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Donaldson Co Inc. (DCI)
Credit Suisse 15th Annual Global Services Conference
March 11, 2013 5:30 pm ET
James F. Shaw - Chief Financial Officer and Vice President
Hamzah Mazari - Crédit Suisse AG, Research Division
Hamzah Mazari - Crédit Suisse AG, Research Division
James F. Shaw
Previous Statements by DCI
» Donaldson Management Discusses Q2 2013 Results - Earnings Call Transcript
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We're organizing into 2 reporting segments. One is the Engine business, and within the Engine, which is diesel engine primarily, we provide air filtration, liquid filtration and exhaust and emissions product. When we say liquid, we sometimes get questions, what you mean by liquid? It's hydraulic filtration, lube or oil filtration and fuel. Those are the 3 primary components when we say liquid on the Engine side. In terms of the end markets on the Engine side, we participate in the off-road market, which is comprised of ag, off-road heavy construction, as well as mining. On the on-road heavy truck, as well as the off-road, we participate both in the first-fit solution, designing the OEMs' solution to help with their first-fit solution and then participate in the aftermarket in terms of the replacement parts.
We also participate in the Aerospace and Defense business, about 2/3 of that is defense or military applications, about 1/3 of that is commercial aerospace, in terms of fixed or rotary ring -- rotary-winged aircraft.
On the other side of our business, the Industrial Products Group. Very diversified, in terms of the types of end markets we serve. The first is the Industrial Filtration Systems business. The picture here is an example of a Torit dust collector, which is the -- dust collector is the biggest piece of this Industrial Filtration business. This would be a dust collector outside a factory, outside a -- maybe some grain handling, anything where there's particulates to be removed from an industrial workspace.
The largest application we sell is a gas turbine inlet filter. This system here is multiple stories high. We will design and build, through subcontractors, that housing and then inside the housing, on that intake side, there's hundreds of filters there that are cleaning the air prior to it reaching the turbine, gas turbine, for electrical production.
And then, purposely, we go from our largest application to our smallest. We also provide filtration in hard disk drives, both to take out moisture, as well as other contaminants that could affect that drive. So great diversity terms of the end market applications and even the size of the filter solution.
Today, we're a very diversified portfolio. The Engine business makes up 63% of our business. The Industrial, 37%. In terms of geographic mix, we're greater than 50% outside the Americas, and the Americas includes Latin America, so even more so outside the U.S., 23% Asia-Pacific and 30% in terms of Asia.
In terms of the mix between our first-fit and aftermarket dollars, we're 50-50 right now, in terms of first-fit solutions versus replacement parts. And we think this diversification that I've just been talking about really does work. Back in the early 80s, we were primarily a diesel engine, North America, first-fit-focused company. And we went through a lot of ups and downs in terms of the cyclicality of that market. And as you see, once we started to focus -- the new management focused on how do we diversify more international, more replacement parts, more industrial other than diesel engine. And once that started to kick in the early 90s, you see, previously, we were 6% compounded annual growth rate. Since then, we've been 18% compounded annual growth rate, which really emphasizes that, that has worked.
During that same period, which included the recession, our sales have grown 8%, including the impact of '08 and earnings up 15% during that same 23-year period.
We also focused on the quality of our earnings, not just growing, but growing well. We have an internal threshold of 15% ROI. We've hit that, as you see here, since 1990, every year except 2 on that chart, and some cases exceeding that fairly significantly.
This chart -- we also invest significantly in the business because we see a lot of opportunities for growth here over the next, really, the next decade. This chart here, on the top line, is capital expenditures as a percent of sales since 1990. We've historically been between 3% and 4% of our revenues, sometimes it ticks up a bit higher in terms of -- maybe we're adding a significant piece of capacity. Sometimes, like through the recession years, '08, '09, we did dip a little bit below that, but we've been ticking up. So, generally, we're between 3% to 4% of our revenues in terms of CapEx.