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Q3 2013 Earnings Call
May 17, 2013 10:00 am ET
Richard Sheffer - Director of Investor Relations and Assistant Treasurer
William M. Cook - Chairman of the Board, Chief Executive Officer and President
James F. Shaw - Chief Financial Officer and Vice President
Kevin R. Maczka - BB&T Capital Markets, Research Division
Laurence Alexander - Jefferies & Company, Inc., Research Division
Charles D. Brady - BMO Capital Markets U.S.
Andrew Obin - BofA Merrill Lynch, Research Division
Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division
Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division
Eli S. Lustgarten - Longbow Research LLC
Brian Drab - William Blair & Company L.L.C., Research Division
Hamzah Mazari - Crédit Suisse AG, Research Division
Previous Statements by DCI
» Donaldson Company's CEO Presents at Bank of America Merrill Lynch Global Industrials & EU Autos Conference 2013 (Transcript)
» Donaldson Company's Management Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)
» Donaldson Management Discusses Q2 2013 Results - Earnings Call Transcript
Thank you, Greg. Following this brief introduction, Bill Cook, our Chairman, President and CEO; and Jim Shaw, our Vice President and CFO, will review our third quarter earnings and our updated outlook for the balance of fiscal '13.
Next, I need to review our Safe Harbor statement with you. Any statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from the forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings.
Now I'd like to turn the call over to Bill Cook. Bill?
William M. Cook
Thanks, Rich, and good morning, everyone. There are 3 key messages that we're going to spend the majority of our time discussing today. And just to summarize, the first is that economic conditions are still challenging in a number of our end markets. Second, that despite these conditions, by aggressively focusing on what we can control, we are operating our company very well. A few examples of this include our record operating margin percent and our second best quarter ever for cash flow generation. And third or finally, we remain confident of our long-term growth opportunities and are continuing to execute and invest in support of our strategic growth plan.
Okay, I'll begin by discussing our third quarter sales, and then Jim will discuss our operating performance, and then I'll conclude our presentation by discussing our outlook. So now talking about our sales by segment. The story in our Engine Products segment is very similar to last quarter. Conditions in our ag equipment market, especially for large farm equipment, remains strong, while our other engine OEM end markets had another weak quarter with On-Road truck sales decreasing 24% and Off-Road equipment sales decreasing 4%, both in local currency. Excluding the ag sector, many of our OEM customers continue to schedule their production levels below last year to reflect the drop-off in their end-user demand for new equipment and also to reduce their own finished good inventory levels. Among those end markets that had notable decreases were the North American and Asian heavy truck and the global construction and mining equipment markets. While some recent economic reports suggest that end-user conditions may be starting to improve in some of these markets, a number of our customers have reported that they are still working to reduce their own finished -- new finished -- new equipment finished good inventories. Therefore, we believe it'll take several more months for our customers' production rates for new equipment to improve enough for our businesses serving those markets to post year-over-year growth.
Now fortunately, we saw better conditions in our engine aftermarket, where we supply replacement filters and exhaust products to both our OEM and independent channels. Our engine aftermarket businesses in both the Americas and Europe were up in local currency.
So now I'm going to switch and talk about our Industrial Products reporting segment and starting first with our Gas Turbine business, which had another outstanding quarter with sales of $69 million, up 35% from the same quarter last year. Moving to our Industrial Filtration Solutions business, our global sales were down 6% in local currency as the continuing weak capital spending environment reduced demand for our dust collectors and compressed air filtration systems.
And finally in our Special Applications business, our sales decreased 21% for 2 reasons. First, there was a global decline in PC sales which drove a decrease for our disk drive filters. And second, we saw weak demand in industrial end markets, which drove a decrease for our membrane products.
Now fortunately, we continue to see the positive impact from our efforts over the past 20 years to diversify both by end markets and geographically. In addition to the help provided by our GTS business, we also had a number of regions which delivered year-over-year local currency sales growth, including Latin America, South Africa, Australia and India.
I'll now turn the call over to Jim for his comments on our operational metrics before we discuss our updated outlook for fiscal '13. Jim?
James F. Shaw
Thanks, Bill, and good morning, everyone. Our gross margin was 35.8%, an increase of 50 basis points from the 35.3% in last year's third quarter. As we noted in our press release, one of the biggest drivers of the increase in gross margin were our Continuous Improvement initiatives, which benefited our gross margin by approximately 100 basis points compared to last year. Product mix also helped our gross margin with an increase in the percentage of our sales coming from replacement filters. Replacement filter sales were 52% in the current quarter compared to 50% last year. In many of our end markets, the utilization of existing equipment in the field is good, which is obviously good for our replacement filter sales.