Donaldson Co. Inc.: No Time To Celebrate

Dec. 3, 2008
Filtration systems provider posts solid start to 2009, but recognizes the challenges looming ahead.

Record quarters are great when the economy is running full steam, but they seem to carry even more significance when times are tough. So when filtration systems provider Donaldson Co. Inc. announced another record performance for the first quarter of fiscal 2009, it could have been a time to celebrate.

In fact, Donaldson's chairman, president and CEO Bill Cook did say he was "very pleased" to start the new fiscal year with another record performance, which included a 13% rise in earnings. However, he also recognized that the hard road ahead made any celebrations seem premature.

"While we had a solid start to our new fiscal year, we also foresee a challenging global economic environment in front of us," said Cook. "As a result, we have been proactively managing our business and working aggressively to reduce our expense levels."

So far the aggressiveness has resulted in the IW 50 Best Manufacturer for 2008 reporting an increases in net income of 11% and sales of 9%, compared with the first quarter of fiscal 2008. Operating expenses decreased to 20.4% of sales for the quarter, from 22% last year, while operating margin performance stayed flat from the year-earlier period at 12.2%.

Donaldson was able to offset higher raw material costs early in the first quarter by implementing a variety of pricing actions with customers, in addition to internal cost reduction efforts.

"Continued strength in our aerospace and defense, industrial filtration, and gas turbine businesses helped to offset weakness in our other end markets," Cook added. Our sales grew 14% in Asia, 11% in the Americas, and 4% in Europe."

However, looking to 2009 some problems seem unavoidable. For one, the company is anticipating the strengthening U.S. dollar's impact on exchange rates, which Cook said would result in a 6% decrease in Donaldson's 2009 sales. The forecast was later revised, with revenues now expected to be "flat or slightly down" compared to 2008.

"We recognize that it is critical that we successfully manage through the current difficult economic climate," Cook said. "However, it is important to note that we also remain focused on our longer-term strategic objectives. Our recent acquisition of Western Filter was part of these plans."

Donaldson Co. Inc.
At A Glance

Donaldson Co. Inc.
Minneapolis, Minn.
Primary Industry: Machinery
Number of Employees: 12,000
2007 In Review
Revenue: $2.2 billion
Profit Margin: 7.85%
Sales Turnover: 1.45
Inventory Turnover: 7.42
Revenue Growth: 13.25%
Return On Assets: 13.41%
Return On Equity: 27.56%

Back in October, Donaldson acquired Valencia, Calif.-based Western Filter Corp., which designs and manufactures filters for hydraulic oil, fuel, lube oil, and coolant systems commercial and military aircraft and helicopters, military ground vehicles, and naval shipboard systems.

With expected 2008 sales around $28 million, Western Filter is expected to significantly complement Donaldson's existing aerospace and defense business, according to Jay Ward, the company's senior vice president of engine products.

"The combination of Western's liquid filtration expertise with our existing leadership in air filtration broadens the overall filtration solutions we can offer our aerospace and defense customers," Ward said.

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