Donaldson Company Inc (DCI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the Donaldson fourth quarter and year end results conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question-and-answer session.

If anyone needs assistance at any time during today's conference, please press the star followed by the zero.

As a reminder, the conference today is being recorded Tuesday, August 27, 2002.

I would now like to turn the conference over to Mr. Bill Cook.

Please go ahead, sir.

Thanks, Jeff.

Good morning, and welcome to the Donaldson Company conference call.

I am Bill Cook, Senior Vice President and Chief Financial Officer.

Joining me today are Bill Van Dyke, our Chairman, CEO and President.

Rich Sheffer, Assistant Treasurer and Director of Investor Relations.

Tom Windfeldt, Vice President and Controller.

Norm Linnell, Vice President, General Counsel and Corporate Secretary.

And Nickolas Priadka, Senior Vice President, Engine Systems and Parts.

Before we get started, I need to caution you that statements in this call regarding Donaldson's business that are not historical facts, are forward-looking statements, and that future results could differ materially from the forward-looking statements made today.

Actual results may be affected by many important factors, including risks and uncertainties identified in yesterday's press release and in our SEC filings.

We really appreciate the opportunity to talk with so many of you about the business and financial matters important to all of us at Donaldson.

Yesterday, we announced our fourth quarter and full-year numbers and are very pleased with the results despite the continuing weak economic conditions.

As our press release is quite detailed, I'll start out by summarizing our financial highlights.

Bill Van Dyke will then comment on the business conditions we are facing and expect to see in the near term.

At yesterday's market close, we reported record fourth quarter diluted net earnings per share of 55 cents versus 50 cents last year, an increase of 10%.

Record net earnings of $25 million were up almost 9% from $23 million last year.

Revenue was a record $303 million, up 2%.

Please note that Ultrafilter, our recent acquisition that closed in July, is not included in these results.

For the year, Donaldson reported record diluted net earnings per share of $1.90 versus $1.66 last year, an increase of 14.5%.

Record net earnings of $87 million were up 15% from $76 million last year.

Revenue was $1,126,000.000, down 1% from $1,137,000,000 last year.

Foreign currency translation increased our fourth quarter revenue by 2%, but reduced the full-year revenues by half a percent.

Free cash flow for the year was a record of $111 million, up 152% from $44 million last year.

The primary driver of this was an improvement in working capital management, mostly coming from our various return on investment projects, all of which had specific objectives around receivables and inventory controls.

We made significant improvements in working capital management and will continue to see incremental improvements in the coming year as a result of our ongoing efforts.

Additionally, we expect our gas turbine business to improve its working capital utilization as the business begins to soften.

Gas turbine requires the highest level of working capital investment of any of our businesses as the lead times from order to delivery require longer holding periods for inventory.

This business also has the longest days outstanding for collecting receivables.

Reducing this portion of our business to our total will be positive to working capital.

In summary, we are very pleased with our fiscal '02 results.

Our 13th consecutive year of double-digit earnings growth.

The employees of Donaldson achieved this by executing a plan that we developed a year ago to deliver the results by focusing on the areas we could control within our business and not assuming that either the economy or revenue uptick would help us.

That was our plan and we were successful in executing it.

Now I'd like to introduce Bill Van Dyke, our Chairman, President and CEO.

Bill?

Thanks, Bill.

As Bill has said a couple of times, we are very pleased to announce this 13th consecutive year of double-digit earnings growth.

This one was particularly satisfying, our best ever.

As the Donaldson people rose to the challenge of another difficult revenue year.

We again produced record earnings by continuing to focus on those things within our control.

That is, by managing our costs and our balance sheet.

Despite flat revenue, we improved on every line of our income statement.

We improved inventory turn and overall working capital and used our record cash flow to bring down debt costs, buy back stock and fund acquisition activity.

Those of you who follow the Company know that our simple model is that effective diversification of our end markets will support consistent superior earnings.

That model was once again tested and reinforced as continued strong sales in gas turbine, and an upturn in truck, offset weakness in industrial capital spending, which depressed sales in industrial air filtration and many of our special application markets.

Geographic diversification again played an important role in our results.

Overseas revenues grew faster in all six of the product groups that we discussed in our earnings announcement.

We moved closer to our goal of 50% of revenues coming from outside the U.S., as international sales grew to 39% from 37% of total sales, even before the inclusion of the recently acquired Ultrafilter business.

Sales in Europe were up nearly 7% this year and grew faster than the U.S. in every product group.

Asia-Pacific also turned in strong performances this year in truck and the engine aftermarket.

While economic conditions in Europe and Asia were not robust, the results again reinforced our belief that there are great growth opportunities for Donaldson outside the U.S.

Turning to our business units, I'll begin with the question that we've gotten from many of you over the last several months.

That is, how will Donaldson cope with the now certain contraction in gas turbine?

The persistence of that question has been helpful for us in underlining one truth.

That we see the strength of Donaldson's diversification much more clearly than do many investors and analysts from outside the Company.

The fact is that we expect the North American gas turbine contraction to be severe.

Dropping something in the neighborhood of $50 million from next year's gas turbine sales.

But the larger fact is that projecting from recent order trends in our other businesses, we expect organic growth to roughly offset that drop.

Granted, this isn't a particularly bullish outlook but we see it as sufficient to sustain continuing our track record for earnings performance.

First, the engine business appears to be turning up, both domestically and overseas.

Since the bottom in our second fiscal quarter, incoming orders for both original equipment and parts have trended up strongly, especially overseas.

New equipment orders in the fourth quarter were up from last year 5% domestically and 24% overseas.

Coupling higher volume with ongoing significant improvements in engine profitability gives us important leverage for the coming year.

Specifically, the North American heavy truck market is enjoying a prebuy in advance of October's deals emission regulations.

Trucks are forecasted to then slump back to build rates like those at the bottom of the last trough in 2001.

We think that too much has been made of the prebuy, at least as it pertains to Donaldson.

Yes, it will buoy our first quarter numbers and deflate at least the second quarter.

More important for us will be the impact of increased volume in emissions products and the impact of several new light truck intake programs coming online this year.

A further qualifier is that this is a North American phenomenon and so will not affect our overseas truck businesses, which saw a 21% increase in fourth quarter sales.

In industrial air filtration, what we have previously called dust collection, the good news is, so far, limited to the absence of a negative, that is, the business contraction appears at an end.

Fourth quarter delivered the first positive sequential quarter in two years.

While this doesn't yet translate into an upturn, it does suggest that there is some stability developing in the capital equipment markets, both domestically and overseas.

We have paired our product line and our cost structure so that incremental revenue when it comes will have an immediate bottom line impact.

In sum, order volume for engine was up 10% in the fourth quarter and exclusive of North American gas turbine, industrial was up 6%.

If we do no better than hold gains like that for '03, we'll comfortably backfill the projected gas turbine drought.

Revenue from the recently completed Ultrafilter acquisition will likely add another $100 million.

Having said that, none of us takes this gas turbine contraction lightly.

We expect North American sales to soften this fall.

Gas turbine manufacturers still project their North American sales decrease at 30 to 50% in calendar year 2003.

Off of their best year ever.

When the current North American market upswing began in 1999, we knew that the market would eventually see a correction.

And we remain disciplined in our manufacturing investments.

We kept a healthy share of manufacturing at subcontractors and the capacity we brought online during the boom will be strategically valuable post-bubble.

This North American downturn will be softened by increased market share in Europe where demand remains strong.

We're also building share in the replacement filter market as plants we equipped during the early part of the boom are starting to come due for their first filter replacements.

Finally, we're developing the last -- the next generation of turbine intake systems.

A new and dramatically different product solution that will allow us to further differentiate ourselves from the competition.

To repeat a comment I made earlier, this is by any measure a difficult revenue environment, probably the most difficult we have seen in 20 years.

Despite this, we have clearly strengthened our business and extended our record of double-digit earnings growth.

There is no magic to this.

A lot of people all over our Company signed up to do what was in their power to do to control the impact that the business cycle was going to have in their lives.

In dozens of locations around the world, we saw truly stunning operating improvements.

Processes changed, product lines paired, facilities closed, more cost efficient ones opened and brought online ahead of schedule.

The list goes on but it has a simple manifestation.

Six consecutive quarters of climbing gross margin averaging 31% for the year, the highest level Donaldson has ever produced.

And the work that delivered these results is a work in process and promises additional lift going forward.

So with our operations in solid shape and continuing to improve, and cautious, modest, careful optimism about the revenue outlook, the other piece of the story for next year is the marrying of our latest acquisition, Ultrafilter, into the Company.

Ultrafilter satisfies all three dimensions of the diversification strategy that we have been pursuing over the past dozen years.

It expands our presence in industrial markets.

It focuses on replacement parts.

And the majority of its revenues are outside the U.S.

Thus, in one transaction, we achieve better balance between mobile diesel engine markets and industrial markets, between new capital equipment and replacement parts, and between the U.S. economy and international economies.

This better balanced portfolio should enhance the stability of our performance over time.

This acquisition in compressed air purification builds on the AirMaze acquisition of two years ago.

Where AirMaze brought us to the filtration needs of the compressor itself, Ultrafilter moves out of the compressor room to all points of use in the factory.

Ultrafilter's products remove particulate mist and moisture from the compressed air stream that ultimately finds its way to conveying systems, pneumatic tools, controls, spray-painting operations, and many other points of use in the factory.

Ultrafilter's direct selling approach is similar to our industrial air filtration business which has the highest market share in its industry.

Direct access to the end user clearly has been a competitive advantage in industrial air filtration and was one of the primary drivers in our pursuit of Ultrafilter.

Ultrafilter is about a $100 million business and has grown at a rate of 14% over the last five years, clearly well above the pace of industrial manufacturing.

Gross margin has run in the mid to high 30% range.

But operating margins have been slim as the business was run as a privately held German company.

Combining Ultrafilter's growth track with Donaldson's operating controls, systems and infrastructure, yields a business opportunity that will play a meaningful part in our future financial performance.

To summarize the acquisition, Ultrafilter further diversifies our portfolio and provides another building block for the bundle of filtration capabilities that Donaldson now offers to its industrial customers.

Wrapping up all that I have just talked about, we have yet to feel much of a tail wind from the economy, but the head wind has abated.

This coming year will likely be the third consecutive year where sales to one of our prime markets have contracted by $50 million.

So far, that has not diminished our ability to perform on earnings.

This year, while coping with gas turbine's change, we expect some modest lift from our other businesses and we're a long way from done with tuning our operations.

It would certainly be easier with stronger revenue.

But either way, we remain committed to sustaining our earnings growth record and strengthening the business.

That concludes my prepared comments.

Operator, we can now open up the call to questions.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

If you have a question, please press the star followed by the one on our push button phone.

If you would like to decline from the polling process, press the star followed by the two.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received.

And if you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment for our first question.

Our next question comes from David Seeno.

Please state your company name followed by your question.

David Seeno with Gabilly and Company.

Good morning.

A couple of questions.

First, I'm assuming that the balance sheet was a little bit skewed by the addition of Ultrafilter.

I guess before the end of the quarter.

Can you say what receivables and inventory and payables look like ex-Ultrafilter?

Sure.

David, this is Rich Sheffer.

Looking at the balance sheet, receivables ran roughly $230 million at the end of July.

Receivables approximately $103 million.

Inventory.

Inventory.

Pardon me.

What other categories were you looking for?

Just payables.

Payables.

About $101 million.

Okay.

And you mentioned some light truck intake business.

I'm assuming that's the new blocks of business you referred to in the release.

Have you done much work in that area prior to these contracts?

On the light duty side?

This is Nickolas Priadka.

The light truck market is of special interest to us, particularly the diesel niches within that market because they represent heavy duty applications.

And we're excited about that segment since that is very applicable to our new technology with power core.

And we'll see the work that has been done starting to flow into our revenue later on this year.

So that's incremental new business?

Can you quantify that at all?

We have a significant amount of business coming in from the major manufacturers, the Detroit manufacturers, that will be coming on stream somewhere about midyear.

That will roughly, I believe, offset the decline that we expect to see in the heavy duty market.

Okay.

And one last question.

I'll get back in line.

Does the, uhm, plant rationalization expenses completely go away this year?

No.

On and on going basis, we are always going to have expenses like that David, as we continue to close the older, less efficient and open newer, more efficient facilities.

I think it was 16 cents or so last year, and it came down to 5 cents this year.

Is there going to be a similar amount in '03 or....

I think '03 will be more like '02 but we don't comment really on the specifics.

Okay.

Thank you very much.

Sure.

Does that answer your question, sir?

Yes.

Thanks.

Thank you.

Our next question comes from David Kurzman.

Please state your company name followed by your question.

H. G. Wainwright and Company.

Hello, gentlemen.

A question on where you see fiscal '03 CAPEX and share repurchases and then also can you give any quantification as to how big the working capital changes, those improvements that you mentioned in your opening comments, are likely to be in fiscal '03?

Okay, David.

On the CAPEX, we look at a sort of our staying in our normalized range of between 42 and $45 million for fiscal '03.

Okay.

And that would be, you know, independent of making any other acquisitions or things like that that's just the normal capital.

On the share repurchase, we don't comment on that in terms of what we're doing in any one time period, but over the long period, our objective is to reacquire 3% on average each year, which after employee grants leave us with a net 2% reduction in shares outstanding.

So that's our long-term goal and over time, that's what we strive to hit.

Okay.

And then working capital quantification?

This past year was pretty tremendous improvement.

I'm not sure that we are going to be able to match that pace but we're -- I'm not going to give you a specific number on it but we are looking at certainly in the double-digit millions in terms of a decrease.

Gotcha.

Thank you.

Thank you.

Our next question comes from Kevin Monroe.

Please state your company name followed by your question.

Hi.

It's Thomas Weisel Partners.

In your prepared comments, you mentioned that you expect organic growth to offset the gas turbine decline.

Can you give a little more detail as to, you know, where you expect to see that come from?

You know, what business lines and what gives you that confidence?

Sure, Kevin.

There isn't one hero that's going to offset what's going to happen to gas turbine.

It's a lot of smaller stories that where we're getting growth.

Nick mentioned one with these light vehicle programs.

Generally our businesses overseas are growing at still very healthy rates.

So those are the types of things that we're seeing.

It's all these little pieces that add up together offset the downturn in the gas turbine business.

And on the Ultrafilter acquisition, you mentioned that they grew 14%, I guess, over the past 5 years.

Do you think they can continue to grow at that kind of clip and also what are the synergy opportunities within that business?

We're not expecting a lot of synergy gains in the short term.

We really intend to operate that business on a standalone basis for the near future.

Yes, to your first question, we do believe that we can continue that kind of growth rate.

That there is a substantial opportunity to expand the direct sales operation that has really been their backbone and the vehicle for their growth because they are in the overall scheme of things $100 million leaves a lot of market yet untapped.

Great.

Thank you.

Does that answer your question, sir?

Yes, it does.

Thank you.

Our next question comes from Mel Cody.

Please state your company name followed by your question.

Sanders Morris Harris.

On gas turbines what are you currently seeing out of Europe and what makes you so confident you are not going to see a similar type decline in Europe and overseas that we're expecting here in the US?

Mel, the the business in Europe never had that boom phenomena.

It's just been growing at a nice steady clip for the past couple of years.

We have nice solid backlog going into fiscal '03 so we're seeing continuing very strong growth.

That represents right now about 25% of our total gas turbine business.

So, you know, it didn't go through the boom so it's not going to go through the bust and we have a very strong backlog to support our plants for fiscal '03.

And the fourth quarter orders overseas in gas turbine were the highest in -- as far back as my data shows.

Okay.

Are you expecting increasing backlogs as the quarters move on and we get into 2003?

In that area?

Increasing backlogs in gas turbine?

In overseas.

Generally, yes, overseas the backlogs have been increasing and we expect will continue to do so.

Okay.

Thank you.

Sure.

Our next question comes from Richard Easterman.

Please state your company followed by your question.

Robert W. Baird.

Bill, could you throw some color on the international, European and Asian growth in the engine business?

If you look at some of the macro data for those markets, Volvo, Mann, you know, they're seeing and expecting production levels that are actually down double-digit.

So is this, you know, currency has probably played a factor here but are we seeing market share gains or is there something going on on the distribution side?

Because it certainly -- your performance certainly seems to exceed the markets pretty significantly.

This is Nickolas Priadka.

I think you've hit the nail on the head.

Market share gain is the driver primarily for our overseas business in engine.

We have seen over the last three, four years a fairly significant increase in share in the truck market.

That coupled with the increased demand for replacement parts that that typically generates, and we anticipate that that will continue to grow.

We have lower market shares overseas than we have in North America.

So it's really a growth opportunity for us.

Okay.

And then, Nick, the light duty truck business, I guess I'm just trying to do the math real quickly here.

We talk about that, you know, the -- the domestic business falling off in Q2 and beyond, and the way we model out the quarters, your suggestion is that the light duty truck business offsets much of that decline.

Can -- is the light duty truck incremental business, is it, you know, in the $20 million year range or --

Yes.

It is definitely incremental business.

It as I mentioned earlier, represents application of our air filter technology power core.

That is geared at the diesel segment and the diesel segment of that market is a fairly substantial one as we measure it.

It is in excess of $20 million incremental business.

We are factoring in approximately $25 million or more with the business that we currently have on the order board.

That's annually, $25 million or more annually?

That's new business annually, yes.

And then just one last question.

Can you throw a little bit of color -- this might be directed at Bill Cook -- on the currency loss that you incurred transferring funds to pay for Ultrafilter?

Did that -- how does that occur, exactly, the accounting on that?

Rick, this is Rich Sheffer.

When we moved money from one of our Asian businesses over to Europe to get the money where we needed it to accomplish the purchase, that was at a time when the Euro was strengthening quite a bit against the rest of the world's currency.

And that's really the driver of how that -- how that currency loss, FX loss occur.

So you're transferring funds from Asia to Europe?

Correct.

So you have that currency impact?

Yes.

Thank you.

Thank you, sir.

Our next question comes from Lorraine Micas.

Please state your company name followed by your question.

Merrill Lynch.

Could you talk about long-term goals for growth and operating margins and how mixed shifting from the turbine business will affect this?

The lesser role that gas turbine will play next year should have a lifting effect on our gross margin overall.

One of the things that I didn't say when I commented on the 31% gross margin for this year was that was in the face of really trading out our dust collection industrial air filtration sales for gas turbine sales and there is a substantial difference in gross margin there.

So net-net, we are going to get a mix lift.

Over time, we have really run this business not targeting raising the operating margin but targeting a substantial return on investment.

And some years in some phases of the cycle we are going to get that by increasing revenue.

And holding margin.

In other years, where increasing revenue isn't going to be available to us as in the last year and probably this year, we are going to focus very hard on tightening up the operations.

Our history -- and I suspect it's characteristic of businesses generally -- is that you can't do both at the same time.

You are either going to be growing your top line or you are going to be working on cleaning up the -- tuning up the operation inside.

And so we'll move back and forth on our emphasis depending on what the market shows us.

But again we're not targeting an ever-rising bottom line margin what we're targeting is trying to get high double-digit return on investment consistently.

Thank you.

Our next question comes from Keith Hughes.

Please state your company name followed by your question.

Hi.

It's Scott Phillips on Keith's behalf, SunTrust Robinson Humphrey.

Most of our questions have been answered.

I was just wondering if you guys could comment -- as you indicated earlier, you might be open to doing another acquisition in '03.

Can you give us an update there on what you are saying in that target pool?

How's it looking?

You know, would that be more of a back half '03 situation or if it is at all, just any color there would be helpful.

Scott, we're always looking, you know, but we don't feel compelled to do every acquisition that we see.

History would support that I think over the past dozen years, acquisitions accounted for of our 9% revenue growth for the period from '89 through '01, only about 1.5% of the 9.

So it was a small part.

But it's still an important part and obviously when we see opportunities like Ultrafilter, then we are going to strive to do them.

So we're always looking but don't feel compelled to do every one or have to do them to support our financial objectives.

Right.

Is that body of targets increased over the past 6 months or is it relatively constant?

It sort of ebbs and flows.

If you had asked me the same question two months ago I would have said there were a lot of candidates.

And now it seems that there aren't.

So it's sort of it's a dynamic situation.

Over the course of the last year there have been a lot of opportunities.

There's a lot of activity, a lot of companies either changing hands or thinking about changing hands.

Right okay.

Thanks a lot.

Our next question comes from Seth Tirkeltaub.

Please state your company name followed by your question.

Hi.

It's Seth Tirkeltaub with S.R. Capital.

Question I had just looking at the cash flow statement.

Depreciation and amortization line, I guess is down from $38.6 million last year to $31.7 million this year.

Obviously, there's some change in the way amortization is expensed.

That's right.

What's -- so what makes up the deference?

Is there any change in the depreciation number?

This is Tom Windfeldt.

The biggest change for in us that category is we no longer amortize goodwill under the new accounting principles.

And how much is that year-over-year?

It was a little under $6 million.

All right.

Okay.

I'm sorry.

A little under $4 million.

Okay so under 4, the difference is about 7.

So is the remaining $3 million is just a reduction in the depreciation?

We have eliminated a few of our facilities in the contraction of manufacturing.

Okay.

Great.

Thank you.

Thank you, sir.

Our next question comes from Eric Fell.

Please state your company name followed by your question.

(indiscernible) Capital Partners.

Just wanted to ask this question again.

What was inventory pre-Ultrafilter acquisition?

I thought I heard you say 150 million but that didn't make any sense.

It was 103.

103.

Okay.

Thanks.

Does that your question, sir?

And payables you said was 101?

Correct.

Thank you.

Any further questions, sir?

No, thanks.

Okay.

Our next question comes from Alan Metrany.

Please state your company name followed by your question.

Hi.

Copper Beach Capital.

I just want to clear up, were there any revenue -- is there any revenue contribution from the acquisition this quarter?

No.

None at all.

So it closed at the July 30 --

It closed during the month but we're -- the way we are going to treat it is we are going to pick that up in our fiscal '03.

Okay.

And could you give maybe some outlook -- I guess a lot of your business in gas turbines comes from GE.

What are you hearing from them?

It seems like some people at least the talk on the street is their numbers for gas turbine shipments may be too high.

Do you get that impression for what they gave versus their conference call?

They put out a lot of information on what they think is going to happen.

I think it's sort of a moving target.

They were talking about 150.

We've heard that same number.

So I would guess that's the last number that they gave, that's probably their most up-to-date view of the market.

Okay.

Is your view in concert with their view from what you're seeing?

Yes.

Okay.

And lastly, did you hit your 2% target into this past year in terms of buying back shrinking the outstanding shares 2%?

We reacquired about 1.5%.

Okay.

Does that mean there's extra shares to acquire this coming year potentially, or is it still a 2% target?

We don't comment prospectively.

It's just long-term average is to reacquire 3% gross and after employee grants, leave with us a net 2% reduction.

But we don't hit that exactly every year.

Obviously, we didn't this past year.

But that's what we strive to do on -- over the long term.

Okay.

Do you expect you'll be active still in acquisitions this coming year?

We are going to continue to look.

But again, we don't feel compelled.

If we see something that makes very good strategic sense, then we'll pursue it.

As I think we have said a number of times before, we see acquisitions as an ongoing steady part of our diet that Bill mentioned our historical average was something under 2%.

We expect it to be slightly higher going prospectively, slightly higher going forward.

But I mean slightly. 2 to 3% of revenue on average -- revenue growth going forward.

Okay.

And then just one last question.

Can you speak to I guess the first quarter numbers this coming quarter?

Give us at least some more guidance in terms of how to model out the rest of the year, starting from the first quarter?

Generally, the only guidance we give is an on an annual basis and that we expect to see our 14th consecutive year of double-digit earnings growth next year.

I think we've given a lot of color to where we see revenue progressing through the year and also what we anticipate seeing for our gross and operating margins.

We view the business on a long-term basis rather than on a quarter-to-quarter basis.

Okay.

That's probably the right way to look at it.

Thank you.

Thanks a lot.

Thank you, sir.

We have a follow-up question from David Seeno.

Please go ahead, sir.

Could you just refresh my memory, IGT, how much is aftermarket business right now?

I guess 2002?

David, I'm sorry, repeat the question for me?

How much of IGT is replacement business --

IGT, industrial group?

Right.

In other words, you said you expect to grow the replacement --

In gas turbine?

Yes.

This past year it was probably about 10% of total revenues.

But we anticipate that growing in the double digits on a prospective basis because we have installed all these new systems out there that will be coming up on replacement cycles.

Okay, thanks.

There are no further questions.

You may continue.

Bill?

Oh.

I'm sorry

I'm sorry, we have another follow-up question from Alan Metrany.

Did you want to take that question?

Sure.

Please go ahead, sir.

Thank you.

I appreciate that.

What were your new orders this quarter?

New orders for the business in total?

Yes.

Hang on one second. $281 million.

Do you have it by segment as well?

We don't report it by segment.

We do.

We do.

Okay.

Let me ask -- is there a reason why at least going forward maybe if you can -- is there a reason why you don't report it by segment?

Just that's the path that we have chosen to date, so...

Okay.

We assume that all of our competitors are listening to the webcast and don't think that we come out ahead by sharing that information.

Fair enough.

Thank you very much.

We have another follow-up question from Eric Fell.

Please go ahead, sir.

Thanks.

Just trying to reconcile the working capital swing.

Or the cash contributed from working capital.

Was there an increase in deferred tax or something?

Because it doesn't seem like $40 million would have been created given sort of the offsetting inventory and --

If you look at the non-interest-bearing portion of the current liabilities, there was also an increase in the income taxes payable.

Mm-hm.

That was probably the piece you're missing.

That was about $20 million, though, right?

Right.

So you have about $40 million of cash created between income taxes payable and accrued compensation, but you also have a $40 million use in inventories.

No, inventory was a contributor this year close to $13 million.

He may be looking at the post-Ultrafilter the -- operating statements don't include Ultrafilter except the balance sheet does because we brought Ultrafilter in right at the end of the year.

So the comments we are making refer to the operations exclusive of Ultrafilter.

Right.

And you said inventories ex-Ultrafilter were $103 million and if I'm maybe mistaken here, buy I thought inventories at year end last year were 60.

No.

Inventories at the end of last year were approximately $113 million.

Okay.

I'm sorry.

That's my fault.

Thank you.

Thank you, sir.

We have another follow-up question from Seth.

Please go ahead, sir.

Thanks.

Those are all going ahead with our follow-up -- since we're all going ahead with our follow-up questions here, maybe a comment in terms of an outlook for free cash flow generation next year, have you mentioned anything about what you think CAPEX is going to be or DNA, or whether or not you think you are going to get $40 million out of working capital again this coming year?

The CAPEX numbers should be about the same, Seth, going forward.

Okay.

You know, that excludes if we didn't do any more acquisitions.

So that would be pretty much the same or a constant.

You know, we are going to continue to optimize our working capital management and I'm not going to give you a specific number but I think the improvement is certainly in the double digits of millions that we can squeeze out of there.

Along with what's going to happen with the gas turbine business as we mentioned in our remarks about how as that -- this -- business starts to cycle down, there is a significant working capital improvement opportunity.

So if you're doing apples to apples it looks to me, you know, like you did $110 million or so in free cash flow this year, uhm, prior to that you have been, you know, $40 million a year.

Where would you say the the number would be closer to what you have done historically or closer to what you have done this year?

I probably would pick the historical number as probably a better target.

Okay.

Sounds good.

Thank you.

We have another follow-up question from David Kurzman.

Thanks.

Appreciate you taking all these extra followups.

One question I had was in terms of the -- your dollar versus foreign currency exposure.

You have been very disciplined about it in the past.

I'm wondering what your exposure would be today for a strengthening dollar?

David, Rich Sheffer again.

A strengthening dollar would affect revenues to a greater extent than net income.

As you can see, the results regardless of what happened on the revenue line, by the time it gets to the bottom line, it is pretty well muted.

We're -- we operate generally in the local jurisdictions --

You're keeping it offshore, in other words?

Right.

We're naturally hedged with our manufacturing operations.

Okay.

Okay.

And in terms of your desire to use either stock or cash for an acquisition, which would you lean towards today with the stock at $37?

Our history has been that we use cash.

Very good.

Thank you.

Does that answer your question, sir?

It does.

Thank you.

We have no more further questions.

Please go ahead, sir.

All right.

Thank you all for your participation and your questions and your interest.

And I'd like to close with a thank you to all fellow employees at Donaldson for a great performance and for their continued efforts and support.

Thank you all.

Jeff, that concludes our remarks.

Thank you, sir.

This concludes the Donaldson fourth quarter and year end results.

Thank you for participating.

You may now disconnect.