Donaldson Company Inc (DCI) 2004 Q4 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the Donaldson Company fourth-quarter earnings call.

There will be a question-and-answer session at the end of the presentation, and instructions to queue up will be given at that time.

Today's conference is being recorded. (Operator Instructions).

I would like to now turn the call over to Mr. Tom VerHage, CFO of the Donaldson Company.

Please go ahead.

Good morning, and thank you, Connie.

As Connie said, I am Tom VerHage, Donaldson's Chief Financial Officer.

We have a number of members of our management team on the call again today against today, ready to help answer your questions at the end of our prepared remarks.

Those present include Bill Van Dyke, our Chairman;

Bill Cook, President and Chief Executive Officer; our two business unit Senior Vice Presidents, Lowell Schwab for Engine Products and Jim Giertz, Industrial and Commercial;

Nick Priadka, Senior Vice President of International;

Bill Vann, Vice President of Operations; and also with us are Norm Linnell, our General Counsel, and Rich Sheffer, who handles our Treasury and Investor Relations.

Before I start with our comments, I need to review our Safe Harbor policy.

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 would like to briefly review the financial highlights of our fourth quarter.

As you read in our press release, fourth-quarter sales were strong, and we believe our true operating margin came back in line with our expectations.

I will discuss in a moment three expense adjustments in the quarter that we do not expect will be recurring.

And we enter fiscal 2005 with both 90-day and total backlogs up substantially over last year, at near record levels.

This creates confidence that we will deliver double-digit increases in both sales and earnings in fiscal 2005.

At yesterday's market close, we reported record fourth-quarter revenue totaling $384 million, which is up 16 percent from 330 million last year.

For the year, we reported record revenue of $1.4 billion, up 16 percent from 1.2 billion last year.

Moving to our bottom line, we reported fourth-quarter diluted earnings per share of 29 cents, unchanged from last year.

For the year, diluted EPS is a record $1.18 per share, up 12 percent over last year.

We did have three unusual expense items in the fourth quarter that reduced operating income by $11.6 million.

Of this total, 9.3 million increased operating expense and 2.3 increased cost of sales.

Both items are -- first, we increased our legal reserve by $5 million for the EPC patent litigation issue.

As we detailed in our August 13th press release, the U.S.

Federal District Court ruled that damages against Donaldson in this case should be approximately $16 million.

We intend to vigorously challenge this judgment, and will appeal the decision to the Federal Circuit Court of Appeals.

The second adjustment is the result of ongoing discussions on a specific warranty-related matter for which we increased our warranty reserve by $3 million.

Bill Cook will comment further on this matter in his remarks.

Third, during our year-end closing process, we identified an adjustment of $3.6 million relating to a fiscal 2003 transaction between several of our Ultrafilter entities.

The adjustment for this matter was also recorded in the fourth quarter.

The effect of these three items was to reduce EPS, both in the fourth quarter and the year, by 8 cents per share.

Even after absorbing these expenses, we still delivered on our forecast to grow EPS by at least 10 percent, giving us 15 consecutive record years.

I would like to cover just a couple of additional items before I turn the call over to Bill Cook.

We began recovering a significant portion of our third-quarter steel price increases this quarter.

However, we did experience another round of steel price increases in the fourth quarter, which will require additional price recovery from our customers in fiscal 2005.

Market forecasts suggest that steel prices will continue to rise for several months before leveling off, but perhaps not dropping anytime soon.

We continue to monitor this situation, and will continue to seek price recovery as we experience additional steel price increases.

Operating expense as a percent of sales was adversely impacted by the 9.3 million of unusual expense items this quarter.

In fiscal 2005, we expect operating expenses to return to the approximate levels that we ran in 2003, which were in the range of 21 to 21.5 percent.

As you will recall, we invested in the business earlier this year to capture the revenue growth that we saw in front of us, adding sales, engineering and other resources.

This contributed to the rise in operating expense earlier in fiscal 2004.

The tax rate for the fourth quarter decreased to 24.2 percent from 27 percent in the fourth quarter last year.

This decrease reflects the increased profit contribution from our international operations.

The fourth-quarter expense adjustments I referred to earlier took place in our higher-tax countries, which reduced our effective tax rate below below the 27 percent rate that we expected for the quarter.

You will also recall that we recorded a $1.8 million research and development tax credit in the third quarter, which is another contributing factor to our 12-month effective tax rate of 25 percent.

While it is difficult to predict the geographic components of our income for fiscal 2005 at this point, we do expect the tax rate to return to approximately 27 percent next year.

Now, I would like to introduce Bill Cook, who will discuss our outlook and the business conditions shaping our view.

Bill?

Thanks, Tom.

And again, good morning to all of you who have joined us this morning for this call.

Our financial results and business have become pretty complicated, and sometimes because of this, we risk losing sight of the forest for the trees.

So I would like to offer all of you two take-away messages, based on our press release and our discussions of today.

The first headline is that we just delivered our 15th consecutive year of record earnings growth, with EPS growing at 12 percent over our previous record.

Given all the challenges we faced, we are very proud to have achieved year 15.

The second take-away relates to our future.

Our prospects moving forward are very bright.

As Tom mentioned, we have near record order backlogs already in hand, and stripped of all the fourth-quarter noise, our operations are running very well.

We are well-positioned to achieve another earnings record to add to our string in the coming year.

All in all, as I complete my first month as CEO, I realize that not only do I have a great personal opportunity, but I am assuming my new responsibilities at a wonderful time, given the widespread strengths and strong prospects for this company.

So those are the take-away messages for you, and now I will add a little bit of color to the numbers.

As we mentioned, we again delivered another EPS record, growing 12 percent.

We did this despite many hurdles.

I would like to note a few of the challenges we successfully managed through this past year.

First, we had to ramp up quickly in many of our plants, as we faced unexpected demand starting early in the past year.

We also overcame serious operational disruptions in Japan, as we consolidated our operations into one plant in the face of a surge in demand.

The global steel crisis hit us hard about midyear, as we began to deal with significant steel price increases.

Finally, as Tom mentioned, we absorbed nearly $12 million in unusual expenses in the fourth quarter.

Let me digress for a second to talk about one of those that Tom mentioned, which was the warranty-related issue.

We would guess that there are a lot of questions around that, so I will tell you what we feel comfortable saying at this point in time, and that is that this issue is around a single product -- one application with one customer in our engine products business.

It's a product performance issue that is related to the durability of the product or how long it lasts, and related to that, who is responsible for that.

It's still being negotiated, and from our perspective based on what we know, it is fully reserved at this point.

So, let me get back to my presentation.

And on a more positive note, as Tom mentioned, our total and 90-day backlogs are up 14 and 20 percent versus this time a year ago.

This indicates to us that the underlying strength that delivered this past year's sales growth has not dissipated.

Based on our current order backlogs, we see sufficient strength in our markets to deliver another year of double-digit sales and earnings growth in 2005.

We see the North American truck build rate continuing to grow in 2005 by approximately 25 percent; this will obviously benefit us significantly.

This growth is still being driven by the need for fleets to both replace old trucks and add capacity.

We are also seeing continued growth in our first off-road business, as the three end markets we serve -- construction, ag and mining -- our strong worldwide.

Our engine parts or aftermarket business is benefiting from the uptrend in both truck and off-road equipment utilization rates.

So in total, our engine business set another revenue record this past year, with sales of 832 million, up almost 22 percent over the prior year.

With this very strong engine filter growth, we have needed to expand production in a number of our plants around the world.

We are expanding our Italian facility to increase the production for lube and hydraulic filters.

We are adding another line to our brand new Czech plant to increase our capacity for air filters.

We are expanding our Australian facility, as our replacement filters sales there have exceeded our current capacity.

And finally, internationally we will be breaking ground in China this year in a new engine plant to serve the local Chinese market, as well as the surrounding market in Asia.

In addition to these international expansions, we've also significantly expanded our factory capacity and workforce in the US.

We are adding new production equipment in many of our 13 US plants, and have already added over 250 production jobs in the US during the past 12 months.

Now, switching gears to the industrial side of our business, our disk drive filter business is expected to have another good year following a record 2004.

Although the growth rates may be more industry normal than the rapid ramp-up we experienced in 2004, market forecasts show continued strong growth for computer disk drives, and therefore our filters.

To meet the growing demand for this business, we will complete the construction of a new disk drive filter plant in Thailand during the coming year.

With the integration of our industrial air filtration, Ultrafilter and industrial hydraulic businesses nearly complete, we will begin reporting these businesses in 2005 together as Industrial Filtration Solutions or IFS.

These businesses are on the upswing globally, as the Asian and North American markets are much stronger than a year ago and the European market is now clearly recovering.

For example, in our industrial air filtration portion of this business, our 90-day order backlog is up 32 percent over a year ago.

We also had good news in our gas turbine business.

When we began the past year, we expected our turbine business to be down 30 to 35 percent.

Improving conditions in the international market for gas turbines, including some drop-in business for Iraq, caused us to improve our forecasts twice during the past year.

We actually posted positive sales growth in this past fourth quarter.

While we expect this business to be stable in 2005 compared to 2004, we are heartened that it appears that the North American market contraction appears to be over, and we have successfully weathered this downturn.

While we initially struggled with the unexpected volume I mentioned a few minutes ago, we have overcome our manufacturing ramp-up issues, and are now achieving operating leverage in our manufacturing plants.

This leverage has helped to offset the impact of the unrecovered portion of the steel price increases and the unusual fourth quarter expense items Tom spoke about.

We see operating expenses as a percentage of sales trending lower, as our early 2004 investment in sales engineering and training resources is now delivering results.

And for 2005, we expect our plant rationalization activities and the associated expenses to be about the same as in 2004, or about a nickel of EPS.

CapEx for 2005 should be in the range of $45 to $50 million, and depreciation will be about $45 million, as well.

Our dividend and share repurchase policies remain unchanged.

We will pay between 20 and 25 percent of our trailing three years earnings and dividends.

And we continue to target average annual share repurchase of 3 percent of our outstanding shares.

In conclusion, I have been asked a lot during the past month what I plan to change, and the short answer is not much.

Our model works, and we plan to keep working it.

We remain committed to using our diversified portfolio of filtration businesses to deliver consistent long-term earnings growth.

Our target for 2005 is another EPS record, with at least double-digit growth over our 2004 record.

This target would represent our 16th consecutive record earnings year.

That is our goal.

That concludes our prepared remarks, and now Connie, we'd like to open the call up to questions.

(Operator Instructions).

Charlie Brady, Hibernia Southcoast Capital.

Could you just go over the tax rate again?

Just give us a little more clarification on the lower tax rate.

If it's happening because a greater proportion of international sales, but reading through the your outlook and the text of your release, it sounds like your international business still seems pretty robust.

What is causing that mix to ramp it back up so the 27 percent is going to happen in '05?

In the fourth quarter, the proportion of our earnings generated from overseas or lower tax countries was lower than our average of 27 percent.

What also happened in the fourth quarter was the specific adjustments that I referred to took place in our higher-tax countries.

As a result of that, because we do not expect those expenses to be recurring, we expect a return to approximately a 27 percent rate in fiscal '05.

If you had not had those charges in the higher-tax countries, do you have a sense of what the tax rate would have been, just assuming the mix issue -- international/non-international?

It would have been very close to the 27 percent.

Okay.

And the next question on steel costs, really relating to supply constraints.

Are you seeing any supply constraints down the road, or do you think you'll be able to get what you need for manufacturing purposes?

Bill Vann will take that question.

Steel supplies are becoming more available every day.

Prices remain high, but the supply is very good.

Lorraine Maikis, Merrill Lynch.

Could you talk a little bit more about this adjustment in Ultrafilter?

Was this a breach of internal controls or an accounting error?

And I guess, why didn't you have to go back to '03 and restate your numbers?

Last year -- 2003 was the first year of rolling up the Ultrafilter numbers, and as you might know, rolling up Ultrafilter consists of somewhere in excess of 30 entities.

In addition, last year we were ramping up purchase accounting, and then right at the end of year, there was a relatively complex intercompany transaction that just quite simply didn't get eliminated properly in consolidation.

We noted the item this year.

We took the charge in the fourth quarter, and it was immaterial to our 140 million plus of pre-tax income, so it certainly did not require anything like a restatement.

Great, and then the warranty adjustments -- I guess is that a new product?

Can you comment if it's on your new Powercore offering?

Or if not, can you give us a status on Powercore?

We didn't hear much about that in the prepared comments.

On the warranty -- I will take that one.

I think we probably have said everything that we can say at this time.

It's under negotiation with the customer.

It is in our engine products, but I think we have to probably leave it at that.

On Powercore, Lowell?

In Powercore, we have -- we're in four more platforms; it's now 30 of the 36 applications to which it's applied, and there have been several more proposals in the works -- about 10 more proposals in the works.

There's now a total of 36 outstanding, and we would expect news on those over the course of the next year or two years.

But Powercore continues to be a very real product going forward for us.

We expect sales to increase 50 percent next year.

Great.

And then finally, could you put some numbers around the impact of rising steel prices over the past two quarters, and where you would expect that to go in '05?

I will take that.

Steel prices increases globally in the fourth quarter on a year-over-year basis were approximately in the range of $3.5 to $4 million.

Where they go in the future, we're not precisely sure, but we did see some additional increases in August, and the forecast is for additional steel price increases before some leveling off.

So that's our best guess as to where they will go, and we're doing our best to recover as much of those steel price increases as we can from our customers.

Bill Benton, William Blair.

Just again on the steel price side, based on some stuff I've seen in terms of the sequential increase in the current quarter, I would have actually expected your quarterly gross margin to be more negatively impacted.

Maybe I'm doing the calculation wrong, but have you been -- maybe have you not yet experienced some of those increases, and maybe if you can offer a little color on maybe why it may not be as great as I would have expected.

Bill, steel price increases did occur throughout the quarter fairly steadily, and they continued into August, so they are continuing that upward progression.

Our recovery of steel price increases did also increase during quarter, and maybe that's why you didn't quite see the margin compression that you thought.

Just maybe another P.S. on that is that we're getting operating leverage out of our plants, as we mentioned in the release, and then our cost reduction efforts.

So those are the other two things that, fortunately for us, are helping to offset the unrecovered portion of the steel price increase.

Okay.

And then when do you expect to -- I guess last time, I think you said it was a 2 to 3 percent increase.

How much stuck (ph) from last time, and what kind of increase would you be thinking about this time?

What increase are you referring to?

Steel price increases?

Yes, the price increases that you took last time, to offset the steel price increase?

Yes, let me just back you up for a minute.

The steel price increases were about 3 to 3.5 percent of our material costs, and our material costs are about 60 percent of our total product costs.

So that's approximately 2 percent.

We are recovering a majority -- more than a majority of those price increases.

Okay, and you would expect maybe to have to institute a similar increase this time, or no?

Well, as steel price increases continue, we're going to expect to recover a continuing increase from our customers, as well.

Okay.

And then just at the operating expense line, I know you had some moves in and out last quarter, as well.

It looks like they would have actually dropped sequentially, if you exclude the one-time items in both quarters.

Is that correct, or could you provide some sort of reconciliation on what would have happened without all the moving parts there?

Yes, Bill, I think if you would do the math, you would find that operating expenses as a percent of sales actually did decrease in the fourth quarter, more in line with what we were projecting on last quarter's call.

That number is under where we were running year-to-date through the first nine months of this year.

Okay yes, I know in the third quarter you had some one-time items that increased it, as well, and so I'm just trying to get to almost kind of feeling like I have a normalized amount.

But it looks like your sales increase and your operating expense -- you're pretty much done, in terms of maybe ramping in some respects, and that you should see much more moderated operating cost increases going forward.

Is that a fair statement?

I think Bill, if you look back to where we were in 2003, before we had the ramp-up that we experienced in 2004, that level -- which I believe was between 21 and 21.5 percent -- is sort of what we're targeting going forward.

Okay.

Fair enough.

The final question I have is just on the gas turbine market.

I think you indicated in your prepared remarks that you feel like the North American market did stabilize.

It looked like maybe it declined more this quarter than it did last quarter.

It looked like it was down 42 percent this quarter, I think, and the third quarter was down 32 percent.

Is there something that maybe that I'm missing there, in terms of maybe the absolute dollar amount was actually a little better?

Bill, Jim Giertz will take that question.

I'm not sure that the change numbers that you referenced -- can you tell me again what those numbers were so I can try to respond to those?

Yes, I think in the third quarter you indicated the North American gas turbine market was down about 32 percent, and this quarter I think you indicated in your press release that it was down 42.

So I'm just trying to -- but you know obviously, there are different comparisons there, and so I'm just trying to make sure I understand that. (multiple speakers) think it's stabilized, though.

Let me try to give you some more general remarks, and see if that helps.

I think the North American market -- if you're talking about the power generation piece of the North American market, we don't have perfect visibility over it right now, but I guess we would characterize it as stable.

It has reached the bottom and it's stable, and there maybe are some minor signs that it might be starting to pick up a little bit, but it's basically stable now and at a low level.

I think that's pretty much our outlook out through the fiscal '05 period.

Where we do see much better conditions is the oil and gas markets generally, all over the world.

So anybody who participates in oil and gas exploration, production or transmission, there's many more opportunities there -- definitely seeing more aftermarket business.

And then there's power generation markets in certain places around the world that are still quite strong, are strong now -- for example, the Middle East, China, Spain, and some other markets for particular reasons.

So that's kind of the basis of our outlook.

Okay.

Great, guys.

Well, thanks and congratulations.

James Gentile, Sidoti & Co.

I was just wondering if you can give us an update on the EPA mandates regarding omissions for on-road, and then subsequently off-road vehicles, and how you are relating that trend to the trends on your topline over the next couple of years?

James, Lowell will take this question.

The next big increase in emissions revenue will be in 2007, when the next large requirement in emissions performance goes into place.

After that, there is another level of performance that is reached in 2010, in which case the size of the market will again expand a lot, because it will be a much more complicated system when you get to 2010.

In the off-road area, the first generation of improvement happens in 2011.

And the second improvement that mirrors the two improvements in the truck market happens in 2013 or 2014.

So some of it is quite a ways out, but there is a big change coming in 2007, and a lot of those programs are underway with OEMs at the moment.

And your Powercore technology kind of answers this?

No, actually that is our emissions products.

Powercore actually answers the intake on that for large diesel engines.

Are you going to package all that together?

Well, we're trying.

We also a crank case emissions filter that we sell in concert with an emissions device in the retrofit market, in which we actually have a pretty unique capability -- we're the only people who offer that, and that has helped us a lot -- especially in California.

Great.

Thanks.

Kevin Monroe, Thomas Weisel Partners.

Your topline guidance for '05 -- I mean, the engine segment, it's pretty kind of clear to see how you get there, but within the industrial segment, you're talking about gas turbine being kind of flat -- special apps getting kind of a more normal growth rate, so that implies that you are pretty confident about the industrial air filtration business posting some good growth.

This segment has given you some head fakes in the past.

What kind of gives you that confidence that the manufacturing environment in the U.S. and overseas is really back?

Okay, Kevin.

Jim Giertz will take that question.

Sure.

I think we actually have quite a bit of confidence that the dust collection part of our business, Torit DCE, is on a very positive trend.

Specifically in the United States, we have seen pretty consistently -- month-to-month, week-to-week, very consistently strong order patterns, both for equipment and also our aftermarket business, steadily improving -- again, month-to-month, week-to-week.

I'd make the same comment about Europe, actually.

Again, very steady and consistent pattern of better orders for equipment and aftermarket in the business -- particularly since Christmas.

So I think it's the consistency and the repeating it week after week that gives us confidence.

Okay.

The next question would be in terms of it appears you guys are starting to see the early signs of some operating leverage showing up in the margins.

Bill, you've listed a bunch of I guess new plants or new capacity coming online in '05.

Is that going to weigh on your ability to see some margin expansion in '05?

Where do you think operating margins kind of shake out in '05?

Kevin, as you know, we don't cover -- we don't typically talk prospectively about what the operating margin's going to be, or operating margin improvement.

But on your question in terms of the ramp-up of these new plants, I think a lot of what happened to us in the past year is that we were ramping up new plants and we had all this unexpected volume that hit us at the same time.

Japan was a perfect example of that.

That could happen, but based on what we see -- and we think we have some decent visibility -- I think we're pretty confident that we're going to be able to ramp up these new operations without having major ramp-up expenses.

So, we won't have that headwind like we did this past year.

Okay, and one final question.

It looks like your backlog is up strong year over year, but it looks like it ticked down a bit versus last quarter.

Is there any particular reason for that?

We are at near record, so we're pretty happy where we are.

It's been a pretty narrow range the last two or three quarters.

So, we're very optimistic moving into 2005.

Richard Eastman, Baird.

Just a couple of things -- I wanted to just explore the incremental margin for a second at the gross profit line.

Given what we have been through with steel prices this year, when I look at the incremental gross margins sequentially, it's about 16 percent, and I'm a little bit surprised that the volume didn't give us more incremental gross margin.

I mean, you are clearly doing it on the op expense line.

But should we expect that to be better, as we recover some of the steel, or is mix a factor there?

What you see in the fourth quarter, there were really two significant items.

One is a portion of this Ultrafilter adjustment, $2.3 million, impacted gross margin in the fourth quarter, and that had about a 0.6 percent impact.

And then we have a couple of tenths of a percent impact due to the steel price increases that we were unable to recover.

Then just a couple of other things.

Filter media prices continue to go up -- anything that is petroleum-based.

As I think Bill alluded to before, that has been pretty much been offset by the volumes that have been running through our plants, and the favorable impact that has on fixed cost absorption.

So there is a lot of stuff going on there, and that's why if you look at our margins for the last couple of years, they have been right around 32 percent, give or take a couple of tenths of a point, and that's the guidance that we're looking forward to in fiscal '05.

Okay.

So the operating leverage that we're getting on the volume side is still getting absorbed somewhat on the raw material price increases, and it's not really a sales mix issue?

Yes, you know, we have a higher percentage of our products that are engine-related.

Those margins are not as quite as high as the industrial margins.

But given where we see backlogs at this point, I think our view is that that mix should approximately continue for fiscal '05.

Could you also or perhaps Jim Giertz, could you just address the significant growth in industrial air in North America?

I think you commented that was 33 percent in the quarter.

Is there any big shipments in there, or what drove that number to that extent?

I don't think there's anything big in there, it's just a -- again, it was accumulation.

The order patterns have been better all year.

We've been building our backlog.

We began shipping Siemens, our project with Siemens for the Post Office -- we began those shipments.

That's a positive factor, but it doesn't explain all of that.

Our aftermarket definitely had a strong finish, and then equipment sales were good.

So, it's just across the board -- the business looks better in North America.

Okay.

And then lastly, I'm sure Rich has prepared this, but could you just give us the FX impact by business segment?

I certainly can.

Starting on the engine side, the total impact in the quarter was 5.2 million.

It breaks down like this -- transportation, 1.1 million; off-road, 2.3 million; and aftermarket, 1.8 million.

On the industrial side, it was 4.2 million in the quarter.

The breakdown -- gas turbine was 800,000; industrial air filtration was 1.5 million; special applications was 600,000; and Ultrafilter was 1.3 million.

Charlie Brady, Hibernia Southcoast Capital.

On the industrial hydraulics sales being up 68 percent, you commented that was aided by the acquisition.

How much of that increase was from the acquisition you did in Q1?

Charlie, Jim Giertz will take that question.

That's roughly half of the growth is the acquisition.

Okay, and on the 45 or 50 million in CapEx you're going to spend in '05, how much of that is being spent on the expansion and development of new plants?

Charlie, Bill Vann will take that question.

very little on the development of new plants.

Primarily it is related to cost reduction.

James Gentile, Sidoti & Company.

One more question.

I'm just wondering if you can tell me how much of your special product applications revenue was the disk drive sales, and what the incremental margin is?

James, I think Rich is going to take that question.

let's see here.

It was approximately 50 percent of the special applications revenue in the quarter.

Was there a second part to your question?

Yeah, is the disk drive operating margin higher than some of the other products baked into there?

Yes, we typically don't comment specifically on any product lines margins.

So, I'm afraid I won't be able to answer that one for you.

Bill Benton, William Blair.

I just wanted to again follow up on that steel situation.

I guess one of the publicly traded companies released something that indicated that pricing was up 19 percent sequentially.

Is that even remotely close to what you guys are experiencing?

19 percent over what period of time, Bill?

March to June.

March to June -- Bill Vann, do you have a take on that?

The question is the steel pricing?

Yes.

Some of the steel price year-over-year comparison, on the average, is up nearly 50 percent.

Certain types of steel are up 90 percent.

But overall, we look at year-over-year being close to 50 percent.

And that was this last quarter -- what was it the quarter prior?

Was it up like 33 percent or something like that, or 30 percent?

I'm sorry.

I can't answer that.

I don't know.

But less, certainly less.

(Operator Instructions).

Kent Martinson (ph), Bribant (ph).

I just want to ask a quick question -- legal reserve.

You had mentioned that the judgment was approximately 16 million, and that you reserved 5 million this quarter.

What is the reserve at now in total?

At this point, we are not prepared to state what the total reserve is, but just simply that we believe we are fully reserved, based on what we know at this point, and we did take a $5 million charge in the quarter.

Can you at least comment on whether you have been taking reserves up to this point, in addition to the 5 million?

We did have a reserve on our books prior to this quarter, related to the EPC matter, as well.

Jon Braatz, Kansas City Capital.

My question was just answered.

But, going back -- not to belabor the steel issue -- I guess one question I have is compared to where you were let's say last year at this time, are you able to more -- let's say more quickly and expeditiously pass through these price increases as they come, without as much delay and as much cost as might be in on a short-term basis?

I will make an overall comment, and if anybody else wants to chime in, they can.

It is a catch-up game, so we have gradually been increasing our steel price recoveries.

But the challenge is, as steel prices continue to increase, we have to continue to work hard to continue to increase our recovery percent (ph).

So it is a moving target, but the business units are working very, very hard on this.

Given the fact that we've seen these price increases over the last 12 months -- or I don't know, 18 months or whatever -- is there any way to build this into let's say negotiations with your customers, or is it that's just too difficult to do?

I am going to have Lowell respond to that question, Jon.

That depends on the customer, Jon.

In some cases, we are able to negotiate that the customer will pay a certain percentage of whatever the steel price is for those kind of automatically indexed ones -- steel price indexes.

In other cases, we have to slug it out every time there is a change.

So while we have the mechanism for doing that, we've gotten a lot more experience at it in the last six months.

So we're taking action more quickly, and I think more effectively than we were when this all started.

One final question.

I think you mentioned that you were going to build a facility in China.

With the presence or with the actual facility in China, is that going to open a few more doors there, and allow you to move into that market with more -- and take advantage of the opportunity there, in a greater degree than maybe what you have been doing?

Nick Priadka will answer that question.

Our investment in China, and we have several -- but the recent investment doing that Bill brought forward in the engine side of our business is in direct response to our customer opportunities there.

Our customers are moving aggressively into the market, and we're following them with investment to support their growth, as well.

(Operator Instructions).

It appears we have no further questions at this time.

First, I would like to thank all of our listeners for your interest, time and attention today.

I would also like to thank all of my fellow Donaldson employees.

We did it.

We delivered another record year, under some pretty trying circumstances.

We have a lot to be proud of, and I thank all of you for your part in making it happen.

Thanks, Connie.

That concludes our call.

Thank you.

Ladies and gentlemen, that now concludes the presentation for today.

Thank you for attending, and you may now disconnect.