Donaldson Company, Inc. (DCI) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Donaldson's Fourth Quarter and Year-end Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, August 27, 2013. I would now like to turn the conference over to Mr. Rich Sheffer. Please go ahead, sir.

Thank you, Lara, and welcome, everyone, to Donaldson's Fiscal 2013 Fourth Quarter Earnings Conference Call and Webcast. Following this brief introduction, Bill Cook, our Chairman, President and CEO; and Jim Shaw, our Vice President and CFO, will review our fourth quarter earnings and our initial outlook for fiscal '14. 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?

Thanks, Rich, and good morning, everyone. I'd like to start with a few thoughts to summarize our release. Our fourth quarter represented a solid finish to our year. We are very pleased with our operating performance based on key metrics, including our gross and operating margins. Our strong free cash flow in the quarter brought our full year cash flow -- free cash flow to $222 million, our second best year ever. And finally, our earnings per share of $0.48 represented a fourth quarter record. Now, like all industrial companies, we dealt with a wide mixture of economic conditions in our end markets during the quarter, ranging from strong, recovering and still weak. As a result of leveraging growth opportunities where we could, and by aggressively focusing on those aspects of our business that we control, the Donaldson team continues to operate our company very well. Finally, in addition to running our company for today's uncertain conditions, we remain committed to our long-term growth and financial objectives, and have and are continuing to invest in support of our strategic growth plan. Now I'd like to review some of the key details in our fourth quarter. And I'll begin by discussing our sales results, and then Jim will discuss our operating performance. After Jim, I'll conclude our presentation by discussing our outlook for fiscal '14. So starting with our fourth quarter sales, measured in local currency, Engine Products sales posted a small increase year-over-year. Within Engine Products, our OEM businesses were weak in the Americas and Asia, decreasing 21% and 7% versus the prior year, respectively. But we had a surprising rebound in Europe, with sales increasing 9% in local currency. Our strong OEM results in Europe were helped by the launch of a new emissions platform for a European-based ag customer. As we look at our OEM end markets around the world, conditions varied a lot. In the ag equipment market, especially for large farm equipment, business remains strong globally. However, our other OEM end markets had a weaker quarter, with our on-road truck decreasing 14% from last year. Our off-road equipment sales decreased 3% due primarily to the construction and mining markets. As reported elsewhere, during the quarter, many of our construction, mining and heavy truck OEM customers continue to schedule their production levels below last year to reflect their current end-user demand for new equipment while also continuing to work down their own finished equipment inventory levels. Now fortunately, we saw better conditions in our Engine Aftermarket, where we supply replacement filters and exhaust products through both our OEM and independent distribution channels. Our Engine Aftermarket sales increased 3% in the quarter, with strong sales in both the Americas and Europe. We attribute our growth here to the combination of improving equipment utilization in the field, the absence of any more significant channel inventory reductions and our own market growth initiatives. Now I'll switch and talk about our Industrial Products reporting segment. Our Gas Turbine sales in the quarter were $50 million, which represented a good finish as this business achieved a new full year record with revenues of $233 million. In our Industrial Filtration Solutions business, our sales were down 6% in local currency, as the continuing weak capital spending environment reduced demand for our industrial dust collectors and compressed air filtration systems. We attribute this current weakness in our dust collection and compressed air equipment sales to the ongoing general economic uncertainty, which has resulted in the continued pullback in new plant investments by end users. Fortunately, we were able to offset -- to at least partially offset this new equipment decline with very good growth in our replacement filter sales, which were up 8%. And finally, in our Special Applications business, our sales decreased 14% for 2 reasons: first, the continued weakness in the PC-related hard disk drive market drove a demand -- a decrease in demand for our disk drive filters; and second, the same weakness in industrial plant investments I mentioned a minute ago drove a decrease for our membrane products. Now those of you who have followed Donaldson over the past 2 decades know that we are very consciously focused on both growth and the diversification of our company to help minimize the impact of any single major economic cycle. We have focused on diversifying the new filtration markets, emerging regions and the aftermarket everywhere. As noted above, for both our Engine and Industrial segments, we saw solid aftermarket growth in both groups. We also had some other heroes during the quarter, including our Latin American business, which was up 15%; and our new Integrated Venting business, which was up over 60%. As we continue to execute our strategic growth plan, we will intensify our diversification efforts. I'll now turn the call over to Jim for his comments on our operational metrics before I discuss our outlook for fiscal '14. Jim?

Thanks, Bill, and good morning, everyone. Our gross margin was 36.1%, an increase of 110 basis points from the 35% we reported in last year's fourth quarter. As we noted in our press release, one of the biggest drivers of this gross margin increase was product mix, due to an uptick in the percentage of our sales coming from replacement filters. Replacement filter sales were 53% in the current quarter compared to 49% last year. In many of our end markets, the utilization of the existing equipment in the field is good, which helps our replacement filter sales. Overall, mix had a positive 60 basis impact on gross margin. In addition, our ongoing Continuous Improvement initiatives also benefited our gross margin by approximately 40 basis points compared to last year. We've taken many cost-containment actions to aggressively control our manufacturing costs since last fall. The work we have done to align our cost structure with our current level of sales has paid off. And as a result, there was a minimal impact from fixed costs on absorption in the quarter in spite of the 4% lower sales. As part of these cost-containment actions, we incurred $300,000 of restructuring costs in gross margin. Our operating expenses declined by $2 million compared to last year's fourth quarter. The impact from our ongoing expense control initiatives and lower incentive compensation reduced our operating expenses as a percentage of sales by 80 basis points. Our cost control actions partially offset the increases resulting from higher pension expense, the incremental expenses related to our Strategic Business Systems project and the $900,000 of restructuring expenses. So net-net, our operating expenses were lower in dollars, but as a percentage of sales, increased by 50 basis points compared to last year's fourth quarter. As a result of our strong gross margin and expense controls, our operating margin was a record 15.8%. This is up 70 basis points from last year's fourth quarter. Looking forward, we expect our fiscal year '14 operating margin to be between 14.1% and 14.9%. We will begin accruing incentive compensation at normal levels again at the beginning of the new fiscal year, and our investment spending on our Strategic Business Systems project will increase as we move closer to bringing the first plants live on the new system. Additionally, we are selectively increasing our operating investments to more aggressively pursue organic growth opportunities. Our effective tax rate was 28.2% in the quarter versus 30.7% last year. The decrease was mainly attributable to a more favorable geographic mix of earnings compared to last year. Based on our projected global mix of earnings in fiscal '14, we forecast our full year tax rate to be between 28% and 31%. Our fourth quarter CapEx was $25 million, bringing us to $94 million for the full year. As I mentioned last quarter, we responded to the slowdown in many of our end markets by delaying a number of capital projects that we originally expected to complete during fiscal '13. However, we did have a higher capital amount occur in Q4 than we had anticipated a quarter ago due to the timing of payments for our Strategic Business Systems project. Looking forward to fiscal '14, we expect to spend approximately $90 million on CapEx: $58 million of this is from fiscal '13's authorization and $32 million of it is from fiscal '14's capital budget of $75 million. The breakdown of this year's capital expenditure of $90 million is projected to be approximately 20% related to capacity expansion; 30% for our technology initiatives, which includes our Strategic Business Systems projects; another 30% is for tooling for new products; and 20% will be related to cost-reduction activities through our Continuous Improvement initiatives. We expect depreciation and amortization will be between $65 million and $70 million in fiscal '14. Free cash flow was $74 million this quarter and included a $21 million contribution to our U.S. pension plans. Working capital was a $13 million source of cash this quarter. For fiscal '14, we expect full year cash flow from operating activities to be between $275 million and $305 million. Regarding capital deployment, we repurchased 1,166,000 shares in the fourth quarter for $42 million. For the year, we repurchased 2% of our shares for $103 million or $34.34 per share. This was consistent with our long-standing share repurchase target of 2%. As previously announced in May, we increased our dividend payout policy from paying 25% to 30% of the prior 3 years' average EPS to paying 30% to 40% of the prior 3 years' average EPS, which resulted in the 30% increase in our dividend declaration in May. Looking to capital deployment in fiscal '14, we plan to maintain our new dividend payout policy and repurchase between 2% and 4% of our outstanding shares. We repatriated $80 million at year end from our foreign subsidiaries and used approximately $60 million to pay off all of our U.S.-based short-term credit lines. We have an $80 million, 5-year note that matures in November that we plan to repay with our U.S. credit lines and U.S. cash. We expect interest expense in fiscal '14 to be between $9 million and $11 million, and our balance sheet remains very strong with $324 million of cash and short-term investments. So with that, I'll pass it back to Bill, who will provide additional details on our initial outlook for fiscal year '14. Bill?

Thanks, Jim. Looking forward, we believe that many of our end markets have now stabilized and will begin to grow moderately during our fiscal year, and especially during our second half. In total, we expect our full year fiscal '14 sales to be between $2.45 billion to $2.55 billion, which represents an increase of 1% to 5% compared to the year we just completed. Looking at each of the segments, I'll start first with Engine. We expect our full year Engine Products sales to increase 1% to 7% year-over-year. As we noted earlier, our Engine Aftermarket began growing again in the second half of our fiscal '13 and is anticipated to continue growing into fiscal '14. This is a function of the improving utilization of the equipment working in the field, our efforts to broaden our distribution and product line coverage and increasing number of our innovative proprietary systems installed in the field. Our On-Road OEM business is to begin growing -- is expected to begin growing in the first quarter as U.S. end-users continue replacing their aging heavy truck fleets and also due to the anticipated prebuy activity for our customers in Europe ahead of the new Euro 6 regulations. We are anticipating the sales outlook for our Off-Road OEM business to be mixed in fiscal '14. Build rates for new ag equipment are expected to remain steady. The build rates for new construction equipment are expected to slowly improve in North America, but remain weak in Asia and Europe. And the global build rates for new mining equipment are expected to remain at the current low levels for our full fiscal year. Switching to our Industrial Products, we're expecting overall sales to be consistent with fiscal '13, with solid increases in Industrial Filtration Solutions and Special Applications offsetting a decrease in our Gas Turbine sales. The decrease in our Gas Turbine business is primarily due to the absence of the several large unusual projects we shipped in the past year. In our fiscal '14, we do not see a repeat of these types of very large projects, like the $25 million Qurayyah project in Saudi Arabia that we shipped 2 quarters ago. Now I'd like to briefly discuss some of our growth initiatives. As we've discussed in previous calls, we continue to have significant growth opportunities in the faster-growing emerging economies. We are continuing to add sales resources, distribution capabilities, distributors and OEM customers in these regions. One example is in our Engine Aftermarket, we added 72 new distributors and 675 new part numbers in our last quarter. Another of our key growth initiatives is the utilization of our proprietary technologies to help better solve our customers' filtration issues while also protecting the aftermarket or replacement filter business. One of the technologies -- one of these technologies that we specifically highlighted is PowerCore. It is a great example of how we invest centrally into R&D, and then leverage a new technology like PowerCore into as many applications and businesses as possible. We are now very successfully using the newest generations of PowerCore in both our Engine and Industrial segments. Our Engine PowerCore sales in the fourth quarter were $33 million, up 19% over last year, and within that, sales of PowerCore replacement filters were up 32%. On the Industrial side of our business, we sold another 400 Torit PowerCore dust collection systems, while our Torit PowerCore replacement filter sales increased 60%. In total, for the company, PowerCore sales totaled $41 million in the quarter, up 20% over last year. Now to quickly summarize. While many parts of the current global industrial environment remain challenging, we are forecasting a return to good organic growth in fiscal '14. As I noted earlier, our company is running very well today, with all of our key operating metrics and our balance sheet both in great shape. This combination of a well-running company and our financial strength has and is allowing us to continue to invest in our company for the future. As Jim mentioned, we plan to invest $90 million in CapEx in fiscal '14. We will also invest in the incremental operating expenses to support our business systems project and a number of new organic growth initiatives. As we've discussed before, our strategic growth objectives are to build our company's sales to first $3 billion and then $5 billion, and we clearly see the opportunities and have a plan to do so. And we will do this using the model we refined over the past 24 years, leveraging our new technology investments to utilize, grow and expand our global diversified portfolio of filtration businesses. This model has proven to be right over time for our company, our employees and especially, our shareholders. Now Lara, this concludes our prepared comments. We'd like to open up the call to questions.

[Operator Instructions] Our first question comes from the line of Hamzah Mazari with Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: The first question, Bill, is just on -- if you could maybe give some more color on the delta between the low end and the high end of guidance, specifically, how much of the high end versus low end is dependent on a recovery in the sort of second half calendar year '13 in most of your end markets? And how much visibility do you have in talking to your OEM customers as to how this production ramp-up materializes in the back half, as well as maybe you want to touch on how some of these expenses flow through for the balance of the year around some of the growth initiatives?

Okay. Hamzah, I'll start with the sales outlook, and then I think Jim will comment on the -- how the expenses are calendarized during the year. So on the sales outlook and starting with visibility, we don't have, as you know, a tremendous amount of visibility in most of our businesses. The exception is Gas Turbine. And so we have that for Gas Turbine, and we have a pretty good handle on the second half of the year, and that's baked into our guidance. With the rest of our businesses, there is a normal seasonal strength in the second half, so there's typically always some seasonal uptick in the second half, just the way many of our end markets operate with the replacement cycles for filters, for ag equipment or construction equipment, et cetera. For our OEM businesses, we don't have that visibility into the second half of the year, but we're basing this on comments from customers in terms of what they see with -- in some cases, the regulations or the replacement cycle equipment currently in the field, and also that the anticipation that in some segments where there's still equipment inventories that are being worked down, that will be done in the first half of our fiscal year, essentially by the end of the calendar year. So for example, Caterpillar has talked about that they continue to see a work-down of their finished equipment inventory happening through the end of this calendar year, and that they anticipate in calendar year '14 that their production of new equipment will more -- will better match the end-user demand because we won't have that inventory drawdown. So it's a -- those are the factors that we baked into the second half forecast.

Hamzah, it's Jim. I'll comment a little bit in terms of the operating expenses. You saw in the press release, we talked about a $30 million delta year-over-year related to 2 things. One is, this year, with our -- with the way our bonuses are supposed to work, we didn't hit our targets that we set out at the start of the year, so our incentive compensation was at the low end of historical averages. So as we go towards next year, we see about a $20 million impact for the full year of putting that incentive compensation back to normal levels. That should be fairly ratable throughout the year, really no spike from quarter-to-quarter. That's a little over $20 million. The other piece is our Strategic Business System project that we've been working on, a project to standardize our systems around the world. We've been working on that all of this past year. But now as we head into fiscal '14, we'll begin to implement at certain locations, and we see about a $7 million increase year-over-year in terms of our expense related to that project. So that will be generally ratable, but probably a little less first quarter than the rest of the year. So a little light on the first quarter and then a little heavier as we get into second quarter would be how that will play out. Hamzah Mazari - Crédit Suisse AG, Research Division: That's very helpful. And just to follow up, Bill, you mentioned diversification and historically, a lot of your businesses used to operate on different cycles and they provided that diversification relative to what we've seen more recently. Maybe if you could talk about your ability to diversify organically versus acquisitively, and then how investors should think about that.

Good question, Hamzah. Overall, we're still primarily an organic growth story as we have been over the past 2 decades. We think that we certainly see the opportunities to grow and diversify organically, and we also believe that, that's probably a safer model in terms of our financial and operating performance, not that, that we're averse to acquisitions, but they're the smaller part of our growth model. So we would project into the future maybe about 2% of our annual revenue growth should come from acquisitions and, say, roughly 7% organically, which is close to what -- organic is close to what we've done over the past 2 decades. I think the -- from organic diversification, we have some businesses that we're really trying to build out. I mentioned the Integrated Venting Solutions, which is sort of taking our disk drive technology into new markets and markets that move differently than other -- many of the other markets that we're in. That's where that business performed better or had such strong year-over-year comps. It's still small, but it's growing very quickly, so that would be an example. Regionally, we see where our shares are lower, that we see significant opportunities to get into some of the emerging economies that we think over time will run on different cycles. And then the third way of doing it organically is to build up a bigger aftermarket presence. That's typically more stable and tends to cycle, as we're seeing now differently than the OEM business. We would use acquisitions typically for bolt-ons into either markets that we're in or that are closely adjacent. But that doesn't preclude that if we saw a new filtration platform that would help us grow and diversify, that we would add it. But that hasn't been typically our model, but we would consider doing that. And certainly, we have the balance sheet that would afford us the opportunity to do that. We've talked about in our strategic plan, with discussions with people like you, Hamzah, about trying to build out our liquid filtration, especially in fuel filtration, but also maybe some other process liquids as well. So those would be the opportunities for further diversification as well.

Our next question comes from the line of Eli Lustgarten with Longbow Securities.

Can we talk a little bit about mix in 2014? You've got a benefit of 60 basis points mix, and it looks like that should continue into 2014. And as part of it, can you give us some idea of what the -- how the downturn in gas turbine will play out in 2014? How big is mining? And how much is that going to hurt you in that? And can you talk a little bit about Japan, which never comes up? It seems to be -- used to be an important part of the company years ago?

Eli, Bill here. I'll start, talk a little bit about the gas turbine and mining. Now gas turbine, we're looking at a pretty good year. It'll be one of our -- probably our top years in history with gas turbine, but down from last year. And again, it's not really due to a downturn in the market. It's due to the absence of the large projects -- the unusual large projects that we shipped this year. So we're looking at a $180-and-some-odd million year for gas turbine. And we're very bullish long term in terms of gas turbine, because we continue to believe that with the increase in the supply due to frac-ing in North America and the lower prices and the cleaner -- the fact that it's a cleaner fuel, that it's going to continue to take share especially in North America and possibly in other regions over time and more gas turbines are going to be built. That's going to be dependent primarily on sort of an ongoing industrial or general economic recovery, which creates the need for more electricity. So it's a function of increasing electricity demand that'll drive gas turbines over time. And again, I think gas turbines will take a larger share because of the factors I just mentioned. Mining, we're -- I'm sorry, go ahead.

Will the 20% -- one question. The 20% decline that you forecast in gas turbine be evenly spread? Or is it mostly second and third quarter? Or how is it?

The first quarter, we're forecasting at about $40 million. The first 2 quarters are about that, and then the second half, this gets back to the question I was -- answering for Hamzah. The second half for gas turbine will be lower. So we're forecasting quarters 1 and 2 of about $40 million each. On the mining, we've looked to key global customers like Caterpillar for guidance. I think they're not planning any pickup in new mining equipment production any time soon. They are -- they talk about the reduction in this inventory of new equipment drawdown coming to a close over the coming months, so that actually will actually help their production, we hope, in the second half of our fiscal '14, because we won't have that headwind with their inventory -- equipment inventory reduction efforts that then -- even if the mining market doesn't recover, that the -- their production will more closely equal what's being sold by their dealers. Longer term, we're still very...

Yes. Caterpillar was between 8% and 9% of our sales this year, Eli.

And mining?

Yes, mining -- mining as a percentage of our Off-Road business is 20% to 25% of our Off-Road, probably closer to 20% this year.

Eli, this is Jim. Maybe just following up on the first part of your question in terms of mix, it really -- year-over-year, that 60-basis-point number I mentioned is actually a mirror of last year where we went the other way in the fourth quarter. Because this year, we're 53% replacement filter sales fourth quarter, where last year, we were about 47%. And we commented about a decrease in margins through that. So that 60 basis points is really just a reflection of that replacement filter sales going higher than 50%. And looking forward to '14, the way we've built our plan, we did sort of assume that, that will continue because we do have maybe more optimism that the aftermarket is going to remain strong and not a significant pickup, as Bill mentioned, in some of our OEM customers, at least here in the short term.

What was aftermarket as a percent of total sales for the year in '13?

One second. As a percentage of total sales, it was 51%, Eli.

Okay. And can you talk -- just one final [ph] point on Japan, which used to be -- we used to talk a lot more about it years ago, and now we don't talk much. I mean, what's happening there as far -- particularly aftermarket business?

Yes. Eli, Bill here. So Japan is still an important part of the company, just that the economy there has been, maybe up until recently, sort of in a funk for a long period of time. Our sales in Japan in the fourth quarter were actually -- in local currency, were actually down only 1%. So it's not -- it's still operating well. And a lot of what we see happening in Japan actually is the migration by many of our OEMs -- of their production from Japan to other parts of Asia, the Thailand or Indonesia. So we're going to pick that business up in other regions, but we -- Japan is still critical for us in terms of having that presence there to work with their -- our customers' design and engineering people.

Our next question comes from the line of Laurence Alexander with Jefferies.

I guess 2 questions. First, on the mix effect, once your end markets start recovering, do you think the amount of projects to deal [ph] have in tact [ph] is going to be sufficient to keep margins flat? Or do you think there will be a bit of a margin decline as your mix shifts back?

This is Bill. I'll start, and I think then Jim wants to comment as well. I think the -- over time, we've steadily improved our gross and operating margins if you look back at Donaldson over the last 10 or 15, or even 20 years, and that's really a function of our Continuous Improvement initiatives and restructuring that we've done periodically over those years. And our goal is to continue to do that. Quarter to quarter, as Jim mentioned, that -- we can see a little either tailwind or headwind based on the mix impact between aftermarket and first business. But we see over time that aftermarket is going to continue to be an increasing part of our company because we're really focused with our proprietary technologies and retaining more of the aftermarket. So as we look out to fiscal '21 and our strategic growth plan, we're looking at the aftermarket being, say, 55% or higher of our total company sales. So higher than it is even today, because we're going to retain more of the aftermarket. And that's our conscious plan. But quarter to quarter, it can swing depending on whether there's a ramp up in OEM first bid production, because that can go up and down very, very rapidly during -- from quarter to quarter. Jim, do you want to...

Yes. Laurence, the only other thing I would add is we are running less than full right now, so probably the biggest variable would be volume on either side, not necessarily the mix, but to the extent we can get higher volumes than what we're projecting, that will help to a point. There comes a point where we have to add capacity. And on the flip side, to the extent volumes aren't there, that has an impact, too. So I think the mix -- we don't see a significant change here in the short term. But probably the biggest variable is getting the volume.

And then the other question I had, just thinking about your -- longer term, your new product mix, should we think about it in terms of every few years you'll roll out a new product family similar to PowerCore? Or are the existing product families going to have extensions into more markets and applications and just keep growing from there? How should we think about how you'll be discussing that going forward?

Laurence, Bill here. Yes. I think one of the -- one of our -- key elements of our strategy is to refresh our technologies on a more frequent basis than we did historically. And the reasons to do that would -- obviously to provide our customers, our OEM customers, with a better value or better solution on the first bid, but also for both them and for us just to retain more of the aftermarket. So I think we found historically that leaving a technology out there too long allows other people to will fit it in the aftermarket, and we don't want to do that. And so we're very consciously focused on an increasingly -- speed of our new product introduction. So, for example, even PowerCore, which we've talked about for the past 8 years, we're introducing a generation 3 of that, and each of those generations has been sort of a step function improvement over the prior, and that's our goal going forward. The same thing with PowerCore on the dust collection side to do the same thing. So -- and we're doing the same thing with our fuel filtration and other -- every one of our businesses is really tasked to do the same thing. So yes, faster introduction of technology to help grow and diversify our company.

But I guess what I'm trying to get analytically is should we be thinking about each of the families having a different type of step function change? Or is it going to be a brand name tied to a particular end market, and then you keep layering in different functionalities? At some point, will PowerCore retire and then you replace it with some -- a totally different brand?

Well, we have a lot of equity in the brand. So even though we're in the third generation of PowerCore, we're still using PowerCore because we're -- because of the brand equity we've built. But it is possible that if we have, say, a -- some of the new technologies we're working on in our R&D area, that if we -- we could launch one of those and then change the name. But whether we change the name or not, we are very focused on step function improvements and performance every, say, 3 to 5 years.

Our next question comes from the line of Charley Brady with BMO Capital Markets.

Bill, I just want to -- on the gas turbine, I want to make sure I heard you correctly. Did you say Q1, Q2 of fiscal '14, you're looking at a $40 million run rate?

Right, yes.

But second half to be lower than that?

No. Higher than that.

Okay. That's where I misheard you.

Sorry.

I guess I want to look at the guidance for Industrial Filtration and the Special Apps that -- at a plus 5 to plus 11. I mean, your first half of your fiscal year is basically calendar '13, second half of calendar '13. And kind of given where a lot of the industrial companies have ratcheted down organic growth, it kind of implies a very strong second half fiscal '14, first half calendar '14. So I mean, I'm just trying to square that up. Given your lack of visibility, is there something you're -- more tangible that you're seeing from a customer base? Or is it just kind of you're looking at the comps, it drops [ph] to get a lot easier, and that's kind of how you're baking that into it?

I think part of it, Charlie, is that there's a lot of pent-up capital equipment spend. And we think that some of that, based on what we've been reading, is likely going to get spent during the second half of this calendar year. But a good part -- we do see the second half for industrial businesses, our Industrial Filtrations business, being stronger than the first half. But we do see conditions slowly improving during the first half as well and then ramping up from that.

Okay. And one of your largest customers, your largest customer, CAT, has been really trying to push pricing down for its supplier base. I'm just wondering if you could comment on -- I don't know if you'd comment specifically on that one customer, but just broadly speaking, maybe on any kind of pricing headwinds or pushback you're seeing from customers on pricing of the products.

Charley, Bill again. I think the -- in our OEM markets, that's sort of a normal condition. We agreed in many of our OEM -- Engine OEM markets to contractual price-downs. We -- that's one of the reasons why we're -- we've gotten so good at continuous improvement within our business because we have to. We don't get pricing -- price increases in our OEM businesses as a matter of course. We have exceptional circumstances like when steel or other commodities have spiked, but then we've also given that back when the commodities have returned to the previous price. So we're very good at offsetting our ASP decreases with continuous improvement. We've been doing that for 30 years. So I haven't seen anything unusual. That's just sort of the nature of the OEM business for us.

All right. One final one, and I'll hop back in the queue. Just in terms of aftermarket inventory in the channel, do you have a sense? Because we -- obviously, there's been de-stocking going on. It looks like maybe that's going to start stabilizing at some point. But do you have a sense of, from the distributor base, what inventory levels look like in that channel?

Charley, Bill again. I think the -- I think that from a parts perspective, that's mostly out or maybe completely out of the supply chain, whatever people determine was excess. Our distributors, our independent distributers, are really the first to react to that. They don't carry a lot of inventory, and they pull from our distribution centers. So whatever they had to work off, they worked off early. I think our OEM partners, it took longer because they have their own warehouses, and I think that's behind us. The only part of the inventory drawdown that we still see is really, as I was mentioning to Eli, is around new equipment at some of our OEMs, say, like Caterpillar, where they talk about -- that they see -- for them and their dealers, that there's going to be a continued drawdown during the second half of fiscal '13. But that's OEM business, not aftermarket. That's -- but that's mostly -- that's really essentially all we see yet to still happen.

Our next question comes from the line of Brian Drab with William Blair. Brian Drab - William Blair & Company L.L.C., Research Division: First question is just on the Special Apps forecast. I think, Bill, that you did mention just briefly reasons for the momentum that you're seeing in the non-disk drive business. But if you're expecting that disk drive business to be soft and you're thinking that at the high end, you could be up 11% in Special Apps, just wondering if you could just give us a little more granularity around what you're seeing in the non-disk drive membrane market?

Yes -- Brian, Bill. I think what we're seeing -- we think that the disk drive business will improve, and we're looking at the industry forecaster for an increase in units, hard drive units, of about 6% second half over first half. So that's going to help our disk drive business. And then we're seeing the -- related to that business, not that market, is our Integrated Venting Solutions, where we're taking the disk drive technology and going after a whole host of new applications ranging from vents for automotive headlights to ostomy bags. And we're just sort of scratching the surface there. So that's all new markets and new growth from a pretty small base. And so the percents there are pretty high. I think in the last quarter, that IVS business was up about -- was up over 50%. And then the membranes business that we see -- the stomach stents as I was mentioning to -- I think to Charley's question with the slowly improving industrial CapEx environment, that, that business will pick up in the first half and then -- and even stronger in the second half with industrial spending and new plants and refurbishments. So it's a combination of all those that give us that range of 5% to 11% for special apps. Brian Drab - William Blair & Company L.L.C., Research Division: Okay, that helps a lot. So on -- you are expecting growth then in that disk drive business, it's just stronger growth in the membrane venting business?

Exactly. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And then on China, not sure that it has come up yet in this call. So first, is China still about 6% or 7% of sales? And what did you see in China specifically in the quarter?

The -- what we saw in China during the quarter and maybe rolling into fiscal '14 is that we think that conditions for us, for Engine business specifically, have bottomed out and now are improving the backlogs, they're open-order backlogs, which aren't a perfect predictor for both the -- for both our OEM and aftermarket businesses. We're up at the end of July. That's what we used to bake into our plan for China. Talking to people like Caterpillar, their business in China is improving, maybe from low levels, but it's headed in the right direction. So those are the -- we see conditions maybe not improving as quickly as we hoped 6 months ago in China but now steadily improving, and that's the basis for our guidance for fiscal '14. And China as a percentage of our total sales is about 8%. Brian Drab - William Blair & Company L.L.C., Research Division: 8%. Okay. And have you said yet on the call what percent of sales is liquid versus air filtration maybe for the quarter or for the fiscal year?

We haven't. And the number is?

Brian, it was 18% of our total sales for the year. Brian Drab - William Blair & Company L.L.C., Research Division: 18% for the year, Rich, and...

Yes. Brian Drab - William Blair & Company L.L.C., Research Division: Can you tell me for the quarter?

Give me a moment. It was about 19% in the quarter. A little better pickup in the second half here as some of the new programs have gone into production.

Our next question comes from the line of Brian Sponheimer with Gabelli & Company. Brian Sponheimer - Gabelli & Company, Inc.: Bill, just a question I guess broader strategy regarding capital allocation. I mean, you guys are very transparent as far as what your goals are. But with the $110 million of net cash in the balance sheet, another $200 million of free cash for fiscal year '14, maybe talk about the acquisition environment? And I guess in the absence of that, if we get to the end of fiscal year '14 and you're sitting on -- well, at that point, roughly $200 million in net cash, would you, you think, at that point, reconsider some sort of larger buyback programs, especially if the shares haven't adjusted accordingly?

Good question, Brian. We've talked -- Jim and Rich and I and our board have talked about that. I mean, we have a lot of financial gun powder on our balance sheet to do things, and Jim talked about our CapEx that we're planning for next year. And we're -- that's a combination of some -- a little bit of capacity expansion, technology, cost reduction and new programs. And we're very -- we could spend more if we needed to because we -- as you pointed out, we have the cash. We have -- we're looking for acquisitions, and I talked about this as sort of our approach in response to one of the earlier questions. But you can -- as you noted, we can't call the timing of those. So one of the things that we did do, and I think -- I'm glad you brought it up because I think we want to highlight this in our releases, we talked about our -- or maybe in Jim's comments, our share buyback. Historically, we've been talking about maybe 1% to 3%. We're talking about 2% to 4% as our guidance for this year, and part of that is a function of -- if that we aren't able to find attractive acquisitions and close on them, that we will, obviously depending on the stock price and other factors, we will buyback more stock. And that's why we raised the guidance on that. So that is part of our conscious plan to return some of that cash to our shareholders in the form of buybacks if we can't deploy it for acquisitions. Brian Sponheimer - Gabelli & Company, Inc.: You guys ever take a look at the balance sheet and think that maybe the right capitalization would be a full turn of leverage, and maybe that puts you into a different stratosphere as far as your own acquisition? I guess the type of gun you're hunting with for acquisitions.

I'm trying to think through that for a second. Yes. I think we're trying to use a pretty big gun, but -- a large caliber, but I think the -- we've talked about it with our board in terms of trying to reach that balance between trying to deploy that cash to get a better return than having it sit in the bank with the risk. And then just sort of trying to figure out -- trying to maybe build out our pipelines. That was another question you asked. And one of our other reactions to sort of our situation is not only to talk about maybe increased share buybacks as part of our guidance, but also, we're going to very aggressively work on building out a more robust pipeline of acquisition candidates. We think that could help -- should help improve our probabilities of deploying more of that capital for acquisitions, and maybe even some bigger ones. But we're biased towards the bolt-on ones historically.

Our next question comes from the line of Nick Prendergast with BB&T Capital Markets. Nicholas V. Prendergast - BB&T Capital Markets, Research Division: Could you perhaps comment just a little bit on current capacity utilization and if you feel that you have kind of the sufficient capacity in all the right geographies?

Yes. This is Jim. We've actually been doing some benchmarking in terms of just what -- how you define capacity. So I think that's maybe different from company to company. But as we look at our plants, some are busier than others given just the product they make. But we're at about, if we use our sort of normal capacity for that plant -- and sometimes that depends which geography it's in, how many shifts they work, but it's on average about 2 shifts. We're in the low 60s in terms of capacity. So we think, in the short term here, we have a fair amount of runway. But looking longer term, we have announced plans to build another campus in Suzhou, China, and we recently announced another plant in Poland to help with our longer-term capacity needs. So in the short term, we feel we're definitely in good shape. But looking out, we -- because it does take a couple years, we're already working on the capacity for the future. Nicholas V. Prendergast - BB&T Capital Markets, Research Division: Sure. And do you have completion dates when you expect to have completed those expansions?

Nick, this is Bill. They're probably about 2 years out, plus or minus. So we're -- we had announced the China plant over a year ago, and we've dialed that back a little bit or pushed it out a little bit just based on the current -- what happened in China. But as Jim mentioned, as we look forward in support of our long-term strategic growth plan, we know we need more capacity in both Asia and Eastern Europe, and it takes us a couple of years typically to complete that. So that's why we got those on the table now. Nicholas V. Prendergast - BB&T Capital Markets, Research Division: And one more question. Regarding your Special Apps, how much of that is traditional, the hard disk drives? And how much of it is other applications?

Nick, this is Rich. Disk drive of that product group is about 60% of the total sales. About another 20% to 25% is membranes. And then the other pieces would be semicon imaging and the IVS business. The IVS business is the fastest-growing of the group at this point.

[Operator Instructions] Our next question comes from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Very nice quarter. Good year. Sorry it came at the expense of comp, but the page is off $0.02 or $0.03 more in EPS in the comp in the fourth quarter, because that was a nice job. Hey, just a question. Bill, when you look at the geographic mix of the business and you look at your '14 local currency revenue guide, how do you expect Americas, Europe and Asia to play out against a 1 to 5 growth rate for '14.

Yes. Good question, Rick. I think we see conditions improving proportionally more in Asia and in North America. I mean, Latin America is doing very well. And less so in Europe. But we also see conditions beginning to improve in Europe. And just even some of our recent reports on the PMI in Europe give us some confidence that maybe things are moving in the right direction. So stronger in Asia, China, Southeast Asia and the U.S. or North America than in Europe. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And Europe -- but Europe does have a plus sign?

It does. Yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just -- when I look at the Asia business, and we talked a little bit -- I'm not sure that you actually commented about how China did in the fourth quarter. Japan was only a minus 1. Where in Asia did we accumulate the 10% local currency decline? Was that -- why was Asia down 10 in LC? And Industrial was down 15%, Engine down 4%, but...

Yes. Rick, the GTS business had a disproportionate impact on China. So China in total was down about 20% quarter-over-quarter, okay, which -- for the year, it was up 14%, okay, but it's the GTS that swings from quarter to quarter. So in that quarter, the GTS was down almost 40%, and that drove the -- primarily was the driver of the 20% decrease in total. So it's that noise that we get from GTS both on the positive and negative. If you take a look at just the Engine business in China during the quarter, it was down about 6% -- or 5.5%. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then was -- so China for '13 was plus 14%?

Right. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. And can you just -- I mean, maybe Rich can do this off the top of his head. But if you look at Asia, can you just give us an approximate sales mix, Engine versus Industrial? If you can add that up real quick, Rich.

In total? Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Is it a 60-40 mix or a...

It's closer to a 50-50 in total. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: It is?

Yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. Okay. And, Jim, could you just repeat -- I'm sorry, the -- what was the pension contribution that you mentioned in '13? And also, what does that look like in '14? And what's the plan there?

Yes. What I mentioned was in the fourth quarter, we made a pension contribution of $21 million to our U.S. plans for the year in total, including all of our pension plans. We made contributions of $28 million this past year. We see that number going down in '14 as our pension funds are in relatively good shape. So that $21 million was a discretionary that probably won't repeat. So it'll be more on the lines of $5 million to $10 million next year overall.

I'm showing there are no further questions at this time. I would like to turn it back over to Mr. Bill Cook for any closing remarks.

Thanks, Lara. And first, I'd like to again recognize and thank my fellow employees for their contributions to our very good fourth quarter performance. I'd also like to thank everyone on the call today for your time and continued interest in our company. So thank you, and have a great day. Goodbye.

Ladies and gentlemen, this concludes the Donaldson's Fourth Quarter and Year-end Conference Call. This conference will be available for replay after 11:00 a.m. Eastern Standard Time through September 3 of 2013. You may access the replay system at any time by dialing (303) 590-3030, or 1 (800) 406-7325 and entering the access code of 4634794. Thank you for your participation, and you may now disconnect.