Donaldson Company, Inc. (DCI) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Donaldson First Quarter 2014 Earnings Call and Webcast Conference Call. [Operator Instructions] This conference is being recorded today, November 21, 2013. I would now like to hand the presentation over to Rich Sheffer. Please go ahead, sir.

Thank you, Danielle. And welcome, everyone, to Donaldson's Fiscal 2014 First 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 first quarter earnings and our updated 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. We are very pleased to report that our new fiscal year is off to a good start. We delivered record operating results on a 2% sales increase in the quarter. Our 15.3% operating margin was our third consecutive quarterly record and, I believe, is a great indicator of how well our company is running. In this global environment that is still challenged by many economic and political uncertainties, we are fortunate to have seen real progress from our growth strategies. Our core growth model across all of our businesses is based on ongoing filtration and emission innovations, which provide our customers with break-through, first-fit systems for their equipment. The proprietary nature of our first-fit products allows our customers and us to retain more of the aftermarket for replacement parts. In addition, we have supplemented this strategy with an expansion of our overall aftermarket presence by adding new parts and distributors to grow our aftermarket sales much faster in both developed and developing economies. So let me next review some of the key details of our first quarter sales. Measured in local currency, our total sales increased 3% over last year. Within our Engine Products segment, our OEM businesses in the Americas decreased 9%. However, our other major regions delivered OEM sales increases. Our European OEM businesses were up 13% in local currency, as we benefited from the continued growth in the agricultural equipment market and a pickup in heavy truck sales in advance of the upcoming Euro 6 emission standard implementations. Our Asia-Pacific OEM sales increased 2% in the quarter. Our On-Road sales improved in Japan. And in China, we have our first On-Road programs beginning to ramp up. We continue to see improving 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 9% in the quarter, with strong sales in all of our major regions. We attribute this growth to the combination of improving equipment utilization in the field, the actions of any more significant customer channel inventory reductions and our own market growth initiatives. Aftermarket is our earliest cycle end market and improvement -- the improvements we've seen provide some confidence that conditions in our end markets have improved since the sudden contraction we experienced almost exactly a year ago. Now, finishing my review of our Engine Products businesses, our Aerospace and Defense sales posted a 20% local currency sales increase, with strong program shipments for the BLACK HAWK helicopters during the quarter. Now switching to Industrial Products segment. Sales decreased 4% in local currency. This decline was attributable to a 27% decrease in our Gas Turbine shipments. As we highlighted in our outlook in August, we expected a pause in our Gas Turbine business during the first half of fiscal '14, as the marketplace digested the surge of large turbine projects from last year. We are continuing to call this a pause, and I will discuss this more when we get to the discussion of our outlook. Local currency sales increased in our other 2 Industrial Product business units, helping to soften the impact of the Gas Turbine shipment decrease. In our Industrial Filtration Solutions business, our sales increased 2% in local currency, as solid levels of manufacturing activity drove record demand for replacement filters for our Torit dust collectors and compressed air systems. This aftermarket growth was enough to offset the continuing weak manufacturing spend -- capital spending levels, which has reduced the demand for our new dust collectors. And finally, in our Special Applications business, our sales increased 5% on continued growth of our integrated venting products, an increase in disk drive filter sales and an upturn in our semicon and imaging business. In summary, we believe this quarter demonstrated the value of our time-tested business model of having a diversified portfolio of global filtration businesses. Our diversified portfolio provides exposure to many different end markets and regions that are typically cycling up and down at different times. As you may recall, during last year's sudden OEM and industrial contractions, the downturn was softened for us by our late-cycle Gas Turbine business in some of our emerging regions. Now, we're seeing incremental improvement in our replacement filter sales across our engine and industrial markets. At the same time, we're seeing stabilization in a number of our first-fit end markets. In addition, we're again seeing solid growth in some of our key emerging regions. For example, in the quarter, Latin America and India were up 10% and 8%, respectively. All of these combined to offset this quarter's decline in our Gas Turbine shipments. This is how we expect the model to work. Enough of our businesses and regions are either stable or growing to offset other businesses or regions that are in different parts of their cycles. I'll now turn the call over to Jim for his comments on operational metrics before I discuss our outdated outlook. -- updated outlook. Jim?

Thanks, Bill. Good morning, everyone. Our gross margin for the quarter was 35.8%, an increase of 210 basis points from the 33.7% we reported in last year's first quarter. As we noted in our press release, one of the drivers of this gross margin increase was favorable product mix due to an uptick in the percentage of our sales coming from replacement filters. Replacement filter sales were 54% in the current quarter compared to 51% 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. Our product mix was also favorably impacted by the decrease in large Gas Turbine shipments in the quarter, which were a margin headwind in fiscal '13. Overall, mix had a positive 60-basis-point impact on gross margin. In addition, our ongoing Continuous Improvement initiatives also benefited our gross margin by approximately 90 basis points compared to last year. Last year, we took many cost-containment actions to aggressively control our manufacturing costs. This work we did to align our cost structure with our current level of sales is continuing to pay off, and as a result, we saw fixed-cost absorption deliver approximately 7 basis points of benefit compared to the first quarter of last year. We're continuing to make incremental adjustments to our cost structure in certain regions and incurred $600,000 of restructuring costs in gross margin in support of these efforts. Our operating expenses declined by $2 million compared to last year's first quarter. As a percentage of sales, operating expenses decreased 70 basis points. The impact from our ongoing expense control initiatives, slightly lower pension expense and leveraging our fixed cost base reduced our operating expenses of the percentage of sales by 130 basis points. These items more than offset the increases resulting from higher incentive compensation expense, the incremental expenses related to our Strategic Business Systems project, higher U.S. medical insurance expenses and $200,000 of restructuring expenses in operating expense. As a result of our strong gross margin and expense controls, our operating margin was a first quarter record, 15.3%. This is up 280 basis points from last year's first quarter. Looking forward, we expect our full year fiscal year '14 operating margin to be between 14.2% and 15%. We begin accruing incentive compensation at normal levels again at the beginning of fiscal year '14, and our investment spending on our Strategic Business Systems project will start increasing in the second quarter as we start bringing our first 3 facilities live on the new system. As a reminder, as you update your models, our second quarter operating margin is normally our lowest of the year due to seasonal holidays causing the fewest shipping days of any quarter for us. In addition, we have almost half of our annual stock option expense occur in our second quarter, so about $4 million. We are also planning to increase our operating expense investments in the second quarter to pursue organic growth opportunities. And finally, the first go-lives on our Strategic Business Systems project will increase our operating expense in our second quarter compared to the first quarter by approximately $2 million. So in total, we're anticipating our second quarter operating margin to be between 12% and 12.5%. We do expect our operating margin to be more in line with our first quarter run rate beginning again in our third quarter. And again, we expect our full year operating margin to be between 14.2% and 15%. We did have one other restructuring item on the P&L in the quarter, and that's for the sale of our Ultratroc dryer business in Flensburg, Germany. We recorded a $900,000 loss, which is recorded in other income this quarter. Our effective tax rate was 32.2% in the quarter versus 29.4% last year. The increase was mainly attributable to $2.1 million of tax expense related to an intercompany dividend. Based on our projected mix of earnings in fiscal year '14, we forecast our full year tax rate to be between 29% and 31%. We are no longer anticipating the renewal of the U.S. Research and Experimentation Credit prior to the end of our fiscal year, which is the reason we increased the bottom of our full year range from 28%. Our first quarter capital expenditure was $21 million. Looking at our fiscal year '14 forecast, we continue to expect to spend approximately $90 million on CapEx for the full year. The breakdown of the $90 million spend is projected to be approximately 20% related to capacity expansion; 30% for our technology initiatives, which includes our Strategic Business Systems project and our R&D lab expansion project; another 30% as 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 a record $78 million this quarter. For fiscal '14, we expect full year cash flow from operating activities to be $320 million to $350 million. And with our forecast $90 million of CapEx, we expect to generate $230 million to $260 million of free cash flow this year. Regarding capital deployment, we repurchased 339,000 shares in the first quarter for $12 million. 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 a 30% increase in our dividend declaration in May. Looking to capital deployment for fiscal '14, we plan to maintain our new dividend payout policy and repurchase between 2% and 4% of our outstanding shares. We expect interest expense in fiscal '14 to be between $8 million and $10 million, and our balance sheet remains very strong, with $383 million of cash and short-term investments. We did use some of that cash last week to retire an $80 million senior secured note that matured. So with that, I'll pass it back to Bill, who will provide additional details on our updated outlook for fiscal '14. Bill?

Thanks, Jim. Looking forward, as we mentioned earlier, we believe that many of our end markets have either stabilized or in the case of our aftermarket sales, have begun to grow again. And we are forecasting that growth will continue to pick up during the second half of our fiscal year. In aggregate, and while we made some minor tweaks, our current full year sales outlook is very similar to what we provided in August. Our outlook for fiscal '14 is for a sales increase of 1% to 5%, which would result in sales of between $2.45 billion and $2.55 billion. As Jim discussed, based on our first quarter operating performance and forecast for the balance of the year, we have adjusted our operating margin range, so that the midpoint of our new range is 10 basis points higher than our original outlook. On the other hand, we now believe our full year effective tax rate will be slightly higher than our -- in our original outlook as we do not now anticipate a renewal of the U.S. R&D tax credit before the end of our fiscal year. The net of all of these factors is that our EPS range remains the same, at between $1.65 to $1.85, the midpoint of which would represent a new record and a 6% increase over last year. Now, I'd like to briefly discuss some of our growth initiatives, and as we've discussed in previous calls, we continue to have significant growth opportunities in emerging economies where our product -- our current product presence is generally lower. We're continuing to add sales resources, parts to our product lines, distribution capabilities and new distributors and OEM customers in these regions. So, for example, in our engine aftermarket, we added 89 new distributors and over 800 new part numbers in our first quarter. Another of our key growth initiatives is the utilization of our innovative technologies to help better solve our customers' filtration issues, while protecting the aftermarket for replacement filter business over time. One of our most successful proprietary technologies is PowerCore. It is a great example of how we invest centrally to R&D and then leverage our technologies 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 our first quarter were $34 million, up 14% over last year, and within that, sales of PowerCore replacement filters are up 21%. We have a number of new PowerCore programs going into production over the next 12 to 24 months. These are the results of the new diesel emission regulations in North America and Europe that are going into effect and causing our engine OEM customers to launch new product platforms to meet these stricter requirements. As these programs launch, we expect the demand for our replacement filters for these new programs to begin ramping up. We are currently working with these same OEM customers on their next generation of new equipment platforms that they plan to launch later this decade. On the industrial side of our business, we sold over 400 Torit PowerCore dust collection systems in the quarter, which represented a 16% increase over last year. In addition, our sales of Torit PowerCore replacement filters increased 73%. So if you put all that together, in total, our company PowerCore sales totaled $40 million in the quarter, up 16% over last year. And we believe we're still in the early innings of rolling out our proprietary filtration technologies, such as PowerCore or our liquid media Synteq, and we remain very excited about the future of these products. So now to quickly summarize, despite the continuing mixed global economic conditions, we posted a very good start to our new fiscal year, both from a sales and especially from an operating metric perspective. In our first quarter, we fortunately saw the combination of stabilization in some markets and growth in others that we had projected in August. So this continues to further support our outlook for the full year. For the balance of our fiscal year, and especially the second half, we forecast a further strengthening of conditions in our business. Bottom line, we're forecasting a sales increase, with record operating margins in fiscal '14, which will continue our advance in pursuit of our strategic goals of growing our company to $3 billion in sales by fiscal '16 and $5 billion by fiscal '21. This concludes our prepared remarks, Danielle. We'd now like to open the call up to questions.

[Operator Instructions] Our first question is from Eli Lustgarten with Longbow Securities.

Just one clarification, because -- I know Jim gave us the operating expense increases in the second quarter from stock options of $4 million in the strategic investments. I mean, where is all that going to be reported? Is that going to be in the corporate expense or is it going to be split? Or can you give us some idea of how -- where we should put those numbers?

Yes, Eli, this is Jim. Basically, all of that will be in operating expense in terms of -- maybe I'm not understanding, are you asking me to the gross margin? Nicholas V. Prendergast - BB&T Capital Markets, Research Division: I mean, is that going to be flowing through the segments, and so the segment margins will be affected...

Well, I'm sorry. Yes, thank you. Yes, that will be reflected in the segments, basically in proportion to their sales.

Okay. So it will affect equally on -- pretty equal across the board.

Yes.

By sales difference. And during -- as far as operations you started talking about emerging markets. So you mentioned the role, the -- China's initiative, you're starting to ramp up some OEM stuff. Can you give us some color as to what the emerging market size of opportunity? I mean, what kind of magnitude can we expect out of China and some of these -- the new product that you had in India that you talked about? Can we get some magnitude of what we can expect for 2014 and maybe 2015 as these initiatives ramp up?

Yes, Eli. This is Bill. I think the BRICs in total are about 15% of our sales today, roughly. But as part of our strategic plan, I'm going to go out even further than the years you mentioned. So fiscal '21, I mean, we're looking at Asia-Pacific in total being almost 1/3 of our companies, so almost 1/3 of that $5 billion. And we're looking at -- so the similar healthy growth percentages from some of the other emerging markets like Latin America. So the emerging markets in Asia-Pacific, Latin America, are going to have disproportionately higher growth. And that's part of our plan, and we're -- and we've invested over the last couple of years in order to achieve that. We haven't given specific guidance for them for fiscal '14.

Yes, but how big was -- did you say they were because I -- the phone cut out or something. I didn't hear exactly. You made a first comment about how big those businesses were at this point?

I think if you take a look at sort of the BRICs, as we define them, it's about 13% of our sales today.

Okay. And so one final question. The operating profitability in engine was spectacular. And I know they're going to be down in second quarter, but can you give us some idea what's going on in the operating profitability of the Engine business across major markets? And the same thing, I guess, the drop-off in Gas Turbine was probably a little bit bigger than we should have expected. Is that -- is the forecast still the same for the year that you'll have some -- a little bit of results or is it just going to be weaker for the year at the bottom end of what your original guidance was?

Eli, this is Jim. In terms of the Engine margins, it was really the same -- we experienced the same benefit really across the globe. Really, just a function of this time last year, if you remember, our volumes really dropped off pretty significantly. So we did have some unabsorption in the comparable quarter. So as we've adjusted our cost structure really worldwide, and that affected the engine plants maybe a little more so than the industrial plants, we've been able to benefit both from volume and our cost reduction. I think the other thing on the engine side is there's a little bit of favorable mix towards replacement parts versus OEs. So it's not any one region of the world. It's really all of our plants worldwide where we saw that. Maybe in terms of Gas Turbine, maybe Bill will comment on that.

Yes, Eli, it's Bill. Gas Turbine, our guidance for Gas Turbine is the same as what we provided at the end of August. So I think it came in about where we were expecting it for this quarter. We continue to see that sort of back-end or second-half loaded, about 60% of the sales in the second half -- or for Gas Turbine in the second half of our year. And as you all know, I mean, the Gas Turbine business for us quarter-to-quarter is pretty lumpy. So I would say the first quarter came in where we expected for Gas Turbine and was, as I mentioned, was offset by strength that we saw in the aftermarket, some of the regions and the stabilization of some of the other markets.

Our next question is from Charley Brady with BMO Capital Markets.

On the -- I guess when talking about destocking, I mean, one of your major customers that paints their stuff yellow, had orders up and were a bit soft. They're still talking about some destocking in some of the areas. It steps off in Latin America. It sounds like that's not really having much of an impact on Donaldson. And I'm just trying to -- can you square that up for us as kind of why have you not seen that impact?

Yes, this is Bill. I'll start with that. I think a lot of our businesses is replacement parts, and we think we -- that's behind us. I think what we read about with the destocking with that yellow customer you mentioned is related to some pockets of finished equipment that they have and that they've been working off. So there's still a little bit of an impact for us in terms of ramping back up, say, in China, where there's excess finished good inventory. But we're seeing -- we think that the destocking is done in terms of replacement filters.

Okay, that's helpful. And just one more, can you talk about in terms of restructuring activity, the outlook and stuff for the rest of this year, you -- all of a sudden you just kind of normalize ongoing stuff, do you see any other larger projects moving beyond fiscal '14 or does this pretty much tie everything up of what you need to get done?

Bill again. I think we did a lot in the recession in terms of restructuring the business, and I think what we're doing, these are minor projects and that we do not see anything significant going forward. More -- maybe some more of these smaller activities, but not anything major.

Our next question is from Kevin Maczka with BB&T Capital Markets. Kevin R. Maczka - BB&T Capital Markets, Research Division: I think your Q2 EBIT margin guidance is pretty clear. I think we understand some of the headwinds that you've laid out there in terms of the business systems and stock options, but I'm wondering if you can say a little bit more about the second half because I think usually, those margins are a bit higher than you experienced in Q1 and you got the favorable mix, which seems like it would continue, so -- as far as Gas Turbine in aftermarket. So can you just comment on the back half expectation a little bit more?

Yes, this is Jim, Kevin. I think we definitely do see that uptick from second quarter to third and fourth quarter. It obviously depends on the volumes we will see. We are anticipating ramp up in the volume third into our fourth quarter. The other thing is some of that sales volume is coming from GTS. So those generally, as they're primarily first-fit projects, carry a lower margin. The other thing is some of these investments that we've talked about, the strategic business system, our incentive compensation being restored, will have an impact, maybe a little bit more than other years just given the year-over-year impact of that. So we see the third and fourth quarter really being comparable to the first quarter, maybe the third quarter being a little bit more challenged than the fourth. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay, got it. And how does that business system spending flow through the year? I think you said $2 million in Q2, and it was a smaller number in Q1?

Yes, so the Q2 number is going to be about $2 million higher than Q1. So in the $3 million range. That will be a similar number into the remaining quarters. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. And then just finally, in terms of the P&L, top and bottom line guidance isn't much changed, but the cash flow guidance is. Can you just comment on what's driving that improvement?

Yes, we've had -- some of it is mix. As we're seeing better aftermarket, that generally helps our receivable balance a little bit. And then a lot of it has just been -- we've had a lot of success in terms of inventory management. Our inventories have remained relatively stable in spite of sales coming up. So as we work through the first quarter and updated our models based on what we've seen, we've just been able to have better outcomes in terms of working capital management.

Our next question is from Laurence Alexander with Jefferies.

This is actually George D'Angelo in for Laurence. As you look at your share gains in the engine applications, is there any geographic skew that has led the growth rate in the next few years be sensitive to a particular geography because the launches are maybe tilted there?

George, it's Bill. I think that over the next -- over our strategic planning period and tying it back to the question that Eli answered, you will see significantly higher growth percentage-wise in the emerging markets, so it's in most of Asia, outside of Japan and Latin America. So a lot -- the higher growth percentages from these new launches will be in -- from a percentage basis and dollars will be in those -- in the emerging markets.

Our next question is from Brian Drab with William Blair. Brian Drab - William Blair & Company L.L.C., Research Division: Could you give us a little more granularity on China in terms of specifically in China, the OEM sales and what you're seeing in the aftermarket? I know you mentioned that you're working -- you feel like you've worked past inventory issue, but -- and maybe start with what percent of your sales were in China in the quarter?

The percentage of our sales in China in the quarter -- we're just looking it up -- is $50 million.

Yes, we were roughly in the neighborhood of about $50 million of sales in the quarter in China. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And then...

A little bit less than 10%. And we saw -- Brian, we saw -- we had some of the impact of Gas Turbine was in China. And so it had strong shipments last year and not this year, looking at the quarter year-over-year. But if you take a look at our -- our engine business was solidly up in the double digits in local currency, over 20%. So we're -- I think maybe tying that back to the question that we answered earlier about in terms of the sort of the impacts of inventory maybe still stuck, maybe we would like -- maybe last year was bad, we had an easy comp, but we're certainly seen the percentages of our business recover -- our growth percentages, well in China. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. And how does the sales roughly break down now by end market in China, Gas Turbine versus Engine versus Other?

Yes, I think in the quarter -- looking, Brian, it's probably about 2/3 industrial and 1/3 engine right now. Brian Drab - William Blair & Company L.L.C., Research Division: Okay, that's great. And then on Aerospace & Defense, with such strong results here in the first quarter. I'm not sure if you commented this specifically in your prepared remarks, but the balance of the year, is that going to -- is this going to be the strongest growth, I guess, that we see for the Aerospace & Defense segment for the year?

Yes, I think -- Brian, Bill again, I think from -- some of the Aerospace & Defense business is sort of lumpy with these government programs. So as we mentioned in our prepared remarks, we had a lot of BLACK HAWK shipments in the first quarter. And that's essentially sort of done for the rest of the year. So it will be not as strong for the balance of the year, and that's sort of why our guidance for the full year sounds a little bit different than what we did in the first quarter. That one program really helped us in the first quarter.

Our next question comes from Brian Sponheimer with Gabelli & Company. Brian Sponheimer - Gabelli & Company, Inc.: First one, I'm sorry just kind of a historical question. Last year, you had a big quarter from an other income perspective. What was the number there that drove that $5.8 million?

Brian, Rich and Jim are looking up something.

One second.

Do you have another question for me while they're looking it up? Brian Sponheimer - Gabelli & Company, Inc.: Yes, so the balance sheet's in great shape. You've got $180 million in net cash, you've spoken about opportunities from an acquisition standpoint and clearly looking to deploy cash over the next few years. Take a couple of minutes to talk about the acquisition pipeline that you're seeing. And what's preventing you from maybe pulling the trigger on something sizable at this point?

Yes, Brian, Bill. I think the -- most of our growth objectives are based around organic growth, and a lot of the things that Jim and I talked about in terms of investment, in terms of CapEx and operating expense investments are really to support that organic growth. So we are and will remain mostly an organic growth story because we see opportunities to do that. We still really believe or target about 2% of annual revenue growth should be from acquisitions. So that's -- at our current size that would be about a $50 million in sales a year, get that average each year. So not huge, although as you pointed out, we have -- certainly have the capacity to do large ones. We're not restricted to doing only $50 million, but that's sort of our sweet spot. We're-- we have a team that's focused on looking for acquisitions trying to cultivate the relationships. We haven't been successful primarily because of the pricing in the market that with our return expectations, we get priced out. So we're patient. We're fortunate that most of our growth is based on organic, but we're continuing to work at it very hard. So over time, I'm hoping that we can do more, but we're going to continue to focus mostly on organic at the same time. Brian Sponheimer - Gabelli & Company, Inc.: Yes. In the absence of that, your free cash flow is outstanding. You're doing a tremendous job from an operating perspective. And while you've called out that you're increasing how you look at share repurchase, we know we've been seeing a lot of companies -- the Johnson Controls has just into an ASR this morning. How -- would you ever consider something that's a little bit out of, I guess, the character of the company to return cash to shareholders?

While I'd say we'd always be open to other ideas. I mean, I think we, at some point, we -- I guess, we're sort of blessed to be able to have -- to build up the strength in our balance sheet and if, at some point, we can't figure out ways to deploy as much of it as we think we should, then we will -- we're open to other ideas. And Jim has something he wants to add as well.

Yes, maybe -- Brian, this is Jim. I think one of the other things with our balance sheet is the majority -- actually, now after this quarter, all of that cash is overseas. So as we execute on the dividend we talked about and the share repurchase, just by doing the share repurchase at the 4% or so this year, that will add about $125 million to $150 million of new debt to the balance sheet this year. So we will start to leverage up fairly quickly, just executing the strategies we talked about. But we're also open to looking at other things. Brian Sponheimer - Gabelli & Company, Inc.: And, I guess, I can touch-base with Rich off-line about that $5 million.

Actually, I have the other one here. So as we look at other income, it's actually more driven by this year, being a little bit lower than last year. So in that number this year is about $1 million on the loss of the operations in Germany that I mentioned. We also have a little bit of variance in terms of interest income year-over-year. And then we did make a small donation to our foundation this year. So that lowered this year's number. And then the one thing in last year that raised that a little bit is we did have a small insurance recovery in there last year. So those couple of things kind of combined to reconcile the year-over-year. Brian Sponheimer - Gabelli & Company, Inc.: All right. That's helpful. I was going to give you credit for having an even higher quality quarter than it looks.

Our next question is from Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Bill, could you just, on the industrial -- in the industrial business, the IFS business had the 2% consolidated growth. And again, the -- I think the guides still were stuck at 5% to 11% for the year. Is there any order growth or backlog at this point in the fiscal year to support that acceleration?

Rick, Bill. We -- the backlog in that business doesn't go out that far. I mean, we're looking at to the next quarter, the second quarter. And as you point out, we are forecasting a recovery and this is mostly on equipment, the new equipment side, in the second half of the year. And that's based on -- at this point, it's based on the forecast and the quoting activity for our salespeople, but it's -- I would say, most of that's not yet in the backlog, but it'll hopefully be in there over the next 3 months. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So at least you could point to an uptick in the quarter activity? I mean, the...

Well, I think part of that -- and I'd go back to what we said about the aftermarket because that -- in that business, that's usually the leading indicator. And we're knocking it out of the park in terms of aftermarket or replacement filter sales, which is indicative of not only our own growth initiatives, but it's also a function of how the equipment is being used in the field. And typically, customers -- a plant manager always use the equipment he has as fully as possible before he invests. So the fact that the equipment is running a lot means that the investments should follow. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And does -- was the equipment sales, was that a negative number year-over-year?

It was, yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And can you just give us a sense of mix, replacement filters in IFS, maybe 30% or...

I think it was -- I think it's about 40% roughly, Rick. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: 40%? Yes, okay.

Yes. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So that's what -- okay. And then just a quick question, again, just fantastic number on the aftermarket business in engine, especially in the Americas on the 12%. And it just strikes me that the 12% growth in the Americas engine aftermarket, was against the decent comparison. I mean, I think it was up 3% or 4% last year. So can you just -- is there any color -- is there any price in that or can you give us any additional color? Was the independent channel up bigger than the captive channel or...

In terms of price, Rick, really nothing there. So it's real business, so... Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay.

Yes, I mean, I think the one thing, Rick, that we've talked about for a long time is PowerCore and other breakthrough technologies. And we are seeing the replacement parts grow in the 20% range year-over-year. So that's an element as well.

That retention, increasing our ability to retain that through our OEMs and in the independent channel over time is -- that's where we're getting traction. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And there's no price -- I don't want to cut this too thin, but is there any price on a PowerCore replacement versus -- obviously, you would have had a previous element? I mean, is PowerCore aftermarket price point higher than the product that it would have replaced?

Rick, it's Bill again. It might be a little bit -- a lot of that pricing is done by our OEM customers in terms of how they price in the channel. What we're trying to do generally with both the first-fit and aftermarket is about increasing penetration, not by trying to increase the margin, our margin. We've talked about that before. So it's about trying to get as many of those systems out in the field, so then we can harvest the aftermarket annuity. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And would you guys at least -- would you guys take some credit for taking some market share, not just in that 12% in the Americas, but also in Asia in the 11% aftermarket? Would you be willing to say, "Hey, we're taking share there."

I would. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes, okay. All right. And just one last thing, aftermarket...

Jim is nodding his head, too. So we're good. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: So, you're in agreement. And just in the Americas in the aftermarket side, can you just give any color around that captive versus independent channel?

Yes, we had stronger growth in the OED channel, Rick, this quarter. So -- and that's really, really a derivative of our proprietary first-fit strategy. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. Yes, that makes much sense because that's where you'd see the PowerCore replacement sales accelerate the fastest, right?

Exactly, right. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Yes, okay. Well, great. Bill, could I just -- one more question, sorry? Just with -- the commentary you gave around engine, there's still the assumption that the ag market is stable. And yesterday, Deere threw some commentary out just around the first part of -- well, really, fiscal -- calendar '14 for them. They pretty much had all their categories with a negative number in front of them, somewhere between 5% and 10%. Is that outlook pretty dynamic? And are you kind of watching that relative to your own guidance in ag?

Yes, we are, Rick, and we follow the Deere announcement very closely. We still feel comfortable with our outlook based on the mix of how much of it is first-fit versus replacement parts. I think as you might recall, a couple of quarters ago or last year, we were talking about some new emission platforms that we launched that were in the ag segment. So we've got some other things that are in there that help us feel good about our outlook.

Our next question is from Anna Kaminskaya with Bank of America Merrill Lynch.

It's actually Andrew Obin. I don't want to beat this thing to death, but just on the inventory level, do you guys have a sense of days inventory in your distributor channel? And how do those compare to where they were maybe a year ago? I guess what I'm trying to figure, all right, you guys highlighted that the destocking in the channel was coming to an end. And it just seems, looking at your numbers, looking at Parker's, Eaton's, ABB's numbers, that this might have actually happened. Can you give us a comment on that? And how long do you think the tailwind from the end of destocking will last in terms of how much of a benefit we're going to see and for how long?

So Andrew, Bill. I'll start. We're talking about here, we're talking about replacement filter inventory. I talked...

Yes, yes, yes. That's right.

There might be some equipment inventory, and you know this better than me.

Yes, that's separate. That's right.

Okay. I would say the -- our feeling is that the independent channel, the independent distributors, work through their inventory issues faster and more aggressively than the OEDs, okay? They're -- it's more of a cash flow business and they want to manage that, and a working capital business, they want -- they manage that very closely. So they tend to react the fastest and work through it the soonest. I think the OEM parts and service, I think that the tail on that, working through it was longer. I think if we go back to a year ago, I think we probably, at that point, had thought it was going to be over sooner than it actually was, but that was also a function of sort of how far things went down. But I -- our feeling is that that's behind us now from the OED. So it took longer, maybe lasted longer, but it's behind us now on the OE as well. Now, all of that is really a function of what people think are current business levels. I mean, if things get better faster or go down again, there will be an adjustment. The better faster then we typically see sort of almost like a bullwhip effect, because people, not only does the end market demand almost starts to go up, but then there's a restocking on top of that. And we're already starting to plan for that. At some point, that's going to happen, that when activity levels in the field go up, that there'll also be surge of restocking in the channel.

And I know, Bill, that there's only so much you can tell us, but what are the big off-highway OEMs are telling you about next year, specifically on construction? Because Deere has come out pretty positive, but then they were positive a year ago, and then it turned out they shouldn't have been that positive, and then you look at Cat retail sales and they're not particularly good. What is, without naming any customers, what is the broad sense as to where North American production is going into next year?

Andrew, Bill again. I would probably, and I'm going to say sort of a global statement. I think what we see, if we take -- start globally at the 40,000-foot level, and I'll point to some of the customer pronouncements, is that a lot of them are talking about sort of a pretty flat calendar year '14 versus '13. But then the mix of that in terms of regions could be different. And I think we've -- and we've -- as we've seen this year. But we're not looking at a tremendous surge in their sales, but we also think that we'll have less of that headwind from the finished goods equipment that clogged up the channel over the last year. So we've talked -- we touched on China before. There was a significant overhang of new equipment in China and maybe in some other parts of the world that a lot of that has already been worked off. So even if their production levels get back to the end user, the actual end-user demand, that's going to be better for us because they're not trying to work off inventory at the same time.

[Operator Instructions] Our next question is from Gary Farber with CL King. Gary Farber - CL King & Associates, Inc., Research Division: Just curious, now, we've had some good PMI data come out. You guys had a very solid quarter and good, positive commentary. Just to get your perspective -- and have, obviously, good margin leverage, your perspective on are we at the beginning of a cycle, do you think? And if so, how do you see it? And if not, what things should we look for to have more conviction about a cycle coming, just a general manufacturing cycle?

Gary, Bill here. I think maybe tying in a couple of comments that Jim and Rich and I made before, we are forecasting a stronger second half of our year than the first half. And we -- the first half, we think, is going to be okay or good, so a stronger second half. And a lot of that is based on our feeling that there is going to be a general recovery. And as I mentioned to Rick's question, a part of that, we feel that with our aftermarket businesses, both in the engine side and in the industrial side, are strengthening. That's a good leading indicator for us historically that the equipment side will follow. How soon it follows and sort of this -- the angle of that slope, we don't know, but we think that that's going to happen and that's based into our guidance. I think the PMI and other data suggest that, that is happening in the industrial sector and both in this country and in other major economies. And so that's -- we factor that, all of that in. Gary Farber - CL King & Associates, Inc., Research Division: Great. And then just on market share gains, are you doing anything different this year that you didn't do last year, changing any of your programs or anything like that?

I think it's more of the same, Gary. I mean, we're really -- we've been talking about this focus on innovative proprietary technologies on the first-fit to provide our customers with a better solution and then help them and us retain the aftermarket. That's a journey we've been on for a number of years. And, I mean, every opportunity that we have to do that on a new platform, we're doing that. And probably what's -- really, it's been a great opportunity in the last couple of years and will be for the next handful of years, given all of the new platforms that are being developed, both on the On- and Off-Road around these -- the different -- the waves of emission regulation. So we see that installed base with these proprietary technologies really growing very significantly over the next half a dozen years.

And we have a follow-up question from Eli Lustgarten with Longbow Securities.

And just a question. Your referenced during the comments the emission changes. Can you talk a little bit about, as we roll out final tier 4 beginning in '14 here and Euro 6 or so, is there any change in content or any change in programs that you have coming over the next year or 2 that you can quantify for us or give us some indication of?

Eli, Bill. I think, on average, you would say the content per vehicle for us would probably remain the same. We're not looking at a step-function in terms of content. We do have some emissions business on different platforms, but I wouldn't want to put that -- I wouldn't want to average that in. But a lot of what we're -- on the air side, I would say the content would remain very similar. The liquid side is probably where we get the opportunity as they start to adopt our -- like our Synteq media technology to add more liquid filtration to those both on- and off-road vehicles.

And I'm seeing no more questions in the queue. Bill, please continue with any closing remarks.

Thanks, Danielle. Now to conclude our call, first, I would like to recognize and thank all of my fellow employees for their contributions to our wonderful first quarter performance. And I'd 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 First Quarter 2014 Earnings Conference Call. This conference will be available for replay after 12 noon today through November 28, 2013 at midnight. You may access the replay system at any time by dialing 1 (800) 406-7325 and entering the access code of 464-8250. Thank you again for your participation. You may now disconnect.