“Our second quarter first-fit OEM heavy-duty engine filter sales in China were $2.4 million, or 25%, lower than the second quarter of 2011. These lower China sales were almost entirely driven by a decline in the local production of diesel engines in 2012. Although conditions for the remainder of the year are uncertain, we believe our customer relationships remain strong, and we are well-positioned to capitalize on China’s projected long-term heavy-duty engine filtration growth across all products and markets including first-fit and the aftermarket.
“We continue to improve our financial performance at our Industrial/Environmental Filtration segment where our second quarter operating margin improved to 13.2% from 12.1% in last year’s second quarter. For the first six months of 2012, our operating margin in this reporting segment improved 1.6 percentage points to 11.1% and our operating profit increased 21% from the first six months of 2011. With our continued focus on profitable growth by introducing higher margin air filtration products and the continued growth of our process liquid filtration markets, we believe we are well-positioned to achieve our long-term operating margin goal of 15% in this reporting segment in the next three to four years. We believe that a significant contributor to our expected continued profitable growth will be the further development of our natural gas filtration business both in the U.S. and internationally. In the U.S., our natural gas filtration sales are expected to grow close to 10% in 2012 compared with 2011 as we continue to focus on aftermarket element growth while further penetrating upstream and downstream opportunities. Internationally, we are particularly excited about our natural gas filtration growth potential in Asia Pacific. Our natural gas filtration sales in Asia grew almost 50% in the second quarter compared with the second quarter of 2011 and are expected to grow at a similar rate for the second half of this year from the comparable period last year. In Australia, our second quarter acquisition of Modular Engineering Pty Ltd. provides a solid platform for us to take advantage of the high growth of natural gas extraction and transportation that is underway in Western Australia and throughout the region. We believe we are strongly positioned to participate in the expected global growth in the natural gas filtration market—a market we believe has as much long-term potential as any other filtration market.”
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