Second Quarter Results:
Engine/Mobile Filtration Segment
Net sales at our Engine/Mobile Filtration segment declined less than 1% from the second quarter of 2011. Overall, we experienced 1% growth domestically and a 2% reduction in sales outside the U.S. Our slower domestic growth was driven by lower orders from independent distributors due to softer industry demand. The 2% reduction in foreign sales (1% growth when adjusted for changes in foreign currency) was driven by a 25% reduction in heavy-duty engine filter sales in China. Despite recent monetary initiatives to address slower economic activity, our outlook for China for the remainder of 2012 remains uncertain. Lower sales in China in the second quarter were partially offset by higher heavy-duty engine filter sales into other foreign markets including Europe and Northern Africa where sales increased a combined 6% from the second quarter of 2011.
Operating profit at our Engine/Mobile Filtration segment was comparable with the second quarter of 2011. Our operating margin improved 0.2 percentage points from last year’s second quarter to 22.7%—the highest second quarter operating margin in our Engine/Mobile Filtration segment in at least ten years.Industrial/Environmental Filtration Segment Net sales at our Industrial/Environmental Filtration segment increased 1% from the second quarter of 2011. Overall, these higher net sales were the result of less than 1% sales growth domestically and 3% sales growth outside the U.S. Our growth in domestic sales was heavily influenced by continued strong sales at our Total Filtration Services (TFS) distribution business which has steadily increased sales and operating profit over the last several years. These higher sales were offset by lower sales of aviation and marine fuel filtration products and lower natural gas vessel sales due to the timing of several large orders in the second quarter of 2011. The 3% increase in foreign sales (9% when adjusted for changes in foreign currency) was driven by an approximate 34% increase in natural gas vessel and aftermarket filter sales in several international markets including Asia, Australia and Canada. In addition, our European sales in this reporting segment rebounded in the second quarter. After declining 9% in the first quarter compared with the first quarter of 2011, our European sales grew by 8% from last year’s second quarter. This sales growth was the result of strong dust collector system sales at our United Air Specialist (UAS) business and higher military marine fuel filtration sales in the U.K. Although uncertainty persists for our outlook for the remainder of the year in Europe, we are cautiously optimistic that our backlog heading into our second half will facilitate the continuation of sales growth in the third and fourth quarters.