“Top-line growth in our oil and gas market continues to be strong as sales increased 10% in the first quarter of 2013 compared with last year’s first quarter. This strong performance was driven primarily by higher natural gas filtration product sales in the Middle East, the U.S. and Southeast Asia partially offset by lower sales in Canada and of our off-shore oil drilling filtration products. A significant portion of this oil and gas filtration growth was driven by higher natural gas vessel sales, which increased 30% from last year’s first quarter. We anticipate that these natural gas vessel sales will translate into a stream of higher margin aftermarket element sales going forward. Strategically, it has been our long-term goal to fundamentally shift our natural gas product mix to a greater proportion of higher margin aftermarket elements versus first-fit vessels. To support this initiative in the long-run, we sometimes accept a larger proportion of vessel sales in the short-run—the case in our first quarter. Regardless of product mix, as we have noted in the past, we believe the natural gas filtration market has as much long-term potential as any other filtration market. Global energy needs should continue to significantly expand going forward, and we believe natural gas—an abundant, clean-burning fossil fuel—will play a prominent role in satisfying these expanding needs.
“Our execution remained strong in the first quarter as our 13.2% operating margin was slightly lower than our first quarter 2012 operating margin of 13.3%, which was our highest first quarter operating margin in almost twenty years. Financial performance at our Engine/Mobile Filtration segment was solid as operating margin increased 0.5 percentage points from the first quarter of 2012 to 19.9%, our highest first quarter operating margin in this reporting segment since 2008. Operating margin at our Industrial/Environmental Filtration segment was negatively influenced by a higher mix of natural gas vessel sales versus higher margin natural gas aftermarket element sales. As a result, our first quarter operating margin in this reporting segment declined 0.9 percentage points from last year’s first quarter. However, continued operational improvements in our commercial and industrial HVAC filtration and Total Filtration Services (TFS) distribution markets within our Industrial/Environmental Filtration segment resulted in improved operating margins in each of these markets compared with the first quarter of 2012. With continued improved financial performance in these environmental air markets coupled with continued growth at our higher margin process liquid markets, we believe we are on track to meet our 15% operating margin goal in our Industrial/Environmental Filtration segment in the next several years.
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