Donaldson Company Inc. ( DCI - Snapshot Report ) recently announced that it will establish another manufacturing facility in Aguascalientes, Mexico.

The existing plant in Aguascalientes manufactures both air and liquid filters. After the establishment of the new manufacturing facility, the existing plant’s focus will be narrowed down to the manufacture of liquid filters while the new plant will produce air filters.

Management stated that this new plant will assist Donaldson in satisfying the demand of original equipment manufacturer (OEM) and aftermarket customer in the Americas, by enhancing the manufacturing capacity of air and liquid filter.

In the month of February, Donaldson reported results for the second quarter of fiscal 2011. The company posted a net income of $44.6 million or 56 cents per share in the quarter compared with a net income of $30.9 million or 39 cents per share in the year-earlier quarter, beating the Zacks Consensus Estimate of 55 cents.

Sales came in at $537.1 million, up 23% from the year-earlier quarter, driven by increased product demand in end markets and in all regions.

Product wise, Engine Products generated sales of $331 million, up 29% year over year. Industrial Products generated sales of $206 million, up 15% year over year.

Gross margin improved to 35.3% from 33.5% in the year-earlier quarter, attributable to better fixed cost absorption, partially offset by increases in purchased raw material costs and a change in sales mix. Operating margin was 12.6%, up from 8.9% in the year-earlier quarter, resulting form revenue increase and improved cost structure.

Donaldson ended the quarter with cash and equivalents of $219.6 million, down from $267.6 million at the end of the previous quarter. As of January 31, 2011, total debt was $211.9 million, down from $257.2 million at the end of the previous quarter.

For FY11, management expects sales to exceed $2.2 billion, with continued recovery in many of the end -markets and higher growth rates in the emerging economies. Engine Products’ sales are expected to grow in the range of 21% - 26%. Industrial Products’ revenue growth is projected in the range of 10% -15%.

Operating margin would probably be in the range of 13.0% - 13.8%. Earnings per share are estimated between $2.57 and $2.77.

In the second half of fiscal 2011, management expects to combat the pressure of continuous rise in raw material costs, with the help of Donaldson’s cost cutting initiatives and selective price increases.

The company expects to generate cash between $240 million - $270 million from operations and use $70 million - $80 million for capital expenditure.

Based in Minneapolis, Minnesota, Donaldson leads in the business of manufacturing filtration systems, with more than 100 sales, manufacturing, and distribution locations around the world.

We continue to maintain a Neutral recommendation on Donaldson supported by a Zacks #3 Rank (short-term Hold rating) on the stock.