Third quarter highlights includes, sales increased 22% year-over-year and 13% sequentially from second quarter, the largest second to third quarter increase in over 10 years.
Gross margin improved 50 basis points year-over-year and earnings per share grew 32%.
Total company sales increased 22% in the third quarter from prior-year.
In local currency sales rose 17%.
Engine sales recorded strong year-over-year growth of 26%, 22% in local currency.
Our 51% Off-Road business growth was widespread with all regions experiencing an increase in sales.
In particular, local currency sales in Europe and Asia-Pacific were up 78% and 42% respectively.
China sales increased almost 50%.
PowerCore continues to gain traction in China and we are on track to deliver 2 times as many PowerCore air cleaners in 2021 compared to 2020.
On-Road sales experienced a sharp rebound from the 1% year-over-year decline in second quarter, increasing 58% from 2020.
Order and build rates for Class 8 trucks in the US have risen significantly over the past few months and are projected by external data sources to remain at a high level over the next several quarters.
Aftermarket sales increased 23% in third quarter including a 4% currency benefit.
In local currency sales Latin America increased by over 40% and Europe and Asia-Pacific were up 17% and 18% respectively.
Sales in third quarter increased 12% or 7% excluding the favorable impact of currency translation and growth was widespread across geographies.
We also saw increased sales in first-fit and replacement products across the rest of the IFS businesses, including greater than 50% growth at BofA and mid 20s percentage growth in Process Filtration sales.
Sales of Gas Turbine Systems or GTS declined about 13% year-over-year due to a decline in demand for gas turbines used in the oil and gas market, a slowing of retrofit activity and the timing of projects.
Therefore, in third quarter Donaldson contributed $1 million to support our local community and help rebuild areas in Minneapolis and St. Paul that were damaged from the unrest over the last year.
Total sales increased 22% year-over-year and operating margin increased 90 basis points to 14.3%.
Our Engine segment profitability increased 250 basis points year-over-year as we leverage the significant uptick in sales.
The Industrial segment in contrast, recorded a 50 basis decline in profitability.
Third quarter company gross margin improved by 50 basis points to 33.7% which accounted for a bit over half of the 90 basis point increase in operating margin.
In the third quarter operating expenses as a percentage of sales declined 40 basis points year-over-year.
We made capital investments of approximately $10 million in the third quarter, a decline of over 60% from the third quarter of last year as we bring to completion many of our significant capital projects from the prior two years.
We paid over $26 million in dividends and repurchased over $32 million of our stock in the third quarter.
Year-to-date we have returned almost $160 million to shareholders.
We have paid a dividend every quarter for the past 65 years and increased our dividend every calendar year for the past 25 years, making Donaldson among a small group of companies that are included in the S&P High Yield Dividend Aristocrats Index, maintaining this track record is important to us.
Given the strong results we experienced and our visibility into the remainder of fiscal year, we expect full year sales will be up 9% to 11% year-over-year versus our prior guidance of 5% to 8% increase.
Our annual guidance assumes a full year 3% benefit from currency translation.
In our Engine segment, we project a sales increase of 12% to 14%, which is up from our prior guidance of an 8% to 11% increase.
We project full year Off-Road sales will now increase in the mid to high 20% range, driven by continued strong demand for construction and agricultural equipment and increase ore activity in mining.
Our prior guidance was for low 20% range growth.
We continue to expect our full year sales in Aerospace and Defense to decline in the mid to high 20% range, given the pandemic related stock conditions in commercial aerospace resulted in weak demand.
In the Industrial segment, we expect a full-year sales increase of 3% to 5% versus our previous guidance of down 2% to up 2%.
We are expecting adjusted operating margin in a range of 13.8% to 14.2% compared to 13.2% in 2020.
The midpoint of this range implies a sequential step up in operating margin to about 14.5% for the back half of the year compared to 13.5% in the first half.
Additionally, we expect to maintain a disciplined approach to our operating expenses and deliver further leverage in the remainder of the year, despite an expected full year headwind of $5.25 million from increased incentive compensation, about half of which was incurred in the third quarter.
Other fiscal '21 operating metric expectations are: interest expense of about $13 million, other income of $5 million to $7 million and a tax rate between 24% and 25%.
Capital expenditures are planned to be in the range of $55 million to $60 million.
Taking the midpoint of our sales on capital expenditure guidance for 2021 would put us at just over 2% of sales which as we previously noted as lower in the last few years due to the completion of major projects.
We also plan to repurchase 1.5% to 2% of our shares outstanding.
Our cash conversion has been very good in the first nine months of fiscal '21 and we expect to exceed 100% cash conversion for the full year.
The sales momentum we're currently experiencing is likely to carry through to the first half of fiscal 2022.
The expansion of our Filter Minder real time monitoring service to Engine liquid filtration in addition to air filtration and our Rugged Pleat Baghouse industrial dust collector that we introduced in first quarter, which is already on pace to generate 2 times our initial first year forecasted sales.

Summary:
Given the strong results we experienced and our visibility into the remainder of fiscal year, we expect full year sales will be up 9% to 11% year-over-year versus our prior guidance of 5% to 8% increase.
Capital expenditures are planned to be in the range of $55 million to $60 million.
We also plan to repurchase 1.5% to 2% of our shares outstanding.
The sales momentum we're currently experiencing is likely to carry through to the first half of fiscal 2022.