News Column

Donaldson Reports Third Quarter Earnings

May 20, 2014

MINNEAPOLIS--(BUSINESS WIRE)-- Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2014 third quarter. Summarized financial results are as follows (dollars in millions, except per share data):

       
Three Months EndedNine Months Ended
April 30April 30

2014

   

2013

   

Change

2014

   

2013

   

Change

Net sales $624$619 1 % $1,805$1,804 --- %
Operating income 93 99 (6 )% 257 243 5 %
Net earnings 67 70 (4 )% 187 175 7 %
 
Diluted EPS $0.46$0.46 --- % $1.26$1.16 9 %
 


“We are proud of our execution during the quarter while we remain aggressively focused on additional growth opportunities,” said Bill Cook, Donaldson’s CEO. “Our end market conditions remain mixed as demand for our replacement filters continues to improve in both our Engine and Industrial segments, while conditions for new first-fit systems in our OEM markets are recovering slower than we had anticipated. Our Engine Products’ sales increased 5 percent in local currency from last year, driven by increases in Engine Aftermarket and On-Road sales of 11 percent and 13 percent, respectively. However, our Industrial Products’ sales decreased 7 percent in local currency as a result of a 40 percent decline in our Gas Turbine shipments from last year’s record third quarter. As previously discussed, we had a surge in our gas turbine shipments last year, and the overall industry is now installing that new electrical generation capacity. Partially offsetting our Gas Turbine sales decrease were our Industrial Filtration Solutions and Special Applications businesses, which grew 8 percent and 4 percent, respectively. Internationally, excluding our Gas Turbine sales, our local currency sales were strong with Europe up 7 percent, Asia Pacific up 10 percent, and Latin America up 23 percent.”

“As we begin our fourth quarter, we have narrowed our guidance ranges. We reduced our Industrial Products’ sales outlook due to a couple of factors. First, the continued geopolitical uncertainty continues to negatively impact the recovery for general industrial capital investment and, as a result, the demand for our new Industrial Filtration Solutions systems. Second, several of our large gas turbine projects that were scheduled for shipment in our fourth quarter have been rescheduled by our Customers to be delivered in our FY15. As a result, we are now forecasting our full-year Company sales to be a slight increase over last year. The midpoint of our operating margin forecast is 14.3 percent, a 20 basis point improvement over the prior year. The combination of our updated outlook for sales and operational performance results in our FY14 EPS forecast of between $1.69 and $1.77 per share.”

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $0.6 million, or 0.1 percent, during the quarter and decreased sales by $16.2 million, or 0.9 percent, year-to-date. The foreign currency translation impact decreased net earnings by $0.2 million, or 0.3 percent, during the quarter and decreased net earnings by $1.4 million, or 0.8 percent, for the year.

Gross margin was 35.8 percent for the quarter, consistent with last year. During the quarter, we realized positive mix impact from a higher percentage of replacement filter sales. We also benefitted from our Continuous Improvement initiatives. These offset higher compensation expenses. Year-to-date, our gross margin is 35.4 percent versus 34.3 percent last year.

Operating expenses for the quarter were $130.7 million, up 6.4 percent from last year. As a percent of sales, operating expenses were 20.9 percent compared to last year’s 19.8 percent. Higher expenses from our Global ERP project and incentive compensation were partially offset by lower pension, insurance, and warranty expenses. Operating expenses year-to-date were $382.9 million, or 21.2 percent of sales, compared to $375.5 million, or 20.8 percent of sales, last year.

Our operating margin for the quarter was 14.9 percent, down 100 basis points from the prior year. Year-to-date operating margin was 14.2 percent, up 70 basis points from last year.

Our effective tax rate for the quarter was 28.5 percent, compared to the prior year rate of 29.8 percent. This decrease compared to the prior year was primarily due to changes in the mix of earnings between tax jurisdictions. The year-to-date effective tax rate was 27.9 percent, compared to the prior year rate of 29.2 percent.

As part of our ongoing share repurchase program we repurchased 2,400,000 shares for $99.5 million during the quarter. Year-to-date we have repurchased 4,039,000 shares, or 2.7 percent of our diluted outstanding shares, for $165.9 million.

FY14 Outlook

  • We project our Company’s sales to be between $2.44 and $2.48 billion, or a slight increase over the prior year including the negative impact of foreign currency exchange rates. Our forecast is based on the Euro at US$1.35 and 102 Yen to the US$.
  • Our full-year operating margin forecast is 14.1 to 14.5 percent. Included in this forecast is approximately $22 million in operating expense increases for our Global ERP project and incentive compensation.
  • Our FY14 tax rate is anticipated to be between 28 and 29 percent.
  • We forecast our full-year FY14 EPS to be between $1.69 and $1.77.
  • Cash generated by operating activities is projected to be between $310 and $330 million. Our capital spending is estimated to be approximately $90 million. Our share repurchase target remains at 4 percent of our diluted outstanding shares in FY14.

    Engine Products: We now forecast our FY14 sales to increase 3 to 7 percent, including the negative impact of foreign currency.

  • Our On-Road OEM Customers are planning to build more heavy- and medium-duty trucks in 2014.
  • Demand from our Off-Road OEM Customers is anticipated to continue to be mixed: build rates of construction equipment are expected to improve in North America and Europe but remain soft in Asia, build rates of agriculture equipment are forecasted to decrease, and the build rates of mining equipment are expected to remain weak.
  • We are anticipating continued growth for our Engine Aftermarket business. Utilization rates for off-road equipment and on-road heavy truck fleets are expected to continue improving. We should also benefit from our continued expansion into emerging economies, the increasing number of first-fit systems installed in the field with our proprietary filters, and through continued expansion of our product portfolio.
  • We forecast sales to decline slightly for our Aerospace and Defense business compared to last year as the continued slowdown in U.S. military activity should be mostly offset by growth from our commercial aerospace sales.

    Industrial Products: We now forecast sales to decrease 4 to 7 percent, including the negative impact of foreign currency.

  • Our Industrial Filtration Solutions’ sales are projected to increase 2 to 5 percent. We assume our replacement filter sales will remain at record levels due to improving general manufacturing conditions, while our new filtration system sales will remain flat in the near-term due to continuing low levels of new equipment investment by manufacturers.
  • We anticipate our Gas Turbine sales will decrease 29 to 32 percent from our record sales last year due to the current slowdown in large turbine power generation projects by our Customers.
  • We now forecast our Special Applications’ sales to increase 2 to 5 percent due to improved market demand for our semiconductor and venting products.

    About Donaldson Company

    Donaldson is a leading worldwide provider of filtration systems that improve people’s lives, enhance our Customers’ equipment performance, and protect our environment. We are a technology-driven Company committed to satisfying our Customers’ needs for filtration solutions through innovative research and development, application expertise, and global presence. Our approximately 12,300 employees contribute to the Company’s success by supporting our Customers at our more than 140 sales, manufacturing, and distribution locations around the world.

    Donaldson is a member of the S&P MidCap 400 and Russell 1000 indices, and our shares trade on the NYSE under the symbol DCI. Additional information is available at www.donaldson.com.

    SAFE HARBOR STATEMENT UNDER THE SECURITIES REFORM ACT OF 1995

    The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”) and is making this cautionary statement in connection with such safe harbor legislation. This announcement contains forward-looking statements, including, without limitation, forecasts, plans, trends, and projections relating to our business and financial performance and global economic conditions, which involve uncertainties that could materially impact results. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.

    The Company wishes to caution investors that any forward-looking statements are subject to uncertainties and other risk factors that could cause actual results to differ materially from such statements, including but not limited to risks associated with: world economic factors and the ongoing global economic uncertainty, the reduced demand for hard disk drive products with the increased use of flash memory, the potential for some Customers to increase their reliance on their own filtration capabilities, currency fluctuations, commodity prices, political factors, the Company’s international operations, highly competitive markets, governmental laws and regulations, including the impact of the various economic stimulus and financial reform measures, the implementation of our new information technology systems, potential global events resulting in market instability including financial bailouts and defaults of sovereign nations, military and terrorist activities, health outbreaks, natural disasters, and all of the other risk factors included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements.

     
    CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
    DONALDSON COMPANY, INC. AND SUBSIDIARIES
    (Thousands of dollars, except share and per share amounts)
    (Unaudited)
                   

     

    Three Months Ended

    Nine Months Ended

    April 30

    April 30

    2014 2013 2014 2013
    Net sales $624,234$619,371$1,805,240$1,804,354
     
    Cost of sales 400,773   397,870   1,165,737   1,185,583  
     
    Gross profit 223,461 221,501 639,503 618,771
     
    Operating expenses 130,727   122,914   382,914   375,455  
     
    Operating income 92,734 98,587 256,589 243,316
     
    Other income, net (3,822 ) (3,608 ) (10,249 ) (11,962 )
     
    Interest expense 2,374   2,719   6,987   8,275  
     
    Earnings before income taxes 94,182 99,476 259,851 247,003
     
    Income taxes 26,846   29,634   72,583   72,235  
     
    Net earnings $67,336   $69,842   $187,268   $174,768  
     

    Weighted average shares outstanding

    145,310,710 148,136,620 146,543,727 148,404,503
     
    Diluted shares outstanding 147,339,425 150,234,445 148,608,748 150,591,003
     
    Net earnings per share $0.46$0.47$1.28$1.18
     

    Net earnings per share assuming dilution

    $0.46$0.46$1.26$1.16
     
    Dividends paid per share $0.14$0.10$0.41$0.28
     
     
    DONALDSON COMPANY, INC. AND SUBSIDIARIES
    CONDENSED CONSOLIDATED BALANCE SHEETS
    (Thousands of dollars)
    (Unaudited)
           
    April 30July 31
    2014 2013
    ASSETS
     
    Cash and cash equivalents $238,222$224,138
    Short-term investments 152,544 99,750
    Accounts receivable, net 453,151 430,766
    Inventories, net 254,213 234,820
    Prepaids and other current assets 69,465 66,188
     
    Total current assets 1,167,595 1,055,662
     
    Other assets and deferred taxes 289,409 268,614
    Property, plant, and equipment, net 440,997 419,280
     
    Total assets $1,898,001$1,743,556
     
    LIABILITIES AND SHAREHOLDERS’ EQUITY
     
    Trade accounts payable $192,631$186,460
    Employee compensation and other liabilities 183,155 182,121
    Short-term borrowings 65,557 9,190
    Current maturity long-term debt 17,729 98,664
     
    Total current liabilities 459,072 476,435
     
    Long-term debt 227,751 102,774
    Other long-term liabilities 85,015 79,160
     
    Total liabilities 771,838 658,369
     
    Equity 1,126,163 1,085,187
     
    Total liabilities and equity $1,898,001$1,743,556
     
     
    DONALDSON COMPANY, INC. AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    (Thousands of dollars)
    (Unaudited)
       
    Nine Months Ended
    April 30
    2014     2013
    OPERATING ACTIVITIES
     
    Net earnings $187,268$174,768

    Adjustments to reconcile net earnings to net cash provided by operating activities:

    Depreciation and amortization 50,245 48,527
    Changes in operating assets and liabilities (5,764 ) (8,346 )
    Tax benefit of equity plans (8,119 ) (9,483 )
    Stock compensation plan expense 9,474 7,363
    Loss on sale of business 905 -
    Other, net (3,903 ) 4,560  
    Net cash provided by operating activities 230,106 217,389
     
    INVESTING ACTIVITIES
     
    Net expenditures on property and equipment (66,046 ) (69,425 )
    Net change in short-term investments (47,685 ) 30,781  
    Net cash used in investing activities (113,731 ) (38,644 )
     
    FINANCING ACTIVITIES
     
    Purchase of treasury stock (165,871 ) (60,975 )
    Net change in debt and short-term borrowings 98,107 (67,623 )
    Dividends paid (59,675 ) (41,184 )
    Tax benefit of equity plans 8,119 9,483
    Exercise of stock options 13,035   12,131  
    Net cash used in financing activities (106,285 ) (148,168 )
     

    Effect of exchange rate changes on cash

    3,994

     

    7,622

     
     

    Increase in cash and cash equivalents

    14,084

    38,199

     

    Cash and cash equivalents – beginning of year

    224,138

     

    225,789

     
     

    Cash and cash equivalents – end of period

    $238,222

     

    $263,988

     
     
     
    SEGMENT DETAIL
    (Thousands of dollars)
    (Unaudited)
                   
    Engine Industrial Corporate &

    Total

    Products Products Unallocated

    Company

    3 Months Ended April 30, 2014:
    Net sales $402,157$222,077 --- $624,234
    Earnings before income taxes 61,432 32,507 243 94,182
     
    3 Months Ended April 30, 2013:
    Net sales $383,314$236,057 --- $619,371
    Earnings before income taxes 65,680 37,555 (3,759 ) 99,476
     
     
    9 Months Ended April 30, 2014:
    Net sales $1,160,948$644,292 --- $1,805,240
    Earnings before income taxes 170,799 91,682 (2,630 ) 259,851
     
    9 Months Ended April 30, 2013:
    Net sales $1,107,814$696,540 --- $1,804,354
    Earnings before income taxes 152,129 102,709 (7,835 ) 247,003
     
     
    NET SALES BY PRODUCT
    (Thousands of dollars)
    (Unaudited)
                   
    Three Months Ended Nine Months Ended
    April 30April 30
    2014     2013 2014 2013
    Engine Products segment:
    Off-Road Products $88,791$93,797$260,302$268,056
    On-Road Products 33,081 30,288 95,398 96,207
    Aftermarket Products 255,818 231,747 729,052 668,264
    Aerospace and Defense Products 24,467 27,482 76,196 75,287
    Total Engine Products segment $402,157$383,314$1,160,948$1,107,814
     
    Industrial Products segment:
    Industrial Filtration Solutions Products $137,364$125,447$401,642$386,475
    Gas Turbine Products 42,005 68,733 110,106 182,295
    Special Applications Products 42,708 41,877 132,544 127,770
    Total Industrial Products segment $222,077$236,057$644,292$696,540
     
    Total Company$624,234$619,371$1,805,240$1,804,354
     
     
    RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
    (Thousands of dollars, except per share amounts)
    (Unaudited)
           
    Three Months Ended Nine Months Ended
    April 30April 30
    2014     2013 2014     2013

    Net cash provided by operating activities

    $78,501$108,209$230,106$217,389
    Net capital expenditures (23,198 ) (17,672 ) (66,046 ) (69,425 )
    Free cash flow $55,303   $90,537   $164,060   $147,964  
     
    Net earnings $67,336$69,842$187,268$174,768
    Income taxes 26,846 29,634 72,583 72,235
    Interest expense, net 1,824 2,269 5,337 6,110
    Depreciation and amortization 17,078   15,631   50,245   48,527  
    EBITDA $113,084   $117,376   $315,433   $301,640  
     
    Prior year net sales $619,371$647,237$1,804,354$1,836,415

    Change in net sales, excluding foreign currency translation

    5,497 (17,843 ) 17,094 (3,434 )
    Foreign currency translation (634 ) (10,023 ) (16,208 ) (28,627 )
    Current year net sales $624,234   $619,371   $1,805,240   $1,804,354  
     
    Prior year net earnings $69,842$70,946$174,768$193,320

    Change in net earnings, excluding foreign currency translation

    (2,303 ) (413 ) 13,886 (16,698 )
    Foreign currency translation (203 ) (691 ) (1,386 ) (1,854 )
    Current year net earnings $67,336   $69,842   $187,268   $174,768  
     
     
    RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (CONTINUED)
    (Thousands of dollars, except per share amounts)
    (Unaudited)
           
    Three Months Ended Nine Months Ended
    April 30April 30
    2014     2013 2014     2013
    Net earnings $67,336$69,842$187,268$174,768

    Restructuring charges, net of tax

    160

    911

    2,021

    2,098

    Net earnings, excluding special items

    $67,496$70,753$189,289$176,866
     

    Net earnings per share assuming dilution

    $0.46$0.46$1.26$1.16

    Restructuring charges per share, net of tax

    ---

    0.01

    0.01

    0.01

    Net earnings per share assuming dilution, excluding special items

    $0.46$0.47$1.27$1.17
     


    Although free cash flow, EBITDA, net sales excluding foreign currency translation, and net earnings excluding foreign currency translation are not measures of financial performance under GAAP, the Company believes they are useful in understanding its financial results. Free cash flow is a commonly used measure of a company’s ability to generate cash in excess of its operating needs. EBITDA is a commonly used measure of operating earnings less non-cash expenses. Both net sales and net earnings excluding foreign currency translation provide a comparable measure for understanding the operating results of the company’s foreign entities excluding the impact of foreign exchange. A shortcoming of these financial measures is that they do not reflect the company’s actual results under GAAP. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.



    Donaldson Company, Inc.

    Rich Sheffer, 952-887-3753

    Source: Donaldson Company, Inc.


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