Donaldson Reports Second Quarter Earnings

February 25, 2015

Donaldson Company, Inc. announced its financial results for its Fiscal 2015 second quarter, showing a 14 percent drop in net earnings. Summarized financial results are as follows (dollars in millions, except per share data):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 31

 

 

January 31

 

 

 

2015

 

2014

 

Change

 

 

2015

 

2014

 

Change

Net sales

 

 

$

597

 

$

582

 

3

%

 

 

$

1,193

 

$

1,181

 

1

%

Operating income

 

 

 

68

 

 

72

 

(6

%)

 

 

 

145

 

 

164

 

(12

%)

Net earnings

 

 

 

50

 

 

58

 

(14

%)

 

 

 

105

 

 

120

 

(13

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

$

0.35

 

$

0.39

 

($0.04

)

 

 

$

0.75

 

$

0.80

 

($0.05

)

                                         

The following table adjusts reported quarterly net earnings and diluted earnings per share (EPS) for the impact of the strengthened U.S. dollar, a $3.9 million charge associated with the previously announced lump sum settlement of our U.S. pension plan, $0.7 million of costs associated with the closing of our Grinnell, Iowa, facility, and removes the impact of the $6.4 million, or $0.04, in tax benefits related to the favorable settlement of an audit in the prior year quarter:

 

 

 

Adjusted

 

Three Months Ended January 31

 

 

 

2015

 

2014

 

Change
Before
FX

 

Adjusted
For FX

Adjusted net sales

 

 

$

597

 

$

582

 

 

3

%

 

 

7

%

Adjusted operating income

 

 

 

73

 

 

73

 

 

-

 

 

 

7

%

Adjusted net earnings

 

 

 

52

 

 

52

 

 

-

 

 

 

5

%

 

 

 

 

 

 

 

 

 

 

Adjusted Diluted EPS

 

 

$

0.37

 

$

0.35

 

$

0.02

 

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $27.5 million, or 4.8 percent, during the quarter and decreased sales by $38.6 million, or 3.3 percent, year-to-date. The impact of foreign currency translation decreased reported net earnings by $2.7 million, or 4.7 percent, during the quarter and decreased net earnings by $3.9 million, or 3.3 percent, year-to-date. The percentage change in revenue in each of our businesses and the percentage change excluding the impact of foreign currency is as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

January 31, 2015

 

 

January 31, 2015

 

 

 

Reported
Change

 

Constant
Currency
Change

 

 

Reported
Change

 

Constant
Currency
Change

Engine Products segment:

 

 

 

 

 

 

 

 

 

 

Off-Road Products

 

 

(23

%)

 

(18

%)

 

 

(20

%)

 

(17

%)

On-Road Products

 

 

6

%

 

12

%

 

 

10

%

 

14

%

Aftermarket Products

 

 

1

%

 

5

%

 

 

4

%

 

7

%

Aerospace and Defense Products

 

 

13

%

 

16

%

 

 

(3

%)

 

(1

%)

Total Engine Products segment

 

 

(3

%)

 

1

%

 

 

(1

%)

 

2

%

 

 

 

 

 

 

 

 

 

 

 

Industrial Products segment:

 

 

 

 

 

 

 

 

 

 

Industrial Filtration Solutions Products

 

 

(2

%)

 

3

%

 

 

(1

%)

 

2

%

Gas Turbine Products

 

 

91

%

 

100

%

 

 

39

%

 

45

%

Special Applications Products

 

 

-

%

 

4

%

 

 

-

%

 

3

%

Total Industrial Products segment

 

 

13

%

 

19

%

 

 

6

%

 

9

%

 

 

 

 

 

 

 

 

 

 

 

Total Company

 

 

3

%

 

7

%

 

 

1

%

 

4

%

 

 

 

 

 

 

 

 

 

 

 

Gross margin was 34.4 percent for the quarter and 34.7 percent year-to-date, compared to prior year margins of 34.7 percent and 35.2 percent, respectively. The decreases are primarily attributable to the negative impact of lower fixed cost absorption due to reductions in our OEM Customer production volumes, a negative mix impact from the increase in large Gas Turbine project shipments, and the costs associated with the closing of our Grinnell, Iowa, facility. These decreases were partially offset by benefits from our Continuous Improvement initiatives.

Operating expenses for the quarter were $137.2 million, up 6 percent from last year. As a percent of sales, operating expenses were 23.0 percent compared to last year’s 22.3 percent. Operating expenses year-to-date were $269.3 million, or 22.6 percent of sales, compared to $252.2 million, or 21.4 percent of sales, last year. The increase for both periods was primarily attributable to our lump sum pension settlement and our sales growth related initiatives.

The effective tax rate for the quarter was 27.0 percent, compared to the prior year rate of 22.1 percent. The prior year quarter included $6.4 million in tax benefits related to the favorable settlement of a tax audit. The year-to-date effective tax rate was 27.3 percent, compared to the prior year rate of 27.6 percent.

The operating margin for the quarter was 11.4 percent, which includes the $4.6 million of pension settlement and restructuring charges, down 100 basis points from the prior year. Year-to-date operating margin was 12.2 percent, down 170 basis points from Fiscal 2014.

As part of Donaldson's ongoing share repurchase program we repurchased 1,045,000 shares for $39.9 million during the quarter. Year-to-date we have repurchased 4,387,000 shares, or 3.1 percent of our diluted outstanding shares, for $174.2 million.

FY15 Outlook

  • Projected company’s sales to be between $2.4 and $2.5 billion.
  • Our full-year operating margin forecast is 13.6 to 14.4 percent. Included in this forecast is approximately $10 million in operating expense increases for our Global ERP project and specific sales growth initiatives. This excludes the $3.9 million charge associated with the lump sum settlement of our U.S. pension plan recorded in the second quarter and our forecasted full-year restructuring charges.
  • Our FY15 tax rate is anticipated to be between 27 and 29 percent.
  • We forecast our full-year Fiscal 2015 adjusted diluted EPS to be between $1.65 and $1.85, excluding restructuring and pension lump sum settlement expenses.
  • We project that cash generated by our operating activities will be between $245 and $285 million. Capital spending is estimated to be between $90 and $100 million.

Engine Products: We now forecast our FY15 sales growth to be down 0 to 3 percent, including the impact of foreign currency translation. In local currency, sales are forecasted to increase 1 percent to 5 percent.

  • On-Road OEM Customers are expecting to increase production of heavy- and medium-duty trucks in 2015.
  • Demand from Off-Road OEM Customers is anticipated to be mixed: build rates of construction equipment are expected to continue improving moderately in North America, remain stable in Europe and continued weak in Asia, build rates of agriculture equipment are forecasted to decrease in all regions, and build rates of mining equipment are expected to remain weak.
  • Donaldson anticipates continued strong growth for our Engine Aftermarket business globally. 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.
  • The company forecasts a mid-single digit sales increase 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 forecast sales to increase 0 to 3 percent, including the impact of foreign currency translation. In local currency, sales are forecasted to increase 5 to 8 percent.

  •  Industrial Filtration Solutions’ sales are projected to be flat to 4 percent down. We anticipate our replacement filter sales will remain strong due to improving general manufacturing conditions but not strong enough to offset currency headwinds.
  • We anticipate our Gas Turbine sales will increase 20 to 26 percent due to awarded large turbine power generation projects and stronger aftermarket sales. This forecast includes $15 to $18 million from the Northern Technical acquisition, which was completed last September.
  • Donaldson forecasts its Special Applications’ sales to be slightly down with improved demand for our semiconductor and venting products being offset by lower membrane sales and currency headwinds.
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