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Donaldson Reports Record Third Quarter Results

18 May, 2012

Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2012 third quarter. Summarized financial results are as follows (dollars in millions, except per share data):


   
   



Three Months Ended

Nine Months Ended



April 30

April 30



2012     2011     Change

2012     2011     Change
Net sales

$ 647

$ 595

9 %

$ 1,836

$ 1,669

10 %
Operating income


98

83

18 %


264


225

17 %
Net earnings


71

62

15 %


193


160

21 %


















 
Diluted EPS (*)

$ 0.46

$ 0.39

18 %

$ 1.26

$ 1.01

25 %























 

(*) The current and prior year EPS amounts reflect the impact of the two-for-one stock split that occurred on March 23, 2012.

"The continued strength in many of our mid-cycle businesses and the beginning of the recovery of our late-cycle Gas Turbine Systems products, combined with ongoing solid execution across our Company, helped us set new quarterly records in sales, operating margin, and EPS," said Bill Cook, Chairman, President and CEO. "Led by a 15 percent increase in Gas Turbine Products, sales growth was strong across all three of the product groups within our Industrial Products segment, with overall sales up 11 percent. Sales in our Engine Products segment grew 8 percent as new equipment build rates at our Off-Road and On-Road OEM Customers remained healthy."

"We achieved a record operating margin of 15.2 percent due to the combination of operating leverage in our plants and distribution centers, our focus on effective execution in support of our Customers and the benefits of the many Continuous Improvement initiatives across our Company."

"We are forecasting continued growth through our fourth quarter with full year sales expected to be up approximately 9 percent over last year. Forecasted business conditions in our end markets remain consistent with last quarter's outlook through the end of our fiscal year: strong in the Americas, stable in Europe, and slowly improving in China. As a result of our continued strong operating performance, we have increased our FY12 EPS forecast to be between $1.66 and $1.76, which has been adjusted up from our previous guidance of $1.63 to $1.73. All of these EPS numbers have been adjusted for the two-for-one stock split we executed in March. Our new EPS guidance represents a new record and is up 16 percent to 23 percent over last year."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $11.6 million, or 2.0 percent, during the third quarter and decreased sales by $2.4 million, or 0.1 percent, year-to-date, compared to the same periods last year. The impact of foreign currency translation decreased reported net earnings by $0.9 million, or 1.5 percent, during the third quarter and decreased reported net earnings by $0.2 million, or 0.1 percent, for the year.

Gross margin was 35.3 percent for the quarter and 35.1 percent year-to-date, compared to prior year margins of 35.2 percent for the quarter and year-to-date. We continue to benefit from our ongoing Continuous Improvement initiatives as well as improved absorption of fixed costs compared to last year's third quarter. These were partially offset by a slightly less favorable sales mix.

Operating expenses for the quarter were $129.8 million, up 3.2 percent from $125.8 million last year primarily due to the increased sales volume. As a percent of sales, operating expenses were 20.1 percent in the third quarter compared to last year's 21.2 percent. Operating expenses year-to-date were $380.4 million, or 20.7 percent of sales, compared to $361.5 million, or 21.7 percent of sales, last year.

The effective tax rate for the quarter was 29.0 percent, compared to a prior year rate of 24.5 percent. The current year quarter included $1.8 million of tax benefits primarily from a statute of limitation expiration, while last year's quarter included $3.5 million of tax benefits from the expiration of some statutes of limitations and the favorable conclusion of two international tax audits. The year-to-date effective tax rate was 28.0 percent compared to a prior year rate of 28.1 percent.

As part of our ongoing share repurchase program we repurchased 261,000 shares, or 0.2 percent of our diluted outstanding shares, for $9.0 million during the quarter. Year-to-date we have repurchased 3,012,000 shares, or 2.0 percent of our diluted outstanding shares, for $82.6 million.

FY12 Outlook

We expect to achieve full year sales, operating margin, and EPS records.

  • We forecast our FY12 sales to be approximately $2.5 billion, or up about 9 percent from the prior year. Our current forecast is based on the Euro at US$1.28 and 80 Yen to the US$. With the recent depreciation of the Euro against the US$, we do see foreign currency translation to be a headwind for the balance of our fiscal year.
  • Our full year operating margin is forecast to be 14.2 to 14.8 percent.
  • Our full year FY12 tax rate is anticipated to be between 28 and 29 percent.
  • Cash generated by operating activities is projected to be between $260 and $280 million. Capital spending is now estimated to be between $75 and $80 million.

Engine Products: We expect full year sales to increase 8 to 10 percent, including the impact of foreign currency translation.

  • We anticipate sales to both our Off-Road and On-Road OEM Customers will remain strong through the remainder of FY12. We will continue to benefit from increased market share on our Customers' new Tier IV equipment platforms.
  • Sales of our Aftermarket Products are expected to increase moderately based on current utilization rates for both off-road equipment and on-road heavy trucks. We should also benefit from our continued expansion into the emerging economies and from the increasing number of systems installed in the field with our proprietary filtration systems, such as our PowerCore® products.
  • We forecast Aerospace and Defense Products' sales to be level with the prior year as the continued slowdown in military spending is anticipated to be offset by increased commercial aerospace sales.

Industrial Products: We forecast full year sales to increase 8 to 10 percent, including the impact of foreign currency translation.

  • Our Industrial Filtration Solutions' sales are projected to increase 7 to 10 percent and assume a continuing improvement in general manufacturing activity in the U.S., slowly improving conditions in Asia, and forecasted strong fourth quarter project shipments in Europe.
  • We anticipate our Gas Turbine Products' sales to be up 17 to 20 percent due to the recent improvement in the large turbine power generation market and ongoing strength in the oil and gas market segment. We have a very strong schedule for fourth quarter project shipments to our Customers.
  • Special Applications Products' sales are forecast to be level with the prior year as growth in our membrane and venting product sales should offset the reduction in our disk drive filter sales related to the Thai floods last fall.

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 13,300 employees contribute to the Company's success by supporting our Customers at our more than 100 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 forecasts, plans, and projections relating to our business and financial performance and global economic conditions, which involve uncertainties that could materially impact results.

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 economic uncertainty, 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 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 other factors included in our Annual and Quarterly Reports. 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



2012

2011

2012

2011
Net sales

$ 647,237


$ 594,565


$ 1,836,415


$ 1,668,579












 
Cost of sales

  419,008  

  385,407  

  1,192,435  

  1,081,788  












 
Gross margin


228,229



209,158



643,980



586,791












 
Operating expenses

  129,792  

  125,826  

  380,448  

  361,515  












 
Operating income


98,437



83,332



263,532



225,276












 
Other income, net


(4,340 )


(1,381 )


(13,750 )


(5,990 )












 
Interest expense

  2,787  

  2,897  

  8,856  

  9,486  












 
Earnings before income taxes


99,990



81,816



268,426



221,780












 
Income taxes

  29,044  

  20,005  

  75,106  

  62,256  












 
Net earnings

$ 70,946  

$ 61,811  

$ 193,320  

$ 159,524  












 
Weighted average shares











Outstanding (*)


150,536,631



154,651,222



150,385,389



154,716,918












 
Diluted shares outstanding (*)


153,207,471



157,408,094



153,067,148



157,524,628












 
Net earnings per share (*)

$ 0.47


$ 0.40


$ 1.29


$ 1.03












 
Net earnings per share











assuming dilution (*)

$ 0.46


$ 0.39


$ 1.26


$ 1.01












 
Dividends paid per share (*)     $ 0.080       $ 0.065       $ 0.230       $ 0.193  




















 

(*) Current and prior year shares and per share amounts reflect the impact of the Company's two-for-one stock split that occurred March 23, 2012.

 
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 

    April 30     July 31



2012

2011
ASSETS










 
Cash, cash equivalents and short-term investments

$ 308,046
$ 273,494
Accounts receivable – net


453,488

445,700
Inventories – net


265,461

271,476
Prepaids and other current assets

  72,781
  75,912





 
Total current assets


1,099,776

1,066,582





 
Other assets and deferred taxes


263,712

268,009
Property, plant and equipment – net

  390,785
  391,502





 
Total assets

$ 1,754,273

$ 1,726,093






 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$ 204,491

$ 215,918
Employee compensation and other liabilities


185,228

219,326
Short-term borrowings


83,623

13,129
Current maturity long-term debt

  2,311
  47,871





 
Total current liabilities


475,653

496,244





 
Long-term debt


203,646

205,748
Other long-term liabilities

  77,062
  89,390





 
Total liabilities


756,361

791,382






 
Equity

  997,912

  934,711






 
Total liabilities and equity

$ 1,754,273

$ 1,726,093








 
 
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 

    Nine Months Ended



April 30



2012     2011
OPERATING ACTIVITIES









 
Net earnings

$ 193,320

$ 159,524

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



 


 

Depreciation and amortization


46,214


45,276
Changes in operating assets and liabilities


(43,836 )

(23,958 )
Tax benefit of equity plans


(9,698 )

(8,272 )
Stock compensation plan expense


8,624


7,560
Other, net

  (12,223 )
  (11,587 )
Net cash provided by operating activities


182,401


168,543






 
INVESTING ACTIVITIES










 
Net expenditures on property and equipment


(57,987 )

(42,400 )
Purchases of short-term investments


(119,930 )

(67,985 )
Acquisitions and divestitures, net

  -  
  3,493  
Net cash used in investing activities


(177,917 )

(106,892 )






 
FINANCING ACTIVITIES










 
Purchase of treasury stock


(82,573 )

(43,101 )
Net change in debt and short-term borrowings


24,435


(1,516 )
Dividends paid


(34,277 )

(29,547 )
Tax benefit of equity plans


9,698


8,272
Exercise of stock options

  12,345  

  13,535  
Net cash used in financing activities


(70,372 )


(52,357 )










 

Effect of exchange rate changes on cash



 

(18,586

)



 

22,199

 

Increase/(Decrease) in cash and cash equivalents




(84,474

)




31,493


Cash and cash equivalents – beginning of year



 

273,494

 

 

232,000

 

Cash and cash equivalents – end of period



$

189,020

 

$

263,493

 










 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
   
   
   



Engine

Industrial

Corporate &

Total



Products

Products

Unallocated

Company
3 Months Ended April 30, 2012:











Net sales

$ 407,041

$ 240,196

---

$ 647,237
Earnings before income taxes


62,136


38,792

(938)


99,990












 
3 Months Ended April 30, 2011:











Net sales

$ 377,609

$ 216,956

---

$ 594,565
Earnings before income taxes


56,469


33,074

(7,727)


81,816












 












 
9 Months Ended April 30, 2012:











Net sales

$ 1,171,600

$ 664,815

---

$ 1,836,415
Earnings before income taxes


170,432


103,688

(5,694)


268,426












 
9 Months Ended April 30, 2011:











Net sales

$ 1,042,500

$ 626,079

---

$ 1,668,579
Earnings before income taxes


149,123


92,236

(19,579)


221,780















 
 
NET SALES BY PRODUCT
(Thousands of dollars)
(Unaudited)

   
   
   
   



Three Months Ended

Nine Months Ended



April 30

April 30



2012

2011

2012

2011
Engine Products segment:











Off-Road Products

$ 100,307

$ 90,174

$ 281,450

$ 236,672
On-Road Products


42,133


30,924


124,134


88,726
Aftermarket Products


231,298


223,284


672,265


625,042
Retrofit Emissions Products


4,038


6,033


13,326


14,288
Aerospace and Defense Products

  29,265

  27,194

  80,425

  77,772
Total Engine Products segment

$ 407,041

$ 377,609

$ 1,171,600

$ 1,042,500












 
Industrial Products segment:











Industrial Filtration Solutions Products

$ 136,082

$ 126,226

$ 401,522

$ 369,009
Gas Turbine Products


51,036


44,231


123,628


114,607
Special Applications Products

  53,078

  46,499

  139,665

  142,463
Total Industrial Products segment

$ 240,196

$ 216,956

$ 664,815

$ 626,079












 
Total Company

$ 647,237

$ 594,565

$ 1,836,415

$ 1,668,579
















 
 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Thousands of dollars, except per share amounts)
(Unaudited)

   
   



Three Months Ended

Nine Months Ended



April 30

April 30



2012     2011

2012     2011












 
Free cash flow

$ 58,565


$ 57,134


$ 124,414


$ 126,143
Net capital expenditures

  21,638  

  18,349  

  57,987  

  42,400  
Net cash provided by operating activities

$ 80,203  

$ 75,483  

$ 182,401  

$ 168,543  












 
EBITDA

$ 116,861


$ 98,667


$ 320,353


$ 274,586
Income taxes


(29,044 )


(20,005 )


(75,106 )


(62,256 )
Interest expense (net)


(1,553 )


(2,053 )


(5,713 )


(7,530 )
Depreciation and amortization

  (15,318 )

  (14,798 )

  (46,214 )

  (45,276 )












 
Net earnings

$ 70,946  

$ 61,811  

$ 193,320  

$ 159,524  












 
Net sales, excluding foreign currency translation

$ 658,886


$ 577,858


$ 1,838,846


$ 1,659,088
Foreign currency translation

  (11,649 )

  16,707  

  (2,431 )

  9,491  












 
Net sales

$ 647,237  

$ 594,565  

$ 1,836,415  

$ 1,668,579  












 
Net earnings, excluding foreign currency translation

$ 71,844


$ 59,991


$ 193,474


$ 157,423
Foreign currency translation

  (898 )

  1,820  

  (154 )

  2,101  












 
Net earnings

$ 70,946  

$ 61,811  

$ 193,320  

$ 159,524  




















 
 
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (CONTINUED)
(Thousands of dollars, except per share amounts)
(Unaudited)

   
   



Three Months Ended

Nine Months Ended



April 30

April 30



2012     2011

2012     2011
Net earnings, excluding special items

$ 70,946

$ 61,811

$ 193,320

$ 160,090

Restructuring charges, net of tax



 

---



 

---



 

---



  (566 )












 
Net earnings

$ 70,946

$ 61,811

$ 193,320

$ 159,524  

















 

Net earnings per share assuming dilution, excluding special items (*)



$ 0.46

$ 0.39

$ 1.26

$ 1.01

Restructuring charges per share, net of tax (*)



 

---



 

---



 

---



 

---

 












 

Net earnings per share assuming dilution (*)



$ 0.46

$ 0.39

$ 1.26

$ 1.01  

















 

(*) Current and prior year per share amounts reflect the impact of the Company's two-for-one stock split that occurred March 23, 2012.

Although free cash flow, EBITDA, net sales excluding foreign currency translation, net earnings excluding foreign currency translation, net earnings excluding restructuring charges and net earnings per share assuming dilution excluding restructuring charges 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. Both net earnings excluding restructuring charges and earnings per share excluding restructuring charges provide a comparable measure for understanding the results of the Company as compared to prior periods. 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

May 18, 2012
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