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Donaldson Reports Second Quarter Results

25 February, 2013

Donaldson Company, Inc. (NYSE: DCI) announced its financial results for its fiscal 2013 second quarter. Summarized financial results are as follows (dollars in millions, except per share data):


   
   



Three Months Ended

Six Months Ended



January 31

January 31



2013

   

2012

   

Change



2013

   

2012

   

Change

Net sales

$ 596

$ 581

3 %

$ 1,185

$ 1,189

0 %
Operating income


71


75

(5 )%


145


165

(12 )%
Net earnings


51


54

(6 )%


105


122

(14 )%


















 
Diluted EPS (*)

$ 0.34

$ 0.35

(3 )%

$ 0.70

$ 0.80

(13 )%


















 

(*) The prior year EPS amounts reflect the impact of last year's two-for-one stock split.

"Our diversified portfolio of global filtration businesses delivered a new sales record in our second quarter," said Bill Cook, Donaldson's CEO. "Our Gas Turbine Products' sales increased 79 percent as we shipped a number of large project shipments to our Customers this quarter. This offset weaker sales into the North American On-Road truck market, the On-Road and Off-Road equipment markets in Asia, and for On-Road and Off-Road replacement filters in Europe. We did see improved demand for replacement filters in the Americas and in Asia, with our local currency sales increasing 4 and 6 percent, respectively."

"Despite our higher sales, our operating margin decreased 100 basis points from last year to 11.9 percent due to lower fixed cost absorption in our Engine Products segment and the mix shift to large Gas Turbine project shipments. This was partially offset by savings from our ongoing Continuous Improvement initiatives. We continued to take actions to better align our manufacturing and operating expenses with our forecasted Customer demand. However, we are also continuing the engineering work on many new OEM Customer programs that will be going into production in the next 24 months. In addition, we continue to work on our global Strategic Business Systems project. We have chosen to continue these investments to support our Strategic Growth Goals."

"Based on input from key Customers, we see current market conditions continuing in the near term due primarily to the ongoing high levels of global economic uncertainty. Fortunately, we anticipate strength in our Gas Turbine business for the balance of our fiscal year, which will help offset some of the weakness in our other businesses. As a result, we are forecasting our Company's full-year sales to be approximately equal to last year's record $2.5 billion, and our FY13 EPS forecast is between $1.61 and $1.81 per share."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $1.7 million, or 0.3 percent, during the quarter and decreased sales by $18.6 million, or 1.6 percent, year-to-date, compared to the same periods last year. The impact of foreign currency translation increased reported net earnings by $0.2 million, or 0.3 percent, during the quarter and decreased reported net earnings by $1.2 million, or 1.0 percent, for the year.

Gross margin was 33.4 percent for the quarter and 33.5 percent year-to-date, compared to prior year margins of 34.6 percent and 35.0 percent, respectively. The year-over-year decrease is primarily attributable to lower fixed cost absorption due to the decrease in our production volumes and the mix impact due to large Gas Turbine project shipments. Restructuring expenses included in gross margin were $0.5 million in the quarter and $0.7 million year-to-date. The lower fixed cost absorption and restructuring expenses were partially offset by the benefits from our ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $127.8 million, up 1.4 percent from last year's $126.0 million. As a percent of sales, operating expenses were 21.4 percent, compared to last year's 21.7 percent. Operating expenses year-to-date were $252.5 million, or 21.3 percent of sales, compared to $250.7 million, or 21.1 percent of sales, last year. Restructuring expenses included in operating expenses were $0.9 million in the quarter and $1.0 million year-to-date. Our cost containment actions helped offset the restructuring expenses, higher pension expenses, and incremental expenses related to our Strategic Business Systems project.

Our effective tax rate for the quarter was 28.3 percent, compared to a prior year rate of 29.6 percent. The decrease was primarily due to $0.8 million in tax benefits from the retroactive reinstatement of the Research and Experimentation Credit in the U.S. The year-to-date effective tax rate was 28.9 percent, compared to a prior year rate of 27.3 percent.

As part of our ongoing share repurchase program we repurchased 320,000 shares, or 0.2 percent of our diluted outstanding shares, for $10.2 million during the quarter. Year-to-date we have repurchased 1,820,000 shares, or 1.2 percent of our diluted outstanding shares, for $61.0 million.

FY13 Outlook

  • We are projecting our full-year sales to be approximately equal to last year's record $2.5 billion. Our forecast is based on the Euro at US$1.34 and 94 Yen to the US$.
  • Our full-year operating margin forecast is 13.9 to 14.7 percent.
  • Our FY13 tax rate is anticipated to be between 28 and 30 percent.
  • We forecast our FY13 EPS to be between $1.61 and $1.81.
  • Cash generated by operating activities is projected to be between $240 and $270 million. Our capital spending is estimated to be between $90 and $100 million.

Engine Products: We forecast FY13 sales to decrease slightly compared to FY12, including the impact of foreign currency.

  • Our On-Road OEM Customers are planning to build fewer heavy- and medium-duty trucks. Demand from our Off-Road OEM Customers is anticipated to be mixed: build rates of agriculture equipment are forecasted to remain good, build rates of construction equipment are expected to slowly improve in North America but remain weak in Europe and China, and build rates of mining equipment are expected to decrease globally.
  • We are anticipating slowly improving growth for Aftermarket Products. Current utilization rates for off-road equipment and on-road heavy trucks began stabilizing late in the second quarter and inventory levels at dealers and distributors are consistent with current utilization. We should benefit from our continued expansion into emerging economies, from the increasing number of systems installed in the field with our proprietary filters, and from our increasing sales of liquid filtration products.
  • We forecast our Aerospace and Defense Products' sales to be slightly lower than last year as the continued slowdown in military activity is expected to be partially offset by growth from commercial aerospace sales.

Industrial Products: We forecast sales to increase 1 to 6 percent over FY12, including the impact of foreign currency.

  • Our Industrial Filtration Solutions Products' sales are projected to decrease slightly compared to last year. We assume manufacturing activity will increase moderately in the Americas, slowly improve in Asia, and continue to be weak in Europe.
  • We anticipate our Gas Turbine Products' sales to be up 27 to 32 percent due to continued strength in both the large turbine power generation and the oil and gas markets.
  • Special Applications Products' sales are now forecast to be down 1 to 6 percent with expected weaker end market demand for disk drive filters partially offset by growth from membranes products and integrated 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 12,800 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 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 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



Six Months Ended




January 31



January 31



2013

2012

2013

2012
Net sales

$ 596,036


$ 580,883


$ 1,184,983


$ 1,189,178












 
Cost of sales

  397,059  

  380,066  

  787,713  

  773,427  












 
Gross margin


198,977



200,817



397,270



415,751












 
Operating expenses

  127,785  

  126,049  

  252,541  

  250,656  












 
Operating income


71,192



74,768



144,729



165,095












 
Other income, net


(2,542 )


(4,550 )


(8,354 )


(9,410 )












 
Interest expense

  2,885  

  2,899  

  5,556  

  6,069  












 
Earnings before income taxes


70,849



76,419



147,527



168,436












 
Income taxes

  20,036  

  22,598  

  42,601  

  46,062  












 
Net earnings

$ 50,813  

$ 53,821  

$ 104,926  

$ 122,374  












 

Weighted average shares Outstanding (*)




147,951,535



150,105,610



148,531,306



150,309,746












 
Diluted shares outstanding (*)


149,988,832



152,825,570



150,742,467



152,961,346












 
Net earnings per share (*)

$ 0.34


$ 0.36


$ 0.71


$ 0.82












 

Net earnings per share assuming dilution (*)



$ 0.34


$ 0.35


$ 0.70


$ 0.80












 
Dividends paid per share (*)

$ 0.090


$ 0.075


$ 0.180


$ 0.150




















 

(*) Prior year shares and per share amounts reflect the impact of the Company's two-for-one stock split that occurred during the third quarter of Fiscal 2012.

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

   
   



January 31

July 31



2013

2012
ASSETS










 
Cash, cash equivalents and short-term investments

$ 284,483
$ 318,151
Accounts receivable, net


407,528

438,796
Inventories, net


261,932

256,116
Prepaids and other current assets

  78,897
  72,599





 
Total current assets


1,032,840

1,085,662





 
Other assets and deferred taxes


273,100

259,511
Property, plant and equipment, net

  412,728
  384,909





 
Total assets

$ 1,718,668

$ 1,730,082






 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$ 171,881

$ 199,182
Employee compensation and other liabilities


171,328

201,848
Short-term borrowings


59,335

95,147
Current maturity long-term debt

  82,467
  2,346





 
Total current liabilities


485,011

498,523





 
Long-term debt


120,375

203,483
Other long-term liabilities

  109,102
  118,062





 
Total liabilities


714,488

820,068






 
Equity

  1,004,180

  910,014






 
Total liabilities and equity

$ 1,718,668

$ 1,730,082






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

    Six Months Ended



January 31



2013     2012
OPERATING ACTIVITIES









 
Net earnings

$ 104,926

$ 122,374

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






Depreciation and amortization


32,896


30,896
Changes in operating assets and liabilities


(26,831 )

(43,485 )
Tax benefit of equity plans


(8,560 )

(7,576 )
Stock compensation plan expense


6,218


6,440
Other, net

  531  
  (6,451 )
Net cash provided by operating activities


109,180


102,198






 
INVESTING ACTIVITIES










 
Net expenditures on property and equipment


(51,753 )

(36,349 )
Net change in short-term investments

  31,250  
  (93,455 )
Net cash used in investing activities


(20,503 )

(129,804 )






 
FINANCING ACTIVITIES










 
Purchase of treasury stock


(60,975 )

(73,558 )
Net change in debt and short-term borrowings


(38,534 )

33,452
Dividends paid


(26,495 )

(22,342 )
Tax benefit of equity plans


8,560


7,576
Exercise of stock options

  9,152  

  9,791  
Net cash used in financing activities


(108,292 )


(45,081 )










 

Effect of exchange rate changes on cash



 

10,434

 

 

(19,877

)











 

Decrease in cash and cash equivalents




(9,181

)




(92,564

)











 

Cash and cash equivalents – beginning of year



 

225,789

 

 

273,494

 










 

Cash and cash equivalents – end of period



$

216,608

 

$

180,930

 










 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
 
 
 



Engine
Industrial
Corporate &

Total




Products
Products
Unallocated

Company

3 Months Ended January 31, 2013:








Net sales

$ 353,840
$ 242,196
---

$ 596,036
Earnings before income taxes


39,025

32,592
(768 )

70,849









 
3 Months Ended January 31, 2012:








Net sales

$ 370,834
$ 210,049
---

$ 580,883
Earnings before income taxes


48,418

30,597
(2,596 )

76,419









 









 
6 Months Ended January 31, 2013:








Net sales

$ 724,500
$ 460,483
---

$ 1,184,983
Earnings before income taxes


86,449

65,154
(4,076 )

147,527









 
6 Months Ended January 31, 2012:








Net sales

$ 764,559
$ 424,619
---

$ 1,189,178
Earnings before income taxes


108,296

64,896
(4,756 )

168,436









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

       
   
   



Three Months Ended

Six Months Ended



January 31

January 31



2013     2012

2013

2012
Engine Products segment:











Off-Road Products

$83,262

$ 87,035

$ 174,259

$ 181,143
On-Road Products

31,163


39,376


65,919


82,001
Aftermarket Products

211,862


214,070


430,258


440,967
Retrofit Emissions Products

3,362


4,651


6,259


9,288
Aerospace and Defense Products

24,191

  25,702

  47,805

  51,160
Total Engine Products segment

$353,840

$ 370,834

$ 724,500

$ 764,559












 
Industrial Products segment:











Industrial Filtration Solutions Products

$132,452

$ 132,041

$ 261,028

$ 265,440
Gas Turbine Products

66,319


37,011


113,562


72,592
Special Applications Products

43,425

  40,997

  85,893

  86,587
Total Industrial Products segment

$242,196

$ 210,049

$ 460,483

$ 424,619












 
Total Company

$596,036

$ 580,883

$ 1,184,983

$ 1,189,178












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

 
   


Three Months Ended

Six Months Ended


January 31

January 31


2013     2012

2013     2012











 

Net cash provided by operating activities


$ 45,117


$ 44,512


$ 109,180


$ 102,198
Net capital expenditures
  (30,349 )

  (17,858 )

  (51,753 )

  (36,349 )
Free cash flow
$ 14,768  

$ 26,654  

$ 57,427  

$ 65,849  











 
Net earnings
$ 50,813


$ 53,821


$ 104,926


$ 122,374
Income taxes

20,036



22,598



42,601



46,062
Interest expense

2,885



1,789



5,556



4,160
Depreciation and amortization
  16,870  

  15,322  

  32,896  

  30,896  
EBITDA
$ 90,604  

$ 93,530  

$ 185,979  

$ 203,492  











 
Prior year net sales
$ 580,883


$ 537,105


$ 1,189,178


$ 1,074,014

Change in net sales, excluding foreign currency translation



16,898



47,980



14,409



105,946
Foreign currency translation
  (1,745 )

  (4,202 )

  (18,604 )

  9,218  
Current year net sales
$ 596,036  

$ 580,883  

$ 1,184,983  

$ 1,189,178  











 
Prior year net earnings
$ 53,821


$ 44,579


$ 122,374


$ 97,713

Change in net earnings, excluding foreign currency translation



(3,166 )


9,829



(16,285 )


23,917
Foreign currency translation
  158  

  (587 )

  (1,163 )

  744  
Current year net earnings
$ 50,813  

$ 53,821  

$ 104,926  

$ 122,374  



















 

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

Feb 25, 2013
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