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Donaldson Reports Record Fourth Quarter Sales and Earnings

27 August, 2014

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


   
   



Three Months Ended

Twelve Months Ended



July 31

July 31



2014

   

2013

   

Change



2014

   

2013

   

Change

Net sales

$668

$633

6%

$2,473

$2,437

2%
Operating income

99

100

(1)%

356

343

4%
Net earnings

73

73

---%

260

247

5%


















 
Diluted EPS

$0.50

$0.48

4%

$1.76

$1.64

7%


















 

"We are very pleased to report a strong finish to our FY14, with record sales, net earnings, and EPS in our fourth quarter, and also record EPS for the full year," said Bill Cook, Donaldson's CEO. "Our replacement filter sales were strong again this quarter, with double-digit percent growth in both our Engine and Industrial segments. Our Engine Products' sales increased 6 percent in local currency from last year, driven by increases in Engine Aftermarket and On-Road sales of 16 and 8 percent, respectively. Our Industrial Products' sales increased 3 percent in local currency, with increases in Special Applications and in Industrial Filtration Solutions of 11 and 4 percent, respectively, offsetting a 9 percent decline in our Gas Turbine shipments. Internationally, our local currency sales were strong, with Asia Pacific up 7 percent, Europe up 8 percent, and Latin America up 20 percent."

"Looking forward to FY15, we are forecasting 4 to 8 percent sales growth. We expect sales of our replacement filters to remain strong and a continuing improvement in our OEM first-fit end markets for construction equipment, on-road trucks, and gas turbine systems. We will maintain our focus on our Continuous Improvement initiatives to help deliver a higher operating margin in FY15, while also continuing our strategic investments in our Global ERP Project and our targeted revenue growth initiatives. The combination of our top-line growth forecast and our continued emphasis on operational excellence results in our FY15 EPS forecast of between $1.81 and $2.01 per share."

Financial Statement Discussion

The impact of foreign currency translation increased sales by $4.8 million, or 0.8 percent, during the quarter and decreased sales by $11.4 million, or 0.5 percent, for the year. The foreign currency translation impact increased net earnings by $0.4 million, or 0.5 percent, during the quarter and decreased net earnings by $1.0 million, or 0.4 percent, for the year.

Gross margin was 35.7 percent for the quarter versus 36.1 percent in the prior year quarter due to higher compensation expenses and an increase in our purchased material costs. These offset the positive impact from a higher percentage of replacement filter sales and the benefits from our Continuous Improvement initiatives. For the full year, our gross margin increased to 35.5 percent versus 34.8 percent last year.

Operating expenses for the quarter were $139.2 million, up 8.4 percent from the prior year. The increase was driven primarily by our Global ERP Project and incentive compensation. Operating expenses for the year were $522.1 million, up 3.6 percent from the prior year total of $503.8 million.

Our operating margin for the quarter was 14.8 percent, down 100 basis points from the prior year. For the year, our operating margin was 14.4 percent, up 30 basis points from last year.

Our effective tax rate for the quarter was 27.7 percent, compared to the prior year rate of 28.2 percent. Compared to the prior year this decrease was primarily due to changes in the mix of earnings between tax jurisdictions. For the year, the effective tax rate was 27.9 percent, compared to the prior year rate of 29.0 percent.

As part of our ongoing share repurchase program, we repurchased 2,757,000 shares for $114 million during the quarter. For the year, we repurchased 6,796,000 shares, or 4.6 percent of our diluted outstanding shares, for $279 million.

FY15 Outlook

This outlook excludes the impact from our pending acquisition of Northern Technical L.L.C., which is expected to close in September.

  • We project our Company's sales to be between $2.57 and $2.67 billion, or an increase of 4 to 8 percent.
  • Our full-year operating margin forecast is 14.1 to 14.9 percent. Included in this forecast is approximately $10 million in incremental operating expenses for our Global ERP Project and our targeted sales growth initiatives.
  • Our FY15 tax rate is anticipated to be between 27 and 30 percent.
  • We forecast our full-year FY15 EPS to be between $1.81 and $2.01.
  • Cash generated by operating activities is projected to be between $260 and $300 million. Our capital spending is estimated to be between $90 and $100 million. We plan to repurchase between 2 to 4 percent of our diluted outstanding shares in FY15.

Engine Products: We forecast our FY15 sales to increase 3 to 7 percent, including the impact of foreign currency.

  • Our On-Road OEM Customers are expecting to increase production of heavy- and medium-duty trucks in 2015.
  • Demand from our global Off-Road OEM Customers is anticipated to be mixed: build rates of construction equipment are expected to improve with North America forecasted to be the strongest region, build rates of agriculture equipment are forecasted to decrease in all regions, and build rates of mining equipment are expected to remain stable at their current low levels.
  • We are anticipating strong growth globally 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 first-fit filter systems, and through continued expansion of our product portfolio.
  • We forecast a mid-single digit percent sales increase for our Aerospace and Defense business as the continued slowdown in U.S. military activity should be offset by growth from our commercial aerospace sales.

Industrial Products: We forecast sales to increase 5 to 9 percent, including the impact of foreign currency. However, our Industrial Products' forecast excludes the impact from our pending acquisition of Northern Technical L.L.C., which is expected to close in September.

  • Our Industrial Filtration Solutions' sales are projected to increase 1 to 7 percent. We assume our replacement filter sales will remain strong due to improving general manufacturing conditions, while our new filtration system sales are forecasted to grow due to improvements in manufacturing capital spending and from our new product introductions.
  • We anticipate our Gas Turbine sales will increase 20 to 26 percent due to a forecasted improvement in the large turbine power generation market.
  • We forecast our Special Applications' sales to increase 1 to 5 percent due to improved demand for our membrane, 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 12,600 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 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, information security and data breaches, potential global events resulting in market instability including financial bailouts and defaults of sovereign nations, military and terrorist activities, including political unrest in the Middle East and Ukraine, 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



Twelve Months Ended




July 31



July 31




2014

2013

2014

2013
Net sales

$668,226

$632,594

$2,473,466

$2,436,948












 
Cost of sales

429,903

404,238

1,595,640

1,589,821












 
Gross profit

238,323

228,356

877,826

847,127












 
Operating expenses

139,173

128,343

522,087

503,798












 
Operating income

99,150

100,013

355,739

343,329












 
Other income, net

(4,915)

(3,800)

(15,164)

(15,762)












 
Interest expense

3,213

2,635

10,200

10,910












 
Earnings before income taxes

100,852

101,178

360,703

348,181












 
Income taxes

27,896

28,569

100,479

100,804












 
Net earnings

$72,956

$72,609

$260,224

$247,377












 

Weighted average shares outstanding



142,742,659

147,880,382

145,594,300

148,273,904












 
Diluted shares outstanding

144,728,637

149,940,905

147,641,113

150,455,193












 
Net earnings per share

$0.51

$0.49

$1.79

$1.67












 

Net earnings per share assuming dilution



$0.50

$0.48

$1.76

$1.64












 
Dividends paid per share

$0.165

$0.13

$0.575

$0.41












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

   
   



July 31

July 31



2014

2013
ASSETS










 
Cash and cash equivalents

$296,418
$224,138
Short-term investments

127,201
99,750
Accounts receivable, net

474,157
430,766
Inventories, net

253,351
234,820
Prepaids and other current assets

74,150
66,188





 
Total current assets

1,225,277
1,055,662





 
Other assets and deferred taxes

265,469
268,614
Property, plant, and equipment, net

451,665
419,280





 
Total assets

$1,942,411

$1,743,556






 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$216,603

$186,460
Employee compensation and other liabilities

205,936
182,121
Short-term borrowings

185,303
9,190
Current maturity long-term debt

1,738
98,664





 
Total current liabilities

609,580
476,435





 
Long-term debt

243,726
102,774
Other long-term liabilities

86,622
79,160





 
Total liabilities

939,928
658,369






 
Equity

1,002,483

1,085,187






 
Total liabilities and equity

$1,942,411

$1,743,556






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

   



Twelve Months Ended



July 31



2014     2013
OPERATING ACTIVITIES









 
Net earnings

$260,224
$247,377

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






Depreciation and amortization

67,163
64,290
Changes in operating assets and liabilities

(12,207)
2,490
Tax benefit of equity plans

(8,781)
(11,191)
Stock compensation plan expense

11,640
9,148
Loss on sale of business

905
-
Other, net

(1,105)
3,809
Net cash provided by operating activities

317,839
315,923






 
INVESTING ACTIVITIES










 
Net expenditures on property and equipment

(96,815)
(94,337)
Net change in short-term investments

(27,307)
(1,974)
Net cash used in investing activities

(124,122)
(96,311)






 
FINANCING ACTIVITIES










 
Purchase of treasury stock

(279,395)
(102,572)
Net change in debt and short-term borrowings

218,446
(88,310)
Dividends paid

(83,070)
(60,320)
Tax benefit of equity plans

8,781
11,191
Exercise of stock options

14,437

16,043
Net cash used in financing activities

(120,801)

(223,968)






 

Effect of exchange rate changes on cash



(636)



2,705







 

Increase or (decrease) in cash and cash equivalents



72,280



(1,651)







 

Cash and cash equivalents – beginning of year



224,138



225,789







 

Cash and cash equivalents – end of period



$296,418



$224,138







 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
   
   
   



Engine

Industrial

Corporate &

Total




Products

Products

Unallocated

Company

3 Months Ended July 31, 2014:











Net sales

$423,079

$245,147

---

$668,226
Earnings before income taxes

63,121

42,296

(4,565)

100,852












 
3 Months Ended July 31, 2013:











Net sales

$396,374

$236,220

---

$632,594
Earnings before income taxes

68,763

36,399

(3,984)

101,178












 












 
12 Months Ended July 31, 2014:











Net sales

$1,584,027

$889,439

---

$2,473,466
Earnings before income taxes

233,920

133,978

(7,195)

360,703












 
12 Months Ended July 31, 2013:











Net sales

$1,504,188

$932,760

---

$2,436,948
Earnings before income taxes

220,892

139,108

(11,819)

348,181












 












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












 



Three Months Ended

Twelve Months Ended



July 31

July 31



2014

2013

2014

2013
Engine Products segment:











Off-Road Products

$81,903

$90,778

$342,205

$358,834
On-Road Products

34,631

32,239

130,029

128,446
Aftermarket Products

283,113

244,453

1,012,165

912,717
Aerospace and Defense Products

23,432

28,904

99,628

104,191
Total Engine Products segment

$423,079

$396,374

$1,584,027

$1,504,188












 
Industrial Products segment:











Industrial Filtration Solutions Products

$151,714

$143,276

$553,356

$529,751
Gas Turbine Products

46,754

50,627

156,860

232,922
Special Applications Products

46,679

42,317

179,223

170,087

Total Industrial Products segment



$245,147

$236,220

$889,439

$932,760












 
Total Company

$668,226

$632,594

$2,473,466

$2,436,948












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

   
   



Three Months Ended

Twelve Months Ended



July 31

July 31



2014     2013

2014     2013












 

Net cash provided by operating activities



$87,733

$98,534

$317,839

$315,923
Net capital expenditures

(30,769)

(24,912)

(96,815)

(94,337)
Free cash flow

$56,964

$73,622

$221,024

$221,586












 
Net earnings

$72,956

$72,609

$260,224

$247,377
Income taxes

27,896

28,569

100,479

100,804
Interest expense, net

2,552

1,987

7,889

8,097
Depreciation and amortization

16,918

15,763

67,163

64,290
EBITDA

$120,322

$118,928

$435,755

$420,568












 
Prior year net sales

$632,594

$656,833

$2,436,948

$2,493,248

Change in net sales, excluding foreign currency translation



30,826

(20,710)

47,920

(24,144)
Foreign currency translation

4,806

(3,529)

(11,402)

(32,156)
Current year net sales

$668,226

$632,594

$2,473,466

$2,436,948












 
Prior year net earnings

$72,609

$70,981

$247,377

$264,301

Change in net earnings, excluding foreign currency translation



(13)

1,883

13,873

(14,815)
Foreign currency translation

360

(255)

(1,026)

(2,109)
Current year net earnings

$72,956

$72,609

$260,224

$247,377












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

   
   



Three Months Ended

Twelve Months Ended



July 31

July 31



2014     2013

2014     2013
Net earnings

$72,956

$72,609

$260,224

$247,377

Restructuring charges, net of tax



377



856

2,398



2,954

Net earnings, excluding special items



$73,333

$73,465

$262,622

$250,331












 

Net earnings per share assuming dilution



$0.50

$0.48

$1.76

$1.64

Restructuring charges per share, net of tax



0.01



0.01



0.02



0.02

Net earnings per share assuming dilution, excluding special items



$0.51

$0.49

$1.78

$1.66












 

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

Aug 27, 2014
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