Donaldson Company, Inc. (NYSE: DCI) announced its financial results for
its fiscal 2014 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 |
|
| 2014 |
| 2013 |
| Change |
| 2014 |
| 2013 |
| Change |
Net sales
|
|
$582
|
|
$596
|
|
(2)%
|
|
$1,181
|
|
$1,185
|
|
---%
|
Operating income
|
|
72
|
|
71
|
|
1%
|
|
164
|
|
145
|
|
13%
|
Net earnings
|
|
58
|
|
51
|
|
15%
|
|
120
|
|
105
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$0.39
|
|
$0.34
|
|
15%
|
|
$0.80
|
|
$0.70
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
"We delivered record net earnings in our second quarter," said
Bill Cook, Donaldson's CEO. "We see stabilization within many of our OEM
first-fit equipment end markets and increasing demand for our
replacement filters. Our Engine Products' sales increased 7 percent in
local currency from last year, driven by an 11 percent increase in
Engine Aftermarket sales and a 10 percent increase in OEM sales outside
of the U.S. Our Industrial Products' sales decreased 12 percent in local
currency as a result of a 50 percent decrease in our Gas Turbine sales
from last year's record second quarter of $66 million. As we have
discussed previously, we had a surge in our gas turbine shipments last
year, and the overall industry is now installing that new electrical
generation capacity. We do see our Gas Turbine sales improving during
the balance of our FY14 and into FY15. Partially offsetting Gas Turbine
sales in the quarter was our Special Applications business, which grew 7
percent. Geographically, excluding our Gas Turbine sales, our local
currency sales were strong with South Africa up 5 percent, Asia Pacific
up 8 percent, Europe up 9 percent, and Latin America up 17 percent."
"Our business is operating very well and our operations are positioned
to deliver strong performances as volumes are forecast to increase in
the second half of our FY14."
"We have adjusted our Industrial Products' sales outlook for FY14 as the
recovery for business investment for industrial filtration systems has
been slow to develop and several of our gas turbine projects that were
scheduled for shipment this year have been rescheduled by our Customers
for early in our FY15. Including this change, we have maintained our
full-year Company sales forecast to be a 1 to 5 percent increase in
FY14. We will maintain our focus on operational excellence through our Continuous
Improvement initiatives and continue to invest in our Global ERP
project. The combination of our sales and operational performance should
deliver FY14 EPS of between $1.65 and $1.85 per share."
Financial Statement Discussion
The impact of foreign currency translation decreased sales by $8.8
million, or 1.5 percent, during the quarter and decreased sales by $15.6
million, or 1.3 percent, year-to-date. The impact of foreign currency
translation decreased reported net earnings by $0.7 million, or 1.4
percent, during the quarter and decreased reported net earnings by $1.2
million, or 1.1 percent, for the year.
Gross margin was 34.7 percent for the quarter and 35.2 percent
year-to-date, compared to prior year margins of 33.4 percent and 33.5
percent, respectively. The year-over-year increase is primarily
attributable to the positive mix impacts from the reduction in large Gas
Turbine projects and better absorption of our fixed costs due to higher
volumes in most of our other businesses. We also benefitted from our
ongoing Continuous Improvement initiatives.
Operating expenses for the quarter were $129.5 million, up 1.4 percent
from last year's $127.8 million. As a percent of sales, operating
expenses were 22.3 percent compared to last year's 21.4 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 $252.2 million, or 21.4 percent of
sales, compared to $252.5 million, or 21.3 percent of sales, last year.
Operating margin for the quarter was 12.4 percent, up 50 basis points
from the prior year. Year-to-date operating margin was 13.9 percent, up
170 basis points from FY13.
Our effective tax rate for the quarter was 22.1 percent, compared to a
prior year rate of 28.3 percent. The current quarter included $6.2
million in tax benefits related to the favorable settlement of a tax
audit. This is $4.2 million, or $0.03 per share, higher than we had
forecasted in our prior outlook. The year-to-date effective tax rate was
27.6 percent compared to a prior year rate of 28.9 percent.
As part of our ongoing share repurchase program we repurchased 1,300,000
shares, or 0.9 percent of our diluted outstanding shares, for $54.2
million during the quarter. Year-to-date we have repurchased 1,639,000
shares, or 1.1 percent of our diluted outstanding shares, for $66.3
million.
FY14 Outlook
-
We project our Company's sales to be between $2.45 and $2.55 billion,
or an increase of 1 to 5 percent including the negative impact of
foreign currency exchanges rates. Our forecast is based on the Euro at
US$1.35 and 101 Yen to the US$.
-
Our full-year operating margin forecast is 14.2 to 14.8 percent.
Included in this forecast is approximately $30 million in operating
expense increases for our Global ERP project and incentive
compensation.
-
Our FY14 tax rate is anticipated to be between 28 and 30 percent.
-
We forecast our full-year FY14 EPS to be between $1.65 and $1.85.
-
Cash generated by operating activities is projected to be between $280
and $320 million. Our capital spending is estimated to be
approximately $90 million.
Engine Products: We now
forecast FY14 sales to increase 3 to 9 percent, including the 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 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 be steady
to slightly down, and the build rates of new mining equipment are
expected to remain at current low levels.
-
We are anticipating growth for our Engine Aftermarket business.
Utilization rates for off-road equipment and on-road heavy truck
fleets in the field are expected to improve. We should also benefit
from our continued expansion into emerging economies, the increasing
number of first-fit systems installed in the field with our innovative
proprietary filters, and through expansion of our product portfolio.
-
We forecast steady sales for our Aerospace and Defense business
compared to last year as the continued slowdown in U.S. military
activity should be offset by growth from our commercial aerospace
sales.
Industrial Products: We now
forecast sales to decrease slightly compared to FY13, including the
impact of foreign currency.
-
Our Industrial Filtration Solutions' sales are projected to increase 2
to 8 percent. We assume replacement filter sales will remain at record
levels due to improving general manufacturing activity, and for new
filtration equipment sales to remain soft due to continuing low levels
of investment in new equipment by manufacturers.
-
We anticipate our Gas Turbine sales will decrease 24 to 30 percent
from our record sales in FY13 due to the current slowdown in large
turbine power generation projects by our Customers.
-
We are maintaining our Special Applications' forecast for sales to
increase 3 to 9 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 12,200 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
|
|
Six Months Ended
|
|
|
January 31
|
|
January 31
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net sales
|
|
$581,622
|
|
$596,036
|
|
$1,181,006
|
|
$1,184,983
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
379,974
|
|
397,059
|
|
764,964
|
|
787,713
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
201,648
|
|
198,977
|
|
416,042
|
|
397,270
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
129,540
|
|
127,785
|
|
252,187
|
|
252,541
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
72,108
|
|
71,192
|
|
163,855
|
|
144,729
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
(4,773)
|
|
(2,542)
|
|
(6,427)
|
|
(8,354)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
1,999
|
|
2,885
|
|
4,613
|
|
5,556
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
74,882
|
|
70,849
|
|
165,669
|
|
147,527
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
16,542
|
|
20,036
|
|
45,737
|
|
42,601
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$58,340
|
|
$50,813
|
|
$119,932
|
|
$104,926
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
146,957,131
|
|
147,951,535
|
|
147,140,135
|
|
148,531,306
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding
|
|
149,021,755
|
|
149,988,832
|
|
149,204,090
|
|
150,742,467
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$0.40
|
|
$0.34
|
|
$0.82
|
|
$0.71
|
|
|
|
|
|
|
|
|
|
Net earnings per share assuming dilution
|
|
$0.39
|
|
$0.34
|
|
$0.80
|
|
$0.70
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$0.14
|
|
$0.09
|
|
$0.27
|
|
$0.18
|
|
|
|
|
|
|
|
|
|
DONALDSON COMPANY, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(Thousands of dollars)
|
(Unaudited)
|
|
|
|
|
|
|
|
January 31
|
|
July 31
|
|
|
2014
|
|
2013
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$259,119
|
$224,138
|
Short-term investments
|
|
101,153
|
99,750
|
Accounts receivable, net
|
|
395,342
|
430,766
|
Inventories, net
|
|
241,133
|
234,820
|
Prepaids and other current assets
|
|
75,479
|
66,188
|
|
|
|
|
Total current assets
|
|
1,072,226
|
1,055,662
|
|
|
|
|
Other assets and deferred taxes
|
|
273,964
|
268,614
|
Property, plant, and equipment, net
|
|
427,353
|
419,280
|
|
|
|
|
Total assets
|
|
$1,773,543
|
|
$1,743,556
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$165,784
|
|
$186,460
|
Employee compensation and other liabilities
|
|
179,375
|
182,121
|
Short-term borrowings
|
|
105,138
|
9,190
|
Current maturity long-term debt
|
|
17,802
|
98,664
|
|
|
|
|
Total current liabilities
|
|
468,099
|
476,435
|
|
|
|
|
Long-term debt
|
|
103,157
|
102,774
|
Other long-term liabilities
|
|
80,117
|
79,160
|
|
|
|
|
Total liabilities
|
|
651,373
|
658,369
|
|
|
|
|
|
Equity
|
|
1,122,170
|
|
1,085,187
|
|
|
|
|
|
Total liabilities and equity
|
|
$1,773,543
|
|
$1,743,556
|
|
|
|
|
|
DONALDSON COMPANY, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Thousands of dollars)
|
(Unaudited)
|
|
|
|
|
|
Six Months Ended
|
|
|
January 31
|
|
|
2014
|
|
2013
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net earnings
|
|
$119,932
|
$104,926
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
Depreciation and amortization
|
|
33,167
|
32,896
|
Changes in operating assets and liabilities
|
|
94
|
(26,831)
|
Tax benefit of equity plans
|
|
(6,864)
|
(8,560)
|
Stock compensation plan expense
|
|
7,137
|
6,218
|
Loss on sale of business
|
|
905
|
-
|
Other, net
|
|
(2,766)
|
531
|
Net cash provided by operating activities
|
|
151,605
|
109,180
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net expenditures on property and equipment
|
|
(42,848)
|
(51,753)
|
Net change in short-term investments
|
|
650
|
31,250
|
Net cash used in investing activities
|
|
(42,198)
|
(20,503)
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
(66,331)
|
(60,975)
|
Net change in debt and short-term borrowings
|
|
16,236
|
(38,534)
|
Dividends paid
|
|
(39,414)
|
(26,495)
|
Tax benefit of equity plans
|
|
6,864
|
8,560
|
Exercise of stock options
|
|
10,331
|
|
9,152
|
Net cash used in financing activities
|
|
(72,314)
|
|
(108,292)
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(2,112)
|
|
10,434
|
|
|
|
|
|
Increase/(Decrease) in cash and cash equivalents
|
|
34,981
|
|
(9,181)
|
|
|
|
|
|
Cash and cash equivalents – beginning of year
|
|
224,138
|
|
225,789
|
|
|
|
|
|
Cash and cash equivalents – end of period
|
|
$259,119
|
|
$216,608
|
|
|
|
|
|
SEGMENT DETAIL
|
(Thousands of dollars)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Engine
|
|
Industrial
|
|
Corporate &
|
|
Total
|
|
|
Products
|
|
Products
|
|
Unallocated
|
|
Company
|
3 Months Ended January 31, 2014:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$369,675
|
|
$211,947
|
|
---
|
|
$581,622
|
Earnings before income taxes
|
|
47,294
|
|
28,032
|
|
(444)
|
|
74,882
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Months Ended January 31, 2014:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$758,791
|
|
$422,215
|
|
---
|
|
$1,181,006
|
Earnings before income taxes
|
|
109,367
|
|
59,175
|
|
(2,873)
|
|
165,669
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES BY PRODUCT
|
(Thousands of dollars)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
January 31
|
|
January 31
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Engine Products segment:
|
|
|
|
|
|
|
|
|
Off-Road Products
|
|
$82,298
|
|
$83,262
|
|
$171,511
|
|
$174,259
|
On-Road Products
|
|
29,828
|
|
31,163
|
|
62,317
|
|
65,919
|
Aftermarket Products
|
|
234,362
|
|
215,224
|
|
473,234
|
|
436,517
|
Aerospace and Defense Products
|
|
23,187
|
|
24,191
|
|
51,729
|
|
47,805
|
Total Engine Products segment
|
|
$369,675
|
|
$353,840
|
|
$758,791
|
|
$724,500
|
|
|
|
|
|
|
|
|
|
Industrial Products segment:
|
|
|
|
|
|
|
|
|
Industrial Filtration Solutions Products
|
|
$132,847
|
|
$132,452
|
|
$264,278
|
|
$261,028
|
Gas Turbine Products
|
|
33,461
|
|
66,319
|
|
68,101
|
|
113,562
|
Special Applications Products
|
|
45,639
|
|
43,425
|
|
89,836
|
|
85,893
|
Total Industrial Products segment
|
|
$211,947
|
|
$242,196
|
|
$422,215
|
|
$460,483
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$581,622
|
|
$596,036
|
|
$1,181,006
|
|
$1,184,983
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
|
(Thousands of dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
January 31
|
|
January 31
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$52,686
|
|
$45,117
|
|
$151,605
|
|
$109,180
|
Net capital expenditures
|
|
(22,318)
|
|
(30,349)
|
|
(42,848)
|
|
(51,753)
|
Free cash flow
|
|
$30,368
|
|
$14,768
|
|
$108,757
|
|
$57,427
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$58,340
|
|
$50,813
|
|
$119,932
|
|
$104,926
|
Income taxes
|
|
16,542
|
|
20,036
|
|
45,737
|
|
42,601
|
Interest expense, net
|
|
1,356
|
|
2,087
|
|
3,513
|
|
3,841
|
Depreciation and amortization
|
|
16,900
|
|
16,870
|
|
33,167
|
|
32,896
|
EBITDA
|
|
$93,138
|
|
$89,806
|
|
$202,349
|
|
$184,264
|
|
|
|
|
|
|
|
|
|
Prior year net sales
|
|
$596,036
|
|
$580,883
|
|
$1,184,983
|
|
$1,189,178
|
Change in net sales, excluding foreign currency translation
|
|
(5,628)
|
|
16,898
|
|
11,597
|
|
14,409
|
Foreign currency translation
|
|
(8,786)
|
|
(1,745)
|
|
(15,574)
|
|
(18,604)
|
Current year net sales
|
|
$581,622
|
|
$596,036
|
|
$1,181,006
|
|
$1,184,983
|
|
|
|
|
|
|
|
|
|
Prior year net earnings
|
|
$50,813
|
|
$53,821
|
|
$104,926
|
|
$122,374
|
Change in net earnings, excluding foreign currency translation
|
|
8,256
|
|
(3,166)
|
|
16,189
|
|
(16,285)
|
Foreign currency translation
|
|
(729)
|
|
158
|
|
(1,183)
|
|
(1,163)
|
Current year net earnings
|
|
$58,340
|
|
$50,813
|
|
$119,932
|
|
$104,926
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (CONTINUED)
|
(Thousands of dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
January 31
|
|
January 31
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net earnings
|
|
$58,340
|
|
$50,813
|
|
$119,932
|
|
$104,926
|
Restructuring charges, net of tax
|
|
418
|
|
---
|
|
1,861
|
|
---
|
Net earnings, excluding special items
|
|
$58,758
|
|
$50,813
|
|
$121,793
|
|
$104,926
|
|
|
|
|
|
|
|
|
|
Net earnings per share assuming dilution
|
|
$0.39
|
|
$0.34
|
|
$0.80
|
|
$0.70
|
Restructuring charges per share, net of tax
|
|
---
|
|
---
|
|
0.01
|
|
---
|
Net earnings per share assuming dilution, excluding special items
|
|
$0.39
|
|
$0.34
|
|
$0.81
|
|
$0.70
|
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 21, 2014