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Donaldson Reports Second Quarter Earnings

24 February, 2015

Quarterly Sales up 7% in Constant Currencies

p> Donaldson Company, Inc. (NYSE:DCI) announced its financial results for its Fiscal 2015 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



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 our 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















 

"We achieved solid constant currency sales growth of 7 percent in the quarter. The following are the drivers of our sales stated in constant currencies. Our Gas Turbine Products doubled over last year. Our Aerospace and Defense and On-Road businesses grew 16 and 12 percent, respectively. These increases and a modest sales increase in our Engine Aftermarket business were partially offset by an 18 percent decline in Off-Road Products, as a result of continued weak conditions in the global agriculture market and in the construction and mining markets in Asia Pacific. Overall, the currency headwinds were significant in the quarter and decreased our reported sales by $28 million compared to the prior year," said Bill Cook, Donaldson's CEO.

"Our reported operating margin decreased from the prior year quarter but included a $3.9 million charge for the previously announced lump sum settlement of our U.S. pension plan. We also incurred $0.7 million of costs associated with the closing of our Grinnell, Iowa, facility. The effect of these two items was a $0.02 reduction to our reported diluted EPS of $0.35. Also as a reminder, the prior year quarter included $6.4 million, or $0.04, in tax benefits related to the favorable settlement of a tax audit."

"We expect global economic conditions to improve only slightly over the next year. In addition to the negative impact of the stronger U.S. dollar, the slow growth of the global economy combined with ongoing weak commodity prices is projected to have a negative impact on most of our OEM Customers' sales, and as a result, ours. The slow global capital investment environment also negatively impacts our first-fit Dust Collector equipment sales. We have updated our outlook for Fiscal 2015 to reflect these conditions and an ongoing negative translation impact from the stronger U.S. dollar. Overall, we now expect our full-year sales to be flat to down 3 percent, which should result in Fiscal 2015 diluted EPS of between $1.65 and $1.85 per share, excluding restructuring and pension lump sum settlement expenses."

"Since current conditions in many of our end markets remain weak, we will implement additional productivity improvement and restructuring actions during the balance of this fiscal year. This will allow us to continue to invest in our key growth initiatives as we execute our plan to grow to $5 billion in revenues by Fiscal 2021."

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 6.0 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.

Our 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.

Our 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 our 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

  • We now project our Company's sales to be between $2.40 and $2.50 billion. Our forecast is based on the Euro at US$1.13 and 117 Yen to the US$.
  • 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.

  • Our On-Road OEM Customers are expecting to increase production of heavy- and medium-duty trucks in 2015.
  • Demand from our 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.
  • We are anticipating 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.
  • We forecast 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.

  • Our 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.
  • We forecast our 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.

About Donaldson Company

In 2015, Donaldson celebrates a century of providing global filtration solutions that improve people's lives, enhance Customers' equipment performance, and protect the environment. The 100-year-old, technology-driven Company is committed to satisfying Customers' needs for filtration solutions through innovative research and development, application expertise, and global presence. Over 12,800 dedicated employees contribute to the Company's success by supporting Customers at more than 140 sales, manufacturing, and distribution locations around the world. In Fiscal 2014, Donaldson reported sales of $2.5 billion and record earnings per share.

Donaldson is a member of the S&P MidCap 400 and Russell 1000 indices, whose 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, 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



Six Months Ended




January 31

January 31




2015
2014

2015
2014
Net sales

$ 596,944

$ 581,622


$ 1,193,454

$ 1,181,006










 
Cost of sales

  391,469  
  379,974  

  778,927  
  764,964  










 
Gross profit


205,475


201,648



414,527


416,042










 
Operating expenses

  137,249  
  129,540  

  269,329  
  252,187  










 
Operating income


68,226


72,108



145,198


163,855










 
Other income, net


(3,313 )

(4,773 )


(7,138 )

(6,427 )










 
Interest expense

  3,728  
  1,999  

  7,242  
  4,613  










 
Earnings before income taxes


67,811


74,882



145,094


165,669










 
Income taxes

  18,281  
  16,542  

  39,617  
  45,737  










 
Net earnings

$ 49,530  
$ 58,340  

$ 105,477  
$ 119,932  










 

Weighted average shares outstanding




137,954,594


146,957,131



138,768,007


147,140,135










 
Diluted shares outstanding


139,661,287


149,021,755



140,587,668


149,204,090










 
Net earnings per share

$ 0.36

$ 0.40


$ 0.76

$ 0.82










 

Net earnings per share assuming dilution



$ 0.35

$ 0.39


$ 0.75

$ 0.80










 
Dividends paid per share

$ 0.165

$ 0.140


$ 0.330

$ 0.270










 

   
   

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







 



January 31

July 31



2015

2014
ASSETS










 
Cash and cash equivalents

$ 228,998
$ 296,418
Short-term investments


28,220

127,201
Accounts receivable, net


431,498

474,157
Inventories, net


272,007

253,351
Prepaids and other current assets

  100,966
  74,150





 
Total current assets


1,061,689

1,225,277





 
Other assets and deferred taxes


323,056

265,469
Property, plant, and equipment, net

  465,505
  451,665





 
Total assets

$ 1,850,250

$ 1,942,411
 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$ 188,061

$ 216,603
Employee compensation and other liabilities


185,002

205,936
Short-term borrowings


322,160

185,303
Current maturity long-term debt

  1,830
  1,738





 
Total current liabilities


697,053

609,580





 
Long-term debt


240,896

243,726
Other long-term liabilities

  87,511
  86,622





 
Total liabilities


1,025,460

939,928






 
Equity

  824,790

  1,002,483






 
Total liabilities and equity

$ 1,850,250

$ 1,942,411






 

   

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




 



Six Months Ended



January 31



2015

 

2014
OPERATING ACTIVITIES







 
Net earnings

$ 105,477
$ 119,932

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





Depreciation and amortization


37,399

33,167
Changes in operating assets and liabilities


(70,956 )
94
Tax benefit of equity plans


(5,383 )
(6,864 )
Stock compensation plan expense


7,677

7,137
Loss on sale of business


---

905
Other, net

  11,195     (2,766 )

Net cash provided by operating activities




85,409

151,605
 
INVESTING ACTIVITIES








 
Net expenditures on property and equipment


(50,969 )
(42,848 )
Net change in short-term investments


87,474

650
Acquisitions, net of cash acquired

  (96,651 )   ---  
Net cash used in investing activities


(60,146 )
(42,198 )
 
FINANCING ACTIVITIES








 
Purchase of treasury stock


(174,213 )
(66,331 )
Net change in debt and short-term borrowings


135,880

16,236
Dividends paid


(45,695 )
(39,414 )
Tax benefit of equity plans


5,383

6,864
Exercise of stock options

  8,147  
  10,331  
Net cash used in financing activities


(70,498 )

(72,314 )









 

Effect of exchange rate changes on cash



 

(22,185

)


 

(2,112

)










 

Increase (decrease) in cash and cash equivalents




(67,420

)



34,981











 

Cash and cash equivalents – beginning of year



 

296,418

 
 

224,138

 









 

Cash and cash equivalents – end of period



$

228,998

 

$

259,119

 









 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
 
 
 



Engine
Products


Industrial
Products


Corporate &
Unallocated


Total
Company

3 Months Ended January 31, 2015:








Net sales

$ 357,109
$ 239,835
---

$ 596,944
Earnings before income taxes


41,436

37,446
(11,071 )

67,811









 
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









 









 
6 Months Ended January 31, 2015:








Net sales

$ 747,829
$ 445,625
---

$ 1,193,454
Earnings before income taxes


94,596

65,089
(14,591 )

145,094









 
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













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

   
   
 



Three Months Ended

Six Months Ended



January 31

January 31



2015   2014

2015
2014
Engine Products segment:









Off-Road Products

$ 63,703
$ 82,298

$ 137,257
$ 171,511
On-Road Products


31,718

29,828


68,475

62,317
Aftermarket Products


235,576

234,362


492,115

473,234
Aerospace and Defense Products

  26,112
  23,187

  49,982
  51,729
Total Engine Products segment

$ 357,109
$ 369,675

$ 747,829
$ 758,791










 
Industrial Products segment:









Industrial Filtration Solutions Products

$ 130,191
$ 132,847

$ 260,721
$ 264,278
Gas Turbine Products


63,923

33,461


94,953

68,101
Special Applications Products

  45,721
  45,639

  89,951
  89,836
Total Industrial Products segment

$ 239,835
$ 211,947

$ 445,625
$ 422,215










 
Total Company

$ 596,944
$ 581,622

$ 1,193,454
$ 1,181,006














 

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

   
 
   





Three Months Ended



Six Months Ended




January 31



January 31




2015  
  2014



2015  
  2014



















 

Net cash provided by operating activities



$ 36,079



$ 52,686




$ 85,409



$ 151,605


Net capital expenditures

  (24,012 )


  (22,318 )



  (50,969 )


  (42,848

)


 

Free cash flow

$ 12,067  


$ 30,368  



$ 34,440  


$ 108,757  



















 
Net earnings

$ 49,530



$ 58,340




$ 105,477



$ 119,932


Income taxes


18,281




16,542





39,617




45,737


Interest expense


3,728




1,999





7,242




4,613


Depreciation and amortization



  19,270  


  16,900  



  37,399  


  33,167  

EBITDA

$ 90,809  


$ 93,781  



$ 189,735  


$ 203,449  



















 


















 
Operating income

$ 68,226



$ 72,108




$ 145,198



$ 163,855


Restructuring charges


681



(a)



585



(c)




681



(a)



2,232



(d)

Pension lump sum settlement charge




3,906

(b)

---





3,906

(b)

---




 
Adjusted Operating Income

$ 72,813  


$ 72,693  



$ 149,785  


$ 166,087  



















 
Net earnings

$ 49,530



$ 58,340




$ 105,477



$ 119,932


Restructuring charges, net of tax




422



(a)



418



(c)




422



(a)



1,861



(d)

Pension lump sum settlement charge, net of tax




2,422

(b)

---





2,422

(b)

---


Tax audit settlement

  ---



  (6,392 )
(e)

  ---  


  (6,392

)


(e)



 
Adjusted Net Earnings

$ 52,374  
 
$ 52,366  



$ 108,321  


$ 115,401  



 
Diluted EPS

$ 0.35



$ 0.39




$ 0.75



$ 0.80


Restructuring charges per

share, net of tax




---



(a)



---



(c)




---



(a)



0.01



(d)

Pension lump sum settlement charge, net of tax




0.02

(b)

---





0.02

(b)

---


Tax audit settlement

  ---  


  (0.04 )
(e)

  ---  


  (0.04

)


(e)



















 
Adjusted Diluted EPS

$ 0.37  


$ 0.35  



$ 0.77  


$ 0.77  



























 
(a)   Current year restructuring charges include accrued severance, project management fees, warehousing costs, moving expenses, and supplies and equipment related to the closing of our Grinnell, IA facility.


 
(b)
The pension lump sum settlement charge relates to the Company's offer to settle liabilities with certain vested participants in our U.S. pension plans.


 
(c)
The prior year quarter restructuring charges include severance costs associated with a reduction in workforce in our Wuxi, China facility due to decreased customer demand.


 
(d)
The prior year restructuring charges include severance costs associated with a reduction in workforce in our Wuxi, China and Duelmen, Germany facilities due to decreases in customer demand and expenses associated with the sale of our Flensburg, Germany facility in the first quarter of Fiscal 2014.


 
(e)
The prior year tax audit settlement relates to favorable settlement of an audit in the prior year quarter.


 

Although free cash flow, EBITDA, adjusted operating income, adjusted net earnings, and adjusted diluted EPS 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. We evaluate our results of operations both on an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our current period local currency financial results using the prior period exchanges rates and compared these adjusted amounts to our prior period reports results. 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.
Jim Shaw, 952-887-3816

Feb 24, 2015
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