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Donaldson Reports Third Quarter 2015 Earnings

21 May, 2015

Third quarter adjusted EPS of 36 cents was in line with guidance

Donaldson Company, Inc. (NYSE:DCI) today reported third quarter 2015 net earnings of $46.4 million, or 33 cents per share, which includes restructuring charges of $5.2 million, or 3 cents per share. Foreign currency translation negatively impacted third quarter net earnings by $2.0 million, or 3.0 percent. Adjusted earnings per share1 were 36 cents in third quarter, compared with 46 cents in the third quarter of 2014. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures.

"Our third quarter results, and our full-year sales and earnings forecast, are in line with the guidance provided earlier this month, which reflects a slowdown of the Aftermarket business combined with continued pressure from Off-Road end markets and the strong U.S. dollar," said Tod Carpenter, Donaldson's CEO.

"Our Engine Aftermarket sales, in local currencies, increased 2 percent in third quarter, a modest pace compared with the 7 percent increase during the first half of fiscal 2015. Additionally, our first-fit Off-Road end markets remained challenged, with our local-currency sales declining at a pace consistent with year-to-date trends. In China, the pace of decline in our year-over-year sales accelerated in third quarter, with particular pressure on both Aftermarket and Off-Road Products."

"Although the end-market pressures we saw are reflective of our Customers' orders, we are taking further actions to improve our performance until business conditions rebound. Over the past several weeks, we identified additional restructuring initiatives that we expect will provide a similar level of annual savings as those we completed during our third quarter."

"While we continue to aggressively manage our expenses and margins, we are also investing for future sales growth. For example, we added new distribution capabilities in Latin America, where we have achieved local-currency sales growth of roughly 17 percent year-to-date. We are also accelerating our expansion of liquid filtration in Europe with an additional investment in our new Poland facility. These investments, and others across the Company, are critical elements of how we will deliver our Strategic Growth Plans."

 
1 Beginning with its fiscal 2015 second quarter, Donaldson began reporting adjusted operating margin and adjusted diluted earnings per share ("adjusted EPS") measures, which are non-GAAP financial measures that exclude the impact of certain matters not related to the Company's ongoing operations, including restructuring charges and expenses related to pension settlements. See the "Restructuring Charges and Other Adjusting Items" section of this release for more information.
 

Financial Statement Discussion

Third quarter 2015 net sales decreased 9.0 percent versus the prior year, reflecting sales declines in Engine Products and Industrial Products segments of 8.5 percent and 10.0 percent, respectively.

Excluding the impact of foreign currency translation, third quarter sales declined 1.9 percent compared with the prior year, reflecting local-currency sales declines of 1.3 percent in Engine Products and 2.9 percent in Industrial Products.

Compared with last year, the impact of foreign currency translation reduced third quarter sales by approximately $44.4 million, or 7.1 percent, and year-to-date sales by approximately $83.0 million, or 4.6 percent. The table below outlines the year-over-year percentage change for each business segment, with and without the impact of foreign currency translation.


   
   



Three Months Ended

Nine Months Ended



April 30, 2015

April 30, 2015




  Constant


  Constant



Reported
Currency

Reported
Currency



 % Change 


 % Change 



 % Change 


 % Change 

Engine Products segment:











Off-Road Products

(24 )%
(17 )%

(21 )%
(17 )%
On-Road Products

6

12


8

14
Aftermarket Products

(6 )
2


1

5
Aerospace and Defense Products

1  
7  

(2 )
2  
Total Engine Products segment

(9 )%
(1 )%

(4 )%
1 %










 

Industrial Products segment:











Industrial Filtration Solutions Products

(11 )%
(2 )%

(5 )%
1 %
Gas Turbine Products

(15 )
(11 )

19

23
Special Applications Products

(2 )
3  

(1 )
3  
Total Industrial Products segment

(10 )%
(3 )%

0 %
5 %










 
Total Company

(9 )%
(2 )%

(2 )%
2 %














 

Third quarter operating margin of 11.4 percent compares with 14.9 percent last year. Excluding the 0.9 percentage point impact from restructuring, adjusted operating margin was 12.3 percent.

Third quarter gross margin was 33.8 percent, or 2.0 percentage points below the prior-year rate of 35.8 percent. The decrease was driven primarily by lower fixed-cost absorption and restructuring actions, which decreased gross margin by 1.5 percentage points and 0.4 percentage points, respectively. Donaldson's Continuous Improvement initiatives partially offset other gross margin pressures.

As a percent of sales, third quarter operating expenses increased 1.5 percentage points to 22.4 percent from 20.9 percent last year, primarily driven by lack of leverage on lower sales combined with a 0.5 percentage point increase due to restructuring actions.

Fiscal 2015 year-to-date operating margin was 11.9 percent, which includes 0.6 percentage points related to restructuring charges and the lump-sum pension settlement recorded in second quarter. Year-to-date adjusted operating margin was 12.5 percent and 14.3 percent for fiscal 2015 and 2014, respectively.

Donaldson's third quarter effective income tax rate increased to 29.4 percent from 28.5 percent last year, primarily due to discrete tax benefits recorded in the third quarter of the prior year. Year-to-date, the effective tax rate was 28.0 percent, compared to 27.9 percent in the prior year.

Capital Returned to Shareholders

During third quarter 2015, Donaldson repurchased 717 thousand shares of its common stock at an average price of $37.61 for a total of $27.0 million.

Year-to-date, the Company has repurchased 5.1 million shares, or 3.6 percent of the total diluted outstanding shares, at an average price of $39.42 for a total of $201.2 million.

Donaldson paid dividends of $22.5 million in third quarter and $68.2 million year-to-date, an increase from last year of 11.3 percent and 14.4 percent, respectively.

Fiscal 2015 Outlook

Consistent with the guidance provided on May 1, Donaldson expects full-year sales to be approximately $2.35 billion, and adjusted EPS to be in the range of $1.53 to $1.59.

  • The Company expects full-year sales to decline by approximately 5 percent compared with last year, which includes a fourth quarter decrease of 10 percent to 12 percent.
    • In local currencies, full-year sales are expected to increase approximately 1 percent from 2014.
    • The forecast is based on the euro at US$1.12 and 119 yen to the US$.
  • Adjusted operating margin for fiscal 2015 is expected to be in the range of 12.7 percent to 12.9 percent, reflecting year-to-date results combined with an expected operating margin in fourth quarter of 13.5 percent and 14.1 percent.
  • Full-year effective tax rate is expected to be between 27 percent and 29 percent.
  • Adjusted full-year diluted EPS guidance of $1.53 to $1.59 reflects year-to-date performance combined with fourth quarter adjusted EPS of 38 cents to 44 cents.
  • Excluding the impact from future restructuring actions, fourth quarter and full-year GAAP diluted EPS are expected to be lower than adjusted EPS by approximately 1 cent and 6 cents, respectively, driven by:
    • Pre-tax restructuring charges of approximately $8.0 million, or 4 cents per share, including an expected charge of $2.2 million in fourth quarter, and
    • A pre-tax charge in second quarter of $3.9 million, or 2 cents per share, resulting from a U.S. pension settlement.
  • Donaldson expects to repurchase at least 4 percent of its outstanding shares in fiscal 2015.

Engine Products: Fiscal 2015 sales in U.S. dollars are expected to decline 6 percent to 7 percent. In local currency, sales are expected to decrease 1 percent to 2 percent, reflecting:

  • Continued lower rates of sales growth in both the OEM and independent distribution channels for Engine Aftermarket,
  • Mixed demand by end market and geography from continued weakening in equipment build rates by Off-Road OEM first-fit Customers.
  • Strong performance in the On-Road OEM business, reflecting the Customers' expectation for increased production of heavy- and medium-duty trucks.

Industrial Products: Full-year 2015 sales in U.S. dollars are expected to decline 1 percent to 2 percent. In local currency, sales are expected to increase 4 percent to 5 percent.

  • Industrial Filtration Solutions' sales are expected to decline in the mid-single-digit percent range, reflecting the impact of ongoing currency translation headwinds and softer first-fit equipment demand, partially offset by continued strong sales of replacement filters.
  • Gas Turbine sales are expected to increase 15 percent to 20 percent, which includes the benefit from the acquisition of Northern Technical in September 2014.
  • Special Applications' sales are expected to be slightly down as lower membrane sales and currency headwinds offset improved demand for semiconductor and venting products.

Restructuring Charges and Other Adjusting Items

Donaldson has proactively taken restructuring actions aimed at aligning its global operating and manufacturing cost structure with current and projected Customer and end-market demand. In fiscal 2015, restructuring actions included rebalancing and reducing the current salaried and production workforce globally. Fiscal 2015 pre-tax restructuring charges were $5.2 million in third quarter and $5.8 million year-to-date, which compares with fiscal 2014 charges of $0.2 million and $2.4 million, respectively.

In second quarter 2015, the Company recorded a $3.9 million charge related to a lump-sum settlement of its U.S. pension plan.

Miscellaneous

Donaldson will webcast its third quarter earnings conference call at 9:00 a.m. CT today. To participate, go to IR.Donaldson.com and click on the webcast icon. The webcast replay will be available beginning at noon today through 12:00 p.m. CT June 11, 2015, and a telephone replay of the call will be available beginning at noon today through 12:00 p.m. CT May 28, 2015. The audio replay number is (888) 203-1112 (access code: 9351557).

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.

About Donaldson Company

Founded 100 years ago, Donaldson (NYSE: DCI) is a global leader in the filtration industry. The Company's innovative filtration technologies improve people's lives, enhance Customers' equipment performance, and protect the environment. More than 12,500 employees support Customers at 140 sales, manufacturing, and distribution locations. For more information, visit www.Donaldson.com.

 
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



2015

2014

2015

2014
Net sales

$568,013


$624,234


$1,761,467


$1,805,240












 
Cost of sales

376,040  

400,773  

1,154,967  

1,165,737  












 
Gross profit

191,973


223,461


606,500


639,503












 
Operating expenses

126,984  

130,727  

396,313  

382,914  












 
Operating income

64,989


92,734


210,187


256,589












 
Other income, net

(4,647 )

(3,822 )

(11,785 )

(10,249 )












 
Interest expense

3,914  

2,374  

11,156  

6,987  












 
Earnings before income taxes

65,722


94,182


210,816


259,851












 
Income taxes

19,350  

26,846  

58,967  

72,583  












 
Net earnings

$46,372  

$67,336  

$151,849  

$187,268  












 

Weighted average shares outstanding



137,246,854


145,310,710


138,272,093


146,543,727












 
Diluted shares outstanding

138,787,914


147,339,425


140,012,046


148,608,748












 
Net earnings per share

$0.34


$0.46


$1.10


$1.28












 

Net earnings per share assuming dilution



$0.33


$0.46


$1.08


$1.26












 
Dividends paid per share

$0.165


$0.140


$0.495


$0.410
















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

    April 30     July 31



2015

2014
ASSETS











 
Cash and cash equivalents

$222,338

$296,418
Short-term investments

28,062

127,201
Accounts receivable, net

422,801

474,157
Inventories, net

285,678

253,351
Prepaids and other current assets

93,823

74,150






 
Total current assets

1,052,702

1,225,277






 
Other assets and deferred taxes

324,319

265,469
Property, plant, and equipment, net

468,811

451,665






 
Total assets

$1,845,832

$1,942,411






 
LIABILITIES AND SHAREHOLDERS' EQUITY











 
Trade accounts payable

$187,060

$216,603
Employee compensation and other liabilities

168,600

205,936
Short-term borrowings

286,440

185,303
Current maturity long-term debt

1,841

1,738






 
Total current liabilities

643,941

609,580






 
Long-term debt

265,192

243,726
Other long-term liabilities

89,173

86,622






 
Total liabilities

998,306

939,928






 
Equity

847,526

1,002,483






 
Total liabilities and equity

$1,845,832

$1,942,411






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

    Nine Months Ended



April 30



2015     2014
OPERATING ACTIVITIES











 
Net earnings

$151,849


$187,268

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







Depreciation and amortization

55,455


50,245
Changes in operating assets and liabilities

(60,653 )

(5,764 )
Tax benefit of equity plans

(6,473 )

(8,119 )
Stock compensation plan expense

9,238


9,474
Loss on sale of business

---


905
Other, net

11,951  

(3,903 )
Net cash provided by operating activities

161,367


230,106






 
INVESTING ACTIVITIES











 
Net expenditures on property and equipment

(72,601 )

(66,046 )
Net change in short-term investments

87,474


(47,685 )
Acquisitions, net of cash acquired

(96,651 )

---  
Net cash used in investing activities

(81,778 )

(113,731 )






 
FINANCING ACTIVITIES











 
Purchase of treasury stock

(201,167 )

(165,871 )
Net change in debt and short-term borrowings

122,163


98,107
Dividends paid

(68,242 )

(59,675 )
Tax benefit of equity plans

6,473


8,119
Exercise of stock options

10,457  

13,035  
Net cash used in financing activities

(130,316 )

(106,285 )








 

Effect of exchange rate changes on cash



(23,353

)



3,994

 








 

Increase (decrease) in cash and cash equivalents



(74,080

)



14,084










 

Cash and cash equivalents – beginning of year



296,418

 

224,138

 








 

Cash and cash equivalents – end of period



$222,338

 

$238,222

 








 
 
SEGMENT DETAIL
(Thousands of dollars)
(Unaudited)

   
   
   
   



Engine

Industrial

Corporate &

Total



Products

Products

Unallocated

Company
3 Months Ended April 30, 2015:











Net sales

$368,046

$199,967

---


$568,013
Earnings before income taxes

47,760

23,183

(5,221 )

65,722












 
3 Months Ended April 30, 2014:











Net sales

$402,157

$222,077

---


$624,234
Earnings before income taxes

61,432

32,507

243


94,182












 












 
9 Months Ended April 30, 2015:











Net sales

$1,115,875

$645,592

---


$1,761,467
Earnings before income taxes

142,356

88,272

(19,812 )

210,816












 
9 Months Ended April 30, 2014:











Net sales

$1,160,948

$644,292

---


$1,805,240
Earnings before income taxes

170,799

91,682

(2,630 )

259,851













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

       
   
   



Three Months Ended

Nine Months Ended



April 30

April 30



2015     2014

2015

2014
Engine Products segment:











Off-Road Products

$67,204

$88,791

$204,461

$260,302
On-Road Products

35,000

33,081

103,475

95,398
Aftermarket Products

241,039

255,818

733,154

729,052
Aerospace and Defense Products

24,803

24,467

74,785

76,196
Total Engine Products segment

$368,046

$402,157

$1,115,875

$1,160,948












 
Industrial Products segment:











Industrial Filtration Solutions Products

$122,383

$137,364

$383,104

$401,642
Gas Turbine Products

35,763

42,005

130,716

110,106
Special Applications Products

41,821

42,708

131,772

132,544
Total Industrial Products segment

$199,967

$222,077

$645,592

$644,292












 
Total Company

$568,013

$624,234

$1,761,467

$1,805,240












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

   

   



Three Months Ended


Nine Months Ended



April 30


April 30



2015
    2014


2015
    2014















 

Net cash provided by operating activities



$75,958



$78,501



$161,367



$230,106
Net capital expenditures

(21,632 )


(23,198 )


(72,601 )


(66,046 )
Free cash flow

$54,326  


$55,303  


$88,766  


$164,060  















 
Net earnings

$46,372



$67,336



$151,849



$187,268
Income taxes

19,350



26,846



58,967



72,583
Interest expense

3,914



2,374



11,156



6,987

Depreciation and amortization



18,056  


17,078  


55,455  


50,245  
EBITDA

$87,692  


$113,634  


$277,427  


$317,083  















 















 
Operating income

$64,989



$92,734



$210,187



$256,589
Restructuring charges

5,154


(a)



202


(c)



5,835


(a)



2,434

 (d)

Pension lump sum settlement charge



---
(b)

---



3,906
(b)

---















 
Adjusted Operating Income

$70,143  


$92,936  


$219,928  


$259,023  















 
Net earnings

$46,372



$67,336



$151,849



$187,268

Restructuring charges, net of tax



3,521


(a)



160


(c)



3,943


(a)



2,021

 (d)

Pension lump sum settlement charge, net of tax



---
(b)

---



2,422
(b)

---
Tax audit settlement

---



---
(e)

---



(6,392 ) (e)















 
Adjusted Net Earnings

$49,893  


$67,496  


$158,214  


$182,897  



















 
Diluted EPS

$0.33



$0.46



$1.08



$1.26

Restructuring charges per share, net of tax



0.03


(a)



---


(c)



0.03


(a)



0.01 (d

)

Pension lump sum settlement charge, net of tax



---
(b)

---



0.02
(b)

---
Tax audit settlement

---  


---   (e)

---  


(0.04 ) (e)















 
Adjusted Diluted EPS

$0.36  


$0.46  


$1.13  


$1.23  



















 

(a) Current year restructuring charges include actions related to rebalancing and reducing the current workforce and accrued severance, project management fees, warehousing costs, moving expenses, and supplies and equipment associated with the closing of our Grinnell, Iowa, 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 primarily 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 Dulmen, 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.
Brad Pogalz, 952-887-3753
or
Jim Shaw, 952-887-3816

May 21, 2015
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