Donaldson Company Inc. announces fourth quarter and full-year 2016 results. Fourth quarter 2016 net earnings increased 5.5% to $59.5 million from $56.4 million last year. For the full year, net earnings declined 8.3% to $190.8 million from $208.1 million in 2015.
Fiscal 2016 GAAP earnings per share (EPS) were 44 cents in fourth quarter and $1.42 for full-year. Excluding certain one-time items, fourth quarter 2016 adjusted EPS increased 2.2% to 46 cents from 45 cents last year. Full-year 2016 adjusted EPS declined 3.8% to $1.52 from $1.58 in 2015.
“Consistent with last quarter, both sales and operating margin improved sequentially as we saw more typical seasonality and continued benefits from our expense discipline,” says Tod Carpenter, President and Chief Executive Officer. “We are pleased that we delivered full-year sales and operating margin in line with guidance. On the bottom line, higher-than-expected expense in ‘other income and expense’ resulted in earnings that were below our expectations.
“The markets presented significant challenges in the past year, and I am very proud of the dedication and resilience our employees have shown. As a company, we maintained an unwavering commitment to our customers while intensifying our focus on operational efficiency. Additionally, we made great progress on strengthening the company for future growth, including the implementation of our global ERP system, which we completed in August.
“Looking to fiscal 2017, we do not expect overall market conditions to improve meaningfully, so we will continue to press forward where we see opportunity. Across the world, we are actively pursuing growth of our replacement part sales while also remaining focused on winning new first-fit programs for future growth. Through these efforts, and supported by our operational discipline, we expect to translate a relatively flat sales environment into operating profit growth in fiscal 2017.”
Sales Results
Donaldson generated fiscal 2016 sales of $593.8 million in fourth quarter and $2.22 billion for the full year, reflecting a year-over-year decline of 2.8% and 6.4%, respectively. Foreign currency translation negatively affected fourth quarter sales by $5.1 million and full-year 2016 sales by $74.2 million.
Excluding the impact from currency translation, fourth quarter sales declined 1.8% from 2015, reflecting a 4.4% decline in Industrial Products and sales of Engine Products that were comparable with last year. For the full year, constant-currency sales declined 3.2%, reflecting year-over-year declines in Engine Products and Industrial Products of 3.3% and 3.1%, respectively.
Operating Profit Results
Fourth quarter 2016 operating margin was 15.2%, compared with 12.8% last year. Fourth quarter adjusted operating margin, which excludes certain one-time charges, increased from last year by approximately 1.8 percentage points to 15.8%, driven by year-over-year improvements in both gross margin and operating expense as a percent of sales (expense rate).
Fourth quarter 2016 gross margin rate increased approximately 2.1 percentage points to 35.2% from 33.1% in 2015. Lower restructuring charges contributed approximately 0.7 percentage points of the increase, while lower raw materials costs, higher fixed-cost absorption and a favorable mix of product sales within and across businesses also contributed to the year-over-year improvement.
The expense rate in fourth quarter 2016 declined to 20.1% from 20.3% last year. The improvement from last year reflects a benefit of approximately 0.4 percentage points from previously taken restructuring actions and disciplined expense control, partially offset by higher restructuring charges in fourth quarter 2016 than 2015.
Full-year 2016 operating margin increased to 12.3% from 12.2% in 2015, and the adjusted operating margin increased to 13.2% from 12.9% last year. The full-year improvement in operating margin reflects expense rate favorability, primarily driven by the company’s efforts to control expenses, partially offset by a year-over-year decline in gross margin, reflective of lower fixed-cost absorption.
The company realized net other expense of $2.7 million in fourth quarter 2016 and net other income of $3.9 million for the full year, compared with net other income of $3.8 million and $15.5 million, respectively, in the comparable periods of fiscal 2015. The fourth quarter and full-year 2016 results reflect a loss on foreign exchange, compared with a gain last year. Additionally, income from Donaldson’s joint venture partnerships was lower in fiscal 2016 than 2015, which contributed to the full-year decline in other income.
Interest expense was $4.9 million in fourth quarter and $20.7 million for full-year 2016, compared with $4.1 million and $15.2 million, respectively, in 2015. The year-over-year increase was driven by the company’s decision to increase its debt level in recent fiscal years.
The effective income tax rate in fourth quarter 2016 increased 0.3 percentage points to 28.0% from 27.7% last year. The full-year 2016 effective income tax rate declined approximately 2.0 percentage points to 25.9% from 27.9% in 2015, driven primarily by favorable settlements of tax audits and the mix of earnings between tax jurisdictions.
Capital Returned to Shareholders
During fourth quarter, the company repurchased 470 thousand shares of its common stock, or 0.3%, at an average price of $34.67 for a total investment of $16.3 million. In fiscal 2016, Donaldson invested $84.3 million to repurchase 2.5 million shares, or 1.9%, of its common stock at an average price of $33.18 per share.
On May 25, 2016, Donaldson’s Board of Directors approved a 2.9% increase in the quarterly cash dividend. During fiscal 2016, Donaldson paid fourth quarter and full-year dividends of $23.3 million and $91.2 million, respectively.
Fiscal 2017 Outlook
Donaldson expects full-year 2017 GAAP and adjusted EPS between $1.50 and $1.66, compared with fiscal 2016 GAAP EPS of $1.42 and adjusted EPS of $1.52. The company expects full-year sales in a range between a 2% decline and a 2% increase compared with 2016, and the impact on total sales from foreign currency translation is expected to be immaterial.
Compared with last year, Engine Products segment sales are expected in a range between a 2% decline and a 2% increase. Aftermarket sales are expected to increase while sales related to production of heavy-duty equipment, including off-road, on-road and commercial helicopters, are expected to continue to decline compared with last year.
Industrial Products segment sales are expected in a range between a 2% decline and a 2% increase from fiscal 2016. Growth of Industrial Filtration Solutions product sales, primarily driven by sales of replacement parts, is expected to be offset by year-over-year sales declines in the Gas Turbine Systems and Special Applications businesses.
Donaldson expects a full-year 2017 operating margin between 13.3% and 13.9% and an effective income tax rate between 26.7% and 28.7%. During fiscal 2017, the company expects to repurchase between 2% and 3% of its outstanding shares.
Accounting Considerations
During the fiscal years 2016 and 2015, Donaldson implemented restructuring actions to align its cost structure with customer demand. In fiscal 2016, these activities resulted in pre-tax restructuring charges of $3.5 million in fourth quarter and $16.1 million for the full year, compared with fiscal 2015 restructuring charges of $7.2 million and $13.0 million, respectively.
During first quarter 2016, the Audit Committee of Donaldson’s Board of Directors engaged independent external counsel and independent forensic accountants to investigate revenue recognition issues in Donaldson’s European Gas Turbine Systems business. The investigation was completed in second quarter 2016 and resulted in pre-tax charges of $3.1 million.
