Donaldson Announces Third Quarter 2013 Financial Results

Donaldson Company Inc. announced its financial results for its fiscal 2013 third quarter. 

Read the full press release to see Donaldson's third quarter financial data.

"Our overall sales growth during the quarter continued to be challenged by the global economic environment," says Bill Cook, Donaldson's CEO. "On the positive side, our Gas Turbine Products' sales increased 35% as we delivered a number of large projects to our customers. We also achieved solid sales growth in several regions including Latin America, South Africa and India. But these strong performances were offset by significant declines in our Engine Products' OEM businesses in the U.S. and Japan. During the quarter, we continued to see many of our major OEM On-Road and Off-Road Customers reduce their equipment production schedules in response to their weaker end-market demand."

"Despite our lower sales, we delivered a record operating margin of 15.9%. We continued to proactively take actions to align our manufacturing and operating expenses with our anticipated customer demand. During the quarter, we incurred $1.1 million as part of these restructuring activities. In addition, we continued to generate significant savings from our ongoing Continuous Improvement initiatives. Due to our strong operating margin performance, our EPS of $0.46 was equal to last year's record third quarter."

"We believe that the weak end-market conditions we have experienced this year may have now stabilized. Unfortunately, we have not yet seen any strong signs of a material recovery for our customers in any of our capital equipment-related end markets and, therefore, we are not anticipating sales growth in these markets for at least the next quarter. As a result, we are forecasting our company's full-year sales to be between $2.40 and $2.45 billion and our FY13 EPS forecast to be between $1.57 and $1.65 per share."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $10.0 million, or 1.6%, during the quarter and decreased sales by $28.6 million, or 1.6%, year-to-date. The impact of foreign currency translation decreased reported net earnings by $0.7 million, or 1.0%, during the quarter and decreased reported net earnings by $1.9 million, or 1.0%, year-to-date.

Gross margin was 35.8% for the quarter and 34.3% year-to-date, compared to prior year margins of 35.3% and 35.1%, respectively. The improvement in the quarter is primarily attributable to a higher percentage of our sales coming from replacement filters and the benefits from our Continuous Improvement initiatives, offset by a mix impact due to large Gas Turbine project shipments and some impact from lower fixed cost absorption. Restructuring expenses included in gross margin were $0.6 million in the quarter and $1.3 million year-to-date.

Operating expenses for the quarter were $122.9 million, down 5.3% from last year's $129.8 million. As a percent of sales, operating expenses were 19.8% compared to last year's 20.1%. Operating expenses year-to-date were $375.5 million, or 20.8% of sales, compared to $380.4 million, or 20.7% of sales, last year. Restructuring expenses included in operating expenses were $0.5 million in the quarter and $1.5 million year-to-date. Our ongoing cost containment actions helped to offset the restructuring expenses, higher pension expenses, and the incremental expenses related to our Strategic Business Systems project.

Our effective tax rate for the quarter was 29.8%, compared to a prior year rate of 29.0%. The prior year's quarter included $1.8 million of tax benefits primarily from a statute of limitation expiration. The year-to-date effective tax rate was 29.2% compared to a prior year rate of 28.0%.

We did not repurchase any shares during the third quarter, and year-to-date we have repurchased 1,820,000 shares, or 1.2% of our diluted outstanding shares, for $61.0 million.

FY13 Outlook

• We are projecting our full-year sales to decrease 2 to 4% from last year's record $2.5 billion. Our forecast is based on the Euro at US$1.31 and 98 Yen to the US$.
• Our full-year operating margin forecast is 13.6 to 14.2%.
• Our FY13 tax rate is anticipated to be between 29 and 30%.
• We forecast our FY13 EPS to be between $1.57 and $1.65.
• Cash generated by operating activities is projected to be between $260 and $280 million. Our capital spending is estimated to be approximately $85 million.

Engine Products: We forecast FY13 sales to decrease 4 to 6% compared to FY12, including the impact of foreign currency.

• Our On-Road OEM customers are planning to build fewer heavy- and medium-duty trucks, although the rate of decline is expected to begin moderating in our fourth quarter. Demand from our Off-Road OEM customers is anticipated to be mixed: build rates of agriculture equipment are forecasted to remain good, build rates of construction equipment are expected to slowly improve in North America, but remain weak in Europe and China, and the build rates of mining equipment are expected to decrease globally.
• We are anticipating slowly improving growth for our Aftermarket Products. Current utilization rates for off-road equipment and on-road heavy truck fleets in the field have begun stabilizing and inventory levels at dealers and distributors are now consistent with current end-market utilization. We should also benefit from our continued expansion into emerging economies, from the increasing number of systems installed in the field with our proprietary filters, and from our increasing sales of liquid filtration products.
• We forecast a mid-single digit percent decrease in our Aerospace and Defense Products' sales compared to last year as the continued slowdown in U.S. military activity is expected to be partially offset by growth from our commercial aerospace sales.

Industrial Products: We forecast sales to be consistent with FY12, including the impact of foreign currency.

• We forecast a mid-single digit percent decrease in our Industrial Filtration Solutions Products' sales as compared to last year. We assume general manufacturing activity will continue to increase moderately in the U.S., slowly improve in Asia, and continue to be weak in Europe.
• We anticipate our Gas Turbine Products' sales to be up 27 to 30% due to continued strength in both the large turbine power generation and the oil and gas markets.
• Special Applications Products' sales are now forecast to be down 8 to 11% due to weaker market demand for our disk drive filters and membranes products.