Donaldson reports first quarter results

Donaldson Company Inc. announce its financial results for its fiscal 2014 first quarter. Summarized financial results can be found on Donaldson's website.

"We had a good start to our new fiscal year as we delivered record operating results on a modest sales increase in our first quarter," says Bill Cook, Donaldson's CEO. "We believe that many of our first-fit equipment end markets have stabilized, while demand for our replacement filters continues to grow. Our Engine Products' sales increased 7% in local currency from last year, driven by our Engine Aftermarket and Aerospace and Defense businesses, which were up 9 and 20%, respectively. Our Industrial Products' sales decreased 4% in local currency. Consistent with our earlier guidance, Gas Turbine shipments decreased 27% but were partially offset by our Industrial Filtration Solutions and Special Applications businesses, which were up 2 and 5%, respectively. Geographically, excluding our Gas Turbine sales, our company's local currency sales growth was widespread across all of our major regions.

"Both our operating income of $92 million and operating margin of 15.3% were first quarter records. Over the last year, we have worked to align our manufacturing and operating expenses with current customer demand while generating savings from our ongoing Continuous Improvement initiatives.

"Our updated outlook for FY14 is consistent with our original outlook from August. Overall, we are expecting our full year sales to increase between $25 and $100 million in FY14. We will maintain our focus on operational excellence through our Continuous Improvement initiatives. We continue to invest in our Strategic Business Systems 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 $6.8 million, or 1.2%, during the first quarter. The impact of foreign currency translation decreased reported net earnings by $0.5 million, or 0.8%.

Restructuring expenses in the quarter were $1.7 million of which $0.6 million was included in gross margin, $0.2 million in operating expense, and $0.9 million in other expense. These expenses were primarily related to two initiatives: a facility downsizing and a facility sale – both in Germany.

Gross margin was 35.8%, compared to 33.7% in last year's first quarter. The year-over-year increase is primarily attributable to improved fixed cost absorption due to an increase in our production volumes and the positive mix impacts from higher aftermarket sales. The company also benefited from its ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $122.6 million, down 1.7% from last year's $124.8 million. As a percent of sales, operating expenses were 20.5% compared to last year's 21.2%. Ongoing cost containment actions and operating leverage offset higher expenses from incentive compensation and Strategic Business Systems project.

Effective tax rate for the quarter was 32.2%, compared to a prior year rate of 29.4%. The current quarter included $2.1 million of tax expense primarily related to an intercompany dividend.

As part of an ongoing share repurchase program, the company repurchased 339,000 shares, or 0.2% of its diluted outstanding shares, for $12.1 million during the quarter.

FY14 Outlook

Donaldson projects company sales to be between $2.45 and $2.55 billion, or an increase of 1 to 5%. The forecast is based on the Euro at US$1.36 and 98 Yen to the US$.

The full-year operating margin forecast is 14.2 to 15.0%. Included in this forecast is approximately $30 million in operating expense increases for both incentive compensation and a Strategic Business Systems project.

The FY14 tax rate is anticipated to be between 29 and 31%.

Donaldson forecasts the full year FY14 EPS to be between $1.65 and $1.85.

Cash generated by operating activities is projected to be between $320 and $350 million. Capital spending is estimated to be approximately $90 million.

Engine Products: Donaldson forecasts FY14 sales to increase 3 to 9% including the impact of foreign currency. 

On-Road OEM Customers are planning to build more heavy- and medium-duty trucks in FY14. Demand from Off-Road OEM Customers is anticipated to be mixed: build rates of agriculture equipment are forecasted to remain steady, build rates of construction equipment are expected to slowly improve in North America and Europe but remain soft in Asia, and the build rates of new mining equipment are expected to remain at current low levels.

Donaldson is anticipating improving growth for its Engine Aftermarket business. Utilization rates for off-road equipment and on-road heavy truck fleets in the field are expected to improve. The company should also benefit from its continued expansion into emerging economies, the increasing number of first-fit systems installed in the field with innovative proprietary filters, and through expansion of its product portfolio.

Donaldson forecasts steady sales for the Aerospace and Defense business compared to last year as the continued slowdown in U.S. military activity should be offset by growth from commercial aerospace sales.

Industrial Products: Donaldson forecasts sales to be consistent with FY13, including the impact of foreign currency.

The Industrial Filtration Solutions' sales are projected to increase 5 to 11%. The company assumes general manufacturing activity and investments will increase moderately in the Americas and Asia, while activity in Europe has stabilized with a gradual improvement expected during the second half of our fiscal year.

Donaldson anticipates Gas Turbine sales will decrease 18 to 24% from record sales in FY13 due to the slowdown in large turbine power generation projects by customers this year.

Special Applications' sales are forecasted to increase 3 to 9% due to improved market demand for our semiconductor and venting products.