Donaldson reports record second quarter earnings

Donaldson reports it had record earnings during its fiscal 2014 second quarter.

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Donaldson Company Inc. announces its financial results for its fiscal 2014 second quarter. Summarized financial results can be found on in the full press release.

"We delivered record net earnings in our second quarter," says Bill Cook, Donaldson's CEO. "We see stabilization within many of our OEM first-fit equipment end markets and increasing demand for our replacement filters. Our Engine Products' sales increased 7% in local currency from last year, driven by an 11% increase in Engine Aftermarket sales and a 10% increase in OEM sales outside of the U.S. Our Industrial Products' sales decreased 12% in local currency as a result of a 50% decrease in our Gas Turbine sales from last year's record second quarter of $66 million. As we have discussed previously, we had a surge in our gas turbine shipments last year, and the overall industry is now installing that new electrical generation capacity. We do see our Gas Turbine sales improving during the balance of our FY14 and into FY15. Partially offsetting Gas Turbine sales in the quarter was our Special Applications business, which grew 7%. Geographically, excluding our Gas Turbine sales, our local currency sales were strong with South Africa up 5%, Asia Pacific up 8%, Europe up 9%, and Latin America up 17%."

"Our business is operating very well and our operations are positioned to deliver strong performances as volumes are forecast to increase in the second half of our FY14."

"We have adjusted our Industrial Products' sales outlook for FY14 as the recovery for business investment for industrial filtration systems has been slow to develop and several of our gas turbine projects that were scheduled for shipment this year have been rescheduled by our Customers for early in our FY15. Including this change, we have maintained our full-year company sales forecast to be a 1 to 5% increase in FY14. We will maintain our focus on operational excellence through our Continuous Improvement initiatives and continue to invest in our Global ERP 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 $8.8 million, or 1.5%, during the quarter and decreased sales by $15.6 million, or 1.3%, year-to-date. The impact of foreign currency translation decreased reported net earnings by $0.7 million, or 1.4%, during the quarter and decreased reported net earnings by $1.2 million, or 1.1%, for the year.

Gross margin was 34.7% for the quarter and 35.2% year-to-date, compared to prior year margins of 33.4% and 33.5%, respectively. The year-over-year increase is primarily attributable to the positive mix impacts from the reduction in large Gas Turbine projects and better absorption of our fixed costs due to higher volumes in most of our other businesses. Donaldson also benefited from its ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $129.5 million, up 1.4% from last year's $127.8 million. As a percent of sales, operating expenses were 22.3% compared to last year's 21.4%. Higher expenses from the Global ERP project and incentive compensation were partially offset by lower pension, insurance, and warranty expenses. Operating expenses year-to-date were $252.2 million, or 21.4% of sales, compared to $252.5 million, or 21.3% of sales, last year.

Operating margin for the quarter was 12.4%, up 50 basis points from the prior year. Year-to-date operating margin was 13.9%, up 170 basis points from FY13.

Effective tax rate for the quarter was 22.1%, compared to a prior year rate of 28.3%. The current quarter included $6.2 million in tax benefits related to the favorable settlement of a tax audit. This is $4.2 million, or $0.03 per share, higher than we had forecasted in our prior outlook. The year-to-date effective tax rate was 27.6% compared to a prior year rate of 28.9%.

As part of Donaldson's ongoing share repurchase program the company repurchased 1,300,000 shares, or 0.9% of its diluted outstanding shares, for $54.2 million during the quarter. Year-to-date Donaldson has repurchased 1,639,000 shares, or 1.1% of its diluted outstanding shares, for $66.3 million.

FY14 Outlook

  • Donaldson projects its company sales to be between $2.45 and $2.55 billion, or an increase of 1 to 5% including the negative impact of foreign currency exchanges rates. The forecast is based on the Euro at US$1.35 and 101 Yen to the US$.
  • The full-year operating margin forecast is 14.2 to 14.8%. Included in this forecast is approximately $30 million in operating expense increases for the Global ERP project and incentive compensation.
  • The FY14 tax rate is anticipated to be between 28 and 30%.
  • Donaldson forecasts its full-year FY14 EPS to be between $1.65 and $1.85.
  • Cash generated by operating activities is projected to be between $280 and $320 million. Capital spending is estimated to be approximately $90 million.

Engine Products: The company now 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 2014. Demand from Off-Road OEM Customers is anticipated to be mixed: build rates of construction equipment are expected to improve in North America and Europe but remain soft in Asia, build rates of agriculture equipment are forecasted to be steady to slightly down, and the build rates of new mining equipment are expected to remain at current low levels.
  • Donaldson is anticipating 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 the company's product portfolio.
  • Donaldson forecasts steady sales for its 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 now forecasts sales to decrease slightly compared to FY13, including the impact of foreign currency.

  • The Industrial Filtration Solutions' sales are projected to increase 2 to 8%. Donaldson assumes replacement filter sales will remain at record levels due to improving general manufacturing activity, and for new filtration equipment sales to remain soft due to continuing low levels of investment in new equipment by manufacturers.
  • The company anticipates Gas Turbine sales will decrease 24 to 30% from record sales in FY13 due to the current slowdown in large turbine power generation projects by customers.
  • Donaldson is maintaining its Special Applications' forecast for sales to increase 3 to 9% due to improved market demand for its semiconductor and venting products.
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