Donaldson Company Inc. has announced its financial results for its fiscal 2014 third quarter.
"We are proud of our execution during the quarter while we remain aggressively focused on additional growth opportunities," says Bill Cook, Donaldson's CEO. "Our end market conditions remain mixed as demand for our replacement filters continues to improve in both our Engine and Industrial segments, while conditions for new first-fit systems in our OEM markets are recovering slower than we had anticipated. Our Engine Products' sales increased 5% in local currency from last year, driven by increases in Engine Aftermarket and On-Road sales of 11% and 13%, respectively. However, our Industrial Products' sales decreased 7% in local currency as a result of a 40% decline in our Gas Turbine shipments from last year's record third quarter. As previously discussed, we had a surge in our gas turbine shipments last year, and the overall industry is now installing that new electrical generation capacity. Partially offsetting our Gas Turbine sales decrease were our Industrial Filtration Solutions and Special Applications businesses, which grew 8% and 4%, respectively. Internationally, excluding our Gas Turbine sales, our local currency sales were strong with Europe up 7%, Asia Pacific up 10%, and Latin America up 23%.
"As we begin our fourth quarter, we have narrowed our guidance ranges. We reduced our Industrial Products' sales outlook due to a couple of factors. First, the continued geopolitical uncertainty continues to negatively impact the recovery for general industrial capital investment and, as a result, the demand for our new Industrial Filtration Solutions systems. Second, several of our large gas turbine projects that were scheduled for shipment in our fourth quarter have been rescheduled by our Customers to be delivered in our FY15. As a result, we are now forecasting our full-year Company sales to be a slight increase over last year. The midpoint of our operating margin forecast is 14.3%, a 20 basis point improvement over the prior year. The combination of our updated outlook for sales and operational performance results in our FY14 EPS forecast of between $1.69 and $1.77 per share."
Financial Statement Discussion
The impact of foreign currency translation decreased sales by $0.6 million, or 0.1%, during the quarter and decreased sales by $16.2 million, or 0.9%, year-to-date. The foreign currency translation impact decreased net earnings by $0.2 million, or 0.3%, during the quarter and decreased net earnings by $1.4 million, or 0.8%, for the year.
Gross margin was 35.8% for the quarter, consistent with last year. During the quarter, Donaldson realized positive mix impact from a higher percentage of replacement filter sales. It also benefitted from Continuous Improvement initiatives. These offset higher compensation expenses. Year-to-date, the gross margin is 35.4% versus 34.3% last year.
Operating expenses for the quarter were $130.7 million, up 6.4% from last year. As a percent of sales, operating expenses were 20.9% compared to last year's 19.8%. Higher expenses from Donaldson's Global ERP project and incentive compensation were partially offset by lower pension, insurance and warranty expenses. Operating expenses year-to-date were $382.9 million, or 21.2% of sales, compared to $375.5 million, or 20.8% of sales, last year.
Operating margin for the quarter was 14.9%, down 100 basis points from the prior year. Year-to-date operating margin was 14.2%, up 70 basis points from last year.
The effective tax rate for the quarter was 28.5%, compared to the prior year rate of 29.8%. This decrease compared to the prior year was primarily due to changes in the mix of earnings between tax jurisdictions. The year-to-date effective tax rate was 27.9%, compared to the prior year rate of 29.2%.
As part of the company's ongoing share repurchase program it repurchased 2,400,000 shares for $99.5 million during the quarter. Year-to-date Donaldson has repurchased 4,039,000 shares, or 2.7% of its diluted outstanding shares, for $165.9 million.
- Donaldson projects its company's sales to be between $2.44 and $2.48 billion, or a slight increase over the prior year including the negative impact of foreign currency exchange rates. Its forecast is based on the Euro at US$1.35 and 102 Yen to the US$.
- The full-year operating margin forecast is 14.1 to 14.5%. Included in this forecast is approximately $22 million in operating expense increases for the Global ERP project and incentive compensation.
- The FY14 tax rate is anticipated to be between 28 and 29%.
- Donaldson forecasts its full-year FY14 EPS to be between $1.69 and $1.77.
- Cash generated by operating activities is projected to be between $310 and $330 million. Capital spending is estimated to be approximately $90 million. The share repurchase target remains at 4% of diluted outstanding shares in FY14.
Engine Products: Donaldson now forecasts its FY14 sales to increase 3 to 7%, including the negative 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 continue 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 decrease, and the build rates of mining equipment are expected to remain weak.
Donaldson is anticipating continued growth for its Engine Aftermarket business. Utilization rates for off-road equipment and on-road heavy truck fleets are expected to continue improving. The company should also benefit from its continued expansion into emerging economies, the increasing number of first-fit systems installed in the field with proprietary filters, and through continued expansion of its product portfolio.
Donaldson forecasts sales to decline slightly for its Aerospace and Defense business compared to last year as the continued slowdown in U.S. military activity should be mostly offset by growth from commercial aerospace sales.
Industrial Products: Donaldson now forecasts sales to decrease 4 to 7%, including the negative impact of foreign currency.
The Industrial Filtration Solutions' sales are projected to increase 2 to 5%. Donaldson assumes its replacement filter sales will remain at record levels due to improving general manufacturing conditions, while new filtration system sales will remain flat in the near-term due to continuing low levels of new equipment investment by manufacturers.
It anticipates Gas Turbine sales will decrease 29 to 32% from record sales last year due to the current slowdown in large turbine power generation projects by customers.
Donaldson now forecasts its Special Applications' sales to increase 2 to 5% due to improved market demand for its semiconductor and venting products.