Donaldson Company Inc. has announced its financial results for its fiscal 2014 fourth quarter.
"We are very pleased to report a strong finish to our FY14, with record sales, net earnings and EPS in our fourth quarter, and also record EPS for the full year," says Bill Cook, Donaldson's CEO. "Our replacement filter sales were strong again this quarter, with double-digit percent growth in both our Engine and Industrial segments. Our Engine Products' sales increased 6% in local currency from last year, driven by increases in Engine Aftermarket and On-Road sales of 16 and 8%, respectively. Our Industrial Products' sales increased 3% in local currency, with increases in Special Applications and in Industrial Filtration Solutions of 11 and 4%, respectively, offsetting a 9% decline in our Gas Turbine shipments. Internationally, our local currency sales were strong, with Asia Pacific up 7%, Europe up 8%, and Latin America up 20%.
"Looking forward to FY15, we are forecasting 4 to 8% sales growth. We expect sales of our replacement filters to remain strong and a continuing improvement in our OEM first-fit end markets for construction equipment, on-road trucks and gas turbine systems. We will maintain our focus on our Continuous Improvement initiatives to help deliver a higher operating margin in FY15, while also continuing our strategic investments in our Global ERP Project and our targeted revenue growth initiatives. The combination of our top-line growth forecast and our continued emphasis on operational excellence results in our FY15 EPS forecast of between $1.81 and $2.01 per share."
Financial Statement Discussion
The impact of foreign currency translation increased sales by $4.8 million, or 0.8%, during the quarter and decreased sales by $11.4 million, or 0.5%, for the year. The foreign currency translation impact increased net earnings by $0.4 million, or 0.5%, during the quarter and decreased net earnings by $1.0 million, or 0.4%, for the year.
Gross margin was 35.7% for the quarter versus 36.1% in the prior year quarter due to higher compensation expenses and an increase in purchased material costs. These offset the positive impact from a higher percentage of replacement filter sales and the benefits from the Continuous Improvement initiatives. For the full year, gross margin increased to 35.5% versus 34.8% last year.
Operating expenses for the quarter were $139.2 million, up 8.4% from the prior year. The increase was driven primarily by Donaldson's Global ERP Project and incentive compensation. Operating expenses for the year were $522.1 million, up 3.6% from the prior year total of $503.8 million.
Operating margin for the quarter was 14.8%, down 100 basis points from the prior year. For the year, operating margin was 14.4%, up 30 basis points from last year.
The effective tax rate for the quarter was 27.7%, compared to the prior year rate of 28.2%. Compared to the prior year this decrease was primarily due to changes in the mix of earnings between tax jurisdictions. For the year, the effective tax rate was 27.9%, compared to the prior year rate of 29.0%.
As part of the company's ongoing share repurchase program, it repurchased 2,757,000 shares for $114 million during the quarter. For the year, Donaldson repurchased 6,796,000 shares, or 4.6% of its diluted outstanding shares, for $279 million.
FY15 Outlook
This outlook excludes the impact from our pending acquisition of Northern Technical L.L.C., which is expected to close in September.
- Donaldson projects company sales to be between $2.57 and $2.67 billion, or an increase of 4 to 8%.
- Full-year operating margin forecast is 14.1 to 14.9%. Included in this forecast is approximately $10 million in incremental operating expenses for our Global ERP Project and our targeted sales growth initiatives.
- The FY15 tax rate is anticipated to be between 27 and 30%.
- Donaldson forecasts its full-year FY15 EPS to be between $1.81 and $2.01.
- Cash generated by operating activities is projected to be between $260 and $300 million. Capital spending is estimated to be between $90 and $100 million. Donaldson plans to repurchase between 2 to 4% of its diluted outstanding shares in FY15.
Engine Products: Donaldson forecasts its FY15 sales to increase 3 to 7%, including the impact of foreign currency.
- On-Road OEM Customers are expecting to increase production of heavy- and medium-duty trucks in 2015.
- Demand from the global Off-Road OEM Customers is anticipated to be mixed: build rates of construction equipment are expected to improve with North America forecasted to be the strongest region, build rates of agriculture equipment are forecasted to decrease in all regions, and build rates of mining equipment are expected to remain stable at their current low levels.
- Donaldson is anticipating strong growth globally for its Engine Aftermarket business. Utilization rates for off-road equipment and on-road heavy truck fleets are expected to continue improving. Donaldson should also benefit from its continued expansion into emerging economies, the increasing number of first-fit systems installed in the field with our proprietary first-fit filter systems, and through continued expansion of its product portfolio.
- The company forecasts a mid-single digit percent sales increase for its Aerospace and Defense business as the continued slowdown in U.S. military activity should be offset by growth from the commercial aerospace sales.
Industrial Products: Donaldson forecasts sales to increase 5 to 9%, including the impact of foreign currency. However, the Industrial Products' forecast excludes the impact from the pending acquisition of Northern Technical L.L.C., which is expected to close in September.
- The Industrial Filtration Solutions' sales are projected to increase 1 to 7%. Donaldson assumes its replacement filter sales will remain strong due to improving general manufacturing conditions, while new filtration system sales are forecasted to grow due to improvements in manufacturing capital spending and from its new product introductions.
- Donaldson anticipates Gas Turbine sales will increase 20 to 26% due to a forecasted improvement in the large turbine power generation market.
- It forecasts Special Applications' sales to increase 1 to 5% due to improved demand for membrane, semiconductor and venting products.
