Donaldson Company Inc. has announced its financial results for its fiscal 2015 first quarter.
"We had solid growth from our Engine Aftermarket and On-Road businesses which increased in local currencies by 9 and 17%, respectively. However, these strong sales increases were partially offset by a 16% local currency decrease from Off-Road Products, as a result of weaker conditions in the global agriculture and Asia Pacific construction and mining markets. In addition, our first quarter sales were challenged by a 2% translation impact from the stronger U.S. dollar against most other major currencies and also as some large Gas Turbine projects originally planned to ship were rescheduled by our customers to ship in our second quarter," says Bill Cook, Donaldson's CEO.
"We are excited to have completed the acquisition of Northern Technical during our first quarter. Due to the timing of this acquisition closing, Northern Technical's sales were less than $1 million in our quarter. Within this fiscal year, we anticipate Northern Technical sales to be $17 to $20 million and for it to be accretive to earnings.
"We have updated our outlook for FY15 to include Northern Technical but to also reflect current weak conditions in our Off-Road Products and an ongoing translation impact from the stronger U.S. dollar. Overall, we are expecting our full year sales to increase between 1 and 5% and to achieve record sales of over $2.5 billion. The combination of this sales record and our ongoing focus on operational performance should deliver record FY15 EPS of between $1.77 and $1.97 per share, excluding restructuring and pension lump sum settlement expenses.
"While current conditions in some of our end markets remain mixed, we will continue to make our key long-term investments and utilize our well diversified portfolio of global filter businesses as we execute our plan to grow to $5 billion in revenues by FY21."
Financial Statement Discussion
The impact of foreign currency translation decreased sales by $11.1 million, or 1.9%, during the first quarter. The impact of foreign currency translation decreased reported net earnings by $1.2 million, or 1.9%.
Gross margin was 35.0% versus 35.8% in last year's first quarter. The year-over-year decrease is primarily attributable to the negative impact of lower fixed cost absorption due to a decrease in production volumes, primarily outside the U.S. These decreases were partially offset by benefits from ongoing Continuous Improvement initiatives and the positive mix impacts from higher aftermarket sales.
Operating expenses for the quarter were $132.1 million, up 7.7% from the prior year's $122.6 million. The increase was primarily attributable to higher compensation expenses, employee benefit costs in the U.S., and a Global ERP Project. Amortization and integration expenses related to the acquisition of Northern Technical were approximately $1 million in the quarter.
Donaldson's operating margin for the quarter was 12.9%, down 240 basis points from the prior year.
Its effective tax rate for the quarter was 27.6%, compared to a prior year rate of 32.2%. Last year's first quarter included $2.1 million of tax expense primarily related to an intercompany dividend, while the company had a favorable shift in the mix of earnings between tax jurisdictions in this year's first quarter.
As part of Donaldson's ongoing share repurchase program it repurchased 3,342,000 shares, or 2.% of its diluted outstanding shares, for $134.3 million during the quarter.
- Donaldson now projects the company's sales to be between $2.50 and $2.60 billion, or an increase of 1 to 5%. Its forecast is based on the Euro at US$1.25 and 112 Yen to the US$.
- The full-year operating margin forecast is 13.9 to 14.7%. Included in this forecast is approximately $10 million in operating expense increases for the Global ERP Project and targeted sales growth initiatives. This excludes approximately $5 million of forecasted restructuring charges as a result of the announced closing of the Grinnell, IA, muffler plant and approximately $4 million in the second quarter related to lump sum settlements accepted by certain participants of U.S. pension plans.
- The FY15 tax rate is anticipated to be between 27 and 30%
- Donaldson forecasts its full year FY15 EPS to be between $1.77 and $1.97, excluding the restructuring and pension lump sum settlements discussed above.
- The company projects that cash generated by its operating activities will be between $275 and $315 million. Capital spending is estimated to be between $90 and $100 million.
- Engine Products: The company forecasts its FY15 sales growth rate to be between 0 and 3%, including the impact of foreign currency translation.
- On-Road OEM Customers are expecting to increase production of heavy- and medium-duty trucks in 2015.
- Demand from 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 weak.
- The company is anticipating continued strong growth for the 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 a mid-single digit sales increase 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: The company forecasts sales to increase 5 to 9%, including the impact of foreign currency translation and the addition of the Northern Technical acquisition into the Gas Turbine business.
- The Industrial Filtration Solutions' sales are projected to increase 1 to 5%. Donaldson anticipates its replacement filter sales will remain strong due to improving general manufacturing conditions, while new filtration system sales are forecasted to grow due to an improvement in new manufacturing capital spending and from recent new product introductions.
- The company anticipates its Gas Turbine sales will increase 25 to 30% due to an expected improvement in the large turbine power generation market. This forecast includes $17 to $20 million from the Northern Technical acquisition, which was completed in September.
- It forecasts Special Applications' sales to be steady with improved demand for semiconductor and venting products being offset by slightly lower membrane and hard disk drive filter sales.