Donaldson reports solid 7% currency growth for second quarter 2015

For the second quarter of its 2015 fiscal year, Donaldson had a solid constant currency sales growth of 7% but anticipates the full fiscal year will be flat to down 3%.

Screenshot 2024 07 01 141708

Donaldson Company Inc. has announced its financial results for its Fiscal 2015 second quarter. 

"We achieved solid constant currency sales growth of 7% in the quarter. The following are the drivers of our sales stated in constant currencies. Our Gas Turbine Products doubled over last year. Our Aerospace and Defense and On-Road businesses grew 16 and 12%, respectively. These increases and a modest sales increase in our Engine Aftermarket business were partially offset by an 18% decline in Off-Road Products, as a result of continued weak conditions in the global agriculture market and in the construction and mining markets in Asia Pacific. Overall, the currency headwinds were significant in the quarter and decreased our reported sales by $28 million compared to the prior year," says Bill Cook, Donaldson's CEO.

"Our reported operating margin decreased from the prior year quarter but included a $3.9 million charge for the previously announced lump sum settlement of our U.S. pension plan. We also incurred $0.7 million of costs associated with the closing of our Grinnell, IA, facility. The effect of these two items was a $0.02 reduction to our reported diluted EPS of $0.35. Also as a reminder, the prior year quarter included $6.4 million, or $0.04, in tax benefits related to the favorable settlement of a tax audit.

"We expect global economic conditions to improve only slightly over the next year. In addition to the negative impact of the stronger U.S. dollar, the slow growth of the global economy combined with ongoing weak commodity prices is projected to have a negative impact on most of our OEM customers' sales, and as a result, ours. The slow global capital investment environment also negatively impacts our first-fit Dust Collector equipment sales. We have updated our outlook for Fiscal 2015 to reflect these conditions and an ongoing negative translation impact from the stronger U.S. dollar. Overall, we now expect our full-year sales to be flat to down 3%, which should result in Fiscal 2015 diluted EPS of between $1.65 and $1.85 per share, excluding restructuring and pension lump sum settlement expenses. 

"Since current conditions in many of our end markets remain weak, we will implement additional productivity improvement and restructuring actions during the balance of this fiscal year. This will allow us to continue to invest in our key growth initiatives as we execute our plan to grow to $5 billion in revenues by Fiscal 2021."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $27.5 million, or 4.8%, during the quarter and decreased sales by $38.6 million, or 3.3%, year-to-date. The impact of foreign currency translation decreased reported net earnings by $2.7 million, or 4.7%, during the quarter and decreased net earnings by $3.9 million, or 3.3%, year-to-date. 

Gross margin was 34.4% for the quarter and 34.7% year-to-date, compared to prior year margins of 34.7% and 35.2%, respectively. The decreases are primarily attributable to the negative impact of lower fixed cost absorption due to reductions in OEM customer production volumes, a negative mix impact from the increase in large Gas Turbine project shipments, and the costs associated with the closing of the Grinnell, IA, facility. These decreases were partially offset by benefits from Continuous Improvement initiatives.

Operating expenses for the quarter were $137.2 million, up 6.0% from last year. As a percent of sales, operating expenses were 23.0% compared to last year's 22.3%. Operating expenses year-to-date were $269.3 million, or 22.6% of sales, compared to $252.2 million, or 21.4% of sales, last year. The increase for both periods was primarily attributable to a lump sum pension settlement and sales growth related initiatives.

Donaldson's effective tax rate for the quarter was 27.0%, compared to the prior year rate of 22.1%. The prior year quarter included $6.4 million in tax benefits related to the favorable settlement of a tax audit. The year-to-date effective tax rate was 27.3%, compared to the prior year rate of 27.6%.

Operating margin for the quarter was 11.4%, which includes the $4.6 million of pension settlement and restructuring charges, down 100 basis points from the prior year. Year-to-date operating margin was 12.2%, down 170 basis points from Fiscal 2014.

As part of its ongoing share repurchase program Donaldson repurchased 1,045,000 shares for $39.9 million during the quarter. Year-to-date it has repurchased 4,387,000 shares, or 3.1% of our diluted outstanding shares, for $174.2 million.

FY15 Outlook

  • Donaldson now projects the company's sales to be between $2.40 and $2.50 billion. The forecast is based on the Euro at US$1.13 and 117 Yen to the US dollar. 
  • Full-year operating margin is forecasted at 13.6 to 14.4%. Included in this forecast is approximately $10 million in operating expense increases for the Global ERP project and specific sales growth initiatives. This excludes the $3.9 million charge associated with the lump sum settlement of a U.S. pension plan recorded in the second quarter and forecasted full-year restructuring charges. 
  • The FY15 tax rate is anticipated to be between 27 and 29%. 
  • Donaldson forecasts its full-year Fiscal 2015 adjusted diluted EPS to be between $1.65 and $1.85, excluding restructuring and pension lump sum settlement expenses. 
  • Projected cash generated by operating activities will be between $245 and $285 million. Capital spending is estimated to be between $90 and $100 million. 

Engine Products: Donaldson now forecasts FY15 sales growth to be down 0 to 3%, including the impact of foreign currency translation. In local currency, sales are forecasted to increase 1 to 5%. 

  • 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 continue improving moderately in North America, remain stable in Europe and continue weak in Asia; build rates of agriculture equipment are forecasted to decrease in all regions, and build rates of mining equipment are expected to remain weak. 
  • Donaldson is anticipating continued strong growth for its Engine Aftermarket business globally. Utilization rates for off-road equipment and on-road heavy truck fleets are expected to continue improving. It should also benefit from 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. 
  • The company 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 mostly offset by growth from commercial aerospace sales. 

Industrial Products: Donaldson forecasts sales to increase 0 to 3%, including the impact of foreign currency translation. In local currency, sales are forecasted to increase 5 to 8%. 

  • Industrial Filtration Solutions' sales are projected to be flat to 4% down. Anticipated replacement filter sales will remain strong due to improving general manufacturing conditions but which are not strong enough to offset currency headwinds. 
  • Donaldson anticipates Gas Turbine sales will increase 20 to 26% due to awarded large turbine power generation projects and stronger aftermarket sales. This forecast includes $15 to $18 million from the Northern Technical acquisition, which was completed last September. 
  • Forecasted Special Applications' sales will be slightly down with improved demand for semiconductor and venting products being offset by lower membrane sales and currency headwinds. 
Latest