Donaldson Company Inc. has reported first quarter 2016 net earnings of $38.5 million, or 29 cents per share1. In addition to a negative impact from foreign currency translation of $3.0 million, or 5.4%, GAAP EPS reflects:
- Restructuring charges of $7.5 million, or 4 cents per share, and
- Investigation-related costs of $2.6 million, or 1 cent per share.
First quarter 2016 adjusted EPS2 was 34 cents, compared with 40 cents last year.
"Our first quarter performance reflects disciplined management of the business in light of continued and persistent pressures related to reduced customer demand, economic uncertainty and currency translation," says Tod Carpenter, President and Chief Executive Officer of Donaldson. "Our focus remains on supporting our customers, enhancing operational efficiency and investing for growth.
"In response to the challenging environment, we took restructuring actions during the quarter in each of our geographic regions. These actions will generate annual savings of approximately $25 million, with the majority of those savings realized this fiscal year.
"We have also revised full-year 2016 sales and earnings guidance, reflecting slowing conditions primarily in our Off-Road, Engine Aftermarket and Industrial Filtration Solutions businesses. Despite the reduction of our sales guidance, the midpoint of our adjusted EPS guidance is slightly above last year, reflecting the benefits from recent and previous restructuring actions, our Continuous Improvement initiatives and expense controls."
1 All earnings per share figures refer to diluted EPS.
2 Adjusted earnings per share, a non-GAAP financial measure, exclude the impact of certain matters not related to the company's ongoing operations. See the "Restructuring Charges and Other Adjusting Items" section of this release for more information.
First quarter 2016 sales declined 9.8% to $538.0 million from $596.5 million in 2015, which includes a negative impact from foreign currency translation of 6.3%, or $37.4 million. Excluding the impact of currency translation, first quarter sales decreased 3.6%, primarily due to a 5.4% decline in Engine Products.
Operating Profit Results
First quarter operating margin was 10.3%, which includes an impact from restructuring charges and investigation-related costs of 1.4 percentage points and 0.5 percentage points, respectively. Excluding these impacts, first quarter adjusted operating margin was 12.2%, compared with 12.9% in first quarter 2015.
Gross margin decreased 1.9 percentage points in first quarter to 33.1% from 35.0% last year, reflecting an impact of 0.6 percentage points related to restructuring charges and a 0.6 percentage point transactional impact from foreign currency exchange rates. Other gross margin pressures, including lower fixed-cost absorption, were partially offset by Donaldson's Continuous Improvement initiatives.
First quarter operating expense rate increased to 22.8% from 22.1% last year. Restructuring charges and investigation-related costs increased the expense rate by 0.8 percentage points and 0.5 percentage points, respectively. Additionally, Donaldson recorded product warranty charges in first quarter that increased the rate by 0.6 percentage points. These impacts were partially offset by the benefit of restructuring actions taken in fiscal 2015, combined with disciplined expense control across the organization.
Interest expense increased to $5.0 million in first quarter from $3.5 million last year, reflecting a higher level of debt.
The company's first quarter 2016 effective income tax rate increased 0.3 percentage points to 27.9% from 27.6% in 2015, primarily due to non-recurring discrete tax benefits recorded last year.
Capital Returned to Shareholders
During first quarter, Donaldson repurchased 2.07 million shares, or 1.5%, of its common stock at an average price of $32.85 for a total of $68.0 million. The company paid dividends of $22.7 million in first quarter.
Fiscal 2016 Outlook3
Donaldson now expects fiscal 2016 adjusted EPS between $1.49 and $1.69, compared with prior adjusted EPS guidance of $1.57 to $1.77. Fiscal 2016 GAAP EPS is expected to be approximately 6 cents lower than adjusted EPS, reflecting the full-year impact from restructuring charges and investigation-related costs of 5 cents and 1 cent, respectively. GAAP guidance does not reflect any potential future costs related to the independent investigation, which was completed in November 2015.
Donaldson's full-year 2016 guidance reflects:
- Sales between $2.2 billion and $2.3 billion, or 3 to 7% below last year, compared with prior guidance for sales to be approximately equal to last year. In local currency, sales are now expected in a range between flat and a decline of 4% compared with fiscal 2015.
- Based on a forecast of the euro at US$1.09 and 124 yen to the US$, foreign currency translation is expected to negatively impact full-year 2016 sales by approximately $80 million.
- Adjusted operating margin in a range between 12.9 and 13.7%, in line with prior guidance.
- An effective income tax rate between 26.0 and 28.0%, compared with prior guidance of 26.5 to 28.5%.
- Repurchasing between 2 and 4% of outstanding shares.
3 The fiscal 2016 outlook excludes the acquisition of Industrias Partmo, which is expected to close in the second quarter of 2016 following customary regulatory approval in Colombia.
Engine Products: Full-year 2016 Engine sales are now expected to decline between 3 and 7% compared with 2015. In local currency, sales are now expected in a range between flat and a decline of 4% compared with fiscal 2015, reflecting:
- Continued weakness in the global agriculture and mining equipment markets, a slowdown in the construction market and moderating build rates for on-road heavy-duty transportation in the second half of fiscal 2016.
- A moderate increase in utilization of on-road heavy-duty trucks offset by a decline in utilization of off-road equipment, resulting in a decline in sales of replacement filters.
- A continued slowdown in U.S. defense spending partially offset by growing sales of commercial aerospace products.
Industrial Products: Full-year 2016 Industrial sales are now expected to decline between 3 and 7% compared with 2015. In local currency, sales are now expected in a range between a 3% decline and a 1% increase compared with fiscal 2015.
- Industrial Filtration Solutions' sales are now expected to decrease between 2 and 6% from last year, reflecting a lower growth rate for manufacturing production and new capital investment, partially offset by the benefit from Donaldson's introduction of new products.
- Gas Turbine sales are now expected to decline between 11 and 15% due to market declines in Europe and Asia Pacific, partially offset by share gains from replacement parts.
- Special Applications' sales are expected to decline slightly due to the membrane, disk drive and semiconductor businesses, partially offset by growth in venting products.
Restructuring Charges and Other Adjusting Items
In first quarter 2016, Donaldson took actions to further align its operating and manufacturing cost structure with current and projected customer and end-market demand. These actions resulted in a pre-tax charge of $7.5 million, driven primarily by restructuring the salaried and production workforce. The company also recorded an additional charge related to the closure of its production facility in Grinnell, IA, which will be completed in second quarter 2016.
During first quarter, the Audit Committee of Donaldson's Board of Directors engaged independent external counsel and independent forensic accountants to investigate revenue recognition issues in Donaldson's European Gas Turbine business. In first quarter, the company recognized pre-tax costs of $2.6 million related to the investigation, which completed in November 2015.