Donaldson Reports Second Quarter Results

Donaldson Reports Second Quarter Results

MINNEAPOLIS--(BUSINESS WIRE)-- Donaldson Company, Inc. (NYS: DCI) announced its financial results for its fiscal 2013 second quarter. Summarized financial results are as follows (dollars in millions, except per share data):

Three Months Ended

Six Months Ended

January 31

January 31

2013

2012

Change

2013

2012

Change

Net sales

$

596

$

581

3

%

$

1,185

$

1,189

0

%

Operating income

71

75

(5

)%

145

165

(12

)%

Net earnings

51

54

(6

)%

105

122

(14

)%

Diluted EPS (*)

$

0.34

$

0.35

(3

)%

$

0.70

$

0.80

(13

)%

(*) The prior year EPS amounts reflect the impact of last year's two-for-one stock split.


"Our diversified portfolio of global filtration businesses delivered a new sales record in our second quarter," said Bill Cook, Donaldson's CEO. "Our Gas Turbine Products' sales increased 79 percent as we shipped a number of large project shipments to our Customers this quarter. This offset weaker sales into the North American On-Road truck market, the On-Road and Off-Road equipment markets in Asia, and for On-Road and Off-Road replacement filters in Europe. We did see improved demand for replacement filters in the Americas and in Asia, with our local currency sales increasing 4 and 6 percent, respectively."

"Despite our higher sales, our operating margin decreased 100 basis points from last year to 11.9 percent due to lower fixed cost absorption in our Engine Products segment and the mix shift to large Gas Turbine project shipments. This was partially offset by savings from our ongoing Continuous Improvement initiatives. We continued to take actions to better align our manufacturing and operating expenses with our forecasted Customer demand. However, we are also continuing the engineering work on many new OEM Customer programs that will be going into production in the next 24 months. In addition, we continue to work on our global Strategic Business Systems project. We have chosen to continue these investments to support our Strategic Growth Goals."

"Based on input from key Customers, we see current market conditions continuing in the near term due primarily to the ongoing high levels of global economic uncertainty. Fortunately, we anticipate strength in our Gas Turbine business for the balance of our fiscal year, which will help offset some of the weakness in our other businesses. As a result, we are forecasting our Company's full-year sales to be approximately equal to last year's record $2.5 billion, and our FY13 EPS forecast is between $1.61 and $1.81 per share."

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $1.7 million, or 0.3 percent, during the quarter and decreased sales by $18.6 million, or 1.6 percent, year-to-date, compared to the same periods last year. The impact of foreign currency translation increased reported net earnings by $0.2 million, or 0.3 percent, during the quarter and decreased reported net earnings by $1.2 million, or 1.0 percent, for the year.

Gross margin was 33.4 percent for the quarter and 33.5 percent year-to-date, compared to prior year margins of 34.6 percent and 35.0 percent, respectively. The year-over-year decrease is primarily attributable to lower fixed cost absorption due to the decrease in our production volumes and the mix impact due to large Gas Turbine project shipments. Restructuring expenses included in gross margin were $0.5 million in the quarter and $0.7 million year-to-date. The lower fixed cost absorption and restructuring expenses were partially offset by the benefits from our ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $127.8 million, up 1.4 percent from last year's $126.0 million. As a percent of sales, operating expenses were 21.4 percent, compared to last year's 21.7 percent. Operating expenses year-to-date were $252.5 million, or 21.3 percent of sales, compared to $250.7 million, or 21.1 percent of sales, last year. Restructuring expenses included in operating expenses were $0.9 million in the quarter and $1.0 million year-to-date. Our cost containment actions helped offset the restructuring expenses, higher pension expenses, and incremental expenses related to our Strategic Business Systems project.

Our effective tax rate for the quarter was 28.3 percent, compared to a prior year rate of 29.6 percent. The decrease was primarily due to $0.8 million in tax benefits from the retroactive reinstatement of the Research and Experimentation Credit in the U.S. The year-to-date effective tax rate was 28.9 percent, compared to a prior year rate of 27.3 percent.

As part of our ongoing share repurchase program we repurchased 320,000 shares, or 0.2 percent of our diluted outstanding shares, for $10.2 million during the quarter. Year-to-date we have repurchased 1,820,000 shares, or 1.2 percent of our diluted outstanding shares, for $61.0 million.

FY13 Outlook

  • We are projecting our full-year sales to be approximately equal to last year's record $2.5 billion. Our forecast is based on the Euro at US$1.34 and 94 Yen to the US$.

  • Our full-year operating margin forecast is 13.9 to 14.7 percent.

  • Our FY13 tax rate is anticipated to be between 28 and 30 percent.

  • We forecast our FY13 EPS to be between $1.61 and $1.81.

  • Cash generated by operating activities is projected to be between $240 and $270 million. Our capital spending is estimated to be between $90 and $100 million.

Engine Products: We forecast FY13 sales to decrease slightly compared to FY12, including the impact of foreign currency.

  • Our On-Road OEM Customers are planning to build fewer heavy- and medium-duty trucks. Demand from our Off-Road OEM Customers is anticipated to be mixed: build rates of agriculture equipment are forecasted to remain good, build rates of construction equipment are expected to slowly improve in North America but remain weak in Europe and China, and build rates of mining equipment are expected to decrease globally.

  • We are anticipating slowly improving growth for Aftermarket Products. Current utilization rates for off-road equipment and on-road heavy trucks began stabilizing late in the second quarter and inventory levels at dealers and distributors are consistent with current utilization. We should benefit from our continued expansion into emerging economies, from the increasing number of systems installed in the field with our proprietary filters, and from our increasing sales of liquid filtration products.

  • We forecast our Aerospace and Defense Products' sales to be slightly lower than last year as the continued slowdown in military activity is expected to be partially offset by growth from commercial aerospace sales.

Industrial Products: We forecast sales to increase 1 to 6 percent over FY12, including the impact of foreign currency.

  • Our Industrial Filtration Solutions Products' sales are projected to decrease slightly compared to last year. We assume manufacturing activity will increase moderately in the Americas, slowly improve in Asia, and continue to be weak in Europe.

  • We anticipate our Gas Turbine Products' sales to be up 27 to 32 percent due to continued strength in both the large turbine power generation and the oil and gas markets.

  • Special Applications Products' sales are now forecast to be down 1 to 6 percent with expected weaker end market demand for disk drive filters partially offset by growth from membranes products and integrated venting products.

About Donaldson Company

Donaldson is a leading worldwide provider of filtration systems that improve people's lives, enhance our Customers' equipment performance, and protect our environment. We are a technology-driven Company committed to satisfying our Customers' needs for filtration solutions through innovative research and development, application expertise, and global presence. Our approximately 12,800 employees contribute to the Company's success by supporting our Customers at our more than 100 sales, manufacturing, and distribution locations around the world.

Donaldson is a member of the S&P MidCap 400 and Russell 1000 indices, and our shares trade on the NYSE under the symbol DCI. Additional information is available at www.donaldson.com.

SAFE HARBOR STATEMENT UNDER THE SECURITIES REFORM ACT OF 1995

The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and is making this cautionary statement in connection with such safe harbor legislation. This announcement contains forward-looking statements, including forecasts, plans, and projections relating to our business and financial performance and global economic conditions, which involve uncertainties that could materially impact results.

The Company wishes to caution investors that any forward-looking statements are subject to uncertainties and other risk factors that could cause actual results to differ materially from such statements, including but not limited to risks associated with: world economic factors and the ongoing global economic uncertainty, the reduced demand for hard disk drive products with the increased use of flash memory, the potential for some Customers to increase their reliance on their own filtration capabilities, currency fluctuations, commodity prices, political factors, the Company's international operations, highly competitive markets, governmental laws and regulations, including the impact of the various economic stimulus and financial reform measures, the implementation of our new information technology systems, potential global events resulting in market instability including financial bailouts and defaults of sovereign nations, military and terrorist activities, health outbreaks, natural disasters, and all of the other risk factors included in our Annual and Quarterly Reports. We undertake no obligation to publicly update or revise any forward-looking statements.

CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS

DONALDSON COMPANY, INC. AND SUBSIDIARIES

(Thousands of dollars, except share and per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

January 31

January 31

2013

2012

2013

2012

Net sales

$

596,036

$

580,883

$

1,184,983

$

1,189,178

Cost of sales

397,059

380,066

787,713

773,427

Gross margin

198,977

200,817

397,270

415,751

Operating expenses

127,785

126,049

252,541

250,656

Operating income

71,192

74,768

144,729

165,095

Other income, net

(2,542

)

(4,550

)

(8,354

)

(9,410

)

Interest expense

2,885

2,899

5,556

6,069

Earnings before income taxes

70,849

76,419

147,527

168,436

Income taxes

20,036

22,598

42,601

46,062

Net earnings

$

50,813

$

53,821

$

104,926

$

122,374

Weighted average shares Outstanding (*)

147,951,535

150,105,610

148,531,306

150,309,746

Diluted shares outstanding (*)

149,988,832

152,825,570

150,742,467

152,961,346

Net earnings per share (*)

$

0.34

$

0.36

$

0.71

$

0.82

Net earnings per share assuming dilution (*)

$

0.34

$

0.35

$

0.70

$

0.80

Dividends paid per share (*)

$

0.090

$

0.075

$

0.180

$

0.150

(*) Prior year shares and per share amounts reflect the impact of the Company's two-for-one stock split that occurred during the third quarter of Fiscal 2012.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

January 31

July 31

2013

2012

ASSETS

Cash, cash equivalents and short-term investments

$

284,483

$

318,151

Accounts receivable, net

407,528

438,796

Inventories, net

261,932

256,116

Prepaids and other current assets

78,897

72,599

Total current assets

1,032,840

1,085,662

Other assets and deferred taxes

273,100

259,511

Property, plant and equipment, net

412,728

384,909

Total assets

$

1,718,668

$

1,730,082

LIABILITIES AND SHAREHOLDERS' EQUITY

Trade accounts payable

$

171,881

$

199,182

Employee compensation and other liabilities

171,328

201,848

Short-term borrowings

59,335

95,147

Current maturity long-term debt

82,467

2,346

Total current liabilities

485,011

498,523

Long-term debt

120,375

203,483

Other long-term liabilities

109,102

118,062

Total liabilities

714,488

820,068

Equity

1,004,180

910,014

Total liabilities and equity

$

1,718,668

$

1,730,082

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

Six Months Ended

January 31

2013

2012

OPERATING ACTIVITIES

Net earnings

$

104,926

$

122,374

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization

32,896

30,896

Changes in operating assets and liabilities

(26,831

)

(43,485

)

Tax benefit of equity plans

(8,560

)

(7,576

)

Stock compensation plan expense

6,218

6,440

Other, net

531

(6,451

)

Net cash provided by operating activities

109,180

102,198

INVESTING ACTIVITIES

Net expenditures on property and equipment

(51,753

)

(36,349

)

Net change in short-term investments

31,250

(93,455

)

Net cash used in investing activities

(20,503

)

(129,804

)

FINANCING ACTIVITIES

Purchase of treasury stock

(60,975

)

(73,558

)

Net change in debt and short-term borrowings

(38,534

)

33,452

Dividends paid

(26,495

)

(22,342

)

Tax benefit of equity plans