Donaldson Q1 FY'14 sales down 1.2%

Financial Statement Discussion

The impact of foreign currency translation decreased sales by $6.8 million, or 1.2 percent, during the first quarter. The impact of foreign currency translation decreased reported net earnings by $0.5 million, or 0.8 percent.

Restructuring expenses in the quarter were $1.7 million of which $0.6 million was included in gross margin, $0.2 million in operating expense, and $0.9 million in other expense. These expenses were primarily related to two initiatives: a facility downsizing and a facility sale – both in Germany.

Gross margin was 35.8 percent, compared to 33.7 percent in last year's first quarter. The year-over-year increase is primarily attributable to improved fixed cost absorption due to an increase in our production volumes and the positive mix impacts from higher aftermarket sales. We also benefitted from our ongoing Continuous Improvement initiatives.

Operating expenses for the quarter were $122.6 million, down 1.7 percent from last year's $124.8 million. As a percent of sales, operating expenses were 20.5 percent compared to last year's 21.2 percent. Our ongoing cost containment actions and operating leverage offset higher expenses from incentive compensation and our Strategic Business Systems project.

Our effective tax rate for the quarter was 32.2 percent, compared to a prior year rate of 29.4 percent. The current quarter included $2.1 million of tax expense primarily related to an intercompany dividend.

As part of our ongoing share repurchase program we repurchased 339,000 shares, or 0.2 percent of our diluted outstanding shares, for $12.1 million during the quarter.

"We had a good start to our new fiscal year as we delivered record operating results on a modest sales increase in our first quarter," said Bill Cook, Donaldson's CEO. "We believe that many of our first-fit equipment end markets have stabilized, while demand for our replacement filters continues to grow.

“Our Engine Products' sales increased 7 percent in local currency from last year, driven by our Engine Aftermarket and Aerospace and Defense businesses, which were up 9 and 20 percent, respectively.

"Our Industrial Products' sales decreased 4 percent in local currency. Consistent with our earlier guidance, Gas Turbine shipments decreased 27 percent but were partially offset by our Industrial Filtration Solutions and Special Applications businesses, which were up 2 and 5 percent, respectively. Geographically, excluding our Gas Turbine sales, our Company's local currency sales growth was widespread across all of our major regions."

"Both our operating income of $92 million and operating margin of 15.3 percent were first quarter records. Over the last year, we have worked to align our manufacturing and operating expenses with current Customer demand while generating savings from our ongoing Continuous Improvement initiatives."

"Our updated outlook for FY14 is consistent with our original outlook from August. Overall, we are expecting our full year sales to increase between $25 and $100 million in FY14. We will maintain our focus on operational excellence through our Continuous Improvement initiatives. We continue to invest in our Strategic Business Systems project. The combination of our sales and operational performance should deliver FY14 EPS of between $1.65 and $1.85 per share."

Donaldson