Donaldson Co. has reported first quarter 2016 net earnings of $38.5 million, or 29 cents per share. In addition to a negative impact from foreign currency translation of $3 million, or 5.4 percent, 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,” said Tod Carpenter, president and CEO 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,” added Carpenter. “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.”
First quarter 2016 sales declined 9.8 percent to $538 million from $596.5 million in 2015, which includes a negative impact from foreign currency translation of 6.3 percent, or $37.4 million. Excluding the impact of currency translation, first quarter sales decreased 3.6 percent, primarily due to a 5.4 percent decline in Engine Products.
Operating Profit Results
First quarter operating margin was 10.3 percent, 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 percent, compared with 12.9 percent in first quarter 2015.
Gross margin decreased 1.9 percentage points in the first quarter to 33.1 percent from 35 percent 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 percent from 22.1 percent last year. Restructuring charges and investigation-related costs increased the expense rate by 0.8 percentage points and 0.5 percentage points, respectively. In addition, 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 million in first quarter from $3.5 million last year, reflecting a higher level of debt.
Fiscal 2016 Outlook
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 percent to 7 percent 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 percent compared with fiscal 2015.
- Based on a forecast of the euro at US $1.09 and 124 yen to the U.S. dollar, foreign currency translation is expected to negatively impact full-year 2016 sales by approximately $80 million.
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.
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, Iowa, 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.