Donaldson Company Has a Solid Fiscal Fourth Quarter

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Donaldson reported fiscal fourth-quarter adjusted EPS of $0.51, above the consensus estimate of $0.47. Organic revenue increased 5%, driven by solid growth in engine products and modest growth in industrial products. The industrial products segment had declined on an organic basis in the previous five quarters before a return to growth in the fiscal fourth quarter. The company continued to see strong organic revenue growth in aftermarket engine filtration (up 15%) and first-fit on-road engine filtration (up 8%). Gas turbine sales remained below record sales results in fiscal 2013, although management expects organic growth between 20% and 26% for gas turbine products in fiscal 2015.

Management initiated a fiscal 2015 EPS guidance range of $1.81 to $2.01 (representing 2% to 13% growth), with a midpoint of $1.93, slightly below the consensus estimate. Fiscal 2015 revenue is expected to be between $2.57 billion and $2.67 billion (up 4% to 8%), excluding the pending acquisition of Northern Technical L.L.C. (expected to close in September 2014; see below for more detail), with a midpoint in line with the consensus estimate of $2.61 billion.

The company expects engine products segment revenue to increase 3% to 7% in fiscal 2014, driven by continued expected growth in aftermarket products and increasing builds of heavy- and medium-duty trucks. Expectations for demand from off-road OEM customers are mixed (construction markets are improving, mining is expected to remain weak, and agriculture product sales are forecast to decline). Management anticipates overall industrial products segment sales to increase 5% to 9%. Industrial filtration solutions product sales are expected to increase 1% to 7%, driven by strong replacement filter demand and growth in new filtration systems sales. Gas turbine sales are expected to increase 20% to 26% due to forecast improvement in the large turbine power generation market. Gas turbine sales declined 33% in fiscal 2014 following 29% growth in a record fiscal 2013.

The gas turbine business, which was a 3-percentage-point drag on consolidated revenue growth in fiscal 2014, is expected to add almost 2 points to the consolidated growth rate in fiscal 2015. Special applications product sales are expected to increase 1% to 5% due to improved demand for membrane, semiconductor, and venting products. Operating margin for the full year is expected to range from 14.1% to 14.9%, flat year-over-year at the midpoint of the range on an adjusted basis. Management’s free cash flow guidance is a range of $160 million to $210 million.

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