Donaldson Company, Inc. (DCI)
F4Q09 Earnings Call
September 2, 2009 11:00 am ET
Richard Sheffer - Director of Investor Relations
Thomas R. VerHage - Vice President and Chief Financial Officer
William M. Cook - Chairman, President and Chief Executive Officer
Kevin Maczka - BB&T Capital Markets
Hamzah Mazari – Credit Suisse
Analyst for Charles Brady – BMO Capital Markets
Eli Lustgarten – Longbow Research
Jeffrey Hammond - Keybanc Capital Markets
Brian Drab - William Blair & Company
Richard Eastman - Robert W. Baird
Adam Brooks - Sidoti & Company
Previous Statements by DCI
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Thank you and welcome to Donaldson's 2009 fourth quarter conference call and webcast. Following my brief introduction Tom VerHage, our Vice President and CFO, will give us a brief review of our fourth quarter operating results. Tom will then turn the call over to Bill Cook, our Chairman, President, and CEO, who will discuss our initial outlook for fiscal 2010 and the business conditions shaping that view. Following Bill's remarks, we will open up the call to questions.
Before I turn the call over to Tom, I need to review our Safe Harbor statement with you. Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from the forward-looking statements made today. Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings.
Now I would like to introduce Tom VerHage. Tom?
Thanks Rich and good morning everyone. Yesterday we released our fourth quarter earnings after the market closed and provided our initial guidance for fiscal 2010. Conditions in nearly all of our end markets either remained weak or deteriorated in the quarter. However, we have begun to see signs of stabilization in some of our businesses and while our future visibility remains limited beyond the first quarter and it is too early to call a turnaround we feel that the worst of the economic downturn is behind us in many of our early and mid-cycle end markets. This view is factored into our FY10 outlook in our press release.
As the recessionary conditions continue to unfold in our fourth quarter we saw our sales return to our fiscal 2005 and 2006 levels. We have aggressively reduced our cost structure to match these lower sales levels. We continued our previously announced restructuring plans and incurred an additional $6.7 million tax cost or $0.05 per share in the quarter. That brings our total restructuring costs for the year to $17.8 million pre-tax or $0.15 per share. We planned to complete more actions before the end of the quarter but encountered delays in implementing our plans.
For the actions we completed, approximately $3.2 million was charged to cost of sales. $3.5 million was in operating expenses. As a result of our outlook for near-term business conditions we are planning additional restructuring actions in fiscal 2010 that will likely result in a pre-tax charge between $12-17 million or between $0.10 and $0.15 per share for the full year. These include those items we planned to complete but were unable to in the fourth quarter. The majority of these additional restructuring charges will occur in the first half of fiscal 2010.
In addition to the workforce restructuring actions discussed in our press release, we completed the consolidation of two leased distribution centers in the U.S. into our main U.S. distribution center in Indiana and the consolidation of another leased distribution center in the U.K. into our central European distribution center in Belgium. We expect the cumulative impact of the restructuring actions taken during fiscal 2009 will generate over $100 million of annualized pre-tax cost savings in fiscal 2010 at our current volume levels.
Including the pre-tax restructuring charges we expect to incur in fiscal 2010 we are expecting our full year operating margin to be between 9.5-10.5%. Our operating margin will continue to be impacted by lower than normal absorption of fixed costs and the $12-17 million of additional restructuring costs.
Our gross margin was 32.8% in the quarter which improved from our Q3 and Q2 gross margins of 31.6% and 29.1% respectively. It was below the 33.2% we had achieved in last year’s fourth quarter. The lower absorption of fixed manufacturing costs in the quarter reduced gross margin by just over three percentage points net of savings from completed restructuring activities and the $3.2 million of restructuring costs lowered gross margin by a little less than a percentage point. A positive year-over-year LIFO accounting impact, slightly lower purchased material costs compared to last year, better execution on large project shipments and improved distribution efficiencies combined for approximately a three point improvement in gross margin. As you may recall, last year’s fourth quarter contained a $5 million LIFO accounting charge and that did not recur this year.
In operating expenses we continued the expense reduction programs we discussed last quarter including a hiring freeze, salary freeze, targeted restructurings and various other expense reduction actions. The restructuring charges increased operating expenses by $3.5 million in the quarter while we realized $9 million of cost savings that are reflected in operating expense.
Our effective tax rate was favorably impacted in the quarter by a favorable earnings mix as our Asia Pacific entities which generally have lower tax rates performed relatively better than other regions. This helped us achieve a lower than forecasted effective rate of 26% in the quarter. Based on our projected global mix of earnings we expect our normal tax rate after additional discrete items to approximate 31% going forward but our geographic earnings mix will continue to cause the rate to vary from quarter-to-quarter.