Donaldson Company, Inc. announces first quarter 2017 net earnings of $58.0 million, or 43 cents per share, compared with $38.5 million, or 29 cents per share, in 2016.
First quarter 2017 GAAP earnings per share (EPS) include a benefit of approximately 5 cents per share related to the settlement of claims in an escrow account (the Settlement) that had been established in connection with the company’s acquisition of Northern Technical, L.L.C. during the first quarter of fiscal 2015. Excluding the impact from the Settlement in first quarter 2017 and certain one-time items in the prior year, adjusted EPS increased 11.8% to 38 cents in 2017 from 34 cents in 2016.
“After an encouraging start to our fiscal year, we remain on track to achieve the full-year sales and adjusted profit targets that we laid out last quarter,” says Tod Carpenter, President and Chief Executive Officer. “Driven by our focus on operational efficiency, this guidance reflects our ability to deliver operating profit growth in a relatively flat sales environment.
“Our assessment of the overall environment remains somewhat mixed as recent signs of stability within our business are not yet translating to meaningful improvements in end-market conditions, so we are maintaining a cautious stance. At the same time, we are focused on our strategic priorities, which include leveraging our technology to win new first-fit programs and actively pursuing growth in sales of replacement parts. I am proud of what our employees delivered in first quarter, and I am confident their efforts position us well to deliver our fiscal 2017 commitments.”
First Quarter 2017 Results
First quarter 2017 sales increased 2.8% to $553.0 million from $538.0 million in the prior year, including a benefit from currency translation of approximately 0.3%. Excluding the benefit from currency translation, first quarter sales increased 2.5% from last year, reflecting increases in both the Industrial Products and Engine Products segments of 4.5% and 1.3%, respectively.
Donaldson’s first quarter 2017 operating margin increased to 13.8% from 10.3% in 2016. The prior-year rate was negatively impacted by approximately 1.9 percentage points from certain one-time charges. Excluding the impact from these charges, the first quarter 2017 GAAP operating margin increased by approximately 1.6 percentage points from the adjusted operating margin in 2016.
First quarter gross margin was 35.1% in 2017, compared with last year’s GAAP gross margin of 33.1% and adjusted gross margin of 33.7%. The gross margin improvement from last year was primarily driven by higher fixed-cost absorption.
Expense as a percent of sales (expense rate) of 21.3% in first quarter 2017 reflects a decline from last year’s GAAP and adjusted expense rates of approximately 1.5 percentage points and 0.2 percentage points, respectively. Donaldson’s expense rate benefitted from previously taken restructuring actions and expense discipline across the company, partially offset by increased variable compensation expense.
The company’s net other income increased to $8.1 million in first quarter 2017 from $2.9 million in 2016, driven by the $6.8 million benefit from the Settlement. First quarter 2017 interest expense was $4.8 million, compared with $5.0 million last year. Donaldson’s first quarter effective income tax rate decreased 0.6 percentage points to 27.3% in 2017 from 27.9% in the prior year.
During first quarter 2017, Donaldson repurchased 1.13 million shares, or 0.8%, of its common stock at an average price of $36.59 for a total investment of $41.4 million. The company paid dividends of $23.2 million in first quarter 2017.
Fiscal 2017 Outlook
Donaldson continues to expect fiscal 2017 adjusted EPS between $1.50 and $1.66. GAAP EPS is now expected to be approximately 5 cents greater than adjusted EPS, reflecting the impact in first quarter 2017 from the Settlement.
Donaldson reaffirms its prior full-year sales guidance for fiscal 2017. The company continues to expect total sales between a 2% decline and a 2% increase compared with 2016.
Consistent with prior guidance, the company expects full-year sales in the Engine Products and Industrial Products segments between a 2% decline and a 2% increase when compared with the prior year. In Engine Products, the company expects Aftermarket sales will increase from the prior year while sales of products related to production of on- and off-road heavy-duty equipment, as well as commercial helicopters are expected to decline. Within the Industrial Products segment, Donaldson expects growth of Industrial Filtration Solutions’ sales, primarily driven by sales of replacement parts, and year-over-year sales declines in the Gas Turbine Systems and Special Applications businesses.
Donaldson continues to expect full-year 2017 operating margin between 13.3 and 13.9%, compared with adjusted operating margin of 13.2% in fiscal 2016. Largely driven by the impact from the Settlement in first quarter, the company now expects its full-year effective income tax rate between 26.4 and 28.4%, compared with the prior guidance range of 26.7-28.7%, and other income between $15 and $17 million, compared with prior guidance of $8 million to $10 million.
Donaldson’s full-year capital deployment and cash management expectations are consistent with prior guidance. The company expects capital expenditures between $70 and $80 million and full-year cash conversion between 90 and 100%. During fiscal 2017, the company expects to repurchase between 2 and 3% of its outstanding shares.
Accounting Considerations
During first quarter 2017, Donaldson settled claims against an escrow account that had been established in connection with the company’s acquisition of Northern Technical, L.L.C., which was completed in first quarter 2015. The settlement resulted in income of $6.8 million, which was recorded as other income in Donaldson’s first quarter 2017 consolidated statement of earnings and within the Industrial Products segment earnings. This income was excluded from the company’s adjusted EPS and did not affect the first quarter 2017 operating margin.
During the first quarter of fiscal 2016, Donaldson recognized pre-tax charges related to restructuring actions and an independent investigation into its Gas Turbine Systems business of $7.5 million and $2.6 million, respectively. These charges were excluded from the company’s first quarter 2016 non-GAAP metrics, including adjusted operating margin and adjusted EPS.
