Donaldson Company Inc. announces fiscal 2017 fourth quarter net earnings of $68.2 million and full-year net earnings of $232.8 million, compared with $59.5 million and $190.8 million, respectively, in fiscal 2016. Fourth quarter 2017 GAAP earnings per share (EPS)1 increased 15.9% to $0.51 from $0.44 last year, and full-year GAAP EPS increased 22.5 percent to $1.74 from $1.42 in 2016.
The current and prior year GAAP earnings were impacted by one-time items, which are excluded from the company’s calculation of adjusted EPS2.
“Sales remained strong through our fourth quarter, and benefits from our strategic initiatives combined with improving market conditions in our Engine segment drove a meaningful increase in full-year sales and earnings,” says Tod Carpenter, President and Chief Executive Officer. “I want to thank our employees for doing an excellent job executing our strategy all year long. Through their efforts, we delivered solid growth in sales of replacement parts and innovative air and liquid products, and we also completed two strategic acquisitions, Partmo and Hy-Pro.
“As we turn to fiscal 2018, we expect the recovery in engine-related end markets to continue, whereas industrial markets are likely to remain uncertain. Although the economic environment is still mixed, we plan to deliver strong earnings growth while also investing in technology development, capacity expansion and customer engagement. We are committed to building on the momentum from 2017, and I am confident that executing our fiscal 2018 priorities will create long-term value for our stakeholders.”
Fiscal 2017 Financial Results
Fourth quarter 2017 sales increased 11.2% to $660.1 million from $593.8 million last year, reflecting increases in the Engine Products and Industrial Products segments of 17.8% and 0.4%, respectively.
Fiscal 2017 sales increased 6.8% to $2.37 billion from $2.22 billion in 2016. Excluding the negative impact from foreign currency translation, fiscal 2017 sales increased 7.2%, reflecting an increase of 11.6% in sales of Engine Products, partially offset by a 0.2% decline in Industrial Products.
Fourth quarter 2017 GAAP operating income rate (operating margin) was 14.3%, compared with 2016 GAAP and adjusted rates of 15.2% and 15.8%, respectively. Fourth quarter 2017 GAAP gross margin was 34.8%, compared with last year’s GAAP and adjusted gross margin rates of 35.2% and 35.4%, respectively. Compared with the prior year, fourth quarter 2017 gross margin was negatively impacted by an unfavorable sales mix of products, higher raw materials costs and incremental freight charges. These pressures were partially offset by improved absorption of fixed costs on increasing volume. GAAP operating expense as a rate of sales (expense rate) was 20.5% in fourth quarter 2017, compared with prior-year GAAP and adjusted rates of 20.1% and 19.6%, respectively. The increase from the prior year was primarily driven by higher variable compensation expense.
Fiscal 2017 operating margin increased 1.6 percentage points to 13.9% from 12.3% in 2016, or an increase of 0.7 percentage points when excluding the negative impact from one-time charges in the prior-year rate. The year-over-year increase in full-year operating margin reflects favorability in both gross margin and expense rate. The gross margin increase was driven primarily by higher absorption of fixed costs, partially offset by the higher raw materials costs combined with variable costs attributable to higher demand than the prior year. The fiscal 2017 expense rate reflects leverage on increasing sales, partially offset by an increase in variable compensation expense.
Fiscal 2017 interest expense was $5.1 million in fourth quarter and $19.5 million for the full year, compared with $4.9 million and $20.7 million, respectively, in 2016. Donaldson’s fourth quarter effective income tax rate declined 2.4 percentage points to 25.6%, reflecting a favorable mix of earnings. The full-year 2017 effective income tax rate was 27.7%, compared with 25.9% in 2016. The year-over-year change was primarily driven by discrete benefits recorded in the prior year from favorable settlements of tax audits.
During fourth quarter 2017, Donaldson repurchased 650 thousand shares, or 0.5%, of its common stock at an average price of $46.02 for a total investment of $29.9 million. For the full year, the company repurchased 3.3 million shares, or 2.5%, of its common stock at an average price of $42.14 for a total investment of $140.4 million. Donaldson paid fourth quarter and full-year dividends of $22.9 million and $92.4 million, respectively.
Fiscal 2018 Outlook
Donaldson expects fiscal 2018 GAAP EPS between $1.79 and $1.93, compared with fiscal 2017 GAAP EPS of $1.74 and adjusted EPS of $1.69.
The company expects full-year 2018 sales will increase between 4 and 8% from 2017, including approximately 2% related to a favorable impact from currency translation and benefits from the acquisitions completed during fiscal 2017.
Sales of Engine Products are expected to increase 6-10% from 2017, reflecting growing sales of Aftermarket, Off-Road and On-Road, partially offset by declining sales of Aerospace and Defense. Fiscal 2018 Industrial Products segment sales are expected to be in the range between flat and up 4% from the prior year, reflecting growth in Industrial Filtration Solutions, flat sales of Special Applications and declining sales of Gas Turbine Systems.
Donaldson expects full-year 2018 operating margin between 14.0 and 14.4%, compared with fiscal 2017 operating margin of 13.9%. The company expects 2018 interest expense of approximately $21 million and other income between $5 million and $9 million. The forecast for fiscal 2018 effective income tax rate is between 27.4 and 29.4%.
The company expects fiscal 2018 capital expenditures of $80 million to $100 million and cash conversion between 75 and 90%. Donaldson plans to repurchase approximately 2% of its outstanding shares in fiscal 2018.
Accounting Considerations
During first quarter 2017, Donaldson recorded income of $6.8 million related to the settlement of 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 income was recorded as other income in Donaldson’s first quarter 2017 consolidated statement of earnings and within the Industrial Products segment earnings.
During fiscal 2016, pre-tax charges related to restructuring reduced Donaldson’s fourth quarter and full-year 2016 operating income by $3.5 million and $16.1 million, respectively. The company also incurred $3.1 million of expenses in fiscal 2016 related to an independent investigation into its Gas Turbine Systems business. The restructuring and investigation charges were excluded from certain fiscal 2016 non-GAAP measures.
