Donaldson Company Inc. has announced first quarter 2018 net earnings of $60.9 million, or $0.46 per share, compared with 2017 net earnings of $58.0 million, or $0.43 per share. The prior year results included a one-time gain of approximately 5 cents per share related to the settlement of claims in an escrow account (the Settlement) that had been established with Donaldson’s acquisition of Northern Technical, L.L.C. in 2015. Excluding the impact from the Settlement in the prior year, Donaldson’s first quarter 2018 earnings per share (EPS) increased 21.1% from 2017.
“We delivered record first quarter revenue and are now forecasting full-year sales, operating margin and earnings above our initial projections,” says Tod Carpenter, Chairman, President and Chief Executive Officer. “The Engine segment continues to gain momentum, with sales of both first-fit products and replacement parts up significantly from last year. We are also seeing market conditions improve in the Industrial segment, particularly in our Industrial Filtration Solutions business.
“We expect favorable market conditions to extend through the balance of our fiscal year, giving us confidence that we can deliver strong earnings growth while investing back into our company. As we outlined last quarter, we plan to spend an incremental $10 million to $15 million of expense this year on capacity expansion, customer engagement through e-commerce and technology development. These investments directly align with our strategic priorities, and I am confident that they will create long-term value for our shareholders.”
First Quarter 2018 Performance
First quarter 2018 sales increased 16.6% to $644.8 million from $553.0 million last year. The year-over-year increase includes a benefit of approximately 1.7% from currency translation and 1.6% from acquisitions completed by the company during fiscal 2017.
Compared with the prior year, first quarter 2018 sales increased 24.9% in the Engine Products segment and 1.8% in the Industrial Products segment, or 23.2% and 0.1%, respectively, excluding the benefit from currency translation.
Donaldson’s first quarter 2018 operating income rate increased to 14.1% from 13.8% last year. Gross margin declined 0.3 percentage points to 34.8% from 35.1%, reflecting an unfavorable mix of products, higher raw materials costs and incremental expense associated with higher-than-expected demand, partially offset by fixed cost absorption on higher sales than the prior year. Operating expense as a rate of sales (expense rate) declined approximately 0.6 percentage points to 20.7% from 21.3%, driven by expense leverage on increasing sales, partially offset by higher incentive compensation. Additionally, Donaldson this fiscal year moved its annual stock option incentive grant to first quarter from second quarter, which added approximately 0.5 percentage points to the first quarter 2018 expense rate.
Donaldson’s first quarter 2018 net other expense was $0.8 million, compared with net other income in 2017 of $8.1 million, which included a benefit of $6.8 million from the Settlement. First quarter interest expense was $5.2 million in 2018, compared with $4.8 million in 2017. The company’s first quarter 2018 effective income tax rate increased to 28.1% from 27.3% in 2017.
During first quarter 2018, Donaldson repurchased 933 thousand shares, or 0.7%, of its common stock at an average price of $45.72 for a total investment of $42.6 million. Donaldson paid dividends of $23.4 million in first quarter 2018.
Fiscal 2018 Outlook
Donaldson expects fiscal 2018 GAAP EPS between $1.90 and $2.04, an increase of approximately 6% from prior guidance of $1.79 to $1.93. The midpoint of the revised guidance range reflects an increase from prior year GAAP and adjusted EPS of 13.2% and 16.6%, respectively.
The company is now forecasting full-year sales to increase 10-14%, compared with the prior forecast of 4-8%. The favorable impact from currency translation and benefit from acquisitions Donaldson completed during fiscal 2017 is now expected to contribute approximately 4% to the year-over-year growth, compared with 2% in prior guidance. The change reflects an increased benefit from currency translation.
Sales of Engine Products are expected to increase 13-17% from 2017, compared with an increase between 6-10% in prior guidance. The Engine Products forecast reflects growth in all businesses: Aftermarket, Off-Road, On-Road, and Aerospace and Defense. Fiscal 2018 Industrial Products segment sales are now expected to increase between 4 and 8%, compared with flat to up 4% in prior guidance. Sales of Industrial Filtration Solutions and Special Applications are expected to increase, while Gas Turbine Systems sales are forecast to decline.
Donaldson now expects full-year 2018 operating margin between 14.1 and 14.5%, an increase from prior guidance of 14.0-14.4%. Compared with the prior year, the midpoint of the operating margin guidance range reflects an increase of 0.4 percentage points. The company forecasts 2018 interest expense of approximately $21 million and other income between $3 million and $7 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. The income was excluded from the calculation of adjusted EPS, a non-GAAP measure that excludes certain items not related to the ongoing operations of the Company. The tables attached to this press release include a reconciliation of GAAP to non-GAAP measures.
