Donaldson Company Inc. announces third quarter 2018 net earnings of $69.9 million, compared with net earnings of $60.1 million in the prior year. Third quarter GAAP earnings per share (EPS)1 increased 17.8% to $0.53 in 2018 from $0.45 in 2017.
“We are pleased to have delivered another quarter of strong sales growth in both segments, reflecting benefits from consistent execution of our strategic priorities combined with favorable market conditions,” says Tod Carpenter, Chairman, President and Chief Executive Officer. “Based on incremental strength across our company, particularly in our Engine first-fit and Industrial businesses, and continued momentum in many of our end markets, we now forecast full-year sales to increase about 15% and adjusted EPS to be up 17-19%.
“As we close the year, our strategic agenda is unchanged: invest in our customers, technology innovation, e-commerce and capacity expansion. Additionally, we are addressing the inflationary and demand-related pressures that have been affecting our margin. We made progress last quarter by implementing further cost-cutting initiatives and global price increases, and we view this work as ongoing. Our employees are showing tremendous commitment to enhancing our operating margin while executing our strategic priorities, and I am confident that their efforts position us well to deliver our financial and strategic targets this year and into the future.”
1 All earnings per share figures refer to diluted earnings per share.
Third Quarter 2018 Performance
Third quarter 2018 sales increased 15.1% to $700.0 million from $608.2 million last year. The year-over-year increase includes benefits from currency translation and acquisitions completed in the prior year of approximately 5.7% and 1.4%, respectively.
Compared with the prior year, third quarter 2018 sales increased 16.4% in the Engine Products segment and 12.4% in the Industrial Products segment, or 11.3% and 5.4%, respectively, excluding the benefit from currency translation. The table below illustrates year-over-year performance with and without the impact from currency translation.
Third quarter 2018 operating income rate declined slightly to 14.4% from 14.5% in 2017, reflecting lower gross margin that was partially offset by operating expense leverage. Gross margin declined 0.6 percentage points to 34.2% from 34.8%, reflecting negative impacts from higher raw materials and supply chain costs combined with an unfavorable mix of sales. Operating expense as a rate of sales (expense rate) improved 0.4 percentage points to 19.8% from 20.2%, reflecting leverage on increasing sales, partially offset by higher freight expense and salary expense, which included investments in headcount to support Donaldson’s strategic growth priorities.
Donaldson’s third quarter 2018 other income increased to $3.5 million from $0.6 million in 2017, with a lower loss on foreign exchange being the largest driver. Third quarter interest expense was $5.4 million in 2018, compared with $4.8 million in 2017. The company’s third quarter 2018 effective income tax rate increased to 29.4% from 28.7% in 2017, reflecting an unfavorable mix of earnings across tax jurisdictions combined with provisional charges related to the Federal Tax Cuts and Jobs Act (“TCJA”),2 partially offset by a lower U.S. corporate tax rate and benefits from stock option activity.
During third quarter 2018, Donaldson repurchased 1.0 million shares, or 0.8%, of its common stock at an average price of $44.85 for a total investment of $44.9 million. Year to date, the company has repurchased 2.3 million shares, or 1.8%, of its common stock at an average price of $46.18 for a total investment of $107.7 million. Donaldson paid dividends of $23.4 million in third quarter and $70.2 million year to date. Additionally, Donaldson made discretionary contributions to its U.S. pension plans of $35.0 million during third quarter.
Fiscal 2018 Outlook
Donaldson now expects fiscal 2018 adjusted EPS between $1.97 and $2.012 reflecting an increase of 2 cents when comparing the midpoints of the current and prior guidance ranges. Year-to-date charges related to provisional estimates of the impact from the TCJA result in fiscal 2018 GAAP EPS that is approximately $0.83 lower than adjusted EPS.
Donaldson expects full-year 2018 sales will increase about 15%, compared with prior forecast of 13-15%. The forecast includes benefits from currency translation and acquisitions completed in fiscal 2017 of approximately 3% and 1%, respectively.
Sales of Engine Products are expected to increase between 18 and 19%, compared with prior forecast of 17-19%. The full-year sales forecast reflects growth in On-Road, Off-Road and Aftermarket, partially offset by declining sales in Aerospace and Defense. Industrial Products sales are expected to increase between 8 and 9%, compared with prior forecast of 5-7%. The full-year sales forecast reflects growth in Industrial Filtration Solutions and Special Applications, partially offset by declining sales in Gas Turbine Systems.
Donaldson expects full-year 2018 operating margin between 13.8 and 14.2%, interest expense of approximately $21 million and other income of $1 million to $5 million. Excluding one-time charges related to the TCJA, Donaldson’s fiscal 2018 effective income tax rate is projected between 26.7 and 28.7%, compared with prior guidance of 26.5-28.5%. The full-year tax rate includes a partial-year benefit from the U.S. corporate tax rate reduction that is largely offset by foreign withholding tax and other matters related to the TCJA.
The company expects fiscal 2018 capital expenditures of $100 million to $110 million and cash conversion between 60 and 75%, which excludes the impact from the TCJA and the pension contributions made during third quarter 2018. Donaldson plans to repurchase approximately 2% of its outstanding shares in fiscal 2018.
2 Adjusted earnings per share is a non-GAAP financial measure that excludes the impact of certain matters not related to the Company’s ongoing operations.
Accounting Considerations
Based on provisional estimates of the impact from the TCJA, Donaldson recorded third quarter and year-to-date 2018 charges of $0.4 million and $110.1 million, respectively, primarily due to the repatriation of undistributed foreign earnings and re-measurement of net deferred tax assets.
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 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.
These items were excluded from the calculation of adjusted EPS.
