Donaldson Company Inc. has reported third quarter net earnings of $75.2 million, an increase of 7.6% from $69.9 million in 2018. Third quarter 2019 GAAP earnings per share (EPS) increased 9.4% to $0.58 from $0.53 last year.
“We remain on pace to deliver record levels of sales and profit in 2019, with third quarter performance reflecting strong growth in our strategically important ‘Advance and Accelerate’ businesses and modest year-over-year gross margin improvement in both segments,” says Tod Carpenter, chairman, president and chief executive officer. “While we built momentum in gross margin, a notable decline in customer backlogs and orders toward the end of the quarter resulted in lower-than-expected sales against our already modest forecast.
“Volatility continued into this quarter as uneven demand and apparent destocking suggest that our customers are taking an increasingly cautious stance in light of market uncertainties. Given these dynamics, we revised our fourth quarter sales and profit projections for Off-Road, Aftermarket and Industrial Filtration Solutions to reflect the current operating environment.
“In all market conditions, we focus on operational excellence and strong execution of our strategic priorities. To deliver our sales targets and meaningful operating margin growth through fiscal 2021, we are balancing cost-optimization with further investments in strategically important businesses, like process filtration and our innovative air and fuel products. We also remain committed to returning cash to shareholders, illustrated by the recently announced 10.5% increase to our quarterly dividend and a new share repurchase authorization. With our focused approach to planning and disciplined capital deployment, we believe we are well-positioned to deliver long-term profitable growth.”
Third quarter 2019 sales increased 1.8% to $712.8 million from $700.0 million in third quarter 2018. Currency translation negatively impacted the year-over-year sales growth by 4.1 percentage points, which was partially offset by the following items:
- Price increases added approximately 1.5 percentage points,
- The acquisition of BOFA International LTD (BOFA), which was completed during first quarter 2019, added approximately 1.4 percentage points, and
- Adoption of the revenue recognition accounting standard (revenue recognition) added approximately 0.5 percentage points.
Third quarter sales of Engine Products (Engine) increased 3.6% from last year, including a negative impact from currency translation of 4.1%, partially offset by benefits of 1.7% from pricing and 0.8% from revenue recognition. Aerospace and Defense sales increased across the business unit. On-Road sales reflect continued strength in the US/CA market, partially offset by declining sales in APAC. Market conditions became increasingly mixed for Aftermarket and Off-Road, with variability by geographic region combined with order volatility from some of Donaldson’s largest customers.
Third quarter sales of Industrial Products (Industrial) decreased 1.9% from last year, including benefits of 4.4% from BOFA and 1.1% from pricing, partially offset by a negative impact from currency translation of 4.2%. Sales of Industrial Filtration Solutions (IFS) increased 1.9%, reflecting benefits from BOFA and replacement parts, partially offset by lower sales of new equipment. Gas Turbine Systems (GTS) sales were down due to lower new equipment sales, and the Special Applications (SA) sales decline was due to Disk Drive filters.
Third quarter 2019 operating income as a rate of sales (operating margin) declined to 14.0% from 14.2% in 2018,4 with revenue recognition driving half the change.
Third quarter gross margin of 33.8% was below the prior year by 0.4 percentage points, or 0.2 percentage points when adjusting for revenue recognition. The year-over-year decline in gross margin was driven by higher raw materials and supply chain costs, partially offset by price increases. Operating expense as a percent of sales improved 0.3 percentage points to 19.7% from 20.0% in 2018, reflecting lower incentive compensation expense, partially offset by higher salary and other employee-related expenses.
Other income declined to $4.7 million in third quarter 2019 from $4.8 million in 2018, while third quarter 2019 interest expense declined to $5.2 million from $5.4 million in 2018. Donaldson’s third quarter 2019 tax rate declined to 24.5% from 29.4% last year, due primarily to a lower U.S. corporate tax rate, combined with benefits from stock option activity and other discrete tax benefits.
During third quarter 2019, Donaldson repurchased 49 thousand shares of its common stock at an average price of $49.99 for a total investment of $2.4 million. Year to date, the company repurchased 1.6% of its outstanding shares for a total investment of $104.4 million. Donaldson paid dividends in third quarter of $24.2 million and year-to-date of $72.9 million.
Fiscal 2019 Outlook
Donaldson now expects fiscal 2019 EPS between $2.20 and $2.24, compared with prior guidance of $2.27 to $2.41.
The company now expects full-year sales will increase between 3.5 and 4.5%, which includes a negative impact from currency of approximately 3% and a benefit from BOFA of 1%. The midpoint of the revised sales guidance range is approximately 3% below prior guidance, driven by changes to the Aftermarket, Off-Road and IFS forecasts. Sales forecasts for all other business units are consistent with prior guidance.
Fiscal 2019 Engine sales are projected to increase between 3.5 and 4.5%, including a negative impact of approximately 3% from currency that is partially offset by 1% from revenue recognition. Fiscal 2019 sales of On-Road, Aftermarket and Aerospace and Defense are expected to increase from 2018, while Off-Road sales are expected to decline.
Fiscal 2019 Industrial sales are projected to increase between 4.0 and 5.0%, including a benefit from BOFA of approximately 4% that is partially offset by a negative impact from currency translation of 3%. Fiscal 2019 sales in IFS are expected to increase from 2018, while the company continues to forecast sales declines in GTS and SA.
Donaldson expects fiscal 2019 operating margin between 13.8 and 14.2%, or 0.4 percentage points below the prior guidance range. The midpoint of the revised range implies a year-over-year increase of 0.2 percentage points, or 0.3 percentage points when adjusting for the dilution from revenue recognition.
The company updated its forecast for full-year interest expense to $20 million from $21 million. Other income is forecast between $6 million and $8 million, with a midpoint that is consistent with prior guidance. Donaldson’s fiscal 2019 effective income tax rate is forecast between 24.4 and 25.4%, with a midpoint that is 0.6 percentage points below prior guidance.
The company expects fiscal 2019 capital expenditures of about $150 million, which is the high end of the prior guidance range, and cash conversion between 60 and 65%. Donaldson expects to repurchase approximately 2% of its outstanding shares during fiscal 2019.