Donaldson Company, Inc. reports 2019 net earnings of $58.0 million in fourth quarter and $267.2 million for the full year, compared with $102.4 million and $180.3 million, respectively, in 2018. Excluding certain one-time items in the current and prior years, adjusted earnings per share (EPS)2 were $0.61 in fourth quarter and $2.21 for the full-year 2019, an increase of 5.2% and 10.5%, respectively, from 2018.
“We generated record sales and profit in 2019, due in part to strong performance in our Advance and Accelerate3 businesses, and we made a record level of investments to drive long-term profitable growth,” says Tod Carpenter, chairman, President and Chief Executive Officer. “We were pleased with sales results last quarter, which matched our forecast, and earnings were also in line as a better-than-expected tax rate offset the impact of demand volatility on gross margin.
“Our fiscal 2020 plan reflects focused portfolio management in an uneven demand environment. It is likely that uncertainty related to global trade and the political environment will keep our customers cautious, and some of our engine-related end markets are nearing the peak of their economic cycle. As these factors affect demand, our innovative products with recurring revenue, combined with disciplined expense planning, give us greater stability and flexibility as we remain focused on the future. We are making incremental investments to drive our strategic priorities in 2020, and we are aggressively pursuing gross margin improvement opportunities. Our company is aligned on our strategic and operational objectives, and we are excited about our path to delivering another year of record profit.”
Fourth quarter 2019 sales increased 0.3% to $726.9 million from $724.7 million in 2018. Included within the year-over-year change are the following items:
- The acquisition of BOFA International LTD (BOFA), which was completed during first quarter 2019, added approximately 1.3 percentage points,
- Price increases added approximately 0.9 percentage points,
- Adoption of the revenue recognition accounting standard (revenue recognition) added approximately 0.6 percentage points, and
- Currency translation reduced sales by approximately 2.0%.
Fourth quarter sales of Engine Products (Engine) decreased 1.1% from last year on a reported basis, and the sales increased 0.9% when excluding the negative impact from currency translation. Engine realized benefits from pricing and revenue recognition of 1.1% and 0.9%, respectively. Engine faced mixed conditions across geographies and markets, with On-Road experiencing continued strength in the US/CA market while Off-Road and Aftermarket were stronger internationally. Timing of orders contributed to the year-over-year growth in Aerospace and Defense.
Fourth quarter sales of Industrial Products (Industrial) increased 3.3% from last year. Industrial realized benefits of 3.9% from BOFA and 0.5% from pricing, partially offset by a negative impact from currency translation of 2.2%. Sales of Industrial Filtration Solutions (IFS) increased 6.2%, reflecting benefits from BOFA and replacement parts, partially offset by lower sales of new equipment. Gas Turbine Systems (GTS) sales increased due to the timing of new equipment sales, and the Special Applications (SA) sales decline was due to Disk Drive filters.
Fourth quarter 2019 operating income as a rate of sales (operating margin) declined to 14.4% from 14.9% in 2018,4 including a negative impact of 0.1 percentage point from revenue recognition.
Fourth quarter gross margin was 33.5%, compared with 34.9% in 2018, including a negative impact of 0.2 percentage points from revenue recognition. The year-over-year gross margin decline was driven by unfavorable mix of product sales within markets, combined with higher raw materials and supply chain costs. These gross margin pressures were partially offset by pricing benefits. Operating expense as a percent of sales (expense rate) improved 0.8 percentage points to 19.2% from 20.0 percent in 2018, reflecting lower incentive compensation expense, partially offset by higher salary and other employee-related expenses.
Fourth quarter other expense was $0.5 million, compared with income of $0.9 million in the prior year. The year-over-year change was driven by charges related to Donaldson’s global cash optimization efforts. Fourth quarter 2019 interest expense declined to $5.2 million from $5.6 million in 2018.
Donaldson’s fourth quarter income tax expense included a charge of $19.1 million related to final tax regulations that clarify provisions of the Federal Tax Cuts and Jobs Act. Excluding this impact, the fourth quarter 2019 adjusted tax rate was 21.4%, compared with an adjusted tax rate of 26.2% in 2018. The year-over-year decline was driven by benefits from a lower U.S. corporate tax rate, combined with the favorable settlement of a tax audit.
During fourth quarter 2019, Donaldson repurchased 500 thousand shares of its common stock at an average price of $49.45 for a total investment of $24.7 million. For the full year, the company repurchased 2.0% of its outstanding shares for a total investment of $129.2 million. Donaldson paid dividends of $26.8 million in fourth quarter and $99.7 million for the full year.
Fiscal 2020 Outlook
Donaldson expects fiscal 2020 GAAP EPS between $2.21 and $2.37, compared with fiscal 2019 GAAP and adjusted EPS of $2.05 and $2.21, respectively.
Compared with 2019, fiscal 2020 sales are projected in a range between a 2% decline and a 4% increase, including a negative impact from currency translation of 1-2% that is partially offset by price benefits of approximately 1%. Compared with 2019, fiscal 2020 Engine sales are projected in a range between a 4% decline and a 2% increase, reflecting growth in Aerospace and Defense and Aftermarket, combined with lower year-over-year sales in the company’s first-fit On-Road and Off-Road businesses. Industrial sales are expected to increase from fiscal 2019 between 2 and 8%, reflecting growth in IFS and GTS, partially offset by declining sales in SA. Within Industrial, growth in IFS is due in part to one quarter of incremental benefits from the acquisition of BOFA. Currency translation is expected to negatively impact both segments by 1-2%.
Prior-period profit rates and other income conform to the adoption of new accounting standards, which are described in the “Accounting Considerations” section of this press release.
Donaldson expects fiscal 2020 operating margin between 13.9 and 14.5%, compared with 13.6% in 2019. The year-over-year improvement is due to higher gross margin, partially offset by a higher expense rate.
The company expects full-year 2020 interest expense between $18 million and $20 million, and other income is forecast between $4 million and $8 million. Donaldson’s fiscal 2020 effective income tax rate is forecast between 25.0 and 27.0%.
The company expects fiscal 2020 capital expenditures between $110 million and $130 million, and cash conversion is forecast between 80 and 95%. Donaldson expects to repurchase approximately 2% of its outstanding shares during fiscal 2020.