Donaldson achieved record first quarter
sales and EPS1
First quarter 2019 sales and EPS grew 8.8
percent and 21.7 percent, respectively
First quarter operating margin was 14.1
percent, 0.3 percentage points above last year
Donaldson Company, Inc. (NYSE: DCI) today reported record first
quarter net earnings of $73.8 million, or $0.56 per share, compared
with $60.9 million, or $0.46 per share, in 2018. First quarter
2019 net earnings include a discrete tax benefit of $0.9 million
related to the Federal Tax Cuts and Jobs Act (TCJA),2 which has
been excluded from the calculation of adjusted earnings.3 The
tables attached to this press release include a reconciliation of
GAAP to non-GAAP measures.
“We had a strong start to the fiscal year, with benefits from
consistent execution of our strategic priorities and significant
expense leverage contributing to record first quarter sales and
earnings,” said Tod Carpenter, chairman, president and chief
executive officer. “Strength from program wins and further
penetration into existing and adjacent markets built on favorable
market conditions, and we are on track to deliver record sales and
profit in 2019.
“We remain encouraged by the operating environment, despite
geopolitical uncertainty and inflationary pressure, and we are
investing for the future. We are pursuing organic opportunities
with technology development and capacity expansion, and the recent
acquisition of BOFA complements our already-strong portfolio of
Industrial businesses. Through our focused expense planning and
efforts to offset inflation with pricing, we can make these
investments while driving incremental profit to the bottom line. We
have momentum across the company, and I am confident that executing
our strategic agenda will further strengthen our position as a
leader in the global filtration industry.”
1 All earnings per share figures refer
to diluted earnings per share. 2 See the “Accounting
Considerations” section for more information about the TCJA and
adoption of new accounting standards. 3 Adjusted earnings
are a non-GAAP financial measure that exclude the impact of certain
items not related to ongoing operations.
Fiscal 2019 Performance
First quarter 2019 sales increased 8.8 percent to $701.4 million
from $644.8 million in 2018. The first quarter year-over-year
sales change was impacted by the following items:
- Currency translation negatively
impacted sales by approximately 1.9 percentage points,
- Adoption of the new revenue recognition
accounting standard added approximately 0.7 percentage points,
and
- The recently completed acquisition of
BOFA International LTD (BOFA) added approximately 0.2 percentage
points.
Sales in both the Engine Products (Engine) and Industrial
Products (Industrial) segments increased 8.8 percent from 2018, or
10.9 percent and 10.3 percent, respectively, in constant currency.
The revenue recognition change added approximately 0.9 percentage
points to Engine’s sales growth rate, and BOFA added approximately
0.7 percentage points to Industrial’s sales growth rate.
Three Months Ended October 31, 2018
Constant Reported
Currency
% Change
% Change
Off-Road 1.6 % 3.4 % On-Road 37.7 39.4 Aftermarket 7.2 9.5
Aerospace and Defense 11.7 12.6 Total
Engine Products segment 8.8 % 10.9 % Industrial
Filtration Solutions 11.1 % 12.9 % Gas Turbine Systems (3.1
)
(2.2
)
Special Applications 8.8 9.9 Total
Industrial Products segment 8.8 % 10.3 % Total
Company 8.8 % 10.7 %
First quarter 2019 operating income as a rate of sales
(operating margin) increased to 14.1 percent from 13.8 percent
in 2018.4 First quarter 2019 gross margin of 34.0 percent was below
last year’s rate by 0.8 percentage points, or 0.6 percentage
points when adjusting for the impact from new revenue recognition
accounting. First quarter 2019 gross margin was negatively impacted
by higher raw materials and supply chain costs, combined with an
unfavorable mix of sales, partially offset by pricing benefits.
Operating expense as a percentage of sales improved 1.1 percentage
points to 19.9 percent from 21.0 percent in 2018, reflecting
leverage on increasing sales and lower warranty costs, partially
offset by costs related to the BOFA acquisition and higher freight
costs.
4 Prior-period rates reflect adoption
of the pension accounting standard beginning in fiscal 2019.
First quarter 2019 other income was $1.9 million, compared with
$0.8 million in 2018. The Company’s global cash optimization
efforts following the TCJA resulted in lower first quarter 2019
interest expense, which was $4.2 million compared with $5.2 million
last year, and a discrete tax benefit of $0.9 million. Excluding
this benefit, the adjusted tax rate declined to 24.3 percent
from 28.1 percent last year, driven primarily by a lower U.S.
corporate tax rate and stock option activity, partially offset by
other matters related to the TCJA.
During first quarter 2019, Donaldson repurchased 1.6 million
shares, or 1.2 percent, of its common stock at an average price of
$49.40 for a total investment of $80.9 million. Donaldson paid
dividends during first quarter of $24.4 million.
Fiscal 2019
Outlook5
Donaldson increased its fiscal 2019 forecast to reflect the
impact from the BOFA acquisition.
The Company now expects full-year EPS between $2.31 and $2.45,
an increase of 2 cents from prior guidance. Sales from BOFA are
expected to add about 1 percent to total Donaldson sales, or 4
percent to Industrial sales. Excluding this impact, the Company’s
full-year 2019 sales forecast is consistent with prior
guidance.
Full-year sales in total and for both segments are expected to
increase between 7 and 11 percent, including a negative impact from
currency translation of approximately 2 percent. The Engine sales
forecast reflects growth in On-Road, Off-Road and Aftermarket,
along with flat sales of Aerospace and Defense. Additionally, the
revenue recognition accounting change is expected to add
approximately 1 percent to Engine sales. The Industrial forecast,
which includes BOFA sales, reflects growth in Industrial Filtration
Solutions, flat sales of Special Applications and a decline in Gas
Turbine Systems.
Donaldson now expects full-year 2019 operating margin between
14.2 and 14.6 percent, up 0.1 percentage point from prior
guidance. Adoption of the revenue recognition standard dilutes the
year-over-year change by approximately 0.1 percentage point.
The Company’s full-year 2019 interest expense forecast increased
by $1 million to $23 million, while the other income forecast
remains at $12 million to $16 million. Donaldson’s fiscal 2019
effective income tax rate is still projected between 24.7 and 26.7
percent.
The Company continues to forecast fiscal 2019 capital
expenditures of $130 million to $150 million and cash
conversion between 60 and 75 percent. Donaldson remains committed
to repurchasing approximately 2 percent of its outstanding
shares during fiscal 2019.
5 Fiscal 2019 guidance for revenue,
operating margin and other income conforms to the adoption of new
FASB standards related to revenue recognition and pension
accounting.
Accounting
Considerations
On August 1, 2018, Donaldson adopted the FASB standards ASU
2014-09, Revenue from Contracts with Customers (“revenue
recognition”), and ASU 2017-07, Compensation – Retirement Benefits
(“pension accounting”).
Donaldson elected to adopt the new revenue recognition standard
using the modified retrospective method; therefore, fiscal 2019
results will be presented in conformity with the new standard,
while results prior to August 1, 2018, will conform to the previous
standard. Adoption of the new standard resulted in additional sales
of $4.2 million in first quarter 2019 with a minimal impact to
gross profit. This change effectively reduces the Company’s gross
margin and operating margin when compared to rates reported in
prior fiscal years.
Under the new pension accounting standard, Donaldson will
continue to report the service component of retirement costs in
operating income and the non-service components will now be
reported in other income. The new standard requires use of a
retrospective method in accounting for the change; therefore,
results in all periods presented will conform with the new
standard. Restating fiscal 2018 results reduces full-year 2018
operating margin by approximately 0.1 percentage point,
reflecting a decline of 0.2 percentage points in each of the first
three quarters, while the restated fourth quarter 2018 operating
margin increases by approximately 0.2 percentage points. These
adjustments are offset by a corresponding change to other
income.
Following the TCJA, the Company engaged in additional efforts
related to global cash optimization. Changes implemented during
first quarter 2019 resulted in a discrete tax benefit of $0.9
million, which is excluded from the Company’s calculation of
adjusted earnings. The Company expects to finalize the impact from
the TCJA during second quarter 2019, while global cash optimization
is a continuous focus for Donaldson.
Miscellaneous
The Company will webcast its first quarter 2019 earnings
conference call today at 9:00 a.m. CST. To listen to the
webcast, visit the Events & Presentations section of
Donaldson’s Investor Relations website (IR.Donaldson.com), and
click on the “listen to webcast” option. The webcast replay will
become available at approximately 12:00 p.m. CST today.
Statements in this release regarding future events and
expectations, such as forecasts, plans, trends and projections
relating to the Company’s business and financial performance, are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, and are identified by
words or phrases such as “will likely result,” “are expected to,”
“will continue,” “will allow,” “estimate,” “project,” “believe,”
“expect,” “anticipate,” “forecast,” “plan,” and similar
expressions. These forward-looking statements speak only as of the
date such statements are made and are subject to risks and
uncertainties that could cause the Company’s results to differ
materially from these statements. These factors include, but are
not limited to, economic and industrial market conditions
worldwide; the Company's ability to maintain certain competitive
advantages; threats from disruptive innovation; pricing pressures;
the Company's ability to protect and enforce its intellectual
property rights; the difficulties in operating globally; customer
concentration in certain cyclical industries; unavailable raw
materials or material cost inflation; inability of operations to
meet customer demand; difficulties with information technology
systems and security; foreign currency fluctuations; governmental
laws and regulations; changes in tax laws and regulations and
results of examinations; the Company's ability to attract and
retain qualified personnel; changes in capital and credit markets;
execution of the Company's acquisition strategy; the possibility of
intangible asset impairment; the Company’s ability to manage
productivity improvements; unexpected events and the disruption on
operations; the Company's ability to maintain an effective system
of internal control over financial reporting. These and other risks
and uncertainties are described in Item 1A of the Company’s Annual
Report on Form 10-K for the year ended July 31, 2018. The Company
makes these statements as of the date of this disclosure and
undertakes no obligation to update them unless otherwise required
by law. The results presented herein are preliminary, unaudited and
subject to revision until the Company files its results with the
United States Securities and Exchange Commission on Form 10-Q.
About Donaldson Company
Founded in 1915, Donaldson Company is a global leader in the
filtration industry with sales, manufacturing and distribution
locations around the world. Donaldson’s innovative technologies are
designed to solve complex filtration challenges and enhance
customers’ equipment performance. For more information, visit
www.Donaldson.com.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In
millions, except per share amounts) (Unaudited)
Three Months Ended October 31,
2018 2017 Change Net sales $ 701.4 $ 644.8 8.8 % Cost of
sales 463.0 420.5 10.1 Gross profit
238.4 224.3 6.2 Operating expenses 139.7 135.2 3.4
Operating income 98.7 89.1 10.6 Interest expense 4.2
5.2 (20.8 ) Other income, net (1.9 ) (0.8 ) 196.8
Earnings before income taxes 96.4 84.7 14.0 Income taxes 22.6
23.8 (4.8 ) Net earnings $ 73.8 $ 60.9
21.3 % Weighted average shares – basic 128.8
130.8 (1.5 ) % Weighted average shares – diluted 131.0 132.7 (1.3 )
% Net earnings per share – basic $ 0.57 $ 0.47 21.3 % Net earnings
per share – diluted $ 0.56 $ 0.46 21.7 % Dividends paid per
share $ 0.190 $ 0.180 5.6 %
CONDENSED CONSOLIDATED
BALANCE SHEETS (In millions) (Unaudited)
October 31,
July 31,
2018 2018
Assets Current assets: Cash and cash equivalents $
199.9 $ 204.7 Accounts receivable, net 542.4 534.6 Inventories, net
360.5 334.1 Prepaid expenses and other current assets 67.6
52.3 Total current assets 1,170.4 1,125.7 Property, plant and
equipment, net 517.9 509.3 Goodwill 305.4 238.4 Intangible assets,
net 81.3 35.6 Deferred income taxes 19.0 19.2 Other long-term
assets 50.0 48.4 Total assets $ 2,144.0 $ 1,976.6
Liabilities and shareholders' equity Current
liabilities: Short-term borrowings $ 59.0 $ 28.2 Current maturities
of long-term debt 15.0 15.3 Trade accounts payable 230.6 201.3
Other current liabilities 183.0 224.6 Total current
liabilities 487.6 469.4 Long-term debt 630.6 499.6 Non-current
income taxes payable 106.4 105.3 Deferred income taxes 12.9 4.2
Other long-term liabilities 39.2 40.3 Total liabilities
1,276.7 1,118.8 Redeemable non-controlling interest 12.9 —
Total shareholders' equity 854.4 857.8 Total
liabilities & shareholders' equity $ 2,144.0 $ 1,976.6
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (In millions) (Unaudited)
Three Months Ended October 31, 2018 2017
Operating
Activities Net earnings $ 73.8 $ 60.9 Adjustments to reconcile
net earnings to net cash provided by operating activities:
Depreciation and amortization 19.3 18.9 Deferred income taxes (0.4
) 0.2 Stock-based compensation expense 6.9 6.7 Other, net (1.0 )
0.8 Changes in operating assets and liabilities, excluding effect
of acquired businesses (35.3 ) (23.6 ) Net cash provided by
operating activities 63.3 63.9
Investing Activities
Net expenditures on property, plant and equipment (28.2 ) (19.9 )
Acquisitions, net of cash acquired (96.0 ) 0.8 Net cash used
in investing activities (124.2 ) (19.1 )
Financing
Activities Proceeds from long-term debt 135.0 105.0 Repayments
of long-term debt (14.5 ) (35.2 ) Change in short-term borrowings
32.1 (9.1 ) Purchase of treasury stock (80.9 ) (42.6 ) Dividends
paid (24.4 ) (23.4 ) Tax withholding for stock compensation
transactions (2.2 ) (0.5 ) Exercise of stock options 16.2
3.9 Net cash provided by (used in) financing activities 61.3
(1.9 ) Effect of exchange rate changes on cash (5.2 ) (1.7 )
(Decrease) increase in cash and cash equivalents (4.8 ) 41.2 Cash
and cash equivalents, beginning of period 204.7 308.4
Cash and cash equivalents, end of period $ 199.9 $ 349.6
CONSOLIDATED RATE ANALYSIS (Unaudited)
Three Months Ended October 31, 2018
2017 Gross margin 34.0 % 34.8 % Operating expenses
rate 19.9 % 21.0 % Operating income rate 14.1 % 13.8 %
Effective tax rate 23.5 % 28.1 % Three Months
Ended October 31, 2018 2017
ADJUSTED
RATES
Gross margin 34.0 % 34.8 % Operating expenses rate 19.9 %
21.0 % Operating income rate 14.1 % 13.8 % Effective
tax rate 24.3 % 28.1 %
Note: Rate analysis metrics are computed by dividing the
applicable amount by net sales. Adjusted rates are non-GAAP
measures; see Reconciliation of Non-GAAP Financial Measures
schedule for additional information.
SEGMENT
DETAIL (In millions) (Unaudited) Three
Months Ended October 31, 2018 2017 Change
NET SALES
Engine Products segment Off-Road $ 76.2 $ 75.0 1.6 % On-Road 45.9
33.3 37.7 Aftermarket 331.2 309.1 7.2 Aerospace and Defense 27.6
24.7 11.7 Total Engine Products segment
$ 480.9 $ 442.1 8.8 % Industrial
Products segment Industrial Filtration Solutions $ 149.4 $ 134.5
11.1 % Gas Turbine Systems 25.5 26.3 (3.1 ) Special Applications
45.6 41.9 8.8 Total Industrial Products
segment $ 220.5 $ 202.7 8.8 % Total
Company $ 701.4 $ 644.8 8.8 %
EARNINGS BEFORE
INCOME TAXES
Engine Products segment $ 63.9 $ 62.7 1.8 % Industrial Products
segment 36.6 29.4 24.5 Corporate and Unallocated (4.1 ) (7.4 ) 46.7
Total Company $ 96.4 $ 84.7 14.0
%
EARNINGS BEFORE
INCOME TAXES %
Engine Products segment 13.3 % 14.2 % (0.9 ) Industrial Products
segment 16.6 % 14.5 % 2.1 Note: Percentage is calculated by
dividing earnings before income taxes by sales.
SEGMENT SALES PERCENT CHANGE FROM PRIOR PERIODS BY GEOGRAPHY
AS REPORTED AND CONSTANT CURRENCY (Unaudited)
AS
REPORTED
Three Months Ended October 31, 2018 Engine Products segment
TOTAL US/CA EMEA APAC LATAM Off-Road 1.6 % (8.7 ) % 11.7 % 15.0 %
(56.9 ) % On-Road 37.7 43.5 23.8 40.5 (20.1 ) Aftermarket 7.2 12.7
0.2 5.5 4.0 Aerospace and Defense 11.7 13.8 9.4 (30.4
) Total Engine Products segment 8.8 % 12.5 %
4.4 % 11.2 % (0.6 ) % Industrial Products segment
Industrial Filtration Solutions 11.1 % 9.5 % 8.3 % 24.9 % (0.9 ) %
Gas Turbine Systems (3.1 ) (3.3 ) 22.7 (44.9 ) (39.5 ) Special
Applications 8.8 15.5 1.2 9.7 2.1 Total
Industrial Products segment 8.8 % 7.5 % 9.3 % 11.9
% (7.1 ) % Total Company 8.8 % 11.2 %
6.2 % 11.5 % (1.5 ) %
CONSTANT
CURRENCY
Three Months Ended October 31, 2018 Engine Products segment
TOTAL US/CA EMEA APAC LATAM Off-Road 3.4 % (8.7 ) % 14.3 % 18.4 %
(51.0 ) % On-Road 39.4 43.5 26.8 44.6 (13.9 ) Aftermarket 9.5 12.7
3.0 11.0 9.6 Aerospace and Defense 12.6 13.8 11.9
(28.3 ) Total Engine Products segment 10.9 % 12.5
% 7.1 % 16.1 % 5.1 % Industrial
Products segment Industrial Filtration Solutions 12.9 % 9.5 % 11.2
% 28.8 % 2.3 % Gas Turbine Systems (2.2 ) (3.3 ) 24.0 (41.5 ) (39.5
) Special Applications 9.9 15.5 3.2 10.6 19.5
Total Industrial Products segment 10.3 % 7.5 %
11.9 % 14.1 % (4.1 ) % Total Company 10.7 %
11.2 % 8.9 % 15.2 % 3.8 %
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (In millions,
except per share amounts) (Unaudited) Three Months
Ended October 31, 2018 2017 Net cash provided by
operating activities $ 63.3 $ 63.9 Net capital expenditures
(28.2 ) (19.9 ) Free cash flow $ 35.1 $ 44.0
Net earnings $ 73.8 $ 60.9 Income taxes 22.6 23.8 Interest
expense 4.2 5.2 Depreciation and amortization 19.3
18.9 EBITDA $ 119.9 $ 108.8 Net
earnings $ 73.8 $ 60.9 Tax benefit for Federal Tax Cuts and Jobs
Act (0.9 ) (a) — Adjusted net earnings $ 72.9
$ 60.9 Diluted EPS $ 0.56 $ 0.46 Tax benefit
for Federal Tax Cuts and Jobs Act 0.00 —
Adjusted diluted EPS $ 0.56 $ 0.46
(a) See the “Accounting Considerations” section of this press
release for additional information.
Although free cash flow, EBITDA, adjusted net earnings, adjusted
diluted EPS and adjusted effective tax rate are not measures of
financial performance under GAAP, the Company believes they are
useful in understanding its financial results. Free cash flow is a
commonly used measure of a company’s ability to generate cash in
excess of its operating needs. EBITDA is a commonly used measure of
operating earnings less non-cash expenses. The Company evaluates
its results of operations both on an as reported and a constant
currency basis. The constant currency presentation, which is a
non-GAAP measure, excludes the impact of fluctuations in foreign
currency exchange rates. The Company believes providing constant
currency information provides valuable supplemental information
regarding its results of operations. The Company calculates
constant currency percentages by converting its current period
local currency financial results using the prior period exchanges
rates and compared these adjusted amounts to its prior period
reported results. The adjusted basis presentation excludes the
impact of certain matters not related to the Company's ongoing
operations. A shortcoming of these financial measures is that they
do not reflect the Company’s actual results under GAAP. Management
does not intend these items to be considered in isolation or as a
substitute for the related GAAP measures.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20181204005194/en/
Brad Pogalz (952) 887-3753
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