Filtration company Donaldson Co. has announced net earnings of $102.4 million in the fourth quarter and $180.3 million for full-year 2018, compared with $68.2 million and $232.8 million, respectively, in 2017.
Net earnings in the current and prior years were impacted by non-recurring items, including the Federal Tax Cuts and Jobs Act (TCJA) in fiscal 2018 and an escrow settlement in 2017 related to the company’s acquisition of Northern Technical LLC. These items were excluded from the adjusted earnings per share (EPS) calculation, the company noted.
“We had a strong finish to fiscal 2018, with fourth quarter performance reflecting sales momentum and margin improvement as price realization and expense leverage more than offset inflationary pressure,” said Tod Carpenter, chairman, president and CEO. “Our employees did an excellent job last year meeting our customers’ needs while delivering on our strategic objectives, which contributed to record levels of sales and adjusted EPS.
“We expect to deliver another year of record performance in 2019, and we are maintaining our momentum related to further penetrating key markets, investing in technology development and adding capacity. While macro-factors like geopolitical uncertainty and continued inflationary pressure temper our perspective, sales growth in both the Engine and Industrial segments combined with a targeted approach to expense planning allow us to fund our strategic investments and drive incremental profit to the bottom line. I am confident that our fiscal 2019 strategic agenda balances near- and long-term opportunities, further strengthening our foundation for future success,” he added.
Fiscal 2018 Performance
Fourth quarter 2018 sales increased 9.8 percent to $724.7 million from $660.1 million in 2017, including a 1.3 percent benefit from currency translation. Fourth quarter sales increased 14 percent for Engine Products and 1.9 percent for Industrial Products. Excluding benefits from currency translation, fourth quarter sales increased 8.5 percent, reflecting 13.1 percent growth in Engine Products and flat sales of Industrial Products.
Full-year 2018 sales increased 15.3 percent to $2.73 billion from $2.37 billion in 2017, including benefits from currency translation and acquisitions completed in the prior year of 3.3 percent and 1.1 percent, respectively. Full-year sales increased 19 percent for Engine Products and 8.1 percent for Industrial Products, or 16.1 percent and 4.2 percent, respectively, excluding the benefit from currency translation.
Fourth quarter 2018 operating income as a rate of sales increased to 14.7 percent from 14.3 percent in 2017, reflecting expense leverage and gross margin improvement. Fourth quarter gross margin was 34.9 percent, compared with 34.8 percent last year, primarily due to benefits from price increases, partially offset by higher raw materials costs. Operating expense as a percentage of sales (“expense rate”) improved approximately 0.4 percentage points to 20.1 percent from 20.5 percent, reflecting leverage on increasing sales, partially offset by higher freight expense.
Donaldson’s continued assessment of the TCJA impact resulted in a tax benefit of $26 million in fourth quarter and a full-year charge of $84.1 million. Excluding these impacts, the company’s effective income tax rate was 26.2 percent in fourth quarter and 27.3 percent for the full year, compared with prior-year adjusted rates of 25.6 percent and 28.3 percent, respectively. The fourth quarter and full-year rates benefitted from a lower U.S. corporate tax rate, stock option activity and favorable settlements of tax audits. Offsetting factors included foreign withholding tax and other matters related to the TCJA, combined with an unfavorable mix of earnings across tax jurisdictions.
Donaldson repurchased 0.3 million shares, or 0.2 percent, of its common stock in fourth quarter and 2.6 million shares, or 2 percent, during fiscal 2018. The fourth quarter and full-year repurchases reflect total investments of $14.3 million and $122 million, respectively, at an average price of $46.18 for both periods. Donaldson paid dividends during fourth quarter and full-year 2018 of $24.5 million and $94.7 million, respectively.
Fiscal 2019 Outlook
Donaldson expects fiscal 2019 GAAP EPS between $2.29 and $2.43, compared with prior-year GAAP and adjusted EPS of $1.36 and $2, respectively.
Full-year 2019 sales are expected to increase between 6 and 10 percent, including additional sales related to the new revenue recognition standard. The sales forecasts for total Donaldson and both the Engine and Industrial Products segments include a negative impact from currency translation of approximately 2 percent. Engine Products sales are expected to increase between 7 and 11 percent, reflecting growth in On-Road, Off-Road and Aftermarket, along with flat sales of Aerospace and Defense. The Engine Products forecast also includes additional sales of approximately $25 million related to the new revenue recognition standard. Industrial Products sales are expected to increase between 3 and 7 percent, reflecting growth in Industrial Filtration Solutions, flat sales of Special Applications and a decline in Gas Turbine Systems.
