Donaldson Company, Inc. recently reported fiscal 2020 net earnings of $64.2 million in fourth quarter and $257.0 million for the full year, compared with $58.0 million and $267.2 million, respectively, in 2019. Fiscal 2020 GAAP earnings per share (EPS) were $0.50 in fourth quarter and $2.00 for the full year, compared with $0.45 and $2.05, respectively, in 2019. Excluding non-recurring items in the prior year, fourth quarter and full-year 2020 EPS declined 18.0 percent and 9.5 percent, respectively, from 2019.
“I am proud of how our team performed in fiscal 2020, and we made progress on many of our strategic priorities, including improving gross margin, further expanding into new markets and geographies, strengthening our technological capabilities and executing our capital investment plans,” said Tod Carpenter, chairman, president and CEO. “When the pandemic required us to pivot, our teams acted quickly and decisively as we prioritized the health and safety of our employees, fulfilling our customer commitments and doing our part to lessen the spread of COVID-19. Although this work is ongoing, to date we have delivered on these priorities through global coordination and collaboration, and I am confident we are in a strong position as we enter fiscal 2021.
“Market conditions will likely remain uneven as the pandemic’s duration and its ultimate impact on the economy is still unclear. Despite the uncertainty, we believe we can continue gaining share in new and emerging markets while experiencing relative stability from our strong base of replacement parts. Executing projects to strengthen gross margin will remain a top priority in 2021, and we plan to build on our long track record of taking a disciplined approach to expense management and capital deployment. We are at the tail end of a multi-year investment cycle that included record levels of capital expenditures aimed at supporting our long-term growth plans, and we are excited to add these resources to our already-strong base of return-generating assets. With our deep customer and supplier relationships, incredible employees and relentless focus on those things under our control, I am confident 2021 will be another year of progress towards our company purpose of Advancing Filtration for a Cleaner World.”
Fourth quarter 2020 sales declined 15.1 percent to $617.4 million from $726.9 million in 2019. Excluding the impact from currency translation, fourth quarter sales declined 13.7 percent, reflecting a broad global economic slowdown that is due in part to the COVID-19 pandemic.
Fourth quarter 2020 sales of engine products declined 15.3 percent as the pandemic had a greater impact on the off-road and on-road first-fit businesses than it did on aftermarket sales related to equipment utilization. Additionally, on-road sales in the U.S. were pressured by the cyclical downturn of Class 8 truck production, while off-road was impacted by program timing. Off-road sales in Europe declined as exhaust and emissions programs have yet to ramp up, while new programs in China drove a strong sales increase in that region. The aftermarket decline was due primarily to sales through the company’s independent channel, reflecting oil and gas and transportation slowdowns in the U.S., and economic pressure in Latin America related to COVID-19 and geopolitical uncertainty. Sales through the aftermarket OEM channel declined slightly in fourth quarter, reflecting declining sales at large customers in the U.S., partially offset by growth in China. Sales of aerospace and defense declined due to lower sales for rotary-wing aircraft, partially offset by higher sales of products for ground defense vehicles.
Fourth quarter 2020 sales of industrial products declined 14.6 percent, driven primarily by the impact of the pandemic on industrial production and capital investment. Dust collection sales within industrial filtration solutions (IFS) experienced the greatest pressure from lower industrial production, with sales of both new equipment and replacement parts down from the prior year. Also within IFS, sales of process filtration products for the food and beverage industry were down from the prior year, driven by lower sales of new equipment. The gas turbine systems increase was driven primarily by higher sales of products for small turbines. The sales decline in special applications was driven by decreased sales in disk drive and integrated venting solutions.
Donaldson’s fourth quarter 2020 EBITDA as a rate of sales increased to 17.5 percent from 17.2 percent in the prior year. Fourth quarter 2020 operating income as a rate of sales (operating margin) decreased to 13.4 percent from 14.4 percent in 2019, including an impact of approximately 0.8 percentage points from higher depreciation and amortization expense related to Donaldson’s capacity expansion projects.
Fourth quarter 2020 gross margin increased to 33.7 percent from 33.5 percent in the prior year, reflecting a favorable mix of sales, lower raw materials costs and benefits from the company’s optimization initiatives. These benefits were partially offset by loss of leverage on lower sales, including an impact from higher depreciation expense related to the company’s capacity expansion projects. Fourth quarter 2020 operating expense declined 10.1 percent from the prior year. As a rate of sales, operating expense increased to 20.3 percent from 19.2 percent last year, reflecting a loss of leverage on lower sales that was partially offset by discretionary expense reductions related to the COVID-19 pandemic.
Fourth quarter 2020 interest expense was $3.9 million, compared with $5.2 million in 2019, reflecting interest rate favorability. Other income was $2.7 million in fourth quarter 2020, compared with expense of $0.5 million in 2019, as the Company benefited from higher joint venture income in the current year combined with incremental expense in the prior year related to its ongoing global cash optimization efforts.
Excluding an adjustment in the prior year related to the Tax Cuts and Jobs Act, Donaldson’s fourth quarter 2020 effective income tax rate was 21.1 percent, compared with 21.4 percent in 2019. The fourth quarter 2020 rate benefited from a favorable shift in the mix of earnings among tax jurisdictions and the favorable impact of final regulations related to the TCJA released during the current quarter. The rate in fourth quarter 2019 included a non-recurring discrete benefit related to the favorable settlement of a tax audit.
Donaldson paid fourth quarter and full-year 2020 dividends of $26.5 million and $106.4 million, respectively. Donaldson did not repurchase any outstanding shares in fourth quarter, which is consistent with the previously issued expectations, and full-year 2020 repurchase was 1.6 percent of outstanding shares.
As of July 31, 2020, total liquidity, as defined by cash on hand, availability under a $500 million revolving credit facility and a 364-day credit facility, was $589.1 million. During fourth quarter, Donaldson paid off a $50 million debt obligation that was at maturity. Donaldson’s net-debt-to-EBITDA leverage ratio was 0.9 at the end of the quarter, which is in line with Donaldson’s long-term target and reflects ample headroom related to the company’s debt covenants.
Fiscal 2021 Expectations
Donaldson continues to experience volatility related to the COVID-19 pandemic, and the magnitude and duration of the impact from the pandemic remains uncertain. Consequently, the company is not issuing detailed guidance for full-year 2021 key performance metrics at this time; however, Donaldson will maintain transparency by outlining important factors that are expected to impact the company’s full-year 2021 results, including:
- Sales in August 2020, the first month of fiscal 2021, were down sequentially from July, which is typical seasonality, and about 10 percent from the prior year, reflecting an increase in APAC, driven by growth in China, and continued pressure in the Americas;
- Full-year sales trends are expected to vary widely by geography and market, and year-over-year performance of replacement parts and products related to new markets, like food and beverage, should continue to be better than the company average;
- Sales in the first half of fiscal 2021 will likely experience year-over-year declines, due in large part to the timing of when the pandemic began;
- Gross margin benefits realized in fiscal 2020 from a favorable mix of sales and lower raw material costs are not expected to continue to the same degree in fiscal 2021, while optimization initiatives related to manufacturing, supply chain and procurement are expected to continue benefiting gross margin;
- Operating expense is expected to include a year-over-year increase of approximately $13 million associated with the standard process for resetting the annual incentive plans following a lower level of incentive compensation in the prior year; however, Donaldson is planning to substantially offset this increase with continued expense controls, due in part to pandemic-related restrictions;
- The full-year 2021 effective income tax rate is expected to be in the range of Donaldson’s post-tax reform long-term effective rate estimate of 24 to 27 percent;
- Capital expenditures are planned meaningfully below fiscal 2020 as projects related to capacity expansion, manufacturing and supply chain optimization projects and Donaldson’s new R&D facility are nearing completion;
- Donaldson expects to repurchase at least 1 percent of its outstanding shares in fiscal 2021, consistent with its commitment to offset annual dilution from stock-based compensation; and
- Free cash flow conversion is expected above 100 percent.