Market Overview

Donaldson Company Reports Third Quarter 2019 Earnings


Third quarter 2019 sales increased 1.8 percent from 2018, or 5.9
percent in constant currency

Third quarter 2019 GAAP EPS increased 9.4% to $0.58 from $0.53 in

Full-year 2019 sales forecast up 3.5 to 4.5 percent; EPS forecast
up 10 to 12 percent

Donaldson Company, Inc. (NYSE:DCI) today reported third quarter net
earnings of $75.2 million, an increase of 7.6 percent from $69.9 million
in 2018. Third quarter 2019 GAAP earnings per share (EPS) increased 9.4
percent 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'2 businesses
and modest year-over-year gross margin improvement in both segments,"
said 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 percent 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."

1 All earnings per share figures refer to diluted
earnings per share. Year-over-year increase compares fiscal 2019
GAAP EPS forecast with fiscal 2018 adjusted EPS of $2.00. Adjusted
earnings are a non-GAAP financial measure that exclude the impact of
certain items not related to ongoing operations.
2 Includes Industrial Air Filtration replacement parts,
Engine Aftermarket, Venting Solutions, Process Filtration,
Semiconductor and Industrial Hydraulics.

Performance Overview

Third quarter 2019 sales increased 1.8 percent 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,
  • Adoption of the revenue recognition accounting standard (revenue
    recognition) added approximately 0.5 percentage points.3

Third quarter sales of Engine Products (Engine) increased 3.6 percent
from last year, including a negative impact from currency translation of
4.1 percent, partially offset by benefits of 1.7 percent from pricing
and 0.8 percent 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
percent from last year, including benefits of 4.4 percent from BOFA and
1.1 percent from pricing, partially offset by a negative impact from
currency translation of 4.2 percent. Sales of Industrial Filtration
Solutions (IFS) increased 1.9 percent, 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



Three Months Ended Nine Months Ended
April 30, 2019 April 30, 2019

% Change


% Change

% Change


% Change

Off-Road (5.6 ) % (0.9 ) % (1.6 ) % 1.6 %
On-Road 11.1 14.0 22.6 24.8
Aftermarket 4.0 8.1 5.6 8.7
Aerospace and Defense 19.9     23.2     12.2     14.2    
Total Engine Products segment 3.6   % 7.7   % 6.1   % 9.1   %
Industrial Filtration Solutions 1.9 % 6.7 % 8.7 % 12.0 %
Gas Turbine Systems (14.2 ) (12.3 ) (11.9 ) (10.5 )
Special Applications (6.2 )   (2.6 )   (0.4 )   1.9    
Total Industrial Products segment (1.9 ) % 2.3   % 4.0   % 6.9   %
Total Company 1.8   % 5.9   % 5.4   % 8.3   %
3 See the "Accounting Considerations" section for more
information about the adoption of new accounting standards.

Third quarter 2019 operating income as a rate of sales (operating
margin) declined to 14.0 percent from 14.2 percent in 2018,4
with revenue recognition driving half the change.

Third quarter gross margin of 33.8 percent 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 percent from 20.0 percent 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 percent from 29.4 percent 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 20

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