Third quarter 2022 sales increased 11.5% from 2021 to a quarterly record of $853.2 million

GAAP EPS were $0.67 compared with $0.66 in 2021

Donaldson increases fiscal 2022 sales guidance and narrows EPS range

Donaldson Company, Inc. (NYSE: DCI) (Donaldson or the Company) today reported third quarter 2022 net earnings of $83.0 million, a decrease of 1.8% from $84.4 million in 2021. Earnings per share (EPS)¹ for the third quarter 2022 increased to $0.67 from $0.66.

“Our record third quarter sales were driven by pricing actions offsetting persistent inflation, as well as continued high levels of demand,” said Tod Carpenter, chairman, president and chief executive officer. “Undeterred by the macro challenges, our team maintained a strong commitment to providing technology-led filtration to customers as global demand for our products and services remained at record highs.

“Looking ahead, we anticipate ongoing inflation and supply chain constraints. However, the successful execution of pricing actions by the Donaldson team throughout this fiscal year is expected to drive fourth quarter sequential sales and gross margin improvement. As we close out the year, we remain focused on delivering on our customer commitments, implementing pricing actions to offset cost pressures and investing for the future.”

Operating Results

Third quarter 2022 sales increased 11.5% to $853.2 million from $765.0 million in 2021, including a negative impact of 2.9 percentage points from currency translation.

Third quarter 2022 sales in the Engine Products segment (Engine) increased 13.2%, as robust sales in Aerospace and Defense, Aftermarket, and Off-Road were partially offset by a decrease in On-Road. Aerospace and Defense sales increased 29.2% compared with 2021 with stronger end-market conditions in the commercial aerospace industry driving results. Aftermarket sales rose 14.5% as strong levels of overall end-market demand continued. Off-Road sales increased 13.0% versus the prior year with equipment production remaining high in all regions except China. Exhaust and Emissions program wins in Europe also contributed to Off-Road sales growth. Third quarter 2022 On-Road sales decreased 9.0% year over year, as global supply chain challenges, including chip shortages, and the discontinuation of a low margin product line in the U.S. negatively impacted results.

Third quarter Industrial Products segment (Industrial) sales rose 7.8%, led by Gas Turbine Systems (GTS) and Industrial Filtration Solutions (IFS). GTS sales increased 19.4% versus the prior year due to higher new equipment sales in EMEA and the U.S. IFS sales growth of 9.1% was the result of overall strength in the industrial dust collection business and double-digit growth in Process Filtration sales. Special Applications sales declined 3.6% compared with 2021. Within Special Applications, Disk Drive sales were negatively impacted by the COVID-19 shutdown in China.

Third quarter 2022 operating income as a percentage of sales (operating margin) decreased to 13.0% from 14.3% in 2021. Gross margin decreased to 31.5% from 33.7% in the prior year as inflation headwinds from raw materials, freight, energy and labor costs persisted.

Third quarter 2022 operating expenses as a percentage of sales were 18.5%, an improvement from 19.4% in 2021 due to leverage on higher sales.

Third quarter 2022 interest expense was $3.8 million compared with $3.2 million in the prior year. Other income, net was favorable by $0.6 million versus the prior year. Third quarter 2022 effective tax rate increased to 25.4% from 23.9% in 2021 due to a reduction in net discrete tax benefits.

Year to date, the Company has paid $81.8 million in dividends and repurchased approximately 2% of its outstanding shares for $153.7 million.

Conflict in Eastern Europe

In the third quarter, Donaldson took the following actions in response to the events that unfolded in Ukraine:

1. Complied with all sanctions, including those from the European Union, Great Britain and the United States
2. Ceased direct product shipments into Russia and Belarus

Updated Fiscal 2022 Outlook

Fiscal 2022 sales are expected to increase 14.5% to 16.5% over prior year, up from previous guidance of 11% to 15%, and driven primarily by strength in Engine sales. Currency translation is forecast to negatively impact sales by approximately 3%. Fiscal 2022 generally accepted accounting principles (GAAP) EPS is now expected to be between $2.67 and $2.73, versus a previous range of between $2.66 and $2.76. GAAP and adjusted EPS² in 2021 were $2.24 and $2.32, respectively.

Fiscal 2022 Engine sales are projected to increase between 16% and 18% compared with 2021, and versus previous guidance of a 12% to 16% increase. Better-than-expected third quarter performance in Off-Road and Aftermarket, combined with pricing actions across all business units drove the overall outlook improvement.

Fiscal 2022 Industrial sales are expected to increase between 10% and 12% compared with 2021, narrowed from 9% to 13% previously.

Fiscal 2022 gross margin is expected to be down between 1.5 and 2.0 percentage points, compared with 2021 and versus the previous forecast of a decrease of 1.0 to 1.5 percentage points. Weaker-than-expected third quarter gross margin results drove the revised full-year outlook.

Fiscal 2022 operating margin is forecast to be between 13.5% and 13.9% compared with previous guidance of 14.0% to 14.4%. Fiscal 2021 GAAP and adjusted operating margin were 13.5% and 14.0%, respectively.

The Company anticipates fiscal 2022 interest expense of between $14.5 million and $15.0 million, and other income of between $10.0 million and $12.0 million. Donaldson expects a fiscal 2022 effective income tax rate of between 24% and 26%.

Fiscal 2022 capital expenditures are projected to be between $90.0 million and $100.0 million. Free cash flow conversion is expected to be between 50% and 60%, down from previous guidance of between 70% and 80% due to increased levels of inventory to manage supply chain challenges as well as higher accounts receivable from higher sales. Donaldson is increasing its share repurchase expectation to be between 2.0% and 2.5% of shares outstanding from approximately 2.0% previously.

Miscellaneous

The Company will webcast its third quarter 2022 earnings conference call today at 9:00 a.m. CDT. 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 be available at approximately 12:00 p.m. CDT 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 affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, challenges in global operations; impacts of global economic, industrial and political conditions on product demand, including the Russia and Ukraine conflict; impacts from unexpected events, including the COVID-19 pandemic; effects of unavailable raw materials or material cost inflation; inability to attract and retain qualified personnel; inability to meet customer demand; inability to maintain competitive advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressure; exposure to customer concentration in certain cyclical industries; impairment of intangible assets; inability to manage productivity improvements; inability to maintain an effective system of internal control over financial reporting; vulnerabilities associated with information technology systems and security; inability to protect and enforce intellectual property rights; costs associated with governmental laws and regulations; impacts of foreign currency fluctuations; effects of changes in capital and credit markets; changes in tax laws and tax rates, regulations and results of examinations; and results of execution of any acquisition, divestiture and other strategic transactions strategy. These and other factors are described in Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless 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 is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Our diverse, skilled employees at over 140 locations on six continents partner with customers—from small business owners to the world’s biggest OEM brands—to solve complex filtration challenges. Discover how Donaldson is Advancing Filtration for a Cleaner World at www.Donaldson.com.