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Text: During today's call, we will reference non-GAAP metrics.
I am pleased to report record first quarter results.
We grew our sales to $761 million, sales were up 20% and earnings per share was up 26% versus last year.
It was an encouraging quarter for Donaldson, particularly given the backdrop of well documented supply chain disruptions, labor shortages and significant cost inflation.
In the face of these challenges, our team rose to the occasion and delivered, and I am proud of what we accomplished.
As we look to the remainder of the year, we expect the macro headwinds to persist.
While we are well positioned to deal with these challenges, there is no doubt that we will feel near-term impacts.
To address these macro challenges, we are pulling many levers, including raising prices to mitigate the impact of cost increases, utilizing our geographically diverse manufacturing and distribution footprint to meet the needs of our global customers and to mitigate labor-constraint issues, particularly in the U.S. and aggressively recruiting and competing for talent to expand our strong team of dedicated employees.
As we navigate the year, we are also investing for future organic and inorganic growth.
We continue to spend on our R&D to ensure we remain the leader in what we do best, technology-led filtration.
I'm also pleased to have two new acquisitions under our belt.
First, we recently announced the acquisition of Solaris Biotech.
Solaris is a designer and manufacturer of bioprocessing and filtration equipment used in food and beverage, biotechnology and other life sciences markets.
We've been working hard to expand our reach in the life sciences, and this acquisition is the first step in our string of pearls strategy to get there.
We can now leverage Solaris' technology and customer relationships to advance our capabilities in this space.
I am confident in our ability to scale the Solaris business with our commercial capabilities and strong balance sheet.
Our second recent acquisition was that of P-A Industrial Services.
We closed this transaction on November 1 with a purchase price of $4 million.
While the company only generates a little under $4 million in revenue today, this acquisition allows us to support our Industrial segment with the addition of a services business.
Donaldson and P-A Industrial share the vision of delivering superior service along with great products to help our customers' operations run better.
We believe we are heading into the balance of the year from a position of strength.
And we feel good about our ability to navigate the near-term challenges, while still building our business for the future.
With that said, we are raising our top and bottom line guidance for fiscal 2022 based on a few factors; first quarter results, higher sales expectations driven in part by incremental pricing and operating expense leverage.
We will share more details about our fiscal '22 outlook later in the call.
So I'll now provide some context on our first quarter sales.
Total sales were $761 million, which is up 20% from last year, due in part to last year's softness related to the pandemic.
In Engine, total sales were $527 million, up 21% with our first-fit businesses leading the charge once again.
Sales in Off-Road were $94 million, up 45%.
Nearly half of the first quarter growth was driven by Exhaust and Emissions, reflecting a production ramp up related to new emission standards in Europe.
As we've talked about before, the strength in this business does create mix pressure on margin.
Beyond Exhaust and Emissions, first quarter sales in Off-Road also benefited from increased levels of equipment production across end markets and geographies.
The exception was in the Asia Pacific region where we compared against the sales increase of nearly 40% in the prior year.
In On-Road, first quarter sales were $32 million or down 1.5% year-over-year.
North America had the biggest decline, reflecting the discontinuation of some directed-buy equipment to a large OEM customer.
Importantly, excluding this impact, total On-Road sales would have been up about 12% globally and up 7% in North America.
As we look forward, we believe On-Road will be under additional pressure for the remainder of the year as many customers continue to struggle with supply chain issues, including the persistent chip shortage.
In Engine Aftermarket, sales in the first quarter were $374 million, an increase of 18% from the prior year.
Aftermarket sales were up in all geographies and both channels.
Independent channel sales grew in the mid-teens and OE channel sales were up in the low-20s.
Our innovative proprietary products are always a big piece of the Aftermarket story.
These products accounted for about 30% of total Aftermarket sales and grew about 20% year-over-year.
Our independent channel is benefiting from continued strength in less mature markets.
Brazil, Russia and South Africa put up impressive growth rates in the first quarter, and we are excited about our prospects in these geographies.
In the OE channel of Aftermarket, proprietary products are again contributing to our growth.
In the first quarter, sales of these products were up in the mid-20% range and they now account for nearly 40% of our Aftermarket OE channel sales.
Included in these figures is PowerCore, which achieved another quarterly record for Aftermarket sales and increased more than 18%.
Moving to Aerospace and Defense, first quarter sales of $28 million were up 23% year-over-year as the commercial aerospace industry rebounds from the pandemic-related pressure a year ago.
Activity remains below pre-COVID levels in Aerospace, so there should be more growth to come as the industry continues to recover.
Lastly on Engine, I will quickly talk about China.
Engine sales were down about 6% in the quarter.
However, this is against a 40% increase last year.
The increase last year reflects a faster rebound in China from the pandemic than we saw in other parts of the world.
Overall, we remain pleased with our progress in the region.
We are winning new business with local Chinese manufacturers.
And over time, we continue to expand our share in this massive market.
Now on to Industrial.
The Industrial segment had another solid quarter with total sales increasing 17% to $234 million.
Sales of Industrial Filtration Solutions or IFS, grew 23% to $166 million with two-thirds of the increase coming from industrial dust collection.
We had strong sales growth of new equipment and replacement parts, which reflects more investment and industrial capacity utilization.
Process Filtration sales also contributed to first quarter growth in IFS.
Process Filtration sales, which serve the food and beverage market, grew over 30% due to growth in new equipment and replacement parts in Europe.
First quarter sales of Special Applications were $52 million, up 23% with strong contributions across our product portfolio, including notable increases in our disk drive and membranes businesses.
Also within Special Applications, first quarter sales of venting products grew 19%.
We continue to build share in strategic markets, including high-tech vents for batteries and powertrains in the auto industry and expect venting solutions to contribute to our growth for years to come.
First quarter sales of Gas Turbine Systems or GTS were approximately $17 million, down 28% to almost entirely to timing of orders.
Our outlook for the year has not changed and we expect to make up first quarter revenue shortfalls in the second quarter.
Overall, we are off to a strong start for fiscal 2022 and I feel confident about our ability to successfully navigate this uncertain and volatile environment.
To sum up the first quarter, our employees did an excellent job delivering solid results in a tough environment.
First quarter sales grew 20%, operating income was up 23% and earnings per share of $0.61 was 26% above the prior year.
First quarter operating margin increased 40 basis points to 14.1%.
The increase was from leverage on higher sales, which was partially offset by gross margin pressure.
Driving into gross margin a bit further, the impact of raw material cost inflation built through the quarter.
This impact was compounded by the fact that we were experiencing a deflationary environment one year ago.
As we look at the remainder of the year, we will be impacted by ongoing inflationary headwinds.
We will continue to build on the success we have had implementing price increases in several of our businesses to offset the cost pressure.
That said, the full impact of the pricing benefits may take longer to materialize due to certain large OEM customers.
We are in ongoing discussions with these customers, and we'll continue to drive toward offsetting the incremental costs we are currently absorbing.
On the operating expense front, we are pleased with our discipline and success in optimizing our levels of spend.
We continue to invest in our Advance and Accelerate portfolio.
This spend was offset by controlled expense management elsewhere in the organization.
First quarter operating expense as a percent of sales was favorable by approximately 160 basis points, driven primarily by volume leverage.
Other expense was favorable this quarter by $1.5 million, mostly due to a pension curtailment charge we took in the first quarter of last year.
Turning to the balance sheet and cash flow statements, I'd like to highlight a few things.
Our first quarter cash conversion ratio was 32%, down meaningfully from last year, driven primarily by investments in inventory to further support our increasing demand.
Inventory this quarter were up $60 million sequentially and $115 million year-over-year, mainly due to the impact of inflation, a commitment we made to increased levels of inventory to ensure we're adequately prepared to meet demand and supply chain challenges we have had internally with our customers on order deliveries.
As a result, working capital was $71 million, net use of cash this quarter versus a $33 million benefit last year.
First quarter capital expenditures were $18 million as we invested in various projects, including PowerCore capacity expansion in North America.
This quarter, we continued with our track record of returning cash to shareholders.
We repurchased 1.3% of our outstanding shares for $103 million and we paid dividends of $27 million.
Our strong balance sheet and financial flexibility has been an important asset, while operating in this challenging supply environment.
We ended the quarter with a net debt to EBITDA ratio of 0.7 times.
Now I'd like to walk through our fiscal '22 outlook.
We are now expecting fiscal 2022 sales to be up between 8% and 12% with the nominal impact from currency translation.
This increase from our previous guidance of 5% to 10% is driven by Q1 results as well as benefits from additional pricing actions that will be implemented and rolling over the balance of the year.
We continue to expect a greater sales year-over-year increase in the first half versus the second, driven in large part by prior year comparisons.
From a segment perspective, we've increased our full year sales expectations for both Engine and Industrial.
For the Engine segment, we expect the revenue increase between 8% and 12%, up from our previous expectation of between 5% to 10%.
Within Engine, sales of our first-fit businesses are forecasted to be mixed.
Off-Road sales are expected to grow in the high-teens versus last year due to increased levels of equipment production and the continued success of new program wins in our Exhaust and Emissions business.
The Off-Road forecast is up slightly from the low-double-digit growth we've previously projected.
In On-Road, we are seeing a slowdown in demand from some of our customers as they grapple with their own supply chain issues.
Based on first quarter results and our current order trends, we now expect On-Road sales to be down low-single-digits versus our previous guide of up low-single-digits.
For Engine Aftermarket, we are increasing our expectations slightly to high-single-digit growth from our previous guidance of mid-single-digit growth.
Equipment utilization remained strong and we are continuing to gain share with proprietary products.
Our outlook for Aerospace and Defense has not changed.
We are still forecasting low-double-digit growth for the year, due in large part to comping against the COVID-related market weakness in fiscal '21.
Now on to the Industrial segment.
We expect sales to be up between 7% and 11%, which brings up the bottom end of our previous guidance range of 6% to 11% by a point.
Sales of Industrial Filtration Solutions are planned up in the low-double-digit range consistent with the guidance we gave last quarter.
Improved sales of new equipment and replacement parts, particularly dust collection as well as strength in process filtration will continue to be the drivers.
In terms of IFS, I would just like to mention that while revenue related to our recent acquisition of Solaris Biotech will follow in the segment, we do not expect a material impact this fiscal year.
Solaris bookings for this calendar year are expected to be approximately EUR11 million.
And revenue related to those bookings should flow through over the next several quarters.
We continue to expect fiscal '22 sales up high-single-digits.
As Tod noted in his remarks, the first quarter sales decrease was a result of timing, and we do expect to recover those sales.
Special Applications revenue is forecasted to be up low-single-digits versus our initial guidance of down low-single-digits, reflecting stronger than expected growth across the portfolio in the first quarter.
Now let's move to operating margin.
We maintained our expectation for a full year rate between 14.1% and 14.7%.
As a reminder, last year's adjusted operating margin was 14%.
Expense leverage will be the primary driver of the year-over-year benefit.
On gross margin, given what we saw in the first quarter and the trends we are seeing in raw material, freight and labor crisis, we believe the inflation headwind will be more significant than we originally planned.
We expect to offset the higher costs with pricing over time.
However, the net impact on gross margin will be greater than anticipated.
And we now expect gross margin to be down 50 to 100 basis points from the prior year.
To expand further on this point, last quarter we said we expected to pay 8% to 10% more for our raw materials this year, which equated to about 300 basis points.
That estimate is now 12% to 14% or a little shy of 400 basis points.
Additionally, freight and labor costs have now become a more significant headwind than we anticipated, which results in additional 100 basis points of gross margin pressure.
So as a result of these dynamics and our typical seasonality, we should see operating margin improve in the second half of the year versus the first half.
Based on our updated forecast, we plan for a new earnings per share record of between $2.57 and $2.73, implying an increase from last year's adjusted earnings per share of 11% to 18%.
Just briefly on the balance sheet and cash flow outlook.
In terms of capital expenditures, we are lowering our planned spend for this year to a range of between $90 million and $110 million.
So essentially, a $10 million reduction to the range we provided in September of $100 million to $120 million.
The macro headwinds we've been talking about this quarter are impacting almost every part of our business.
Given supply chain uncertainty and other variables, the timing of execution on some of our capacity expansion projects could be slowed.
So we felt it prudent to bring the range down in line with current expectations.
In terms of free cash flow, increased inventory levels, partially offset by the lower capex, result in a reduction to our free cash flow conversion forecast to between 70% and 80%, down from our initial guidance of 80% to 90%.
On share repurchases, we still plan to repurchase about 2% of our outstanding shares this fiscal year.
In summary, I am pleased with our first quarter results.
I am also confident our business model is equipped to manage the uncertain times ahead.
While the results of our more recent pricing actions will take a bit of time to flow through our financials, we are taking the right steps to protect our margins and deliver record level of sales and profit this fiscal year.
We are also committed to managing the business for long-term, and we'll continue to make thoughtful investments for future growth.
As we look to the rest of the fiscal year and beyond, I would like to touch on a few key paths we are pursuing to build on our success and push the company forward to the next stage of its evolution through profitable growth.
First, we are continuing to invest in our existing Advance and Accelerate solutions, including Process Filtration, dust collection and replacement parts and Engine Aftermarket.
Second, we are diversifying the company's offerings, both organically and inorganically, to ensure we meet the needs of our existing and future customers globally.
On the organic side, we are committed to our R&D.
We previously invested $15 million for our materials research center, which will enable further development of our polymer-based chemistry solutions.
It is also important to note, we increased our R&D budget this fiscal year by 10% over last year.
On inorganic diversification, the recent acquisitions of Solaris and P-A Industrial Services are just the beginning.
Solaris is the first inorganic step on our journey to create a life sciences business.
We are excited about the value we can add through our global market reach, science and technology, filtration capabilities and our ability to invest for future growth.
This, combined with Solaris' market reputation and product portfolio, are a winning combination.
Third, we are investing in our people and recruiting the right talent to drive the company forward.
We have made people investments in areas such as life sciences, food and beverage and ESG.
Donaldson employees with their dedication and hard work are the core of our business.
Before we close, I also want to touch on our ESG efforts as this is an important part of our culture.
We began global implementation of our environmental health and safety policies in 2018.
Safety and greenhouse gas emission reductions are near-term priorities, and we're making progress.
We are well on our way of reducing CO2 emissions by 6,000 metric tons by the end of fiscal 2022.
Our company is geographically and culturally diverse.
We have strong governance, including a seasoned board with balanced tenure.
Also critically important is the alignment of the compensation of our board and management with shareholder interest.
So as I look out over the long-term, I strongly believe we have the right strategy in place to continue delivering value to our stakeholders for years to come.

user
compname reports q1 earnings per share of $0.61.
q1 earnings per share $0.61.
q1 2022 operating margin increased to 14.1% from 13.7% in 2021.
donaldson increases fiscal 2022 sales and earnings per share guidance.
raising our fiscal 2022 sales and earnings outlook.
macro-economic headwinds are creating a different path to achieving our results than we previously anticipated.
donaldson company - gross margin is under additional pressure as raw material, freight, and labor costs have climbed beyond our original expectations.
to partially mitigate pressure by raising prices in most markets.
fiscal 2022 gaap earnings per share is now expected to be between $2.57 and $2.73.
sales growth during first half of year is expected to outpace second half of year.
currency translation is expected to be a nominal headwind in fy22.
fy22 net sales are projected to increase between 8% and 12% year-over-year.

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