Donaldson Reports Fourth Quarter and Full-Year 2017 Earnings

Fourth quarter 2017 sales increased 11.2 percent, full-year sales
increased 6.8 percent

Full-year 2018 sales are expected to be up between 4 percent and 8
percent from 2017

MINNEAPOLIS–(BUSINESS WIRE)–Donaldson Company Inc. (NYSE: DCI) today announced fiscal 2017 fourth
quarter net earnings of $68.2 million and full-year net earnings of
$232.8 million, compared with $59.5 million and $190.8 million,
respectively, in fiscal 2016. Fourth quarter 2017 GAAP earnings per
share (EPS)1 increased 15.9 percent to $0.51 from $0.44 last
year, and full-year GAAP EPS increased 22.5 percent to $1.74 from $1.42
in 2016.

The current and prior year GAAP earnings were impacted by one-time
items, which are excluded from the Company’s calculation of adjusted EPS2
and summarized in the table below. The tables attached to this press
release include a reconciliation of GAAP to non-GAAP measures.

“Sales remained strong through our fourth quarter, and benefits from our
strategic initiatives combined with improving market conditions in our
Engine segment drove a meaningful increase in full-year sales and
earnings,” said Tod Carpenter, president and chief executive officer. “I
want to thank our employees for doing an excellent job executing our
strategy all year long. Through their efforts, we delivered solid growth
in sales of replacement parts and innovative air and liquid products,
and we also completed two strategic acquisitions, Partmo and Hy-Pro.

“As we turn to fiscal 2018, we expect the recovery in engine-related end
markets to continue, whereas industrial markets are likely to remain
uncertain. Although the economic environment is still mixed, we plan to
deliver strong earnings growth while also investing in technology
development, capacity expansion and customer engagement. We are
committed to building on the momentum from 2017, and I am confident that
executing our fiscal 2018 priorities will create long-term value for our
stakeholders.”

Fiscal 2017 Financial Results

Fourth quarter 2017 sales increased 11.2 percent to $660.1 million from
$593.8 million last year, reflecting increases in the Engine Products
and Industrial Products segments of 17.8 percent and 0.4 percent,
respectively.

Fiscal 2017 sales increased 6.8 percent to $2.37 billion from $2.22
billion in 2016. Excluding the negative impact from foreign currency
translation, fiscal 2017 sales increased 7.2 percent, reflecting an
increase of 11.6 percent in sales of Engine Products, partially offset
by a 0.2 percent decline in Industrial Products. The table below
illustrates year-over-year sales performance with and without the impact
from foreign currency translation.

Fourth quarter 2017 GAAP operating income rate (“operating margin”) was
14.3 percent, compared with 2016 GAAP and adjusted3 rates of
15.2 percent and 15.8 percent, respectively. Fourth quarter 2017 GAAP
gross margin was 34.8 percent, compared with last year’s GAAP and
adjusted gross margin rates of 35.2 percent and 35.4 percent,
respectively. Compared with the prior year, fourth quarter 2017 gross
margin was negatively impacted by an unfavorable sales mix of products,
higher raw materials costs and incremental freight charges. These
pressures were partially offset by improved absorption of fixed costs on
increasing volume. GAAP operating expense as a rate of sales (“expense
rate”) was 20.5 percent in fourth quarter 2017, compared with prior-year
GAAP and adjusted rates of 20.1 percent and 19.6 percent, respectively.
The increase from the prior year was primarily driven by higher variable
compensation expense.

Fiscal 2017 operating margin increased 1.6 percentage points to 13.9
percent from 12.3 percent in 2016, or an increase of 0.7 percentage
points when excluding the negative impact from one-time charges in the
prior-year rate. The year-over-year increase in full-year operating
margin reflects favorability in both gross margin and expense rate. The
gross margin increase was driven primarily by higher absorption of fixed
costs, partially offset by the higher raw materials costs combined with
variable costs attributable to higher demand than the prior year. The
fiscal 2017 expense rate reflects leverage on increasing sales,
partially offset by an increase in variable compensation expense.

Fiscal 2017 interest expense was $5.1 million in fourth quarter and
$19.5 million for the full year, compared with $4.9 million and $20.7
million, respectively, in 2016. Donaldson’s fourth quarter effective
income tax rate declined 2.4 percentage points to 25.6 percent,
reflecting a favorable mix of earnings. The full-year 2017 effective
income tax rate was 27.7 percent, compared with 25.9 percent in 2016.
The year-over-year change was primarily driven by discrete benefits
recorded in the prior year from favorable settlements of tax audits.

During fourth quarter 2017, Donaldson repurchased 650 thousand shares,
or 0.5 percent, of its common stock at an average price of $46.02 for a
total investment of $29.9 million. For the full year, the Company
repurchased 3.3 million shares, or 2.5 percent, of its common stock at
an average price of $42.14 for a total investment of $140.4 million.
Donaldson paid fourth quarter and full-year dividends of $22.9 million
and $92.4 million, respectively.

Fiscal 2018 Outlook

Donaldson expects fiscal 2018 GAAP EPS between $1.79 and $1.93, compared
with fiscal 2017 GAAP EPS of $1.74 and adjusted EPS of $1.69.

The Company expects full-year 2018 sales will increase between 4 percent
and 8 percent from 2017, including approximately 2 percent related to a
favorable impact from currency translation and benefits from the
acquisitions completed during fiscal 2017.

Sales of Engine Products are expected to increase 6 percent to 10
percent from 2017, reflecting growing sales of Aftermarket, Off-Road and
On-Road, partially offset by declining sales of Aerospace and Defense.
Fiscal 2018 Industrial Products segment sales are expected to be in the
range between flat and up 4 percent from the prior year, reflecting
growth in Industrial Filtration Solutions, flat sales of Special
Applications and declining sales of Gas Turbine Systems.

Donaldson expects full-year 2018 operating margin between 14.0 percent
and 14.4 percent, compared with fiscal 2017 operating margin of 13.9
percent. The Company expects 2018 interest expense of approximately $21
million and other income between $5 million and $9 million. The forecast
for fiscal 2018 effective income tax rate is between 27.4 percent and
29.4 percent.

The Company expects fiscal 2018 capital expenditures of $80 million to
$100 million and cash conversion between 75 percent and 90 percent.
Donaldson plans to repurchase approximately 2 percent of its outstanding
shares in fiscal 2018.

Accounting Considerations

During first quarter 2017, Donaldson recorded income of $6.8 million
related to the settlement of claims against an escrow account that had
been established in connection with the Company’s acquisition of
Northern Technical, L.L.C., which was completed in first quarter 2015.
The income was recorded as other income in Donaldson’s first quarter
2017 consolidated statement of earnings and within the Industrial
Products segment earnings.

During fiscal 2016, pre-tax charges related to restructuring reduced
Donaldson’s fourth quarter and full-year 2016 operating income by
$3.5 million and $16.1 million, respectively. The Company also incurred
$3.1 million of expenses in fiscal 2016 related to an independent
investigation into its Gas Turbine Systems business. The restructuring
and investigation charges were excluded from certain fiscal 2016
non-GAAP measures.

Miscellaneous

The Company will webcast its fiscal 2017 year-end earnings conference
call today at 9:00 a.m. CDT. To listen to a live webcast of the call,
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 within the Events & Presentations section of the Company’s
Investor Relations website beginning 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,”
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 cause the Company’s results to differ
materially from these statements. These factors include, but are not
limited to, world economic and industrial market conditions; the
Company's ability to maintain certain competitive advantages over
competitors; pricing pressures; the Company's ability to protect and
enforce its intellectual property rights; the Company's dependence on
global operations; customer concentration in certain cyclical
industries; commodity availability and pricing; the implementation of
new information technology systems; information security and data
breaches; foreign currency fluctuations; governmental laws and
regulations; changes in tax laws, regulations and results of
examinations; the Company's ability to attract and retain key personnel;
changes in capital and credit markets; execution of the Company's
acquisition strategy; the possibility of goodwill or intangible asset
impairment; execution of restructuring plans; the Company's ability to
maintain an effective system of internal control over financial
reporting. These risks and uncertainties are described in Item 1A of the
Company’s Annual Report on Form 10-K for the year ended July 31, 2016.
The Company makes these statements as of the date of this disclosure,
and undertakes no obligation to update them unless otherwise 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-K.

About Donaldson Company

Founded in 1915, Donaldson Company is a global leader in the filtration
industry with sales, manufacturing and distribution locations around the
world. Donaldson’s innovative technologies are designed to solve complex
filtration challenges and enhance customers’ equipment performance. For
more information, visit www.Donaldson.com.

Contacts

Donaldson Company Inc.
Brad Pogalz, 952-887-3753