Donaldson Reports Fiscal 2018 First Quarter Earnings

Sales increased 16.6 percent, with Engine up 24.9 percent and
Industrial up 1.8 percent

Full-year 2018 sales now expected to increase between 10 percent
and 14 percent

MINNEAPOLIS–(BUSINESS WIRE)–Donaldson Company, Inc. (NYSE: DCI) today announced first quarter 2018
net earnings of $60.9 million, or $0.46 per share,1 compared
with 2017 net earnings of $58.0 million, or $0.43 per share. The prior
year results included a one-time gain of approximately 5 cents per share
related to the settlement of claims in an escrow account (the
“Settlement”) that had been established with Donaldson’s acquisition of
Northern Technical, L.L.C. in 2015.2 Excluding the impact
from the Settlement in the prior year, Donaldson’s first quarter 2018
earnings per share (EPS) increased 21.1 percent from 2017.

“We delivered record first quarter revenue and are now forecasting
full-year sales, operating margin and earnings above our initial
projections,” said Tod Carpenter, chairman, president and chief
executive officer. “The Engine segment continues to gain momentum, with
sales of both first-fit products and replacement parts up significantly
from last year. We are also seeing market conditions improve in the
Industrial segment, particularly in our Industrial Filtration Solutions
business.

“We expect favorable market conditions to extend through the balance of
our fiscal year, giving us confidence that we can deliver strong
earnings growth while investing back into our company. As we outlined
last quarter, we plan to spend an incremental $10 million to $15 million
of expense this year on capacity expansion, customer engagement through
e-commerce and technology development. These investments directly align
with our strategic priorities, and I am confident that they will create
long-term value for our shareholders.”

First Quarter 2018 Performance

First quarter 2018 sales increased 16.6 percent to $644.8 million from
$553.0 million last year. The year-over-year increase includes a benefit
of approximately 1.7 percent from currency translation and 1.6 percent
from acquisitions completed by the company during fiscal 2017.

Compared with the prior year, first quarter 2018 sales increased 24.9
percent in the Engine Products segment and 1.8 percent in the Industrial
Products segment, or 23.2 percent and 0.1 percent, respectively,
excluding the benefit from currency translation. The table below
illustrates year-over-year performance with and without the impact from
currency translation.

Donaldson’s first quarter 2018 operating income rate increased to
14.1 percent from 13.8 percent last year. Gross margin declined 0.3
percentage points to 34.8 percent from 35.1 percent, reflecting an
unfavorable mix of products, higher raw materials costs and incremental
expense associated with higher-than-expected demand, partially offset by
fixed cost absorption on higher sales than the prior year. Operating
expense as a rate of sales (“expense rate”) declined approximately 0.6
percentage points to 20.7 percent from 21.3 percent, driven by expense
leverage on increasing sales, partially offset by higher incentive
compensation. Additionally, Donaldson this fiscal year moved its annual
stock option incentive grant to first quarter from second quarter, which
added approximately 0.5 percentage points to the first quarter 2018
expense rate.

Donaldson’s first quarter 2018 net other expense was $0.8 million,
compared with net other income in 2017 of $8.1 million, which included a
benefit of $6.8 million from the Settlement. First quarter interest
expense was $5.2 million in 2018, compared with $4.8 million in 2017.
The Company’s first quarter 2018 effective income tax rate increased to
28.1 percent from 27.3 percent in 2017.

During first quarter 2018, Donaldson repurchased 933 thousand shares, or
0.7 percent, of its common stock at an average price of $45.72 for a
total investment of $42.6 million. Donaldson paid dividends of $23.4
million in first quarter 2018.

Fiscal 2018 Outlook

Donaldson expects fiscal 2018 GAAP EPS between $1.90 and $2.04, an
increase of approximately 6 percent from prior guidance of $1.79 to
$1.93. The midpoint of the revised guidance range reflects an increase
from prior year GAAP and adjusted EPS of 13.2 percent and 16.6 percent,
respectively.

The Company is now forecasting full-year sales to increase 10 percent to
14 percent, compared with the prior forecast of 4 percent to 8 percent.
The favorable impact from currency translation and benefit from
acquisitions Donaldson completed during fiscal 2017 is now expected to
contribute approximately 4 percent to the year-over-year growth,
compared with 2 percent in prior guidance. The change reflects an
increased benefit from currency translation.

Sales of Engine Products are expected to increase 13 percent to 17
percent from 2017, compared with an increase between 6 percent and 10
percent in prior guidance. The Engine Products forecast reflects growth
in all businesses: Aftermarket, Off-Road, On-Road, and Aerospace and
Defense. Fiscal 2018 Industrial Products segment sales are now expected
to increase between 4 percent and 8 percent, compared with flat to up 4
percent in prior guidance. Sales of Industrial Filtration Solutions and
Special Applications are expected to increase, while Gas Turbine Systems
sales are forecast to decline.

Donaldson now expects full-year 2018 operating margin between 14.1
percent and 14.5 percent, an increase from prior guidance of 14.0
percent to 14.4 percent. Compared with the prior year, the midpoint of
the operating margin guidance range reflects an increase of 0.4
percentage points. The Company forecasts 2018 interest expense of
approximately $21 million and other income between $3 million and $7
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. The income was excluded from the calculation
of adjusted EPS, a non-GAAP measure that excludes certain items not
related to the ongoing operations of the Company. The tables attached to
this press release include a reconciliation of GAAP to non-GAAP measures.

Miscellaneous

The Company will webcast its first quarter 2018 earnings conference call
today at 9:00 a.m. CST. 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. CST
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 Company’s ability to
develop new information technology systems and maintain and upgrade
existing 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
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, 2017. 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-Q.

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.

(a) See the “Accounting Considerations” section of this press release
for additional information.

Although free cash flow, EBITDA, adjusted net earnings and adjusted
diluted EPS are not measures of financial performance under GAAP, the
Company believes they are useful in understanding its financial results.
Free cash flow is a commonly used measure of a company’s ability to
generate cash in excess of its operating needs. EBITDA is a commonly
used measure of operating earnings less non-cash expenses. The Company
evaluates its results of operations both on an as reported and a
constant currency basis. The constant currency presentation, which is a
non-GAAP measure, excludes the impact of fluctuations in foreign
currency exchange rates. The Company believes providing constant
currency information provides valuable supplemental information
regarding its results of operations. The Company calculates constant
currency percentages by converting its current period local currency
financial results using the prior period exchanges rates and compared
these adjusted amounts to its prior period reported results. A
shortcoming of these financial measures is that they do not reflect the
Company’s actual results under GAAP. Management does not intend these
items to be considered in isolation or as a substitute for the related
GAAP measures.

Contacts

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