Donaldson Company, Inc.’s (DCI Quick QuoteDCI - Free Report) first-quarter fiscal 2022 (ended Oct 31, 2021) earnings and sales surpassed the Zacks Consensus Estimate by 10.9% and 2.4%, respectively.

The company’s earnings in the reported quarter were 61 cents per share, beating the Zacks Consensus Estimate of 55 cents. The bottom line improved 27.1% from the year-ago quarter’s 48 cents. Sales growth in the reported quarter more than offset the headwinds stemming from supply-chain constraints and higher cost of raw material.

Revenue Results

In the fiscal first quarter, Donaldson’s net sales were $760.9 million, reflecting year-over-year growth of 19.5%. The top line surpassed the Zacks Consensus Estimate of $743 million.

Region-wise, the company’s net sales in the United States/Canada increased 19.8% year over year. Likewise, the top line expanded 19.6% in Europe, the Middle East and Africa, 13.6% in the Asia Pacific and 33.5% in Latin America.

The company reports revenues under the following segments — Engine Products and Industrial Products. A brief snapshot of the segmental sales is provided below:

Engine Products’ (accounting for 69.3% of net sales in first-quarter fiscal 2022) sales were $527.2 million, reflecting year-over-year growth of 20.9%.

The results were positively impacted by growth of 44.9% in Off-Road, 22.9% in Aerospace and Defense and 18.1% in Aftermarket sales. However, sales declined 1.4% in On-Road.

Revenues generated from Industrial Products (accounting for 30.7% of net sales in first-quarter fiscal 2022) were $233.7 million, increasing 16.6% from the year-ago quarter.

Results benefited from sales growth of 22% in Industrial Filtration Solutions and 23.3% in Special Applications, partially offset by a decline of 27.8% in Gas Turbine Systems.

Margin Profile

In the reported quarter, Donaldson’s cost of sales increased 21.7% year over year to $503.9 million. It represented 66.2% of net sales compared with 65% in the year-ago quarter. Gross profit increased 15.4% to $257 million, while gross margin declined 120 basis points (bps) to 33.8%. The margin results were negatively impacted by higher raw material costs, labor and freight, partially offset by volume growth and favorable pricing.

Operating expenses increased 10.4% year over year to $149.5 million. It represented 19.7% of net sales compared with 21.3% in the year-ago quarter. Operating profit in the quarter under review increased 23.2% to $107.5 million. Operating margin was 14.1%, up 40 bps year over year.

Effective tax rate in the reported quarter was 25.9% compared with 24.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting first-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $200.8 million, down 9.9% from $222.8 million recorded in the last reported quarter. Long-term debt was up 18.9% sequentially to $548.1 million.

In the first three months of fiscal 2022, the company repaid the long-term debt of $35 million.

In the reported quarter, it generated net cash of $42.9 million from operating activities, reflecting a decrease of 66.7% from the year-ago figure. Capital expenditure totaled $18.3 million compared with $18.8 million in the year-ago quarter. Free cash flow in the reported quarter decreased 77.7% to $24.6 million.

In the first three months of fiscal 2022, the company used $102.9 million for repurchasing shares and $27.4 million for paying out dividends.

Outlook

For fiscal 2022 (ending July 2022), Donaldson anticipates benefiting from solid demand for its products. However, supply-chain challenges weigh on the company.

It expects earnings per share of $2.57-$2.73 compared with $2.50-$2.66 predicted earlier. Sales are anticipated to increase 8-12% year over year compared with 5-10% guided previously. Movements in foreign currencies are expected to have a nominal impact on sales.

On a segmental basis, Engine Products sales are anticipated to increase 8-12% year over year. The segment’s performance is likely to benefit from growth in Off-Road and Aftermarket sales. Also, growth in Aerospace and Defense sales is anticipated. However, supply chain issues are expected to have a negative impact on On-Road sales.

Sales growth for Industrial Products is anticipated to be 7-11% year over year. The segment is likely to gain from growth in Industrial Filtration Solutions, Gas Turbine Systems and Special Applications.

Operating margin is expected to be 14.1-14.7% for fiscal 2022. Interest expenses are predicted to be $14 million. Other income is likely to be $7-$11 million. Effective tax rate is anticipated to be 24-26%.

Capital expenditure for the fiscal year is expected to be $90-$110 million. Free cash flow conversion is anticipated to be 70-80%. Share buybacks will account for 2% of outstanding shares.

Zacks Rank & Stocks to Consider

The company currently carries a Zacks Rank #4 (Sell).

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