Donaldson Company, Inc. (DCI Quick QuoteDCI - Free Report) reported impressive results for the first quarter of fiscal 2021 (ended October 31, 2020). Its earnings surpassed the Zacks Consensus Estimate by 6.7% and sales exceeded the same by 3.5%.

The company’s earnings in the reported quarter were 48 cents per share, surpassing the Zacks Consensus Estimate of 45 cents. However, the bottom line decreased 5.9% from the year-ago quarter’s figure of 51 cents due to sales weakness caused by the pandemic, partially offset by margin improvements.

Top-Line Results

In the fiscal first quarter, Donaldson’s net sales were $636.6 million, reflecting a year-over-year decline of 5.4%. The results suffered from a 6.4% fall in organic sales due to the adverse impacts of the pandemic, partially offset by a 1% gain from movements in foreign currencies.

However, the top line surpassed the Zacks Consensus Estimate of $615 million.

On a geographical basis, the company’s net sales in the United States decreased 12.5% year over year. Results also suffered from a 3.5% decline in Europe, Middle East and Africa’s sales, and 7.9% growth in the Asia Pacific sales. Sales in Latin America declined 6.5% year over year.

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 68.5% of net sales in first-quarter fiscal 2021) sales were $436.2 million, reflecting a year-over-year decline of 5%.

The results were adversely impacted by a 5.6% fall in Off-Road, 21.4% in On-Road and 0.7% in Aftermarket sales. Also, the company recorded a 26.5% fall in Aerospace and Defense sales.

Revenues generated from Industrial Products (accounting for 31.5% of net sales in first-quarter fiscal 2021) were $200.4 million, decreasing 6.1% from the year-ago quarter.

Results suffered from a sales decline of 9% in Industrial Filtration Solutions and a 4.4% fall in Special Applications’ sales, partially offset by an 11% rise in Gas Turbine Systems sales.

Margin Profile

In the reported quarter, Donaldson’s cost of sales decreased 6.2% year over year to $413.9 million. It represented 65% of net sales versus 65.6% in the year-ago quarter. Gross margin in the quarter was 35%, up 60 basis points (bps) year over year. The margin results benefitted from sales mix and lower costs related to raw materials.

Operating expenses dipped 5% year over year to $135.5 million. It represented 21.3% of net sales versus 21.2% in the year-ago quarter. Operating margin in the quarter under review was 13.7%, up 50 bps year over year. Effective tax rate in the quarter was 24.7% as compared with 24.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting first-quarter fiscal 2021, Donaldson’s cash and cash equivalents were $270 million, up 14.4% from $236.6 million recorded in the last reported quarter. Long-term debt was down 6.7% sequentially to $576.3 million.

In the first quarter, the company repaid the long-term debt of $40 million.

In the first quarter of fiscal 2021, Donaldson generated net cash of $128.9 million from operating activities, reflecting an increase of 49.7% from the year-ago figure. Capital expenditure totaled $18.8 million versus $37.1 million in the year-ago quarter. Free cash flow in the reported quarter increased 124.7% year over year to $110.1 million.

In the quarter, the company used $15.6 million for repurchasing shares and $26.6 million for paying out dividends.

Outlook

Donaldson is wary about the uncertainties related to the pandemic and thus refrained from providing detailed financial projections for fiscal 2021 (ending July 2021).

For second-quarter fiscal 2021 (ending January 2021), the company predicts sales to improve from the previous quarter and expects change on a year-over-year basis to be (4%)-1%. Further, it expects healthy sales at the Advance and Accelerate portfolio and improving economic conditions to aid top-line results in the second half of fiscal 2021.

Also, gains from optimization actions and improved sales are predicted to boost the company’s gross margin performance in the quarters ahead.     

For fiscal 2021, it expects operating expenses (% of sales) to be flat year over year. Its effective tax rate is expected to be 24-26%, while capital expenditure is likely to be lower year over year and free cash flow conversion is anticipated to exceed 100%. Share buybacks will be 1% of outstanding shares.