Donaldson Company, Inc. (DCI Quick QuoteDCI - Free Report) reported better-than-expected results for the second quarter of fiscal 2021 (ended January 31, 2021). Its earnings beat the Zacks Consensus Estimate by 2% and sales surpassed the same by 3.8%.

The company’s earnings in the reported quarter were 52 cents per share, surpassing the Zacks Consensus Estimate of 51 cents. Also, the bottom line increased 4% from the year-ago quarter’s figure of 50 cents on the back of sales growth and margin improvements.

Top-Line Results

In the fiscal second quarter, Donaldson’s net sales were $679.1 million, reflecting year-over-year growth of 2.6%. Also, the top line surpassed the Zacks Consensus Estimate of $654 million.

On a geographical basis, the company’s net sales in the United States/Canada decreased 4.2% year over year. However, results benefitted from 3.6% growth in Europe, Middle East and Africa’s sales, an 11.7% expansion in the Asia Pacific sales, and a 7.7% increase in sales from 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 68.1% of net sales in second-quarter fiscal 2021) sales were $462.4 million, reflecting year-over-year growth of 6.2%.

The results were positively impacted by growth of 15.4% in Off-Road and 7.2% in Aftermarket sales. However, On-Road sales declined 1.2% and that from Aerospace and Defense decreased 20.4%.

Revenues generated from Industrial Products (accounting for 31.9% of net sales in second-quarter fiscal 2021) were $216.7 million, decreasing 4.3% from the year-ago quarter.

Results suffered from a sales decline of 3.3% in Industrial Filtration Solutions, an 8.1% fall in Special Applications’ sales and a 3.5% fall in sales from Gas Turbine Systems.

Margin Profile

In the reported quarter, Donaldson’s cost of sales increased 3.4% year over year to $453.8 million. It represented 66.8% of net sales versus 66.3% in the year-ago quarter. Adjusted gross profit increased 3.5% year over year to $231.1 million, while adjusted gross margin grew 30 basis points (bps) to 34%. The margin results benefitted from lower costs related to raw materials, partially offset by unfavorable sales mix.

Adjusted operating expenses increased 1.1% year over year to $140.2 million. It represented 20.6% of net sales versus 21% in the year-ago quarter. Adjusted operating profit in the quarter under review increased 7.6% year over year to $90.9 million. Adjusted operating margin was 13.4%, up 60 bps year over year.

Effective tax rate in the quarter was 23.9% as compared with 22.2% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting second-quarter fiscal 2021, Donaldson’s cash and cash equivalents were $207.3 million, down 23.2% from $270 million recorded in the last reported quarter. Long-term debt was down 14.1% sequentially to $495.1 million.

In the first half of fiscal 2021, the company repaid the long-term debt of $125 million.

In the second quarter of fiscal 2021, Donaldson generated net cash of $73.4 million from operating activities, reflecting a decline of 19.1% from the year-ago figure. Capital expenditure totaled $11.6 million versus $42.6 million in the year-ago quarter. Free cash flow in the reported quarter increased 28.5% year over year to $61.8 million.

In the first half, the company used $46.3 million for repurchasing shares and $53.1 million for paying out dividends.

Outlook

Donaldson is hopeful to gain from the recovery in end markets in fiscal 2021 (ending July 2021). It also believes that the pandemic-related uncertainties will exist during the year.

For fiscal 2021, it expects adjusted earnings per share of $2.17-$2.25. This projection excludes restructuring charges of 8 cents associated with actions taken in the second quarter. Notably, adjusted earnings were $2.00 per share in fiscal 2020.

Movements in foreign currencies are anticipated to boost sales by 3%. On a segmental basis, sales are anticipated to increase 8-12% year over year for Engine Products in the year, while that of Industrial Products will be between a decline of 2% and an increase of 2%.

Adjusted operating margin is expected to be 13.8-14.2% in fiscal 2021, up from 13.2% in fiscal 2020. Interest expenses are predicted to be $13 million, other income is likely to be $2-$4 million and effective tax rate is anticipated to be 24-25%. Capital expenditure in the year is expected to be $55-$65 million and cash flow conversion is anticipated to exceed 100%. Share buybacks will be 1-2% of outstanding shares.