Donaldson Company, Inc.’s (DCI Quick QuoteDCI - Free Report) third-quarter fiscal 2022 (ended Apr 30, 2022) earnings missed the Zacks Consensus Estimate by 6.9% while sales surpassed the same by 2.7%.

Its shares gained 5.2% yesterday to eventually close the trading session at $53.63.

The company’s earnings in the reported quarter were 67 cents per share, lagging the Zacks Consensus Estimate of 72 cents. The bottom line improved 1.5% from the year-ago quarter’s 66 cents. Sales growth in the reported quarter was partially offset by the headwinds stemming from supply-chain constraints and higher cost of raw materials.

Revenue Results

In the fiscal third quarter, Donaldson’s net sales were $853.2 million, reflecting year-over-year growth of 11.5%. The top line surpassed the Zacks Consensus Estimate of $831 million.

Region-wise, the company’s net sales in the United States/Canada increased 18.4% year over year. The top line expanded by 7.8% in Europe, the Middle East and Africa, and by 33.7% in Latin America. It declined 4.4% in Asia Pacific.

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 70.4% of net sales in third-quarter fiscal 2022) sales were $601 million, reflecting year-over-year growth of 13.2%.

The results were positively impacted by 13% growth in Off-Road, 29.2% in Aerospace and Defense, and 14.5% in Aftermarket sales. However, sales declined 9% in On-Road.

Revenues generated from Industrial Products (accounting for 29.6% of net sales in third-quarter fiscal 2022) were $252.2 million, increasing 7.8% from the year-ago quarter.

Results benefited from sales growth of 9.1% in Industrial Filtration Solutions and 19.4% in Gas Turbine Systems. However, sales declined 3.6% in Special Applications.

Margin Profile

In the quarter, Donaldson’s cost of sales increased 15.2% year over year to $584.2 million. Gross profit jumped 4.3% to $269 million while gross margin declined 220 basis points (bps) to 31.5%. The margin results were negatively impacted by higher raw material costs, partially offset by volume growth and favorable pricing.

Operating expenses increased 6.3% year over year to $158 million. Operating profit in the quarter under review increased 1.5% to $111 million. Operating margin was 13%, down 130 bps year over year.

Effective tax rate in the quarter was 25.4% compared with 23.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting third-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $168.7 million, down 1% from $170.4 million recorded in the last-reported quarter. Long-term debt was up 9.6% sequentially to $607.2 million.

In the first nine months of fiscal 2022, the company repaid the long-term debt of $90 million.

In the reported quarter, it generated net cash of $64.2 million from operating activities, reflecting a decrease of 37.9% from the year-ago figure. Capital expenditure (net) totaled $23.2 million compared with $9.8 million in the year-ago quarter. Free cash flow decreased 56.1% to $41 million.

In the first nine months of fiscal 2022, the company used $153.7 million for repurchasing shares and $81.8 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 $2.67-$2.73 compared with $2.66-$2.76 predicted earlier. Sales are anticipated to increase 14.5-16.5% year over year compared with 11-15% guided previously. Movements in foreign currencies are expected to have a negative impact of 3% on sales.

On a segmental basis, Engine Products sales are anticipated to increase 16-18% year over year. The segment’s performance is likely to benefit from growth in Off-Road and Aftermarket sales. Also, solid growth in Aerospace and Defense sales is anticipated. However, supply chain issues might hurt On-Road sales.

Sales growth for Industrial Products is anticipated to be 10-12% year over year. The segment is likely to gain from solid momentum in Industrial Filtration Solutions, Gas Turbine Systems and Special Applications.

Operating margin is expected to be 13.5-13.9% for fiscal 2022. Interest expenses are predicted to be $14.5-$15 million. Other income is likely to be $10-$12 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 50-60%. Share buybacks are expected to account for 2-2.5% of outstanding shares.

Zacks Rank & Stocks to Consider

The company currently carries a Zacks Rank #3 (Hold).

Some better-ranked companies from the same space are discussed below:

Applied Industrial Technologies, Inc. (AIT Quick QuoteAIT - Free Report) presently sports a Zacks Rank #1 (Strong Buy). AIT delivered a trailing four-quarter earnings surprise of 25.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

AIT’s earnings estimates have increased 5.9% for fiscal 2022 (ending June 2022) in the past 60 days. Its shares have inched up 4.8% in the past three months.

Graphic Packaging Holding Company (GPK Quick QuoteGPK - Free Report) presently sports a Zacks Rank #1. Its earnings surprise in the last four quarters was 7.2%, on average.

In the past 60 days, GPK’s earnings estimates have increased 7.6% for 2022. The stock has gained 12.7% in the past three months.

Nordson Corporation (NDSN Quick QuoteNDSN - Free Report) presently has a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 4.5%, on average.

In the past 60 days, NDSN’s earnings estimates have increased 3% for 2022. The stock has declined 1.9% in the past three months.