Donaldson (DCI) Q3 Earning Miss Estimates, Revenue Beat – June 3, 2022

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Donaldson Company, Inc.it is (ICD Free Report) earnings for the third quarter of fiscal 2022 (ended April 30, 2022) missed Zacks’ consensus estimate by 6.9% while sales topped the same by 2.7%.

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

The company’s earnings in the reported quarter were 67 cents per share, lagging Zacks’ consensus estimate of 72 cents. Net income improved 1.5% from 66 cents in the prior year quarter. Sales growth in the reported quarter was partially offset by headwinds resulting from supply chain constraints and rising raw material costs.

Revenue Results

During the fiscal third quarter, Donaldson’s net sales were $853.2 million, reflecting 11.5% year-over-year growth. The top line topped Zacks’ consensus estimate of $831 million.

Regionally, the company’s net sales in the United States and Canada increased 18.4% year-over-year. Revenue increased by 7.8% in Europe, the Middle East and Africa, and by 33.7% in Latin America. It fell by 4.4% in Asia-Pacific.

The company reports revenue in the following segments – Engine Products and Industrial Products. A brief overview of sales by segment is provided below:

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

Results were positively impacted by growth of 13% in Off-Road, 29.2% in Aeronautics and Defense and 14.5% in Aftermarket. On the other hand, sales fell by 9% in On-Road.

Revenue from Industrial Products (representing 29.6% of net sales in the third quarter of Fiscal 2022) was $252.2 million, up 7.8% from the fiscal quarter. last year.

Results benefited from sales growth of 9.1% in industrial filtration solutions and 19.4% in gas turbine systems. On the other hand, sales fell by 3.6% in Special Applications.

Margin profile

During 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 fell 220 basis points (bps) to 31.5%. Margin results were negatively impacted by higher raw material costs, partially offset by volume growth and favorable pricing.

Operating expenses rose 6.3% year over year to $158 million. Operating profit for the quarter under review rose 1.5% to $111 million. The operating margin was 13%, down 130 basis points year-on-year.

The effective tax rate during the quarter was 25.4%, compared to 23.9% in the corresponding quarter of the previous year.

Balance sheet and cash flow

At the end of the third quarter of fiscal 2022, Donaldson’s cash and cash equivalents were $168.7 million, down 1% from $170.4 million last quarter . Long-term debt increased 9.6% sequentially to $607.2 million.

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

In the reported quarter, it generated $64.2 million in net cash from operating activities, reflecting a 37.9% decline from the prior year figure. Capital expenditures (net) totaled $23.2 million, compared to $9.8 million in the corresponding quarter of the previous fiscal year. Free cash flow decreased 56.1% to $41 million.

In the first nine months of fiscal 2022, the company used $153.7 million to repurchase stock and $81.8 million to pay dividends.

Outlook

For fiscal 2022 (ending July 2022), Donaldson expects to benefit from strong demand for its products. However, supply chain challenges are weighing on the company.

It expects earnings per share of $2.67 to $2.73, versus $2.66 to $2.76 previously forecast. Sales are expected to grow 14.5-16.5% year-over-year from 11-15% previously. Foreign currency fluctuations are expected to have a negative impact of 3% on sales.

On a segmental basis, engine product sales are expected to grow 16-18% year-over-year. The segment’s performance should benefit from growth in Off-Road and Aftermarket sales. In addition, solid growth in aerospace and defense sales is expected. However, supply chain issues could hurt on-road sales.

Growth in sales of industrial products should be 10 to 12% year-on-year. The segment should benefit from strong momentum in industrial filtration solutions, gas turbine systems and special applications.

Operating margin is expected to be 13.5 to 13.9 percent for fiscal 2022. Interest expense is expected to be between $14.5 and $15 million. Other income is expected to be between $10 million and $12 million. The effective tax rate is expected to be 24-26%.

Capital expenditures for the fiscal year are expected to be between $90 million and $110 million. Free cash flow conversion is expected to be 50-60%. Share buybacks are expected to represent 2-2.5% of outstanding shares.

Zacks Ranking and Stocks to Consider

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

Some higher-ranked companies in the same space are featured below:

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

AIT’s earnings estimates have risen 5.9% for fiscal year 2022 (ending June 2022) over the past 60 days. Its shares have edged up 4.8% over the past three months.

Graphic packaging holding company (GPK Free Report) currently sports a Zacks No. 1 rank. Its earnings surprise over the past four quarters averaged 7.2%.

Over the past 60 days, GPK’s earnings estimates have risen 7.6% for 2022. The stock has gained 12.7% over the past three months.

Nordson Company (NDSN Free Report) currently has a Zacks Rank #2 (Buy). Its earnings surprise over the past four quarters averaged 4.5%.

Over the past 60 days, NDSN’s earnings estimates have risen 3% for 2022. The stock has fallen 1.9% over the past three months.

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