Donaldson Reports Mixed Q2 Results, Hikes FY2022 Projections

Donaldson Company, Inc. (NYSE: DCI) has reported mixed results for the second quarter of Fiscal 2022 (ended January 31, 2022). The company’s earnings lagged the consensus estimate by 8.1% but revenues surpassed the same by 4.4%.

Strength in business segments, weak margins, and hiked earnings and revenue projections were the main highlight of the release. Shares of Donaldson declined 0.9% on Wednesday, closing the trading session at $53.27.

Donaldson is an expert in manufacturing filtration products and related replacement parts. It has a large customer base in multiple end markets. The company is headquartered in Minneapolis, MN.

Financial Highlights

In the reported quarter, Donaldson’s adjusted earnings were $0.57 per share, below the consensus estimate of $0.62. On a year-over-year basis, the bottom line increased 9.6% on the back of healthy sales growth, partially offset by weak margins.

Revenues stood at $802.5 million, above the Street’s estimate of $768.7 million and representing an increase of 18.2% from the year-ago quarter.

The Engine Products segment’s revenue increased 19.8% year-over-year to $554.1 million on the back of growth in Off-Road, Aftermarket, and Aerospace and Defense businesses. Weakness in On-Road business was a headwind. Revenues for the Industrial Products segment increased 14.6% on the back of impressive performances of Industrial Filtration Solutions, Gas Turbine Systems, and Special Applications businesses.

Further, the company’s revenues grew in all operating regions, with year-over-year growth of 22.6% in the U.S. and Canada; 20.2% in Europe, the Middle East and Africa; 5.5% in Asia Pacific, and 26.9% in Latin America.

The company’s cost of sales grew 21.8% year-over-year. While adjusted gross profit grew 8.1% to $249.87 million, gross margin decreased 290 basis points (bps) to 31.1%. Cost inflation and supply-chain restrictions left adverse impacts on the gross margin.

Operating expenses (adjusted) increased 9.9% from the year-ago quarter. Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) were $121.7 million, up 5.6% from the year-ago quarter, and adjusted EBITDA margin was down 180 bps to 15.2%. Adjusted operating margin during the quarter decreased 150 bps to 11.9%.

Balance Sheet & Cash Flow

Exiting the second quarter, Donaldson’s cash and cash equivalents were $170.4 million, down 23.5% from $222.8 million at the end of Fiscal Year 2021. Long-term debt increased 20.2% to $553.9 million.

In the first half of Fiscal Year 2022, cash flow generated from operating activities decreased 60.6% year-over-year to $79.8 million, while capital expenditure expanded 10.2% to $33.5 million. Free cash flow was $46.3 million, down 73.1% from the year-ago period.

Official Comment

Donaldson’s Chairman, President and CEO, Tod Carpenter, said, “With the first half of the fiscal year behind us and given our expectations for robust sales through the balance of the year, we are increasing our fiscal 2022 sales and earnings guidance. Inflation and supply chain constraints are likely to remain a headwind, however, we expect our second half gross margins to improve sequentially as we realize increased benefits from pricing actions. More broadly, I am confident in the direction Donaldson is heading with our expanded global footprint, commitment to R&D, and integration and scaling of recent and future acquisitions.”

Projections for Fiscal 2022   

For the Fiscal Year 2022 (ending July 2022), Donaldson anticipates revenues to increase 11%-15% from the previous year, compared with 8%-12% growth expected earlier. For the Engine Products segment, revenue growth is predicted to be within the 12%-16% range versus the earlier 8%-12% range. Industrial Products revenues are expected to grow 9%-13% year-over-year, compared with the 7%-11% increase expected earlier.

Earnings per share are predicted to be within $2.66-$2.76 per share, above the earlier forecast of $2.57-$2.73 per share.

Gross margin is predicted to be adversely impacted by the prevailing cost inflation and supply-chain related headwinds. The effective tax rate will likely be 24%-26% and capital expenditure to be within $90-$110 million. Share buybacks in the year are likely to be 2% of the company’s outstanding shares.

Capital Deployment

During the first half of 2022, Donaldson spent $49 million on acquisitions (net of cash acquired) and $75 million on repaying long-term debts. The amount used for purchasing treasury stocks were $115.6 million, up 149.7% year-over-year, and dividend payments were $54.6 million, up 2.8% year-over-year. 

Stock Rating

Donaldson has a Moderate Buy consensus rating based on one Buy and one Hold. The average Donaldson price target is $70, suggesting 31.41% upside potential from current levels. Over the past year, shares of Donaldson have declined 7%.

Bloggers Opinion

Per TipRanks data, the financial blogger opinions are 100% Bullish on DCI, compared with the sector’s average of 68%.

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