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Donaldson's (DCI) Q4 Earnings Hit by Macroeconomic Woes

Premium filtration products provider Donaldson Company, Inc. DCI reported adjusted earnings per share of 46 cents for fourth-quarter fiscal 2016, which missed the Zacks Consensus Estimate of 50 cents. However, the bottom line was up 2.2% from the prior-year quarter of 45 cents.

For the full-year 2016, the company’s adjusted earnings per share fell 3.8% to $1.52 on a year-over-year basis. The bottom-line decline can be largely attributed to steep currency fluctuations and weak top-line performance.

Inside the Headlines

Donaldson reported total sales of $593.8 million, down 2.8% on a year-over-year basis. Also, revenues missed the Zacks Consensus Estimate of $595 million by a whisker. Poor performance in both of the company’s segments affected the top line. Moreover, currency fluctuations resulted in a $5.1 million decline in the fiscal fourth-quarter sales.

For fiscal 2016, Donaldson reported revenues of $2,220.3 million, down 6.4% from the prior-year tally. Currency fluctuations proved to be a major spoilsport, reducing sales by $74.2 million. This apart, sluggish global agriculture, mining equipment and construction markets as well as project deferrals and volatile global demand proved to be major headwinds, hurting full-year top-line performance adversely. Moreover, pronounced decline of disk drive, membrane and semiconductor businesses also added to the company’s woes.

Revenues at the Engine Products segment declined 5% year over year to $366.5 million.

Three of the four sub-segments under Engine Products – Off-Road, On Road and Aerospace & Defense – recorded declines, which led to the overall weak performance. On-road business (down 12.3%) suffered on account of softness in North America due to poor build rates of heavy duty trucks. Also, weakness in global agricultural and mining markets proved to be a drag on the Off-Road business (down 2.6%).

Revenues at the Industrial Product segment were down 6.2% year over year to $227.3 million.

Unimpressive performance of the Gas Turbines Systems (down 21.1%) and Industrial Filtration Solutions (down 2.5%) business proved to be a drag for this segment. Prolonged weakness in disk drives posed a significant headwind to this segment.

Donaldson’s adjusted operating margin expanded 180 basis points (bps) year over year to 15.8%. Also, the company’s Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) came in at $106.4 million as against $101.0 million recorded a year ago.

Liquidity

Donaldson exited the quarter with cash and equivalents of $243.2 million as against $189.9 million as on Jul 31, 2015. The company had long-term debt of $351.8 million as on Jul 31, 2016, compared with $389.2 million as on Jul 31, 2015.

2017 Guidance

Concurrent with the earnings release, the company provided its guidance for fiscal 2017. Donaldson expects fiscal 2017 adjusted earnings in the range of $1.50–$1.66 per share compared with fiscal 2016 adjusted earnings of $1.52. Based on the current market scenario, the company expects full-year sales in between a 2% decline and a 2% increase from 2016.

In terms of segments, Donaldson expects both Engine Products and Industrial Products sales to be a range of a 2% decline to a 2% increase compared with the prior year.

While robust aftermarket sales are expected to act as tailwind, poor sales of heavy-duty equipment (including off-road and on-road products) and commercial helicopters are anticipated to act as headwinds for Engine Products, increased sales of replacement parts are likely to act as growth catalyst. However, the upside can be largely offset by sluggish Gas Turbine Systems and Special Applications businesses sales.

Conclusion

Donaldson’s financials are taking a hit from the intensifying macroeconomic woes. On the positive side, factors including focus on operational efficiency (like implementation of the global ERP system), robust replacement part sales, winning new first-fit programs and steady market expansion are expected to drive growth. However, these positives are estimated to be more than offset by the overall weakness in market conditions in fiscal 2017.

DONALDSON CO Price, Consensus and EPS Surprise

 

DONALDSON CO Price, Consensus and EPS Surprise | DONALDSON CO Quote

Factors such as decline in heavy-duty on-road transportation business, sluggish global agriculture, mining equipment and construction markets are anticipated to play spoilsport. Moreover, waning U.S. defense spending, softness in the commercial aerospace and major project deferrals are expected to worsen the company’s prospects. Decline in disk drive, membrane and semiconductor businesses are also likely to adversely affect the company’s top-line performance.

Donaldson currently carries a Zacks Rank #2 (Buy). Other favorably placed stocks in the broader sector include H2O Innovation Inc. HEOFF, Heritage-Crystal Clean, Inc HCCI and Landauer Inc. LDR. While H2O Innovation and Heritage-Crystal Clean carry a Zacks Rank #2 (Buy), Landauer sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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