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Donaldson (DCI) Q1 Earnings & Sales Lag Estimates, Down Y/Y

Zacks Equity Research

Donaldson Company, Inc. DCI reported weaker-than-expected results for first-quarter fiscal 2020 (ended Oct 31, 2019). Its earnings and sales in the quarter lagged estimates by 3.77% and 3.4%, respectively.

The company’s adjusted earnings in the reported quarter were 51 cents per share, lagging the Zacks Consensus Estimate of 53 cents. Also, the bottom line decreased 8.9% from the year-ago quarter’s figure of 56 cents on weak sales and lower operating margin.

Weak Top-Line Results

In the fiscal first quarter, Donaldson’s net sales were $672.7 million, reflecting a year-over-year decline of 4.1%. Notably, the BOFA International acquisition added 1.1% to sales growth, while pricing had a positive 0.6% impact. Also, business for new equipment was soft in the quarter and unfavorable movements in foreign currencies had 1.4% negative impact.

However, the top line lagged the Zacks Consensus Estimate of $696 million.

On a geographical basis, the company’s net sales in the United States decreased 6% year over year. Results also suffered from a 0.8% decline in Europe, Middle East and Africa’s sales and a 9.4% dip in the Asia Pacific’s sales. Sales in Latin America expanded 9.1% year over year.

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 68.3% of net sales in first-quarter fiscal 2020) sales were $459.2 million, reflecting a year-over-year decline of 4.5%.

The results were adversely impacted by a 10% fall in Off-Road, 11.4% in On-Road and 3.6% in Aftermarket sales. This was partially offset by a 10.6% increase in Aerospace and Defense sales.

Revenues generated from Industrial Products (accounting for 31.7% of net sales in first-quarter fiscal 2020) amounted to $213.5 million, decreasing 3.2% from the year-ago quarter.

Results suffered from a decline of 18.8% in Gas Turbine Systems, 0.3% in Industrial Filtration Solutions and 4% fall in Special Applications’ sales.

Margin Profile

In the reported quarter, Donaldson’s cost of sales decreased 4.7% year over year to $441.4 million. It represented 65.6% of net sales versus 66% in the year-ago quarter. Adjusted gross margin in the quarter was 34.4%, up 40 basis points (bps) year over year. Results gained from pricing activities, supply-chain optimization and lower costs related to raw materials, partially offset by weak sales.

Operating expenses grew 2.1% year over year to $142.6 million. It represented 21.2% of net sales versus 19.9% in the year-ago quarter. Adjusted operating margin in the quarter under review was 13.2%, down 90 bps year over year. Adjusted effective tax rate in the quarter was 24.9%, up from 24.3% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting first-quarter fiscal 2020, Donaldson’s cash and cash equivalents were $210 million, up 18.1% from $177.8 million recorded in the last reported quarter. Long-term debt was up 2.1% sequentially to $596.8 million.

In the fiscal first quarter, the company repaid long-term debt of $111.1 million, while raised $122.9 million from long-term debts.

In the reported quarter, Donaldson generated net cash of $86.1 million from operating activities, reflecting an increase of 36% from the year-ago figure. Capital expenditure totaled $37.1 million versus $28.2 million in the year-ago quarter. Free cash flow in the reported quarter was $49 million, suggesting a year-over-year increase of 39.6%.

In the first quarter of fiscal 2020, the company used $65 million for purchasing 1.4 million shares and $26.6 million for paying out dividends.

Outlook

Going forward, Donaldson believes that capacity expansion, investments to enhance market shares, focus on innovation and optimization of supply chain will be boon.

The company expects sales in fiscal 2020 (ending July 2020) to decline 2% to increase 4% from the previous year. It projects forex woes to have an adverse impact of 1-2% on sales, while pricing will positively impact the same by 1%.

The company anticipates fiscal 2020 Engine Products’ sales between 4% decline and 2% increase. The results will likely benefit from growth in Aftermarket as well as Aerospace and Defense sales. However, it projects year-over-year declines in Off-Road and On-Road sales. The company expects forex woes to hurt results by 1-2%.

Donaldson anticipates Industrial Products’ sales growth of 2-8%. The results will likely gain from growth in Industrial Filtration Solutions and Gas Turbine Systems sales, partially offset by a decline in Special Applications sales. The company expects forex woes to hurt results by 1-2%.

It predicts operating margin of 13.9-14.5%, up from 13.6% in fiscal 2019 (ended July 2019). The results will likely benefit from gross margin improvement, partially offset by the adverse impact of rise in operating expenses.

The company anticipates interest expenses of $18-$20 million and capital expenditure of $110-$130 million. It expects effective income tax rate of 25-27%.

It projects earnings of $2.21-$2.37 per share, higher than $2.05 in fiscal 2019. Share buybacks in the fiscal year are likely to be 2% of the company’s outstanding shares.

Donaldson Company, Inc. Price, Consensus and EPS Surprise

 

Donaldson Company, Inc. Price, Consensus and EPS Surprise

Donaldson Company, Inc. price-consensus-eps-surprise-chart | Donaldson Company, Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of approximately $7 billion, Donaldson currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Dover Corporation DOV and Standex International Corporation SXI. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Dover and Standex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Tennant and Dover have improved for the current year, while have been unchanged for Standex. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 4.58% for Dover and 2.11% for Standex.

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