Premium filtration products provider, Donaldson Company, Inc.’s (DCI Quick QuoteDCI - Free Report) adjusted earnings per share came in at 35 cents for second-quarter fiscal 2017, beating the Zacks Consensus Estimate of 31 cents by 12.9%.

Investors were impressed with the beat and the promising guidance revision which drove Donaldson’s shares 6.9% higher to $45.92 at the close of the trading session on Mar 1.

The bottom-line figure also improved from the prior-year quarter tally of 29 cents, reflecting an increase of 20.7%. Earnings were driven by sturdy top-line growth, manufacturing efficiencies and streamlined operations.

Inside the Headlines

Donaldson reported total sales of $550.6 million, up 6.4% on a year-over-year basis. Also, revenues beat the Zacks Consensus Estimate of $517 million. Strong performance by the Engine Products segment drove the top line. Also, stabilization in the overall market conditions, as evidenced by the recent restocking activity, proved conducive to the second-quarter fiscal 2017 sales performance.

Revenues at the Engine Products segment were up 12.8% year over year to $361.9 million.

The On Road sub-segment under Engine Products saw a steep decline of 28.2%, which marred the performance of this segment. However, both Aftermarket and Aerospace and Defense showed robust growth, increasing 20.1% and 10.1%, respectively. Further, impressive Off Road performance (up 9.5%) supplemented overall sales of Engine Products segment.

Revenues at the Industrial Products segment declined 3.9% year over year to $188.7 million.

Lackluster performance by Gas Turbines Systems, which plunged 35.6% year over year, weighed on revenues. Also, the Special Applications business, which was down 7.9%, compounded the fall.

Donaldson’s adjusted operating margin expanded 220 basis points (bps) year over year to 12.6%. In addition, the company’s Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) were $89.5 million as compared with $73.0 million recorded a year ago.

Liquidity & Cash Flow

Donaldson exited the quarter with cash and equivalents of $296.3 million as against $262.2 million as on Oct 31, 2016. The company had long-term debt of $324.7 million as on Jan 31, 2017, compared with $324.7 million as on Oct 31, 2016.

Share Repurchase Program/Dividends

During the fiscal second quarter, the company returned $23.1 million to shareholders through dividend payments. Additionally, Donaldson repurchased 250,000 shares for $10.5 million, which represents 0.2% of its outstanding shares.

2017 Guidance

Concurrent with the earnings release, the company raised both its bottom and top-line guidance for fiscal 2017. Donaldson projects fiscal 2017 adjusted earnings per share in the range of $1.60–$1.68, compared to the earlier guidance of $1.50–$1.66.

Currently, the company projects year-over-year fiscal 2017 sales growth in the band of 2–4%, as against the previously guided range of a 2% decline to a 2% increase.

In terms of segments, Donaldson estimates Engine Products sales rise of 5–7% year over year, mainly on the back of robust performance of Aftermarket, Off-Road and Aerospace and Defense. For the Industrial Products segment, the company expects sales to decline in the range of 1–3% on a year-over-year basis. Unimpressive Gas Turbine Systems and Special Applications performance are expected to play spoilsport.

To Conclude

Donaldson’s bottom and top-line beat clearly reflects its inherent strength and focus on maintaining operational efficiency. The company’s restructuring efforts to improve operating and manufacturing cost structure is helping it to counter uncertain market conditions to some extent. Going forward, robust replacement part sales, first-fit program wins and steady market expansion are expected to drive growth. Also, increasing stability of the end markets raises hope.

Despite these positives, mixed signals provided by many large customers and currency translation headwinds are expected to play dampeners, thus restricting growth of the Zacks Rank #3 (Hold) company.

Stocks to Consider

Better-ranked stocks in the broader sector include II-VI Inc. , Vertex Energy, Inc. and Applied Industrial Technologies Inc. (AIT Quick QuoteAIT - Free Report) . While II-VI boasts a Zacks Rank #1 (Strong Buy), Vertex Energy and Applied Industrial Technologies carry the Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

II-VI Incorporated has registered a remarkable positive average surprise of 59.2% for the trailing four quarters, driven by four consecutive earnings beats.

Vertex Energy has beaten estimates twice in the preceding four quarters, the average positive surprise being 27.1%.

Applied Industrial Technologies managed to beat estimates thrice over the trailing four quarters and has a positive earnings surprise of 6.2%.

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