Donaldson Company, Inc.’s (DCI Quick QuoteDCI - Free Report) second-quarter fiscal 2022 (ended Jan 31, 2021) earnings missed the Zacks Consensus Estimate by 8.1%, while sales surpassed the same by 3.6%.

The company’s earnings in the reported quarter were 57 cents per share, lagging the Zacks Consensus Estimate of 62 cents. The bottom line improved 9.6% from the year-ago quarter’s 52 cents. Sales growth in the reported quarter more than offset the headwinds stemming from supply-chain constraints and higher cost of raw material.

Revenue Results

In the fiscal second quarter, Donaldson’s net sales were $802.5 million, reflecting year-over-year growth of 18.2%. The top line surpassed the Zacks Consensus Estimate of $774 million.

Region-wise, the company’s net sales in the United States/Canada increased 22.6% year over year. The top line expanded 20.2% in Europe, the Middle East and Africa, 5.5% in the Asia Pacific and 26.9% in Latin America.

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 69% of net sales in second-quarter fiscal 2022) sales were $554.1 million, reflecting year-over-year growth of 19.8%.

The results were positively impacted by growth of 22.6% in Off-Road, 29.6% in Aerospace and Defense and 20.6% in Aftermarket sales. However, sales declined 0.7% in On-Road.

Revenues generated from Industrial Products (accounting for 31% of net sales in second-quarter fiscal 2022) were $248.4 million, increasing 14.6% from the year-ago quarter.

Results benefited from sales growth of 14.1% in Industrial Filtration Solutions, 9.8% in Special Applications and 26.3% in Gas Turbine Systems.

Margin Profile

In the quarter, Donaldson’s cost of sales increased 21.8% year over year to $552.7 million. Gross profit jumped 10.9% to $249.8 million, while gross margin declined 210 basis points (bps) to 31.1%. The margin results were negatively impacted by higher raw material costs, labor and freight, partially offset by volume growth and favorable pricing.

Operating expenses increased 3.2% year over year to $154.1 million. Operating profit in the quarter under review soared 25.8% to $95.7 million. Operating margin was 11.9%, up 70 bps year over year.

Effective tax rate in the quarter was 24.1% compared with 23.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting second-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $170.4 million, down 15.1% from $200.8 million recorded in the last reported quarter. Long-term debt was up 1.1% sequentially to $553.9 million.

In the first six months of fiscal 2022, the company repaid the long-term debt of $75 million.

In the reported quarter, it generated net cash of $36.9 million from operating activities, reflecting a decrease of 49.6% from the year-ago figure. Capital expenditure (net) totaled $15.2 million compared with $11.6 million in the year-ago quarter. Free cash flow decreased 64.9% to $21.7 million.

In the first six months of fiscal 2022, the company used $115.6 million for repurchasing shares and $54.6 million for paying out dividends.

Outlook

For fiscal 2022 (ending July 2022), Donaldson anticipates benefiting from solid demand for its products. However, supply-chain challenges weigh on the company.

It expects earnings per share of $2.66-$2.76 compared with $2.57-$2.73 predicted earlier. Sales are anticipated to increase 11-15% year over year compared with 8-12% guided previously. Movements in foreign currencies are expected to have a negative impact of 2% on sales.

On a segmental basis, Engine Products sales are anticipated to increase 12-16% year over year. The segment’s performance is likely to benefit from growth in Off-Road and Aftermarket sales. Also, growth in Aerospace and Defense sales is anticipated. However, supply chain issues might hurt On-Road sales.

Sales growth for Industrial Products is anticipated to be 9-13% year over year. The segment is likely to gain from solid momentum in Industrial Filtration Solutions, Gas Turbine Systems and Special Applications.

Operating margin is expected to be 14-14.4% for fiscal 2022. Interest expenses are predicted to be $14 million. Other income is likely to be $7-$11 million. Effective tax rate is anticipated to be 24-26%.

Capital expenditure for the fiscal year is expected to be $90-$110 million. Free cash flow conversion is anticipated to be 70-80%. Share buybacks will account for 2% of outstanding shares.

Zacks Rank & Stocks to Consider

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

Some better-ranked companies in the Zacks Industrial Products sector are discussed below.

Franklin Electric Co., Inc. (FELE Quick QuoteFELE - Free Report) presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Its earnings surprise in the last four quarters was 17.44%, on average.

In the past 30 days, Franklin Electric’s earnings estimates have increased 10.9% for 2022. FELE’s shares have lost 8.2% in the past three months.

Standex International Corporation (SXI Quick QuoteSXI - Free Report) presently has a Zacks Rank #2 (Buy).  Its earnings surprise in the last four quarters was 5.85%, on average.

In the past 30 days, Standex’s earnings estimates have increased 5.9% for fiscal 2022 (ending June 2022). SXI’s shares have gained 1.5% in the past three months.

AZZ Inc. (AZZ Quick QuoteAZZ - Free Report) presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 16.90%, on average.

AZZ’s earnings estimates have been stable for fiscal 2022 (ended February 2022, results awaited) in the past 30 days. AZZ’s shares have declined 7.4% in the past three months.