Donaldson Company Reports Second Quarter 2021 Earnings and Provides Full Year 2021 Guidance

Rhea-AI Summary

Donaldson Company (NYSE: DCI) reported Q2 2021 GAAP net earnings of $56.2 million, down from $64.4 million in 2020, impacted by $14.8 million in restructuring charges. Adjusted net earnings were $66.8 million, with GAAP EPS at $0.44, a decrease from $0.50 the previous year. Sales rose 2.6% to $679.1 million, led by growth in Off-Road and Aftermarket segments. Full-year guidance estimates GAAP EPS between $2.09 and $2.17, with sales set to increase 5%-8% compared to last year.

Positive

• Adjusted net earnings of $66.8 million indicate strong operational performance.
• Sales increased 2.6% to $679.1 million, showing resilience amidst challenges.
• Expected fiscal 2021 GAAP EPS between $2.09 and $2.17 demonstrates growth outlook.
• Forecasted sales growth of 5% to 8% reflects recovery in Off-Road and Aftermarket.

Negative

• GAAP net earnings declined to $56.2 million from $64.4 million in 2020.
• Restructuring charges of $14.8 million negatively impacted earnings.
• Operating margin decreased to 11.2% from 12.8% in the prior year.

Donaldson Company, Inc. (NYSE: DCI) today reported second quarter 2021 generally accepted accounting principles (GAAP) net earnings of $56.2 million compared with $64.4 million in 2020. The current period included charges of $14.8 million related to restructuring activities initiated in the second quarter, primarily in Donaldson’s Europe, Middle East and Africa (EMEA) region. Adjusted net earnings were $66.8 million. GAAP earnings per share (EPS)¹ for the second quarter 2021 were $0.44 and were $0.50 in 2020. Excluding the impact of restructuring expense, second quarter 2021 adjusted EPS² were $0.52. The tables attached to this press release include a reconciliation of GAAP to non-GAAP measures.

“Our second quarter results demonstrate the advantage of our diversified portfolio of businesses that allow Donaldson to benefit from cyclical end-market recovery while mitigating the effects of weaker markets at different points in the cycle,” said Tod Carpenter, chairman, president and chief executive officer. “We are executing our strategy to expand our total addressable markets to further enable Donaldson to leverage our filtration technology leadership position, and we are well-positioned to benefit from the post-pandemic recovery.

“We are encouraged by the robust growth in our Engine Off-Road and Aftermarket businesses, which contributed to stronger-than-expected second quarter sales, as well as emerging signs of broad-based recovery. As we are now midway through our fiscal year, and with the backdrop of improving end markets, while noting that uncertainties due to the pandemic continue to exist, full year guidance has been provided for fiscal 2021. We expect adjusted operating margin to increase in fiscal 2021 driven by expanded leverage on higher volumes partially offset by higher commodity costs and mix pressures. I am proud of the hard work and dedication our employees have shown during this unprecedented time of uncertainty. We remain committed to our customers as we advance filtration for a cleaner world.”

1	All earnings per share figures refer to diluted earnings per share.
2	Adjusted earnings per share is a non-GAAP financial measure that excludes the impact of certain items not related to ongoing operations.

Operating Results

Second quarter 2021 sales increased 2.6% to $679.1 million from $662.0 million in 2020.

	Three Months Ended								Six Months Ended
	January 31, 2021								January 31, 2021
	Reported % Change				Constant Currency % Change				Reported % Change				Constant Currency % Change
Engine Products segment
Off-Road	15.4	%			11.2	%			4.8	%			1.8	%
On-Road	(1.2	)			(3.0	)			(12.2	)			(13.3	)
Aftermarket	7.2				5.5				3.2				2.1
Aerospace and Defense	(20.4	)			(21.9	)			(23.7	)			(24.9	)
Total Engine Products segment	6.2				4.1				0.4				(0.9	)
Industrial Products segment
Industrial Filtration Solutions	(3.3	)			(6.5	)			(6.1	)			(8.9	)
Gas Turbine Systems	(3.5	)			(4.7	)			3.2				2.0
Special Applications	(8.1	)			(11.3	)			(6.3	)			(8.5	)
Total Industrial Products segment	(4.3	)			(7.3	)			(5.2	)			(7.7	)
Total Company	2.6	%			0.2	%			(1.4	)%			(3.2	)%

Second quarter 2021 Engine Products (Engine) sales increased 6.2%, reflecting strong results in Off-Road and Aftermarket, partially offset by continued weakness in Aerospace and Defense and On-Road. The decline in Aerospace and Defense was primarily due to lower levels of demand in commercial aerospace as a result of the ongoing COVID-19 pandemic. Engine segment sales across the Asia Pacific region experienced year-over-year growth where both Off-Road and Aftermarket sales were up significantly. On-Road sales declined modestly driven primarily by weaker U.S. Class 8 truck builds.

Second quarter 2021 Industrial Products (Industrial) sales declined 4.3%, driven primarily by continued softness in Industrial Filtration Solutions (IFS) due to lower demand for dust collection products as customers remain cautious in making capital investments. China continues to be a positive for IFS as market share gains, coupled with recovery from the COVID-19 pandemic, drove double-digit growth in the country. Process Filtration sales expanded globally driven by market share gains. Gas Turbine Systems’ sales decline was due to lower project sales, and sales in Special Applications remain under pressure from lower sales of disk drive filters.

Second quarter 2021 gross margin was 33.2% versus 33.7% in 2020, including a negative impact of 80 basis points from restructuring expense related to the Company’s ongoing optimization initiatives. Excluding restructuring expense, adjusted gross margin increased to 34.0%, driven by lower raw material costs, due in part to the Company’s procurement initiatives, partially offset by an unfavorable mix of sales.

Second quarter 2021 operating expenses as a percent of sales increased by 1.0% to 22.0% from 21.0% in 2020. Restructuring expense of $9.0 million added 130 basis points to the operating expense rate. Excluding restructuring expense, adjusted operating expense declined 30 basis points from fiscal 2020 reflecting improved leverage from higher sales and disciplined expense management, partially offset by higher incentive compensation expense.

Second quarter 2021 operating income as a rate of sales (operating margin) declined to 11.2% from 12.8% in 2020. Adjusted operating margin, which excludes $14.8 million of restructuring expense, was 13.4%, or 60 basis points better than the prior year operating margin.

Second quarter 2021 interest expense declined to $3.3 million from $4.5 million in 2020, reflecting interest rate favorability and a lower debt level. Other income, net was $1.1 million in second quarter 2021, compared with $2.8 million in 2020. The year-over-year change was driven by several items including foreign exchange losses.

Donaldson’s second quarter 2021 GAAP effective tax rate increased to 23.9% from 22.2% in 2020, driven primarily by an overall decrease in discrete tax item benefits. The adjusted effective tax rate was 24.7%. Donaldson paid second quarter 2021 dividends of $26.5 million and repurchased approximately 0.4% of its outstanding shares for $30.7 million. Year-to-date Donaldson has repurchased 0.7% of its outstanding shares for $46.3 million.

Fiscal 2021 Outlook

Donaldson expects fiscal 2021 GAAP EPS between $2.09 and $2.17, including a negative impact of $0.08 per share related to restructuring activities in the second quarter, compared with 2020 GAAP EPS of $2.00. Adjusted fiscal 2021 EPS is expected between $2.17 and $2.25. Total Company sales are expected to increase between 5% and 8% compared to 2020. Currency translation is expected to benefit sales by 3%.

Fiscal 2021 Engine sales are projected to increase between 8% and 12% versus 2020, reflecting continuing growth in Off-Road and Aftermarket and strong second half growth in On-Road combined with lower year-over-year sales in the Company’s Aerospace and Defense businesses. Industrial sales are expected to be down 2% to up 2% from 2020, reflecting second half growth in IFS led by Industrial Air Filtration and Process Filtration, and modest growth in Gas Turbine Systems partially offset by declining sales in Special Applications primarily driven by expected declines in disk drive filters.

Donaldson expects fiscal 2021 adjusted operating margin in the range of 13.8% and 14.2%, versus 13.2% in 2020. The year-over-year improvement is projected to come from higher gross margin, reflecting improved absorption and operating expense leverage. The improvement was partially offset by higher raw material costs, mix pressures, and increased incentive compensation expense. The adjusted operating margin forecast excludes the impact of the restructuring charges recorded in the second quarter of 2021.

The Company expects fiscal 2021 interest expense of approximately $13 million, and other income is forecast between $2 million and $4 million. Donaldson’s 2021 effective income tax rate is forecast between 24% and 25%.

The Company expects fiscal 2021 capital expenditures between $55 million and $65 million. Cash flow conversion is still expected above 100%, reflecting strong year-to-date conversion and anticipated increases in working capital later in the fiscal year. Donaldson expects to repurchase 1% to 2% of its outstanding shares during fiscal 2021.

Restructuring

In second quarter 2021, Donaldson initiated actions to further improve its operating and manufacturing cost structure, primarily in its EMEA region. These actions resulted in second quarter and year-to-date pre-tax charges of $14.8 million. These charges reduced second quarter 2021 GAAP EPS by approximately $0.08. Donaldson expects approximately $8 million in annualized savings from these restructuring activities once completed over the next twelve months. The tables attached to this release include a reconciliation of GAAP to non-GAAP measures.

Miscellaneous

The Company will webcast its second quarter 2021 earnings conference call today at 9:00 a.m. CST. To listen to the webcast, visit the “Events & Presentations” section of Donaldson’s Investor Relations website (IR.Donaldson.com), and click on the “listen to webcast” option. The webcast replay will be available at approximately 12:00 p.m. CST today.

Statements in this release regarding future events and expectations, such as forecasts, plans, trends, and projections relating to the Company’s business and financial performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are identified by words or phrases such as “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” “plan,” and similar expressions. These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that could cause the Company’s results to differ materially from

FAQ

What were Donaldson Company's second quarter 2021 earnings?

Donaldson reported second quarter 2021 GAAP net earnings of $56.2 million.

How did Donaldson's sales perform in the second quarter of 2021?

Sales increased by 2.6% to $679.1 million compared to $662.0 million in 2020.

What is the expected fiscal 2021 EPS for Donaldson Company?

The company expects fiscal 2021 GAAP EPS between $2.09 and $2.17.

What restructuring charges did Donaldson Company incur in Q2 2021?

Donaldson incurred $14.8 million in restructuring charges related to optimization initiatives.

What is the sales growth forecast for Donaldson in fiscal 2021?

Donaldson forecasts a sales increase of 5% to 8% compared to fiscal 2020.