Donaldson (NYSE: DCI) reported Q2 EPS of $0.50, $0.03 better than the analyst estimate of $0.47. Revenue for the quarter came in at $662 million versus the consensus estimate of $696.4 million.

• Operating margin grew 0.7 percentage points in second quarter, driven by strong gross margin
• Second quarter 2020 GAAP EPS1 increased 8.7 percent on a sales decline of 5.9 percent
• Fiscal 2020 sales forecast updated to reflect slowing market conditions, macro-uncertainty
• Donaldson still expects gross margin expansion will drive operating margin growth in fiscal 2020

“Strong gross margin performance and disciplined expense management contributed to record second quarter net income, despite a softer-than-expected demand environment,” said Tod Carpenter, chairman, president and chief executive officer. “Our margin expansion initiatives mitigated the profit impact from lower sales of new equipment and replacement parts, and favorability in non-operating income, and we delivered a second quarter EPS increase of nearly 9 percent.

“Our revised 2020 forecast anticipates additional sales pressure from a customer base that is increasingly cautious, due in part to the recent coronavirus outbreak. As we navigate the complexities created by the outbreak, we have an unwavering focus on the health and safety of our employees, and teams across the world are showing an incredible level of coordination and collaboration. While broad-based geopolitical and economic uncertainty creates short-term headwinds, we remain focused on executing our long-term strategic priorities.

“The recently announced potential divestiture of our Exhaust and Emissions2 business aligns with our commitment to pursuing opportunities where we believe we offer a distinct competitive advantage, and we are continuing to invest in driving our Advance and Accelerate portfolio.3 We expect these investments will drive strong growth in businesses that expand our access to new markets, like Process Filtration and Venting Solutions. Additionally, our optimization projects related to production, supply chain, procurement and pricing are building momentum, and we expect notable gross margin expansion this fiscal year. As we navigate this dynamic environment, I am confident that our ongoing commitment to driving innovation, growing market share and strengthening our profit structure will continue to create value for all our stakeholders.”

GUIDANCE:

Donaldson sees FY2020 EPS of $2.05-$2.19, versus the consensus of $2.25.

• Donaldson updated its full-year 2020 sales forecast to reflect softer-than-expected market conditions, primarily in the Engine Aftermarket and IFS businesses, which contributed to the revised forecasts for operating margin and EPS. The updated fiscal 2020 guidance does not reflect the divestiture of Exhaust and Emissions.
• Donaldson now expects fiscal 2020 GAAP EPS between $2.05 and $2.19, compared with prior year GAAP and adjusted EPS of $2.05 and $2.21, respectively.
• Compared with 2019, fiscal 2020 sales are now projected to decline between 7 and 3 percent. Consistent with prior guidance, the Company expects a negative impact from currency translation of 1 to 2 percent and pricing benefits of approximately 1 percent.
• Compared with 2019, fiscal 2020 Engine sales are now projected to decline between 9 and 5 percent. The updated forecast reflects a lower projection for full-year Aftermarket sales, which are now expected to be down from the prior year. The Company continues to expect full-year sales of its first-fit On-Road and Off-Road businesses will be down from the prior year, while sales of Aerospace and Defense are still projected to increase.
• Compared with 2019, fiscal 2020 Industrial sales are now projected in a range between a 3 percent decline and a 1 percent increase. The forecast update was primarily due to a lower projection for full-year IFS sales, which are now expected to be down from the prior year. The Company also updated its GTS forecast, with sales now expected to be about flat with the prior year. Sales of SA are still expected to be down from the prior year.
• Donaldson now expects fiscal 2020 operating margin between 13.5 and 13.9 percent, compared with 13.6 percent in the prior year. The Company continues to expect year-over-year gross margin improvement due to benefits from production and supply chain optimization, procurement savings and pricing initiatives. Donaldson also expects to mitigate the loss of leverage on lower sales with disciplined expense management and lower incentive compensation.
• The Company now expects full-year 2020 interest expense of approximately $18 million, compared with prior guidance of $18 million to $20 million. Other income is now forecast between $7 million and $11 million, compared with prior guidance of $4 million to $8 million. Donaldson’s fiscal 2020 effective income tax rate is now forecast between 24.3 and 25.3 percent, compared with prior guidance of 25.0 to 27.0 percent.
• The Company continues to expect fiscal 2020 capital expenditures between $110 million and $130 million, and cash conversion is forecast between 80 and 95 percent. Donaldson continues to expect to repurchase approximately 2 percent of its outstanding shares during fiscal 2020.

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