Donaldson(DCI) - 2020 Q3 - Quarterly Report

Filing Information Details the Form 10-Q filing for Donaldson Company, Inc. for the period ended April 30, 2020, confirming SEC compliance Form 10-Q Details Details the filing of the Quarterly Report on Form 10-Q for Donaldson Company, Inc. for the period ended April 30, 2020, confirming SEC compliance - The report is a Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 30, 2020[2] - Donaldson Company, Inc. (Commission File Number 1-7891) is incorporated in Delaware with its principal executive offices in Minneapolis, Minnesota[3] - The registrant has filed all required reports during the preceding 12 months and is a large accelerated filer[3] PART I. FINANCIAL INFORMATION Presents unaudited condensed consolidated financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including earnings, balance sheets, cash flows, and equity changes, with detailed notes Condensed Consolidated Statements of Earnings Provides the company's net sales, gross profit, operating income, and net earnings for the specified periods Condensed Consolidated Statements of Earnings (in millions, except per share amounts) | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $629.7 | $712.8 | $1,964.4 | $2,117.9 | | Cost of sales | $420.5 | $472.1 | $1,300.7 | $1,413.4 | | Gross profit | $209.2 | $240.7 | $663.7 | $704.5 | | Operating expenses | $124.7 | $140.7 | $406.1 | $420.7 | | Operating income | $84.5 | $100.0 | $257.6 | $283.8 | | Interest expense | $4.4 | $5.2 | $13.5 | $14.7 | | Other income, net | $(4.3) | $(4.7) | $(9.8) | $(7.3) | | Earnings before income taxes | $84.4 | $99.5 | $253.9 | $276.4 | | Income taxes | $21.0 | $24.3 | $61.0 | $67.3 | | Net earnings | $63.4 | $75.2 | $192.9 | $209.1 | | Net earnings per share – basic | $0.50 | $0.59 | $1.52 | $1.63 | | Net earnings per share – diluted | $0.50 | $0.58 | $1.50 | $1.60 | Condensed Consolidated Statements of Comprehensive Income Details net earnings and other comprehensive income components, including foreign currency translation and pension adjustments Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :-------------------------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net earnings | $63.4 | $75.2 | $192.9 | $209.1 | | Foreign currency translation loss | $(35.3) | $(11.9) | $(24.8) | $(12.4) | | Pension liability adjustment, net of deferred taxes | $(2.0) | $1.2 | — | $3.3 | | Gain (loss) on hedging derivatives, net of deferred taxes | $1.4 | $(0.2) | $2.2 | $0.3 | | Reclassifications of losses on hedging derivatives to net earnings, net of taxes | $2.1 | — | $3.4 | — | | Total derivatives | $3.5 | $(0.2) | $5.6 | $0.3 | | Net other comprehensive loss | $(33.8) | $(10.9) | $(19.2) | $(8.8) | | Comprehensive income | $29.6 | $64.3 | $173.7 | $200.3 | Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and shareholders' equity as of specific dates Condensed Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | April 30, 2020 | July 31, 2019 | | :--------------------------------- | :------------- | :------------ | | Assets: | | | | Cash and cash equivalents | $326.5 | $177.8 | | Accounts receivable, net | $460.5 | $529.5 | | Inventories, net | $346.5 | $332.8 | | Total current assets | $1,220.5 | $1,122.6 | | Property, plant and equipment, net | $614.3 | $588.9 | | Goodwill | $303.8 | $303.1 | | Total assets | $2,338.5 | $2,142.6 | | Liabilities: | | | | Total current liabilities | $432.8 | $482.9 | | Long-term debt | $735.1 | $584.4 | | Total liabilities | $1,383.7 | $1,239.9 | | Shareholders' Equity: | | | | Total shareholders' equity | $944.5 | $892.7 | | Total liabilities and shareholders' equity | $2,338.5 | $2,142.6 | Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the nine-month periods Condensed Consolidated Statements of Cash Flows (in millions) | Activity | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :---------------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $265.2 | $223.2 | | Net cash used in investing activities | $(106.2) | $(208.4) | | Net cash used in financing activities | $(3.7) | $(13.7) | | Effect of exchange rate changes on cash | $(6.6) | $(2.0) | | Increase (decrease) in cash and cash equivalents | $148.7 | $(0.9) | | Cash and cash equivalents, beginning of period | $177.8 | $204.7 | | Cash and cash equivalents, end of period | $326.5 | $203.8 | Condensed Consolidated Statements of Changes in Shareholders' Equity Details changes in common stock, retained earnings, and other equity components over the reporting periods Shareholders' Equity Changes (in millions) | Metric | Balance Jan 31, 2020 | Three Months Ended April 30, 2020 | Balance April 30, 2020 | | :-------------------------------------- | :------------------- | :-------------------------------- | :--------------------- | | Common Stock | $758.2 | — | $758.2 | | Retained Earnings | $1,354.1 | $63.4 | $1,418.8 | | NonControlling Interest | $5.6 | $0.1 | $5.7 | | Stock Compensation Plans | $14.5 | $(0.5) | $14.0 | | Accumulated Other Comprehensive Loss | $(178.3) | $(33.8) | $(212.1) | | Treasury Stock | $(1,013.7) | $(29.3) | $(1,040.1) | | Total | $940.4 | $4.1 | $944.5 | Shareholders' Equity Changes (Nine Months Ended April 30, 2020) | Metric | Balance July 31, 2019 | Nine Months Ended April 30, 2020 | Balance April 30, 2020 | | :-------------------------------------- | :-------------------- | :------------------------------- | :--------------------- | | Common Stock | $758.2 | — | $758.2 | | Retained Earnings | $1,281.5 | $192.9 | $1,418.8 | | NonControlling Interest | $5.4 | $0.3 | $5.7 | | Stock Compensation Plans | $21.7 | $(7.7) | $14.0 | | Accumulated Other Comprehensive Loss | $(192.9) | $(19.2) | $(212.1) | | Treasury Stock | $(981.2) | $(94.3) | $(1,040.1) | | Total | $892.7 | $51.8 | $944.5 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Summary of Significant Accounting Policies Outlines the key accounting principles and estimates used in preparing the financial statements, including COVID-19 considerations - The financial statements are prepared in accordance with GAAP and Form 10-Q instructions, with all necessary adjustments included[25] - Management evaluated accounting estimates considering COVID-19 impacts, concluding no impairment triggering event existed as of April 30, 2020, due to the essential nature of most business operations[25] - The Company adopted ASU 2016-02, Leases (Topic 842), in Q1 fiscal 2020, increasing assets and liabilities by $71.5 million as of August 1, 2019[25] Note 2. Acquisitions and Divestitures Details significant business transactions, including the BOFA International LTD acquisition and the binding offer for the Exhaust and Emissions business - In Q1 fiscal 2019, the Company acquired 88% of BOFA International LTD for $98.2 million, expanding its fume collection business and filtration technology[28] - On February 21, 2020, the Company received a binding offer from Nelson Global Products for its Exhaust and Emissions business[28] Note 3. Supplemental Balance Sheet Information Provides detailed breakdowns of net inventories and property, plant, and equipment components Net Inventories (in millions) | Component | April 30, 2020 | July 31, 2019 | | :---------------- | :------------- | :------------ | | Raw materials | $114.8 | $114.7 | | Work in process | $35.6 | $33.0 | | Finished products | $196.1 | $185.1 | | Inventories, net | $346.5 | $332.8 | Property, Plant and Equipment, Net (in millions) | Component | April 30, 2020 | July 31, 2019 | | :-------------------------------- | :------------- | :------------ | | Land | $23.7 | $24.2 | | Buildings | $346.3 | $325.3 | | Machinery and equipment | $834.9 | $813.5 | | Computer software | $143.9 | $142.8 | | Construction in progress | $137.5 | $114.3 | | Less: accumulated depreciation | $(872.0) | $(831.2) |\n| Property, plant and equipment, net | $614.3 | $588.9 | Note 4. Earnings Per Share Explains the calculation of basic and diluted earnings per share, including the impact of share-based awards Earnings Per Share Calculation (in millions, except per share amounts) | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net earnings for basic and diluted earnings per share computation | $63.4 | $75.2 | $192.9 | $209.1 | | Weighted average common shares – basic | 126.9 | 128.2 | 127.0 | 128.5 | | Dilutive impact of share-based awards | 0.8 | 1.8 | 1.5 | 1.9 | | Weighted average common shares – diluted | 127.7 | 130.0 | 128.5 | 130.4 | | Net earnings per share – basic | $0.50 | $0.59 | $1.52 | $1.63 | | Net earnings per share – diluted | $0.50 | $0.58 | $1.50 | $1.60 | - Certain outstanding options (2.5 million for Q3 2020, 1.7 million for YTD 2020) were excluded from diluted EPS calculations due to exercise prices exceeding market prices[31] Note 5. Goodwill and Intangible Assets Discusses the annual impairment assessment of goodwill and provides a breakdown of intangible assets - Goodwill is assessed annually for impairment during the third fiscal quarter; no impairment was recorded in Q3 fiscal 2020[32] Goodwill by Reportable Segment (in millions) | Segment | July 31, 2019 | Currency Translation | April 30, 2020 | | :------------------- | :------------ | :------------------- | :------------- | | Engine Products | $84.5 | $(0.4) | $84.1 | | Industrial Products | $218.6 | $1.1 | $219.7 | | Total | $303.1 | $0.7 | $303.8 | Intangible Assets, Net (in millions) | Component | Gross Carrying Amount | Accumulated Amortization | Total (April 30, 2020) | | :------------------------------- | :-------------------- | :----------------------- | :--------------------- | | Customer relationships | $101.8 | $(47.9) | $53.9 | | Patents, trademarks and technology | $22.4 | $(11.0) | $11.4 | | Total intangible assets, net | $124.2 | $(58.9) | $65.3 | Note 6. Revenue Describes the company's revenue recognition policies and disaggregates net sales by geographical region - The Company recognizes revenue from filtration solutions, primarily manufactured systems and replacement parts, with limited services and installation[35] Net Sales Disaggregated by Geography (in millions) | Geography | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :--------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | United States | $265.2 | $301.5 | $819.6 | $896.0 | | Europe, Middle East and Africa | $182.1 | $208.0 | $570.9 | $611.7 | | Asia Pacific | $134.9 | $146.8 | $412.8 | $443.4 | | Latin America | $47.5 | $56.5 | $161.1 | $166.8 | | Total net sales | $629.7 | $712.8 | $1,964.4 | $2,117.9 | - Contract assets increased to $14.8 million (from $12.4 million) and contract liabilities increased to $13.3 million (from $10.4 million) as of April 30, 2020, compared to July 31, 2019[36] Note 7. Warranty Details the activity in the warranty reserve, including accruals and settlements for product warranties Warranty Reserve Activity (in millions) | Metric | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :------------------------------------------------------------------ | :------------------------------- | :------------------------------- | | Balance at beginning of period | $11.2 | $18.9 | | Accruals for warranties issued during the reporting period | $2.0 | $1.6 | | Accruals related to pre-existing warranties (including changes in estimates) | $(0.9) | $(2.0) | | Less: settlements made during the period | $(2.5) | $(6.9) | | Balance at end of period | $9.8 | $11.6 | - No individually material specific warranty matters or significant settlements occurred during the nine months ended April 30, 2020 or 2019[38] Note 8. Stock-Based Compensation Outlines the company's stock incentive plans and the associated compensation expense for stock options and performance-based awards - The 2019 Master Stock Incentive Plan replaced the 2010 Plan, allowing for various stock-based awards including options and performance-based awards[39] Stock Option Compensation Expense (in millions) | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Pretax compensation expense associated with stock options | $1.3 | $1.4 | $9.0 | $8.3 | | Tax benefits associated with stock options | $0.3 | $0.3 | $1.4 | $1.7 | Performance-Based Award Compensation Expense (in millions) | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Pretax compensation expense associated with performance-based awards | $(0.3) | $1.5 | $1.5 | $4.5 | Note 9. Employee Benefit Plans Describes the company's defined benefit pension plans and the calculation of net periodic benefit costs - The Company operates defined benefit pension plans for employees, including U.S. Hourly and Salaried Pension Plans (Salaried Plan no longer accrues new contributions)[41] Net Periodic Benefit Costs (in millions) | Component | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Service cost | $1.5 | $1.5 | $4.7 | $4.5 | | Interest cost | $3.3 | $4.1 | $10.1 | $12.3 | | Expected return on assets | $(6.5) | $(6.6) | $(19.5) | $(19.9) | | Prior service cost amortization | $0.2 | $0.1 | $0.5 | $0.4 | | Actuarial loss amortization | $1.6 | $1.1 | $4.8 | $3.3 | | Settlement charge | $2.3 | — | $2.3 | — | | Net periodic benefit costs | $2.4 | $0.2 | $2.9 | $0.6 | - A pension settlement charge of $2.3 million was recorded in Q3 fiscal 2020, increasing pension obligations and resulting in a $7.9 million adjustment to other comprehensive loss[44] Note 10. Income Taxes Provides information on unrecognized tax benefits and potential expirations within the next 12 months - As of April 30, 2020, gross unrecognized tax benefits were $16.9 million, with accrued interest and penalties of $2.2 million[45] - Up to $6.3 million of unrecognized tax benefits could expire in the next 12 months[45] Note 11. Fair Value Measurements Classifies financial instruments by fair value hierarchy and details derivative fair value measurements - Cash and cash equivalents, accounts receivables, short-term borrowings, and trade accounts payable are classified as Level 1 fair value measurements[47] - Long-term debt is classified as Level 2, with fixed-rate debt having an estimated fair value of $283.9 million compared to a carrying value of $275.0 million as of April 30, 2020[47] Derivative Fair Value Measurements (in millions) | Derivative Type | Notional Amounts (April 30, 2020) | Notional Amounts (July 31, 2019) | Assets (April 30, 2020) | Assets (July 31, 2019) | Liabilities (April 30, 2020) | Liabilities (July 31, 2019) | | :------------------------------------ | :-------------------------------- | :------------------------------- | :---------------------- | :--------------------- | :--------------------------- | :-------------------------- | | Forward foreign currency exchange contracts | $25.3 | $28.2 | $3.9 | $1.6 | $1.6 | $1.8 | | Net investment hedges | $55.8 | $55.8 | $5.7 | $1.1 | — | $1.9 | | Total | $81.1 | $84.0 | $9.6 | $2.7 | $1.6 | $3.7 | Note 12. Shareholders' Equity Reports on common stock repurchases, dividends paid, and remaining share repurchase authorization - The Company repurchased 2.0 million shares for $94.3 million during the nine months ended April 30, 2020, with 10.7 million shares remaining authorized for repurchase[53] - Dividends paid per share were 63.0 cents for the nine months ended April 30, 2020, up from 57.0 cents in the prior year[53] - A cash dividend of 21.0 cents per common share was declared on May 29, 2020, payable June 30, 2020[53] Note 13. Accumulated Other Comprehensive Loss Details changes in accumulated other comprehensive loss, including foreign currency translation and pension adjustments Changes in Accumulated Other Comprehensive Loss (Three Months Ended April 30, 2020, in millions) | Component | Balance Jan 31, 2020 | Other Comprehensive (Loss) Income before Reclassifications and Tax | Reclassifications, Net of Tax | Balance April 30, 2020 | | :--------------------------------------------------------------------- | :------------------- | :----------------------------------------------------------------- | :---------------------------- | :--------------------- | | Foreign Currency Translation Adjustment | $(82.2) | $(35.3) | — | $(117.5) | | Pension Benefits | $(97.0) | $(6.0) | $4.0 | $(99.0) | | Derivative Financial Instruments | $0.9 | $1.4 | $2.1 | $4.4 | | Total | $(178.3) | $(39.9) | $6.1 | $(212.1) | Changes in Accumulated Other Comprehensive Loss (Nine Months Ended April 30, 2020, in millions) | Component | Balance July 31, 2019 | Other Comprehensive (Loss) Income before Reclassifications and Tax | Reclassifications, Net of Tax | Balance April 30, 2020 | | :--------------------------------------------------------------------- | :-------------------- | :----------------------------------------------------------------- | :---------------------------- | :--------------------- | | Foreign Currency Translation Adjustment | $(92.7) | $(24.8) | — | $(117.5) | | Pension Benefits | $(99.0) | $(6.0) | $6.0 | $(99.0) | | Derivative Financial Instruments | $(1.2) | $2.2 | $3.4 | $4.4 | | Total | $(192.9) | $(28.6) | $9.4 | $(212.1) | - The pension settlement accounting triggered in Q3 fiscal 2020 resulted in a $7.9 million adjustment to other comprehensive loss[55][57] Note 14. Guarantees Describes the company's guarantees related to a joint venture's debt and standby letters of credit - The Company and Caterpillar Inc. equally own and guarantee certain debt of their joint venture, Advanced Filtration Systems Inc. (AFSI)[57] Guarantees (in millions) | Item | April 30, 2020 | July 31, 2019 | | :--------------------------------------- | :------------- | :------------ | | Outstanding debt (Company guarantees half) | $39.6 | $38.8 | | Contingent liability for standby letters of credit | $7.5 | $11.0 | | Amounts drawn for letters of credit | — | — | AFSI Joint Venture Financials (in millions) | Item | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Investment earnings from AFSI | $0.8 | $0.4 | $1.2 | $0.1 | | Royalty income from AFSI | $1.6 | $1.5 | $5.2 | $4.8 | Note 15. Commitments and Contingencies States the company's policy for recording provisions for claims and lawsuits when probable and estimable - The Company records provisions for claims or lawsuits when probable and estimable, believing current liabilities are adequate and material excess settlements are remote[60] Note 16. Segment Reporting Presents financial information for the Engine Products and Industrial Products segments, including net sales and earnings before income taxes - The Company operates in two reportable segments: Engine Products and Industrial Products, with Corporate and Unallocated covering non-allocable corporate expenses[60] Segment Net Sales (in millions) | Segment | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Engine Products segment | $420.4 | $489.4 | $1,315.2 | $1,439.3 | | Industrial Products segment | $209.3 | $223.4 | $649.2 | $678.6 | | Total | $629.7 | $712.8 | $1,964.4 | $2,117.9 | Segment Earnings Before Income Taxes (in millions) | Segment | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Nine Months Ended April 30, 2020 | Nine Months Ended April 30, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Engine Products segment | $56.5 | $71.5 | $172.2 | $188.6 | | Industrial Products segment | $34.7 | $32.7 | $98.8 | $101.5 | | Corporate and Unallocated | $(6.8) | $(4.7) | $(17.1) | $(13.7) | | Total | $84.4 | $99.5 | $253.9 | $276.4 | Note 17. Leases Details the company's operating lease arrangements, including lease costs and supplemental balance sheet information - The Company leases real estate, IT, manufacturing equipment, vehicles, and other assets through operating lease arrangements, recognizing right-of-use assets and lease liabilities[63] Operating Lease Costs (in millions) | Cost Type | Three Months Ended April 30, 2020 | Nine Months Ended April 30, 2020 | | :------------------ | :-------------------------------- | :------------------------------- | | Operating lease cost | $7.5 | $22.7 | | Short-term lease cost | $0.5 | $1.6 | | Total lease costs | $8.0 | $24.3 | Operating Lease Supplemental Balance Sheet Information (in millions) | Item | April 30, 2020 | August 1, 2019 | | :-------------------------- | :------------- | :------------- | | Right-of-use lease assets | $71.4 | $71.5 | | Current lease liabilities | $24.0 | $26.0 | | Long-term lease liabilities | $47.4 | $45.5 | Note 18. Borrowings Provides information on the company's revolving credit facility and term loan, including recent borrowing activities - The Company has a $500.0 million unsecured revolving credit facility expiring July 21, 2022, with $142.5 million available as of April 30, 2020[66] - In March 2020, $100.0 million was borrowed from the revolver as a precautionary measure due to COVID-19 uncertainty[66] - In October 2019, the Company entered into an €80.0 million ($89.2 million) unsecured term loan maturing in October 2024, fully borrowed as of April 30, 2020[67] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial performance, condition, liquidity, and capital resources, including COVID-19 impacts Overview Introduces Donaldson Company, Inc. as a global filtration manufacturer and discusses the operational impacts of the COVID-19 pandemic - Donaldson Company, Inc. is a global manufacturer of filtration systems and replacement parts, operating through Engine Products and Industrial Products segments[70] - The COVID-19 pandemic has impacted worldwide economic activity, but the Company has maintained operations at most facilities due to its business lines being deemed 'essential'[70] - The magnitude and duration of future COVID-19 impacts on revenue cannot be reasonably estimated and will likely be material[70] Consolidated Results of Operations Analyzes the company's overall financial performance, including net sales, gross profit, operating income, and net earnings trends Three months ended April 30, 2020 compared with three months ended April 30, 2019 Compares consolidated financial results for the three-month periods, highlighting sales and margin changes Consolidated Results of Operations (Three Months Ended April 30, in millions) | Metric | 2020 | % of sales (2020) | 2019 | % of sales (2019) | | :------------------------- | :------ | :---------------- | :------ | :---------------- | | Net sales | $629.7 | | $712.8 | | | Cost of sales | $420.5 | 66.8% | $472.1 | 66.2% | | Gross profit | $209.2 | 33.2% | $240.7 | 33.8% | | Operating expenses | $124.7 | 19.8% | $140.7 | 19.7% | | Operating income | $84.5 | 13.4% | $100.0 | 14.0% | | Net earnings | $63.4 | 10.1% | $75.2 | 10.6% | - Net sales decreased by $83.1 million (11.7%) to $629.7 million, primarily due to lower demand from COVID-19 and a negative foreign currency translation impact of $14.2 million (2.2%)[72] - Gross margin decreased to 33.2% from 33.8%, mainly due to loss of leverage on lower sales and higher depreciation, partially offset by favorable sales mix and lower raw material costs[72] Nine months ended April 30, 2020 compared with nine months ended April 30, 2019 Compares consolidated financial results for the nine-month periods, focusing on sales and margin drivers Consolidated Results of Operations (Nine Months Ended April 30, in millions) | Metric | 2020 | % of sales (2020) | 2019 | % of sales (2019) | | :------------------------- | :-------- | :---------------- | :-------- | :---------------- | | Net sales | $1,964.4 | | $2,117.9 | | | Cost of sales | $1,300.7 | 66.2% | $1,413.4 | 66.7% | | Gross profit | $663.7 | 33.8% | $704.5 | 33.3% | | Operating expenses | $406.1 | 20.7% | $420.7 | 19.9% | | Operating income | $257.6 | 13.1% | $283.8 | 13.4% | | Net earnings | $192.9 | 9.8% | $209.1 | 9.9% | - Net sales decreased by $153.5 million (7.2%) to $1,964.4 million, impacted by lower unit volume and negative foreign currency translation of $28.3 million (1.4%)[74] - Gross margin increased to 33.8% from 33.3%, driven by production, supply chain, procurement, and pricing optimization initiatives, favorable sales mix, and lower raw material costs[74] Segment Results of Operations Provides a detailed analysis of the financial performance for the Engine Products and Industrial Products segments Engine Products Segment Analyzes net sales and earnings before income taxes for the Engine Products segment, including sub-segment performance Three months ended April 30, 2020 compared with three months ended April 30, 2019 Compares Engine Products segment performance for the three-month periods, noting sales and earnings drivers Engine Products Segment Net Sales (Three Months Ended April 30, in millions) | Sub-segment | 2020 | 2019 | | :-------------------- | :----- | :----- | | Off-Road | $63.5 | $84.8 | | On-Road | $25.1 | $46.9 | | Aftermarket | $301.9 | $327.7 | | Aerospace and Defense | $29.9 | $30.0 | | Total Net Sales | $420.4 | $489.4 | - Engine Products net sales decreased by $69.0 million (14.1%), or 12.0% excluding currency, primarily due to lower equipment production in On-Road and Off-Road markets from COVID-19 shutdowns[78] - Earnings before income taxes for Engine Products decreased to 13.4% of sales from 14.6%, driven by loss of leverage on lower sales and higher depreciation, partially offset by cost optimization and lower raw material costs[78] Nine months ended April 30, 2020 compared with nine months ended April 30, 2019 Compares Engine Products segment performance for the nine-month periods, detailing sales and earnings trends - Engine Products net sales decreased by $124.1 million (8.6%), or 7.1% excluding currency, mainly due to lower equipment production and reduced end-user demand in Aftermarket[80] - Earnings before income taxes remained consistent at 13.1% of sales, with cost optimization and lower raw material costs offsetting the impact of lower sales and higher depreciation[80] Industrial Products Segment Analyzes net sales and earnings before income taxes for the Industrial Products segment, including sub-segment performance Three months ended April 30, 2020 compared with three months ended April 30, 2019 Compares Industrial Products segment performance for the three-month periods, noting sales and earnings drivers Industrial Products Segment Net Sales (Three Months Ended April 30, in millions) | Sub-segment | 2020 | 2019 | | :---------------------------- | :----- | :----- | | Industrial Filtration Solutions | $137.4 | $155.2 | | Gas Turbine Systems | $29.2 | $27.5 | | Special Applications | $42.7 | $40.7 | | Total Net Sales | $209.3 | $223.4 | - Industrial Products net sales decreased by $14.1 million (6.3%), or 4.6% excluding currency, due to lower industrial production impacting Industrial Filtration Solutions, partially offset by growth in Gas Turbine Systems and Special Applications[82] - Earnings before income taxes for Industrial Products increased to 16.6% of sales from 14.6%, driven by favorable sales mix, cost optimization, and lower raw material costs[82] Nine months ended April 30, 2020 compared with nine months ended April 30, 2019 Compares Industrial Products segment performance for the nine-month periods, detailing sales and earnings trends - Industrial Products net sales decreased by $29.4 million (4.3%), or 3.3% excluding currency, primarily due to lower industrial production in Industrial Filtration Solutions, despite growth in Process Filtration and Special Applications[84] - Earnings before income taxes for Industrial Products increased to 15.2% of sales from 15.0%, benefiting from favorable sales mix, cost optimization, and lower raw material costs, partially offset by investments in strategic growth businesses[84] Liquidity and Capital Resources Discusses the company's cash flow generation, investing activities, debt levels, and overall capital structure - Cash provided by operating activities increased by $42.0 million to $265.2 million for the nine months ended April 30, 2020, driven by improvements in net operating assets and liabilities[85] - Cash used in investing activities decreased by $102.2 million to $106.2 million, mainly due to the absence of the BOFA acquisition (fiscal 2019) and a decrease in capital expenditures[85] - Long-term debt increased by $150.7 million to $735.1 million as of April 30, 2020, with total debt representing 45.6% of total capitalization (up from 41.6% at July 31, 2019)[87] Critical Accounting Policies Confirms no material changes to the company's critical accounting policies from the prior fiscal year's Annual Report on Form 10-K - There have been no material changes to the Company's critical accounting policies as disclosed in its Annual Report on Form 10-K for the fiscal year ended July 31, 2019[89] Safe Harbor Statement under the Securities Reform Act of 1995 Warns that forward-looking statements are subject to various risks and uncertainties, including COVID-19 impacts - The Company's forward-looking statements are subject to risks and uncertainties, including economic conditions, competitive markets, intellectual property protection, global operations, and the impact of COVID-19[89][91] - The Company does not undertake to publicly update or revise any forward-looking statements unless required by law[91] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses exposure to foreign currency, interest rate, and commodity price risks, and mitigation strategies - The Company is exposed to market risks from foreign currency exchange rates, interest rates, and commodity prices, and uses strategies to mitigate these fluctuations without engaging in speculative trading[92] - A stronger U.S. dollar negatively impacted net sales by $28.3 million and net earnings by approximately $2.0 million for the nine months ended April 30, 2020[92] - The Company uses forward foreign currency exchange contracts (maturing in 12 months or less) and fixed-to-fixed cross-currency swap agreements (maturing July 2029) to hedge foreign currency exposure[92] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - Management, with CEO and CFO participation, concluded that the Company's disclosure controls and procedures were effective as of April 30, 2020[95] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended April 30, 2020[96] PART II. OTHER INFORMATION Presents additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings States the company records provisions for probable and estimable claims, with current liabilities deemed adequate - The Company records provisions for claims or lawsuits when a liability is probable and estimable[98] - Recorded liabilities for claims or litigation were not material, and it is remote that settlements will materially exceed accrued amounts[98] Item 1A. Risk Factors Highlights risks, particularly the potential adverse effects of the COVID-19 pandemic on business and financial results - The COVID-19 pandemic could adversely affect the Company's business, operations, financial condition, and cash flows due to disruptions to employees, suppliers, and customers[101] - Potential impacts include temporary shutdowns, supply chain disruptions, failure of third parties, and significant reductions or volatility in demand for products[101] - While most operations are deemed 'essential,' future government orders or site-specific health concerns could halt operations, and employee protection measures may affect efficiency[101] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details common stock repurchase activities during the three months ended April 30, 2020 Repurchases of Equity Securities (Three Months Ended April 30, 2020) | Period | Total Number of Shares Purchased | Average Price per Share | | :---------------------------- | :------------------------------- | :---------------------- | | February 1 - February 29, 2020 | — | — | | March 1 - March 31, 2020 | 675,000 | $43.33 | | April 1 - April 30, 2020 | — | — | | Total | 675,000 | $43.33 | - The Company repurchased 675,000 shares for $43.33 per share in March 2020 under its existing authorization[103] - As of April 30, 2020, the Company had remaining authorization to repurchase 10.7 million shares[102] Item 3. Defaults Upon Senior Securities States this item is not applicable to the company for the reporting period Item 4. Mine Safety Disclosures States this item is not applicable to the company for the reporting period Item 5. Other Information States this item is not applicable to the company for the reporting period Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including corporate documents and certifications - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, CEO/CFO certifications (302 and 906), and a 364-Day Revolving Credit Agreement dated May 18, 2020[105] - The report also includes financial statements and notes formatted in iXBRL as Exhibit 101 and the cover page in iXBRL as Exhibit 104[105] SIGNATURES Contains the signatures of authorized officers, certifying the report on June 3, 2020 Signatures Contains the signatures of authorized officers, including the CEO, CFO, and Corporate Controller, certifying the report on June 3, 2020 - The report is signed by Tod E. Carpenter (Chairman, President and CEO), Scott J. Robinson (Senior Vice President and CFO), and Peter J. Keller (Corporate Controller) on June 3, 2020[109]