Donaldson(DCI) - 2021 Q4 - Annual Report

Part I Business Donaldson Company, Inc. is a global manufacturer of filtration systems, operating through Engine and Industrial Products segments, serving diverse markets with business seasonality - The company operates through two primary segments: Engine Products and Industrial Products, selling to OEMs, distributors, and end-users across various global markets[7] - Business seasonality is influenced by the construction and agricultural industries, leading to stronger performance in the second half of the fiscal year. The first half is also impacted by more holiday periods and customer plant closures[9] Backlog Orders (as of July 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Backlog (expected within 90 days) | $626.0 million | $362.4 million | | Engine Products Segment Increase | 84.8% | - | | Industrial Products Segment Increase | 47.4% | - | Research and Development Expenses | Fiscal Year | R&D Expense (millions) | % of Net Sales | | :--- | :--- | :--- | | 2021 | $67.8 | 2.4% | | 2020 | $61.2 | 2.4% | | 2019 | $62.3 | 2.2% | - As of July 31, 2021, the company had approximately 13,100 full-time employees, with 62% in production-related roles[16] Risk Factors The company faces macroeconomic, operational, cybersecurity, legal, and financial risks, including global operations challenges, supply chain disruptions, and technological changes - Macroeconomic and Geopolitical Risks: The company's global operations are subject to risks from political events, tariffs, trade barriers, and varying legal and regulatory requirements[28] - COVID-19 Pandemic Impact: The pandemic has caused volatility in product demand and supply chain constraints, leading to difficulties in meeting increased demand within normal delivery timeframes[28] - Operational Risks: Key operational risks include supply chain disruptions leading to material cost inflation, challenges in attracting and retaining qualified personnel, and the complexity of manufacturing operations which may hinder the ability to meet fluctuating customer demand[31][32] - Competition and Technology Risks: The company operates in highly competitive markets and faces risks from disruptive technologies, such as the electrification of equipment, which could reduce demand for its traditional diesel engine products[35][36] - Cybersecurity Risks: The company faces increasing frequency and sophistication of information technology security threats, which could lead to compromise of confidential data, production downtimes, and operational disruptions[40] - Financial Risks: The company is exposed to unfavorable fluctuations in foreign currency exchange rates, potential disruptions in credit markets affecting access to financing, and changes in effective tax rates across various jurisdictions[45][46] Unresolved Staff Comments There are no unresolved staff comments from the SEC - There are no unresolved staff comments[48] Properties The company's corporate headquarters are in Minneapolis, Minnesota, with global administrative, manufacturing, and distribution facilities - Corporate headquarters and research facilities are in Minneapolis, Minnesota, with numerous other manufacturing and distribution properties located worldwide[49] Legal Proceedings The company has adequate provisions for legal proceedings, with no material excess impact expected from settlements beyond accrued amounts - Recorded liabilities for legal proceedings are not material to the company's financial position, and it is considered remote that settlements will materially exceed accrued amounts[50] Mine Safety Disclosures This section is not applicable to the company - Not applicable[51] Information About Our Executive Officers This section details biographical information, positions, and professional history for the company's executive officers as of August 31, 2021 - The report lists the names, ages, positions, and business experience of eight executive officers, including Chairman, President and CEO Tod E. Carpenter and SVP and CFO Scott J. Robinson[52][54] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with over 1 million shares repurchased in Q4 FY2021, and a five-year return underperforming market indices Share Repurchases (Q4 FY2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | May 2021 | 300,000 | $62.54 | | June 2021 | 332,171 | $61.86 | | July 2021 | 382,661 | $64.81 | | Total | 1,014,832 | $63.17 | - As of July 31, 2021, the company has remaining authorization to repurchase 8.3 million shares under its current plan[58] - Over the five fiscal years from 2016 to 2021, the cumulative total return on the company's common stock was 98.43%, compared to 122.51% for the S&P 500 Stock Index and 124.99% for the S&P Industrial Machinery Index[60][61] Selected Financial Data This section is reserved and contains no information - This item is reserved[62] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 saw net sales increase by 10.5% to $2.85 billion and net earnings grow by 11.6% to $286.9 million, driven by strong demand despite supply chain and inflation challenges Consolidated Results of Operations FY2021 net sales increased 10.5% to $2,853.9 million and net earnings rose 11.6% to $286.9 million, driven by economic recovery and foreign currency translation - The company is experiencing supply chain disruptions and inflationary pressures on raw materials and operating expenses, which are expected to continue into fiscal 2022[68][69] Consolidated Results of Operations (in millions, except EPS) | Metric | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,853.9 | $2,581.8 | 10.5% | | Gross Profit | $971.7 | $871.6 | 11.5% | | Operating Income | $384.7 | $340.1 | 13.1% | | Net Earnings | $286.9 | $257.0 | 11.6% | | Diluted EPS | $2.24 | $2.00 | 12.0% | - Foreign currency translation had a positive impact, increasing net sales by $78.0 million and net earnings by $10.8 million in fiscal 2021[75][82] - The effective tax rate increased to 24.7% in FY2021 from 23.3% in FY2020, primarily due to a decrease in discrete tax benefits[81] Segment Results of Operations FY2021 saw Engine Products net sales increase 13.3% to $1,957.7 million and Industrial Products net sales grow 4.9% to $896.2 million, with both segments improving earnings Engine Products Segment Net Sales (in millions) | Product Line | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Off-Road | $328.1 | $256.5 | 27.9% | | On-Road | $138.8 | $124.4 | 11.5% | | Aftermarket | $1,394.6 | $1,228.9 | 13.5% | | Aerospace & Defense | $96.2 | $117.7 | (18.3)% | | Total | $1,957.7 | $1,727.5 | 13.3% | Industrial Products Segment Net Sales (in millions) | Product Line | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Industrial Filtration Solutions | $621.9 | $581.2 | 7.0% | | Gas Turbine Systems | $96.2 | $101.6 | (5.3)% | | Special Applications | $178.1 | $171.5 | 3.8% | | Total | $896.2 | $854.3 | 4.9% | - The company initiated restructuring activities in Q2 2021, primarily in the EMEA region, resulting in charges of $14.8 million. These actions are expected to generate approximately $8 million in annualized savings[84] Liquidity and Capital Resources The company maintains strong liquidity with $222.8 million in cash and $655.2 million in available credit, reducing total debt to 30.9% of capitalization Cash Flow Summary (in millions) | Activity | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net cash from Operating | $401.9 | $387.0 | | Net cash used in Investing | $(58.3) | $(128.9) | | Net cash used in Financing | $(363.3) | $(199.5) | - As of July 31, 2021, the company had $222.8 million in cash and cash equivalents and $655.2 million available for borrowing under existing credit facilities[90] - Total debt as a percentage of total capitalization decreased from 38.7% in FY2020 to 30.9% in FY2021[99] - In Q4 2021, the company entered into an agreement to issue $150.0 million in unsecured senior notes, with proceeds to be received in fiscal 2022[92] Critical Accounting Policies Critical accounting policies involve significant management estimates for revenue recognition, goodwill impairment, income taxes, defined benefit pension plans, and business combinations - Revenue Recognition: Estimates for variable consideration (rebates, returns) are based on historical experience and future expectations[102] - Goodwill: The annual impairment assessment relies on discounted cash flow models and market approaches, which use significant estimates like growth rates and discount rates[105] - Income Taxes: Management must estimate current and future tax exposures across multiple jurisdictions and assess the realizability of deferred tax assets[106] - Defined Benefit Pension Plans: Accounting for pension plans requires key estimates for discount rates, expected return on plan assets, and mortality rates[107] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign currency, interest rates, and commodity prices using derivatives, with foreign currency positively impacting FY2021 net sales by $78.0 million - The company's primary market risks are foreign currency exchange rates, interest rates, and commodity prices[118] - In fiscal 2021, foreign currency translation increased reported net sales by $78.0 million and net earnings by approximately $10.8 million[120] - A hypothetical 0.5 percentage point increase in short-term interest rates would have increased fiscal 2021 interest expense by approximately $0.8 million[124] - The company is exposed to fluctuating prices of key raw materials, including steel, filter media, and petrochemical-based products[125] Financial Statements and Supplementary Data This section presents management's effective internal control assertion and PricewaterhouseCoopers LLP's unqualified audit opinion on financial statements and internal controls as of July 31, 2021 - Management concluded that the company's internal control over financial reporting was effective as of July 31, 2021[129] - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[133] - The auditor identified the goodwill impairment assessment for one reporting unit within the Industrial Products segment as a critical audit matter due to the significant management judgment involved in estimating its fair value[142][143] Key Consolidated Balance Sheet Data (in millions) | Metric | As of July 31, 2021 | As of July 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $1,244.0 | $1,096.7 | | Total Assets | $2,400.2 | $2,244.6 | | Total Current Liabilities | $606.6 | $406.8 | | Total Liabilities | $1,263.1 | $1,240.8 | | Total Stockholders' Equity | $1,137.1 | $992.9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting principles or financial disclosure - None reported[271] Controls and Procedures The CEO and CFO concluded disclosure controls and procedures were effective as of July 31, 2021, with no material changes to internal control during Q4 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[272] - No material changes were made to the internal control over financial reporting during the fourth quarter of fiscal 2021[273] Other Information No other information is reported for this item - None[273] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement and Part I of this report - Most information required for this item is incorporated by reference from the 2021 Proxy Statement[275] Executive Compensation Executive and director compensation information is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[276] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[280] Certain Relationships and Related Transactions, and Director Independence Related person transactions and director independence information is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[280] Principal Accounting Fees and Services Information on principal accounting fees and services, including audit committee pre-approval policies, is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[281] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including certifications and material contracts - This item lists all financial statements, schedules, and exhibits filed with the report, including certifications by the CEO and CFO[283][287] Form 10-K Summary The company has not provided a summary for this item - None[288]