UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| ☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 31, 20172022 or |
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ |
Commission File Number: 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 41-0222640 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) |
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Delaware | 41-0222640 |
(State or other jurisdiction of
incorporation or organization)
| (I.R.S. Employer
Identification No.)
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1400 West 94th Street, Minneapolis, Minnesota | 55431 |
(Address of principal executive offices) | (Zip Code) |
1400 West 94th Street, Minneapolis, Minnesota 55431
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (952) 887-3131
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $5 Par Value$5.00 par value | DCI | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ☒ | Accelerated filer | ☐ |
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| Large accelerated filerx
| Accelerated filero
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| Non-accelerated filero (Do not check if a smaller reporting company)
| ☐ | Smaller reporting companyo | ☐ |
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| Emerging growth companyo | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes ☒ No
As of January 31, 2017,2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $5,521,028,309$6,840,687,805 (based on the closing price of $41.91$55.66 as reported on the New York Stock Exchange as of that date).
As of September 20, 2017, there were approximately 129,904,8879, 2022, 122,497,515 shares of the registrant’s common stock, par value $5.00 per share, were outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for its 20172022 annual meeting of stockholders (the “2017“2022 Proxy Statement”) are incorporated by reference in Part III, as specifically set forth in Part III.
DONALDSON COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
GeneralThe Company
Founded in 1915, Donaldson Company, Inc. (Donaldson(the Company or Donaldson) is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Donaldson’s diverse, skilled employees at over 140 locations, 74 of which are manufacturing and distribution centers, on six continents partner with customers — from small business owners to the Company) was founded in 1915world’s biggest original equipment manufacturer (OEM) brands — to solve complex filtration challenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements, natural replacement change cycles and need for reliability.
The United States (U.S.), China and India represent the largest three individual markets for the Company’s products. Donaldson’s four regions and their contributing share of fiscal 2022 revenue are as follows: the U.S. and Canada 40.5%; Europe, Middle East and Africa (EMEA) 29.1%; Asia Pacific (APAC) 20.2%; and Latin America (LATAM) 10.2%. Below are the Company’s manufacturing and distribution centers by region.
General
The Company’s operating segments are Engine Products (Engine) and Industrial Products (Industrial). The Engine segment represents 69.6% of net sales, is organized in its present corporate form under the lawsbased on a combination of customer and products and consists of the State of Delaware in 1936.
The Company is a worldwide manufacturer of filtration systemsOff-Road, On-Road, Aftermarket and replacement parts. The Company’s core strengths are leading filtration technology, strong customer relationshipsAerospace and its global presence. Products are manufactured at 44 plants around the world and through three joint ventures.
The Company has two reporting segments:Defense business units. Within these business units, Engine Products and Industrial Products. Products in the Engine Products segmentproducts consist of replacement filters for both air and liquid filtration applications as well as exhaust and emissions. Applications include air filtration systems, liquid filtrationfuel and lube systems, for fuel, lube and hydraulic applications and exhaust and emissions systems and sensors, indicators and monitoring systems. The Engine Products segment sells to original equipment manufacturers (OEMs)OEMs in the construction, mining, agriculture, transportation, aerospace defense and truckdefense end markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in
The Industrial segment represents 30.4% of net sales, is organized based on product type and consists of the Industrial Products segmentFiltration Solutions (IFS), Gas Turbines Systems (GTS) and Special Applications business units. Within the IFS business unit, products consist of dust, fume and mist collectors, compressed air purification systems, gas and liquid filtration for food, beverage and industrial processes. The GTS business unit products consist of air filtration systems for gas turbines,turbines. Special applications products include polytetrafluoroethylene (PTFE) membrane-based products andas well as specialized air and gas filtration systems for applications including hard disk drives and semi-conductor manufacturing. Themanufacturing and sensors, indicators and monitoring systems. Industrial Products segment sells to various dealers, distributors, OEMs of gas-fired turbines and OEMs and end users requiring clean filtration solutions and replacement filters.users.
Diverse Product Groups
The discussion below should be read in conjunction withCompany sells a diverse group of products within each segment and the risk factors discussed in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K (Annual Report).
The table below showsbusiness units within the segments. Below are the diverse product groups across the Company’s two segments represented as a percentage of total fiscal 2022 net sales contributedsales.
Engine Products
Air Filtration Systems
Air filtration systems help protect engine components from abrasive wear caused by dust particles. Donaldson’s standard pleated cellulose filters are used in air filtration systems for diesel engine applications around the principal classesworld. In addition, the Company’s air filtration products include PowerCore®™ and Ultra-Web® filtration technologies. PowerCore® filtration technology is significantly more efficient and compact than standard pleated cellulose filters. PowerCore® filtration technology is a leader of similar productsfiltration for eachdiesel-powered engines and equipment, particularly for OEMs. Ultra-Web® media technology is composed of cellulose or a cellulose and synthetic substrate. It provides a durable filtration solution in high temperature and humid environments experienced by many diesel, turbine, hybrid and other powered engines. Ultra-Web® HD media technology has a fine fiber technology to create consistent inter-fiber spacing at a microscopic level. It is used in extreme fine dust environments, such as mining machinery. Air filtration systems support agricultural, construction and mining machinery, commercial vehicles, aerospace fixed wing and rotorcraft and defense ground vehicle industries.
Fuel and Lube Systems
Fuel and lube systems achieve optimal operations when contaminants are removed. The various components of the years ended July 31, 2017, 2016engine impacted include fuel injectors, valves, pumps, bearings and 2015:actuators. Fuel filters include primary and secondary particulate filters, coalescing fuel water separators, barrier fuel water separators and all-in-one filtration systems. The Company’s technology includes Synteq®™ XP filtration technology, which offers significantly higher fuel system protection and longer life under dynamic application conditions compared to commercially available alternatives. In addition, Donaldson’s Synteq® DRY and Synteq® XP coalescing technology remove significantly more water in real-world conditions than current barrier or coalescing filters on the market. Fuel and lube filtration also supports agricultural, construction and mining machinery, commercial vehicles, aerospace fixed wing and rotorcraft and defense ground vehicle industries.
Hydraulic Applications
Hydraulic applications provide filtration solutions for the same equipment that is filtered by fuel and lube systems. Applications include a suction strainer to protect the pump, high pressure filters, a charge pump or transmission filter, a return-line filter prior to the reservoir and a breather filter located on the reservoir.
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| Engine Products segment | | | | | | |
| Off-Road | | 11 | % | | 10 | % | | 11 | % |
| On-Road | | 5 | % | | 6 | % | | 6 | % |
| Aftermarket | | 46 | % | | 43 | % | | 41 | % |
| Aerospace and Defense | | 4 | % | | 4 | % | | 5 | % |
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| Industrial Products segment | | | | | | |
| Industrial Filtration Solutions | | 22 | % | | 23 | % | | 22 | % |
| Gas Turbine Systems | | 5 | % | | 7 | % | | 8 | % |
| Special Applications | | 7 | % | | 7 | % | | 7 | % |
Total net sales contributedHydraulic oil is adversely affected by contaminants such as wear, metals and moisture. As with fuel and lube, contaminated fluid reduces performance and shortens lives of various system components including valves, pumps and actuators. Hydraulic applications support integral fluid power systems, which are used in machinery in agricultural, construction and mining machinery, commercial vehicles and aerospace fixed wing and rotorcraft industries.
Exhaust and Emissions
Exhaust products include sound-reducing mufflers used on machinery and vehicles, and diesel-powered machinery and commercial vehicles. Emission control systems include diesel particulate filters, exhaust fluid mixers and catalytic reduction substrates to reduce emissions of particulate, nitrogen oxide and other greenhouse gases. Exhaust and emissions products support agricultural, construction and mining machinery industries.
Industrial Products
IFS - Industrial Dust, Fume and Mist Collectors
Industrial air filtration equipment collects particles through an innovative bag house, or a cartridge style collector, which provides higher air-to-media capacity. Customers are supported through a global network of channel partners and services centers, which provide a quality customer experience during the principal classesdesign, installation, use, maintenance and repair of similar productsthe equipment. Technology and financial information about segment operationsfeatures are continually added, such as the Internet-of-Things technology branded as iCue™, which is being integrated into product design to further improve product performance and geographic regions appear in Note 18better connect Donaldson with its end market customers, enabling additional service opportunities. Donaldson is expanding its presence in the Notesindustrial service market. During fiscal 2022, the Company acquired Pearson Arnold Industrial Services (PAIS) headquartered in the U.S. PAIS provides equipment, parts and services for dust, mist and fume collection systems, industrial fans and compressed air systems.
Industrial dust, fume and mist collectors and filters are used within major industries including metals, mining, transportation, chemicals, food and beverage, pharmaceuticals and construction materials. For example, materials transformed in manufacturing, such as metal grinding, plasma cutting, mixing and welding, can create hazardous materials in the air, which can be collected and filtered by Donaldson’s products.
Other Industrial Products
Other industrial products consists of the following:
•compressed air filtration and purification systems, which provide sterile filtration in products such as breathing air systems, condensate management systems, dryers, filter housing, filter elements and sterile air units;
•process filtration products such as LifeTec® filters, Ultrapac™ Smart compressed air treatment system, UltraPleat™ filters and proprietary expanded PTFE membranes, which are used to Consolidated Financial Statements includedstrengthen customers’ food safety initiatives and meet stringent regulations; and
•on-compressor filtration products such as inlet, lube and air-oil separator filters, which support a clean compressor ecosystem.
Donaldson is expanding its presence in Item 8 of this Annual Report.
Thethe life sciences market. During fiscal 2022, the Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statementsacquired Solaris Biotechnology S.r.l. (Solaris) and Purilogics, LLC (Purilogics). Solaris is headquartered in Porto Mantovano, Italy, with U.S. operations based in Berkeley, California. Solaris designs and manufactures bioprocessing equipment, including bioreactors, fermenters and tangential flow filtration systems for use in food and beverage, biotechnology and other information (including amendments to those reports) available freelife sciences markets. Purilogics is headquartered in Greenville, South Carolina, and is a biotechnology company that leverages a novel technology platform for the development of charge through its websitemembrane chromatography products. Purilogics offers a broad portfolio of purification tools for a wide range of biologics. Purilogics’ proprietary formulations and processes create membranes that have significant competitive advantages, enabling faster and more cost-effective production of increasingly complex biologic drugs.
Special Applications
Special applications include the following:
•disk drive products such as advanced materials and adsorbent technologies, which control moisture and contaminants in micro environments, and help protect critical components in cloud computing;
•integrated venting solutions, which provide vents that protect devices and enclosures from pressure fluctuation, liquids and harmful contaminants, such as automotive headlight, outdoor lighting, medical venting solutions, or batteries in electric vehicles;
•semi-conductor filtration solutions, which address concerns over the presence of gas phase molecular contamination at ir.donaldson.com, as soon as reasonably practicable after it electronically files such material with (or furnishes such material to) the Securitiesfabrication, tool and Exchange Commission. Also available onpoint-of-use locations in semiconductor production; and
•PTFE membranes are the Company’s websitecore technology used in venting solutions, technical film applications and industrial laminates, which collect fine dust particles for bag house or cartridge style dust collectors.
GTS
GTS filtration components are corporate governance documents,custom-engineered air intake systems for gas turbines and industrial compressors, for both new and retrofit applications. Aftermarket filters and parts are used in a variety of applications including cartridge filters, panel and compact filters, the Company’s Code of Business Conductpulse system, inlet hood components, filter retention hardware and Ethics, Corporate Governance Guidelines, Audit Committee charter, Human Resources Committee charteraccessories. GTS filtration components are in power plants, oil and Corporate Governance Committee charter. These documents are also available in print, free of charge, to any person who requests them in writing to the attention of Investor Relations, MS 102, Donaldson Company, Inc., 1400 West 94th Street, Bloomington, Minnesota 55431. The information contained on the Company’s website is not incorporated by reference into this Annual Reportgas delivery systems, and should not be considered to be part of this report.other industrial applications and refining and processing machinery.
Seasonality
A number of the Company’s end markets are dependent on the construction, agricultural and power generation industries, which are generally stronger in the second half of the Company’s fiscal year. The first two quarters of the fiscal year also contain the traditional summer and winter holiday periods, which are typically characterized by more customer plant closures.
Competition
Principal methods of competition in both the Engine Products and Industrial Products segments are technology, innovation, price, geographic coverage, service and product performance. The Company competesparticipates in a number of highly competitive filtration markets in both segments. The Company believes it is a market leader within many of its product lines, specifically within its Off-Road and On-Road product lines for OEMs and has a significant business in the aftermarketAftermarket business for replacement filters. The Engine Products segment’s principal competitors include several large global competitors and many regional competitors, especially in the Aftermarket business. The Industrial Products segment’s principal competitors vary from country to country and include severalrange from large regional and global competitors andto a significant number of smaller competitors who compete in a specific geographical region or in a limited number of product applications.
Raw Materials
The principal raw materials that the Company uses are steel, filter media and petrochemical basedpetrochemical-based products including plastics,plastic, rubber and adhesives.adhesive products. Purchased raw materials represent approximately 60% to 65%70% of the Company’s cost of goods sold. Steel, including fabricated parts, and filter media each represent approximately 20%. The remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2017 varied by grade, but in aggregate, increased during the fiscal year. The steel cost increase was related to import restrictions placed on foreign-made steel and on a post-election run-up in steel in U.S. markets and on upward price pressure in other geographies around the world. The Company’s cost of filter media also varies by type and increased slightly year-over-year.sales. The Company operates ongoing continuous improvement efforts, which partially offset increases in bothcontinues to experience supply chain disruptions, including global logistics and labor challenges and constrained supplies of steel, petrochemical products and filter media. The cost of petroleum-based products was relatively flat year-over-year.These disruptions have increased the Company’s input costs significantly and extended lead times. The Company anticipates some continuing pressure on commodityhas undertaken steps to mitigate these negative impacts, such as increasing prices, in fiscal 2018, as compared with fiscal 2017, specifically for steelcarrying a higher level of inventories, evaluating alternative supply chain options, qualifying additional suppliers and filter media. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the Company to reduce volatility in its costs. The Company strives to recover or offset allmaking strategic raw material cost increases through selective price increases to its customerspurchases.
Manufacturing and the Company’s cost reduction initiatives, which include material substitution, process improvement and product redesigns.
Patents and Trademarks
The Company owns various patents and trademarks, which it considers in the aggregate to constitute a valuable asset, including patents and trademarks for products sold under the Ultra-Web®, PowerCore® and Donaldson® trademarks.
Major Customers
The Company had no customers that accounted for over 10% of net sales in the years ended July 31, 2017, 2016 or 2015. The Company had no customers that accounted for over 10% of gross accounts receivable at July 31, 2017 or July 31, 2016.
Backlog
At August 31, 2017, the backlog of orders expected to be delivered within 90 days was $395.5 million. The 90-day backlog at August 31, 2016, was $323.0 million. The increase is due to the continued strong demand across multiple product lines. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of the receipt of orders, in manyas well as product mix. Backlog orders expected to be delivered within 90 days as of July 31, 2022 and 2021 were $658.5 million and $626.0 million, respectively. Backlog increased 1.4% for Engine and 15.1% for Industrial, primarily due to supply chain disruptions and higher demand.
Seasonality
Many of the Company’s end markets are generally stronger in the second half of the Company’s fiscal year. The first half of the fiscal year contains more holiday periods, which typically include more customer plant closures.
Diversification
The Company’s results of operations are affected by conditions in the global economic and geopolitical environment. Under most economic conditions, the Company’s market diversification between its diesel engine end markets and its global end markets and its diversification through technology and its OEM and industrialreplacement parts customers has helped to limit the impact of weakness in any one product line, market or geography on the consolidated operating results of the Company.
Strategy
Donaldson’s strategy is based on three main pillars to support its purpose of Advancing Filtration for a Cleaner World. The pillars are as follows:
•technology-led filtration company - Donaldson is a technology-led filtration company with world-class materials, science and conversion expertise. The Company focuses on creating and offering digitally intelligent solutions to its worldwide customers;
•diverse businesses with expanding market opportunities - Donaldson has a diverse portfolio of businesses and products that serve multiple end markets. Through organic growth execution and strategic acquisitions, Donaldson has opportunities to expand into additional end markets and geographies; and
•global presence with deep customer relationships - Donaldson’s global presence, employee development and commitment to customer relationships drives the Company’s end-to-end operational excellence and high levels of customer satisfaction. Intellectual Capital
Research and Development
During the years ended July 31, 2017, 2016 and 2015, the Company spent $54.7 million, $55.5 million and $60.2 million, respectively, onInvestment in research and development activities, which was 2.3%, 2.5%strengthens the Company’s material science capabilities and 2.5%supports development of net sales, respectively.new and improved products and solutions. Research and development expenses include basic scientific research costs such as salaries, facility costs, testing, technical information technology and administrative expenditures. Research and development expenses are for the application of scientific advances to the development of new and improved products and their uses. Substantially all commercial research and development is performed in-house. During the years ended July 31, 2022, 2021 and 2020, the Company spent $69.1 million, $67.8 million and $61.2 million, respectively, on research and development activities, which was 2.1%, 2.4% and 2.4% of net sales, respectively.
Environmental MattersIntellectual Property
The Company doesowns a broad range of intellectual property rights relating to its products and services, which it considers in the aggregate to constitute a valuable asset. These include patents, trade secrets, trademarks, copyrights and other forms of intellectual property rights in the U.S. and a number of foreign countries. The Company protects its innovations arising from research and development through patent filings and owns a portfolio of issued patents, including utility and design patents. The Company also owns various trademarks related to its products and services including Donaldson® and the turbo D logo, Ultra-Web®, PowerCore®, Downflo®, Torit®, Synteq® XP, LifeTec®, iCue™ and Tetratex®, among others. No single intellectual property right is responsible for protecting the Company’s products.
Environmental
Donaldson is subject to a wide variety of local, state and federal environmental laws and regulations in the U.S., as well as the environmental laws and regulations of other countries in which Donaldson conducts business. Donaldson strives to comply with applicable laws and regulations. Failure to comply with these regulations, however, could lead to fines and other penalties. In fiscal 2022, the Company did not anticipateexperience any material effect on its capital expenditures, earningsresults of operations or competitive position during fiscal 2018financial condition, due to compliance with government regulationsrules regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.environment, nor does it expect such impact during fiscal 2023.
EmployeesHuman Capital Resources
As of July 31, 2022, the Company had approximately 14,000 full time employees, of which 61% were in production related roles. The Company’s production facilities augment their resources utilizing contingent labor. For over 100 years, the Company has been making a difference with customers, employees, investors, suppliers and communities through a collaborative and diverse workplace where every employee matters. The Company prides itself on providing innovative technologies and solutions backed by talented and dedicated employees guided by its core values.
Core Values
The Company’s purpose is to advance filtration for a cleaner world. The principles that guide this purpose are as follows:
•act with integrity - deliver on commitments and be accountable for actions;
•engage and empower people - have a richly diverse and inclusive culture, and provide opportunities for people to grow, build successful careers and make meaningful contributions;
•deliver for customers - understand, anticipate and prioritize customers’ needs, delivering differentiated products and solutions that enable their success;
•cultivate innovation - pursue innovation in everything from continuous improvement in processes to breakthrough solutions that create value and competitive advantage;
•operate safely and sustainably - committed to safety in the workplace, being good stewards of natural resources and reducing environmental impacts; and
•enrich communities - share time, resources and talent to make a positive impact.
Culture
The Company employed approximately 13,200 peopleis comprised of a diverse global team. With a broad base of capabilities, cultures and perspectives, employees reflect the communities they serve. The Company promotes a collaborative workplace. By working together, the Company’s employees can better understand and meet the customers’ needs. While the global team includes filtration industry experts, every role is recognized, and individuals’ contributions have a direct impact. The Company fosters learning and growth. To help employees continue to learn and succeed in their careers, while keeping pace with a rapidly changing global marketplace, the Company provides multiple learning opportunities and programs, including online courses and customized development plans.
Diversity, Equity and Inclusion
The Company values and welcomes employees’ unique views and contributions, knowing that together the global team can better understand and meet the needs of its worldwide operations ascustomers and communities. The Company participates in outreach and fundraising efforts for organizations focused on diversity and supporting educational opportunities to underserved students and communities.
Benefits
The Company is committed to the health, wealth and work-life balance of July 31, 2017.
Geographic Areas
Bothemployees and offers competitive benefits packages to help support individuals and their families. To support the health and well-being of employees in the U.S. and their dependents, the Company offers a discount on private health insurance policies and provides an employee assistance program. In other parts of the Company's segments serve customersworld, the Company offers competitive financial compensation packages that may include both base pay and bonus elements in all geographic regions worldwide. The United States representsaddition to social programs specific to the largest current individual marketcountries in which it operates. To help employees provide and prepare for the Company's products. Germanyfuture, the Company provides several other financial and non-financial benefits.
Employment
The Company attracts a qualified workforce through an inclusive and accessible recruiting process that utilizes online recruiting platforms, campus outreach, internships, recruitment vendor partners, job fairs and other recruitment tools. The Company seeks to retain employees by offering competitive wages, benefits and training opportunities, as well as promoting a safe and healthy workplace. The Company is committed to treating all applicants and employees with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, veteran status, gender identity, disability or other protected status. It is the single largest market outsideCompany’s policy to comply with all applicable state, local and international laws governing non-discrimination in employment in every location where it operates. This compliance includes terms and conditions of employment, which cover recruiting, hiring, placement, promotion, termination, layoff, recall, transfer, leaves of absence, compensation and training.
Health and Safety
The Company empowers its employees and provides the United States. Financialknowledge and tools needed to make safe decisions and mitigate risks. Every employee is responsible for identifying and managing exposure to health and safety hazards and harmful environmental impacts. A variety of training methods are available to fulfill these requirements, including online learning, training, coaching or mentoring and group discussions and activities.
The Company most recently demonstrated these principles as it conceived and implemented its Coronavirus (COVID-19) pandemic response, which included implementing comprehensive protocols to help keep employees safe and healthy. Employees adapted to evolving conditions and continue to change as processes and procedures are adjusted and aligned with public health authority recommendations.
Community Service
Generations of the Company’s employees and their families give their time, energy and aid to various philanthropic efforts, addressing the needs of our local communities and helping transform lives. Organizations are supported in partnership with the Donaldson Foundation and through numerous volunteer events.
Available Information
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information, including amendments to those reports, available free of charge through its website at ir.donaldson.com, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (SEC). These filings are available on the SEC’s website at www.sec.gov. Also available on the Company’s website are corporate governance documents, including the Company’s Code of Business Conduct and Business Conduct Help Line, Corporate Governance Guidelines, Director Independence Standards, Audit Committee Charter, Human Resources Committee Charter and Corporate Governance Committee Charter. The information contained on the Company’s website is not incorporated by geographic areas appears in Note 18 in the Notes to Consolidated Financial Statements included in Item 8reference into this Annual Report and should not be considered as part of this Annual Report.report.
Item 1A. Risk Factors
There are inherentThe Company’s (we, our or us) business is subject to various risks and uncertainties associateduncertainties. The following discussion outlines what we believe to be the risk factors that could materially and adversely affect our business, reputation, financial condition and results of operations. These risk factors should be considered with ourthe Company’s cautionary comments related to forward-looking statements when evaluating information provided in this Annual Report. Risks not currently known to the Company, or the Company currently believes are immaterial, may also impair the Company’s business, reputation, financial condition and results of operations. The Company periodically reviews its strategies, processes and controls with respect to risk identification, assessment and mitigation with the audit committee of the Company’s board of directors.
Macroeconomic and Geopolitical Risks
Global Operations - we have a broad footprint and global operations that involve the manufacturing and sale of products for highly demanding customer applicationsmay present challenges.
We have operations throughout the world. Our stability, growth and profitability are subject to a number of risks of doing business globally including the following:
•political and military events, including the rise of nationalism and support for protectionist policies;
•ongoing military action by Russia in Ukraine, or in neighboring regions;
•tariffs, trade barriers and other trade restrictions;
•legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws and foreign exchange controls;
•potential difficulties in staffing and managing local operations;
•credit risk of local customers and distributors;
•deterioration in economic conditions, including the effect of inflation on our customers and suppliers;
•difficulties in protecting our intellectual property; and
•local economic, political and social conditions.
Due to the global reach of our operations, our business is subject to a complex system of commercial and trade laws, regulations and policies, including those related to data privacy, trade compliance, anti-corruption and anti-bribery. We experience exposure to, and costs of complying with, these laws and regulations. Our global subsidiaries, joint venture partners and affiliates are governed by laws, rules and business practices that differ from those of the U.S. Our compliance programs may not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating laws, regulations or standards. We may incur defense costs, fines, penalties, damage to our reputation and business disruptions, which could result in an adverse effect on our results of operations, financial condition and cash flows.
Business Disruption - unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.
There could be an occurrence of one or more unexpected events, including a terrorist attack, war or civil unrest, a weather event, a natural disaster, a pandemic or other catastrophe in countries in which we operate or in which our suppliers are located. Such an event could result in physical damage to and complete or partial closure of one or more of our headquarters, manufacturing facilities or distribution centers, temporary or long-term disruption in the supply of component products from some local and international suppliers, disruption in the transport of our products to customers and disruption of information systems. Existing insurance coverage may not provide protection for all costs that may arise from any such event. Any disruption in our operations could have an adverse impact on our ability to meet our customer needs or may require us to incur additional expense in order to produce sufficient inventory. Certain unexpected events could adversely impact our business, results of operations, financial condition and cash flows.
COVID-19 Pandemic Business Disruption - the COVID-19 pandemic had, and in the future could have, a negative effect on our business, results of operations, financial condition and cash flows.
The COVID-19 pandemic has significantly impacted the global economy and, consequently, the Company’s business and operations have been, and could continue to be, adversely affected by the COVID-19 pandemic. We experienced temporary shutdowns in certain facilities and we, our employees, suppliers or customers may be prevented in the future from conducting business activities for an indefinite period of time due to shutdowns, import or export restrictions or other preventative measures that may be requested or mandated by governmental authorities.
Further, the COVID-19 pandemic has significantly increased economic uncertainty, has led to volatility in customer demand for the Company’s products and services and has caused supply chain disruptions. These risksevents have and uncertainties could adversely impact our business, results of operations, financial condition and cash flows.
Russia and Ukraine Conflict - the ongoing military action by Russia in Ukraine could have a negative impact on the global economy which could materially adversely affect our operating performancebusiness, results of operations, financial condition and financial condition. The following discussion, along with discussions elsewherecash flows.
On February 24, 2022, Russian forces launched significant military action against Ukraine. As a result, the U.S. and other countries imposed sanctions, penalties and export controls against certain Russian entities and individuals. Although the duration and impact of the ongoing conflict in this report, outlinesUkraine are highly unpredictable, the risksconflict could lead to substantial market disruptions, including counter-sanctions, volatility in the credit available to us and uncertainties that we believe are the most materialour customers, heightened inflation and energy costs, supply chain disruptions, or delays in delivering products to our customers. Any such disruptions could have a negative impact on the global economy, which could materially adversely affect our business, at this time. results of operations, financial condition and cash flows.
Operational Risks
Supply Chain - unavailable raw materials, significant demand fluctuations and material cost inflation have and could continue to have an impact on our sales and cost of sales.
We undertake no obligationobtain raw materials, including steel, filter media, petroleum-based products and other components from third-party suppliers. We often concentrate our sourcing of some materials from one supplier or a few suppliers. We rely, in part, on our suppliers to publicly update or revise any forward-looking statements, whether as aensure they meet required quality and delivery standards. An unanticipated delay in delivery by our suppliers could result of new information, future events, or otherwise, unless required by law.
Economic Environment -in the demand forinability to deliver our products relies on economictime and industrial conditions worldwide.to meet the expectations of our customers. We have experienced, and could continue to experience, an increase in the costs of doing business, including increasing raw material prices and transportation costs, which have and could continue to have an adverse impact on our business, results of operations, financial condition and cash flows.
ChangesPersonnel - our success has been, and could in economicthe future be affected, if we are not able to attract, engage and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, engage, train and retain highly skilled, qualified and diverse personnel globally and successfully execute management transitions at leadership levels of the Company. There is competition for talent with market-leading skills and capabilities in new technologies. Additionally, in some locations we have experienced significant wage inflation due to a shortage of labor, as well as labor shortages, amid low levels of unemployment or industrial conditionsworkforce availability in these markets. We may not be able to attract and retain qualified personnel and it may be difficult for us to compete effectively, which could adversely impact our business.
Operations - complexity of manufacturing could cause inability to meet demand and result in the loss of customers.
Our ability to fulfill customer orders is dependent on our manufacturing and distribution operations. Although we forecast demand, additional plant capacity takes significant time to bring online, and thus changes in demand could result in longer lead times. We cannot guarantee we will be able to adjust manufacturing capacity, in the short-term, to meet higher customer demand. Efficient operations require streamlining processes to maintain or reduce lead times, which we may not be capable of achieving. Unacceptable levels of service for key customers may result if we are not able to fulfill orders on a timely basis or if product quality, warranty or safety issues result from compromised production. We may not be able to adjust our production schedules to reflect changes in customer demand on a timely basis. Due to the complexity of our manufacturing operations, we may be unable to timely respond to fluctuations in demand, which could adversely impact our business, results orof operations, financial condition in any particular period as our business can be sensitive to varying conditions in all major geographies and markets.cash flows.
Products - maintaining a competitive advantage requires continuingconsistent investment with uncertain returns.
We operate in highly competitive markets and have numerous competitors that may already be well-established in those markets. We expect our competitors to continue improvingto improve the design and performance of their products and to introduce new products that could be competitive in both price and performance. We believe that we have certain technological advantages over our competitors, but maintaining these advantages requires us to continuallyconsistently invest in research and development, sales and marketing and customer service and support. There is no guarantee that we will be successful in maintaining these advantages.advantages and we could encounter the commoditization of our key products. We make investments in new technologies that address increased performance and regulatory requirements around the globe. There is no guarantee that we will be successful in completing development or achieving sales of these products or that the margins on such products will be acceptable. Our financial performance may be negatively impacted if aA competitor’s successful product innovation reachescould reach the market before ours or gainsgain broader market acceptance. In addition,acceptance, which could adversely impact our business, results of operations, financial condition and cash flows.
Evolving Customer Needs - disruptive technologies may threaten our growth in certain industries.
Certain industry market trends guide decisions we make in operating the Company, and our growth could be threatened by disruptive technologies. We may be adversely impacted by changes in technology that could reduce or eliminate the demand for our products. These risks include wider adoption of technologies providing alternatives to diesel engines.engines such as electrification of equipment. Such disruptive innovation could create new markets and displace existing companies and products, resulting in significantly negative consequences for the Company. If we do not properly address future customer needs, we may be slower to adapt to such disruption, which could adversely impact our business, results of operations, financial condition and cash flows.
Competition - we participate in highly competitive markets with pricing pressure.
The businesses and product lines in which we participate are very competitive and we risk losing business based on a wide range of factors, including price,price, technology, performance, reliability and availability, geographic coverage product performance and customer service. Our customers continue to seek technological innovation, productivity gains, competitive prices, reliability and lower pricesavailability from us and their other suppliers. IfAdditionally, we aresell through a variety of channels (e.g., OEM, dealer, distributor, eCommerce) in a diverse set of highly competitive filtration markets. The variability complicates the supply chain, affects working capital needs, requires balance between relationships and drives a more targeted sales force. As a result of these and other factors, we may not be able to compete effectively, which could adversely impact our margins andbusiness, results of operations, financial condition and cash flows.
Customer Concentration and Retention - a number of our customers operate in similar cyclical industries. Economic conditions in these industries could impact our sales.
No customer accounted for 10% or more of our net sales in fiscal 2022, 2021 or 2020. However, a number of our customers are concentrated in similar cyclical industries (e.g., construction, agriculture, mining, oil and gas, transportation, power generation and disk drive), resulting in additional risk based on their respective economic conditions. Our success is also dependent on retaining key customers, which requires us to successfully manage relationships and anticipate the needs of our customers in the channels in which we sell our products. Changes in the economic conditions could materially and adversely impact our results of operations, financial condition and cash flows.
Productivity Improvements - if we do not successfully manage productivity improvements, we may not realize the expected benefits.
Our financial projections assume certain ongoing productivity improvements as a key component of our business strategy to, among other things, contain operating expenses, maintain competitiveness, increase operating efficiencies and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost savings if we do not successfully execute these plans while continuing to invest in business growth. Difficulties could be encountered or such cost savings may not otherwise be realized, which could adversely affected.impact our business, results of operations, financial condition and cash flows.
Acquisitions, Divestitures and Other Strategic Transactions - the execution of our acquisitions, divestitures and other strategic transactions may not provide the desired return on investment.
We have made and continue to pursue acquisitions and divestitures and may pursue joint ventures, strategic investments and other similar strategic transactions. Acquisitions, joint ventures and strategic investments could negatively impact our profitability and financial condition due to operating and integration inefficiencies, the incurrence of debt, contingent liabilities and amortization of expenses related to intangible assets. There are also a number of other risks involved in acquisitions including the potential loss of key customers or employees, difficulties in assimilating the acquired operations and the diversion of management’s time and attention away from other business matters. Further, during the pendency of a proposed transaction, we may be subject to risks related to a decline in the business and the risk the transaction may not close. Divestitures may involve significant challenges and risks, such as difficulty separating out portions of our business or the potential loss of revenue or negative impacts on margins. The divestitures may also result in ongoing financial or legal proceedings, such as retained liabilities, which could have an adverse impact on our results of operations, financial condition and cash flows.
Cybersecurity Risks
Cybersecurity Risks - vulnerability of our information technology systems and security.
We have many information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information and to manage or support a variety of business processes and activities, which are critical to our operations. We could encounter difficulties in developing new systems, maintaining and upgrading our existing systems, managing access to these systems and preventing information security breaches. Additionally, we collect and store sensitive data, including intellectual property and proprietary business information, in data centers and on information technology networks.
Our data is subject to a variety of U.S. and international laws and regulations that pertain to the collection and handling of personal information. The laws require us to notify governmental authorities and affected individuals of data breaches involving certain personal information. These laws include the European General Data Protection Regulation and the California Consumer Privacy Act. Regulatory litigation or actions that could impose significant penalties may be brought against us in the event of a breach of data or alleged non-compliance with such laws and regulations.
Information technology security threats are increasing in frequency and sophistication. We have invested in protection to prevent these threats; to date none of them have been material. However, there can be no assurance our efforts will prevent all potential failures, cybersecurity attacks or breaches in our systems. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operation disruptions. The occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, potential liability, increased costs and operational consequences of implementing further data protection matters. The Company maintains insurance coverage for various cybersecurity and business continuity risks, however, there can be no guarantee all costs or losses incurred will be fully insured. Vulnerabilities could lead to significant additional expenses and an adverse effect on our reputation, business, results of operations, financial condition and cash flows.
Legal and Regulatory Risks
Intellectual Property - demand for our products may be affected by new entrants that copy our products and/or infringe on our intellectual property.
The ability to protect and enforce intellectual property rights varies across jurisdictions. An inabilityWhere possible, we seek to preserve our intellectual property rights may adversely affect our financial performance.
through patents. These patents have a limited life and, in some cases, have expired or will expire in the near future. Competitors and others may also initiate litigation to challenge the validity of our intellectual property or allege that we infringe their intellectual property. We may be required to pay substantial damages if it is determined our products infringe on their intellectual property. We may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license on terms that are not favorableunfavorable to us.
Protecting or defending against such claims could significantly increase our costs and divert management’s time and attention away from other business matters, and otherwise adversely affect our results of operations and financial condition.
Global Operations - operating globally carries risks that could negatively affect our financial performance.
We have sales and manufacturing operations throughout the world. Our stability, growth and profitability are subject to a number of risks of doing business globally that could harm our business, including:
political and military events,
legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws and foreign exchange controls,
tariffs, trade barriers and other trade restrictions,
potential difficulties in staffing and managing local operations,
credit risk of local customers and distributors,
difficulties in protecting our intellectual property,
natural disasters, terrorism, war or other catastrophic events and
local economic, political and social conditions, including in the Middle East, Ukraine, China, Thailand, South Korea and other emerging markets where we do business.
Due to the international scope of our operations, we are subject to a complex system of import- and export-related laws and regulations. Any alleged or actual violations may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States (U.S.).
The enforcement of bribery, corruption and trade laws and regulations is increasing in frequency and complexity on a global basis. The continued geographic expansion of our business increases our exposure to, and cost of complying with, these laws and regulations. If our compliance programs do not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions.
Customer Concentration - a number of our customers operate in similar cyclical industries. Economic conditions in these industries could have a negative impact on our financial performance.
No customer accounted for ten percent or more of our net sales in fiscal 2017, 2016 or 2015. However, a number of our customers are concentrated in similar cyclical industries (construction, agriculture and mining), resulting in additional risk based on industrial conditions in those sectors. A decline in the economic conditions of these industries could result in reduced demand for our products and difficulty in collecting amounts due from our customers.
Supply Chain - unavailable or higher cost materials could impact our financial performance.
We obtain raw materials, including steel, filter media, petroleum-based products and other components, from third-party suppliers and tend to carry limited raw material inventories. An unanticipated delay in delivery by our suppliers could result in the inability to deliver on-time and meet the expectations of our customers. An increase in commodity prices could also result in lower operating margins.
Technology Investments and Security Risks - difficulties with our information technology systems and security could adversely affect our results.
We have many information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information and to manage or support a variety of business processes and activities. We could encounter difficulties in developing new systems, maintaining and upgrading our existing systems and preventing information security breaches. Such difficulties could lead to significant additional expenses and/or disruption in business operations that could adversely affect our results.
Additionally, information technology security threats are increasing in frequency and sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromising of confidential information, manipulation and destruction of data, defective products, production downtimes and operations disruptions. The occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, potential liability and increased costs and operational consequences of implementing further data protection matters.
Currency - an unfavorable fluctuation in foreign currency exchange rates could adversely impact our results of operations.
We have operations in many countries, with more than one-half of our annual revenue coming from countries outside of the U.S. Each of our subsidiaries reports itsbusiness and results of operations, financial condition and financial position in its relevant functional currency, which is then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements. Strengthening of the U.S. dollar in comparison to the foreign currencies of our subsidiaries has a negative impact on our results and financial position. In addition, decreased value of local currency may make it difficult for some of our customers, distributors and end users to purchase our products.cash flows.
Legal and Regulatory - costs associated with lawsuits, investigations or complying with laws and regulations may have an adverse effect on our results of operations.regulations.
We are subject to many laws and regulations in the jurisdictions in which we operate. We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing laws and regulations that affect both our operations and our ability to develop and sell products that meet our customers’ requirements. We are involved in various product liability, product warranty, intellectual property, environmental claims and other legal proceedings that arise in and outside of the ordinary course of our business. We are subject to increasingly stringent environmental laws and regulations in the countries
in which we operate, including those governing the environment (e.g., emissions to air; discharges to water; and the generation, handling, storage, transportation, treatment and disposal of waste materials.materials) and data protection and privacy. It is not possible to predict the outcome of investigations and lawsuits, and we could incurincur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have an adverse effect on our business, reputation, results of operations, and financial condition and cash flows in any particular period. In addition, we may not be able to maintain our insurance at a reasonable cost or in sufficient amounts to protect us against any losses.
Income TaxFinancial Risks
Currency - changesan unfavorable fluctuation in our effective tax rateforeign currency exchange rates could adversely impact our net income.results of operations.
We are subject to income taxeshave operations in various jurisdictions in which we operate. Our tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated inmany countries, with lower statutory tax ratesa substantial portion of our annual revenue earned in currencies other than the U.S. dollar. We face transactional and higher than anticipatedtranslational risks associated with the fluctuations in countries with higher statutory tax rates,foreign currency exchange rates. Transactional risk arises from changes in the valuationvalue of deferred tax assetscash flows denominated in different currencies. This can be caused by supply chains that cross borders resulting in revenues and liabilities and changescosts being in tax laws and regulations. We are also subject todifferent currencies. Translational risk arises from the continuous examinationremeasurement of our income tax returns by tax authorities. The resultsfinancial statements. In addition, decreased value of audits and examinations of previously filed tax returns and continuing assessmentslocal currency may make it difficult for some of our tax exposures may have an adverse effect oncustomers, distributors and end users to purchase our provision for income taxes and cash tax liability.
Personnel -products. Each of our success may be affected if we are not able to attract, develop and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, develop and retain qualified personnel worldwide. If we are unable to meet this challenge, it may be difficult for us to execute our strategic objectives and grow our business, which could adversely affect oursubsidiaries reports its results of operations and financial condition.position in its relevant functional currency, which is then translated into U.S. dollars. This translated financial information is included in our Consolidated Financial Statements. Significant fluctuations of the U.S. dollar in comparison to the foreign currencies of our subsidiaries during discrete periods may have a negative impact on our results of operations, financial condition and cash flows.
Liquidity - changes in the capital and credit markets may negatively affect our ability to access financing.financing to support strategic initiatives.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. During fiscal 2017, credit in the global credit markets was accessible and market interest rates remained low. We believe that our current financial resources, together with cash generated by operations, are sufficient to continue financing our operations for the next twelve months. There can be no assurance however, that the cost or availability of future borrowings will not be impacted by future capital market disruptions. Some of our existing borrowings contain covenants to maintain certain financial ratios that, under certain circumstances, could restrict our ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets. As of July 31, 2017, the Company was in compliance with all such covenants.
The majority of our cash and cash equivalents are held by our foreign subsidiaries as over half of our earnings occur outside the U.S. Most of these funds are considered permanently reinvested outside the U.S., as the cash generated from U.S. operations plus our debt facilities are anticipated to be sufficient for our U.S. operation’s cash needs. If additional cash is required for our operations in the U.S., it may be subject to additional U.S. taxes if funds are repatriated from certain foreign subsidiaries.
Acquisitions - the execution of our acquisition strategy may not provide the desired return on investment.
We have made and continue to pursue acquisitions, including our acquisitions of Industrias Partmo S.A. (Partmo) and Hy-Pro Corporation (Hy-Pro) in fiscal 2017, Engineered Products Company (EPC) in fiscal 2016 and Northern Technical L.L.C. (Northern Technical) and IFIL USA L.L.C. (IFIL USA) in fiscal 2015. These acquisitions could negatively impact our profitability due to operating and integration inefficiencies, the incurrence of debt, contingent liabilities and amortization expenses related to intangible assets. There are also a number of other risks involved in acquisitions, including the potential loss of key customers, difficulties in assimilating the acquired operations, the loss of key employees and the diversion of management’s time and attention away from other business matters.
Impairment - if our operating units do not meet performance expectations, assets could be subject to impairment.
Our total assets include goodwill from acquisitions. We test annually whether goodwill has been impaired, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. If future operating performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or more of our acquired businesses were to decline, we could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of our goodwill would have an adverse non-cash impact on our results of operations and reduce our net worth.
Restructuring - if we do not successfully execute our restructuring plans and realize the expected benefits, our financial performance may be adversely affected.
From time to time we have initiated restructuring programs related to our business strategy to, among other things, reduce operating expenses and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost savings if we do not successfully execute these plans. If difficulties are encountered or such cost savings are otherwise not realized, it could adversely impact our results of operations.
Internal Controls - if we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results and prevent material fraud, which could adversely affect the value of our common stock. Failure to maintain an effective system of internal control over financial reporting resulted in a material weakness during fiscal 2015.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and effectively prevent and detect material fraud. If we cannot provide reliable financial reports or prevent or detect material fraud, our operating results could be misstated. Failure to maintain an effective system of internal control over financial reporting resulted in a material weakness during fiscal 2015. Although we completed our remedial actions in response to this matter, there can be no assurances that we will be able to prevent future control deficiencies from occurring, which could cause us to incur unforeseen costs, negatively impact our results of operations, cause the market price of our common stock to decline or have other potential adverse consequences.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s principal administrative officecorporate headquarters and research facilities are located in Bloomington,Minneapolis, Minnesota. The Company’s principal EuropeanCompany also has administrative and engineering offices are located in Leuven, Belgium. The Company also has extensive operationsand research facilities in the Asia Pacificregions of EMEA, APAC and Latin America regions.
LATAM. The Company’s principal manufacturing and distribution activities are located throughout the world. The following is a summary ofworld, and the principal plants and physical properties owned or leased by the Company as of July 31, 2017. |
| | |
Americas | | Europe/Africa/Middle East |
Auburn, Alabama (E) | | Kadan, Czech Republic (I) |
Stockton, California (I)* | | Klasterec, Czech Republic (E) |
Valencia, California (E)* | | Domjean, France (E) |
Dixon, Illinois (E) | | Paris, France (E)* |
Anderson, Indiana (E)* | | Dulmen, Germany (E) |
Frankfort, Indiana (E) | | Haan, Germany (I) |
Cresco, Iowa (E) | | Ostiglia, Italy (E) |
Waterloo, Iowa (E) | | Skarbimierz, Poland (E) |
Nicholasville, Kentucky (I) | | Cape Town, South Africa (E) |
Bloomington, Minnesota (I) | | Johannesburg, South Africa (I)* |
Chesterfield, Missouri (E)* | | Abu Dhabi, United Arab Emirates (I) |
Chillicothe, Missouri (E) | | Hull, United Kingdom (E) |
Harrisonville, Missouri (I) | | Leicester, United Kingdom (I) |
Philadelphia, Pennsylvania (I) | | Asia/Pacific |
Greeneville, Tennessee (E) | | Wyong, Australia (E) |
Baldwin, Wisconsin (I) | | Wuxi, China |
Stevens Point, Wisconsin (E) | | New Delhi, India (E) |
Sao Paulo, Brazil (E)* | | Gunma, Japan (E) |
Brockville, Canada (E)* | | Rayong, Thailand (I) |
Bucaramanga, Columbia (E) | | Third-Party Logistics Providers |
Aguascalientes, Mexico (E) | | Santiago, Chile |
Monterrey, Mexico (I) | | Wuxi, China |
Distribution Centers | | Bogotá, Colombia |
Wyong, Australia | | Cartagena, Colombia |
Brugge, Belgium | | Chennai, India (E) |
Sao Paulo, Brazil* | | Mumbai, India |
Rensselaer, Indiana | | Gunma, Japan |
Jakarta, Indonesia | | Auckland, New Zealand |
Aguascalientes, Mexico | | Lima, Peru |
Lozorno, Slovakia | | Singapore |
Johannesburg, South Africa | | Greeneville, Tennessee (I) |
Seoul, South Korea* | | Laredo, Texas |
Joint Venture Facilities | | |
Most, Czech Republic (E) | | |
Champaign, Illinois (E) | | |
Jakarta, Indonesia (E) | | |
Dammam, Saudi Arabia (I) | | |
The Company’s properties are utilized for both the Engine and Industrial Products segments except as indicated with an (E) for Engine or (I) for Industrial. The Company leases certain of its facilities, primarily under long-term leases. The facilities denoted with an asterisk (*) are leased facilities. In Wuxi, China, and Bloomington, Minnesota, a portion of the activities are conducted
in leased facilities. The Company uses third-party logistics providers for some of its product distribution and neither leases nor owns the related facilities. The CompanyCompany considers its properties to be suitable for their present purposes, well-maintained and in good operating condition.
Item 3. Legal Proceedings
The Company believes the recorded estimated liability in its Consolidated Financial Statements for claims or litigation is adequate in light of the probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial position, results of operations or liquidity and the Company believes it is remote that the settlement of any of the currently identified claims or litigation will be materially in excess of what is accrued. The Company records provisions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and litigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the estimated liability in its Consolidated Financial Statements for claims or litigation is adequate and appropriate for the probable and estimable outcomes. Liabilities recorded were not material to the Company’s financial position, results of operations or liquidity. The Company believes it is remote that the settlement of any of the currently identified claims or litigation will be materially in excess of what is accrued.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers
Our executive officers of the Registrant
Current informationCompany as of August 31, 2017, regarding executive officers is presented below. All officers hold office until their successors are elected and qualify, or their earlier death, resignation or removal. There are no arrangements or understandings between individual officers and any other person pursuant to which the officer was selected2022 were as an executive officer.follows:
| | | Name | | Age | | Positions and Offices Held | | First Year Appointed as an Executive Officer | Name | | Age | | Positions and Offices Held | | First Year
Appointed as an
Executive Officer |
| Amy C. Becker | | 52 | | Vice President, General Counsel and Secretary | | 2014 | Amy C. Becker | | 57 | | Vice President, General Counsel and Secretary | | 2014 |
| Tod E. Carpenter | | 58 | | President and Chief Executive Officer | | 2008 | Tod E. Carpenter | | 63 | | Chairman, President and Chief Executive Officer | | 2008 |
| Sheila G. Kramer | | 58 | | Vice President, Human Resources | | 2015 | Sheila G. Kramer | | 63 | | Vice President, Human Resources | | 2015 |
| Richard B. Lewis | | Richard B. Lewis | | 51 | | Senior Vice President, Global Operations | | 2017 |
| Scott J. Robinson | | 50 | | Vice President and Chief Financial Officer | | 2015 | Scott J. Robinson | | 55 | | Senior Vice President and Chief Financial Officer | | 2015 |
| Thomas R. Scalf | | 51 | | Senior Vice President, Engine Products | | 2014 | Thomas R. Scalf | | 56 | | Senior Vice President, Engine Products | | 2014 |
| Jeffrey E. Spethmann | | 52 | | Senior Vice President, Industrial Products | | 2016 | Jeffrey E. Spethmann | | 57 | | Senior Vice President, Industrial Products | | 2016 |
| Wim Vermeersch | | 51 | | Vice President, Europe, Middle East and Africa | | 2012 | Wim Vermeersch | | 56 | | Vice President, Europe, Middle East and Africa | | 2012 |
Ms. Becker joined the Company in 1998 as Senior Counsel and Assistant Corporate Secretary and was appointed to Vice President, General Counsel and Secretary in August 2014. Ms. Becker joined the Company in 1998 and held positions as Senior Counsel and Assistant Corporate Secretary and Assistant General Counsel. Prior to joining the Company, Ms. Becker was an attorney for Dorsey and Whitney, LLP from 1991 to 1995 and was a Project Manager and Corporate Counsel for Harmon, Ltd. from 1995 to 1998.
Mr. Carpenter was appointed Chairman, President and Chief Executive Officer in November 2017. Mr. Carpenter joined the Company in 1996 and has held various positions, including Director of Operations, Gas Turbine SystemsSystems; General Manager, from 2002 to 2004;Gas Turbine Systems; General Manager, Industrial Filtration Systems Sales from 2004 to 2006; General Manager, Industrial Filtration Systems Americas in 2006;Systems; Vice President, Global Industrial Filtration Systems from 2006 to 2008;Systems; Vice President, Europe and Middle East from 2008 to 2011;East; and Senior Vice President, Engine Products from 2011 to 2014. In April 2014,Products. Mr. Carpenter was appointed Chief Operating Officer. OnOfficer in April 1, 2015, Mr. Carpenter was appointed2014 and President and Chief Executive Officer.Officer in April 2015.
Ms. Kramer was appointed Vice President, Human Resources in October 2015. Prior to joining the Company, Ms. Kramer was Vice President, Human Resources for Taylor Corporation, a print and graphics media company, from 2013 until September 2015. From 1991 to 2013, Ms. Kramer was withDuring her 22 years at Lifetouch, Inc., a photography company, where sheMs. Kramer held various human resources roles including Corporate Vice President, Human Resources from 2009 to 2013.
Mr. RobinsonLewis was appointed Senior Vice President, Global Operations in October 2018. Mr. Lewis joined the Company in 2002 and has held various positions, including Plant Manager; Director of Operations; General Manager, Liquid Filtration; General Manager, Operations; and Vice President, Global Operations. Prior to joining the Company, Mr. Lewis held the positions of Operations Manager, Seleco Inc. from 1998 to 2002, and Operations Manager, Ventra Corporation from 1997 to 1998.
Mr. Robinson was appointed Senior Vice President and Chief Financial Officer in December 2015.September 2017. Mr. Robinson joined the Company in 2015 as Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Robinson was the Chief Financial Officer for Imation Corp., a global scalabledata storage and datainformation security company, a position he held since August 2014.from 2014 to 2015. During his 11 years with Imation Corp., he also served as the Investor Relations Officer, Corporate Controller and Chief Accounting Officer. Prior to that, he held positions at Deluxe Corporation and PricewaterhouseCoopers LLP.
Mr. Scalf was appointed Senior Vice President, Engine Products in April 2014. Mr. Scalf joined the Company in 1989 and has held various positions, including Plant Manager, Director of Global Operations from 2003 to 2006;Operations; General Manager of Exhaust & Emissions from 2006 to 2008;and Emissions; General Manager of Industrial Filtration Solutions from 2008 to 2012;Solutions; and Vice President of Global Industrial Air Filtration from 2012 to 2014. Filtration.
Mr. ScalfSpethmann was appointed Senior Vice President, EngineIndustrial Products in April 2014.
2016. Mr. Spethmann joined the Company in 2013 and has held various positions, including Vice President, of the Exhaust &and Emissions business unit from 2013 to 2014 and Vice President, Global Industrial Air Filtration from 2014 to 2016. Mr. Spethmann was appointed Senior Vice President of Industrial Products in April 2016.Filtration. Prior to joining the Company, from 1999 to 2012, Mr.
Spethmann held positions of General Manager and President of Blow Molded Specialties, Inc., a manufacturing company focused on the extrusion of blow molded partsfrom 1999 to 2012.
Mr. Vermeersch was appointed Vice President, Europe, Middle East and assemblies.
Africa in January 2012. Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, Gas Turbine Systems, Asia Pacific from 2000 to 2005;Pacific; Manager, Aftermarket and Service Industrial Filtration Solutions, Belgium from 2005 to 2006;Belgium; Manager, Industrial Filtration Solutions, Belgium from 2006 to 2007;Belgium; Director, Gas Turbine Systems, Europe, Middle East and North Africa from 2007 to 2010;Africa; and Director, Engine, Europe, Middle East and North Africa from 2010 to 2011. Mr. Vermeersch was appointed Vice President, Europe, Middle East and Africa in January 2012.Africa.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company'sCompany’s common stock, par value $5.00 per share, is traded on the New York Stock Exchange under the symbol "DCI." “DCI.” As of September 9, 2022, there were 1,215 registered stockholders of common stock.
To determine the appropriate level of dividend payouts, the Company considers recent and projected performance across key financial metrics, including earnings, cash flow from operations and total debt. As of September 20, 2017, there were 1,521 registered shareholders of common stock.
The high and low prices for the Company’s common stock for each quarterly period during the years ended July 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
Year Ended July 31, | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
2017 | | $38.65 - 35.52 | | $46.29 - 35.85 | | $47.68 - 41.46 | | $48.91 - 44.66 |
2016 | | $34.38 - 26.36 | | $31.88 - 25.21 | | $33.57 - 27.33 | | $37.08 - 31.52 |
The quarterly dividends declared for the years ended July 31, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | |
| Year Ended July 31, | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2017 | | $ | 0.175 |
| | $ | 0.175 |
| | $ | 0.175 |
| | $ | 0.180 |
|
| 2016 | | $ | 0.170 |
| | $ | 0.170 |
| | $ | 0.175 |
| | $ | 0.175 |
|
The following table summarizes informationInformation in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the three months ended July 31, 2017.2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs |
| May 1 - May 31, 2022 | | — | | | $ | — | | | — | | | 5,756,816 | |
| June 1 - June 30, 2022 | | 213,596 | | | $ | 47.44 | | | 213,596 | | | 5,543,220 | |
| July 1 - July 31, 2022 | | 140,506 | | | $ | 48.42 | | | 140,506 | | | 5,402,714 | |
| Total | | 354,102 | | | $ | 47.83 | | | 354,102 | | | 5,402,714 | |
|
| | | | | | | | | | | | | |
| Period | | Total Number of
Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs |
| May 1 - May 31, 2017 | | — |
| | $ | — |
| | — |
| | 7,823,842 |
|
| June 1 - June 30, 2017 | | 653,738 |
| | $ | 46.02 |
| | 650,000 |
| | 7,173,842 |
|
| July 1 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | 7,173,842 |
|
| Total | | 653,738 |
| | $ | 46.02 |
| | 650,000 |
| | 7,173,842 |
|
| |
(1) | On May 29, 2015, the Board of Directors authorized the repurchase of up to 14.0 million shares of the Company's common stock. This repurchase authorization is effective until terminated by the Board of Directors. There were no repurchases of common stock made outside of the Company's current repurchase authorization during the three months ended July 31, 2017. However, the "Total Number of Shares Purchased" column of the table above includes 3,738 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the quarter. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding of taxes due as a result of exercising stock options or payment of equity-based awards. |
The table set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report is also incorporated herein by reference.
The graph below compares the cumulative total shareholderstockholder return on the Company’s common stock for the last five fiscal years with the cumulative total return of the Standard & Poor’s (S&P) 500 Stock Index and the Standard & Poor’sS&P Industrial Machinery Index. The graph and table assume the investment of $100 in each of the Company’s common stock and the specified indexes at the beginning of the applicable period and assume the reinvestment of all dividends.
COMPARISON OF 5FIVE YEAR CUMULATIVE TOTAL RETURN
Among Donaldson Company Inc., the S&P 500 Index
and the S&P Industrial Machinery Index
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of July 31, |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Donaldson Company, Inc. | | $ | 100.00 | | | $ | 102.00 | | | $ | 108.55 | | | $ | 106.83 | | | $ | 148.46 | | | $ | 123.94 | |
| S&P 500 Stock Index | | $ | 100.00 | | | $ | 116.24 | | | $ | 125.52 | | | $ | 140.53 | | | $ | 191.75 | | | $ | 182.85 | |
| S&P Industrial Machinery Index | | $ | 100.00 | | | $ | 112.88 | | | $ | 121.10 | | | $ | 126.73 | | | $ | 182.96 | | | $ | 157.65 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2012 |
| | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
|
| Donaldson Company, Inc. | | $ | 100.00 |
| | $ | 107.44 |
| | $ | 116.61 |
| | $ | 102.80 |
| | $ | 112.95 |
| | $ | 150.97 |
|
| S&P 500 | | 100.00 |
| | 125.00 |
| | 146.17 |
| | 162.55 |
| | 171.68 |
| | 199.22 |
|
| S&P Industrial Machinery | | 100.00 |
| | 140.30 |
| | 164.71 |
| | 174.88 |
| | 202.52 |
| | 249.04 |
|
Item 6. Selected Financial Data[Reserved]
The following table summarizes selected financial data for each of the fiscal years in the five-year period ended July 31, 2017 (in millions, except per share data):Reserved.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| Net sales | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
| | $ | 2,473.5 |
| | $ | 2,436.9 |
|
| Net earnings | | 232.8 |
| | 190.8 |
| | 208.1 |
| | 260.2 |
| | 247.4 |
|
| Basic earnings per share | | 1.76 |
| | 1.43 |
| | 1.51 |
| | 1.79 |
| | 1.67 |
|
| Diluted earnings per share | | 1.74 |
| | 1.42 |
| | 1.49 |
| | 1.76 |
| | 1.64 |
|
| Total assets | | 1,979.7 |
| | 1,787.0 |
| | 1,807.5 |
| | 1,941.3 |
| | 1,742.9 |
|
| Long-term debt (1) | | 537.3 |
| | 350.2 |
| | 387.2 |
| | 242.6 |
| | 102.1 |
|
| Cash dividends declared per share | | 0.705 |
| | 0.690 |
| | 0.670 |
| | 0.610 |
| | 0.450 |
|
| Cash dividends paid per share | | 0.700 |
| | 0.685 |
| | 0.665 |
| | 0.575 |
| | 0.410 |
|
| |
(1) | Effective fiscal 2017 the Company adopted Accounting Standards Update (ASU) 2015-03, which changes the presentation of debt issuance costs. Prior periods have been adjusted for this new accounting standard. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to helpprovides a comparison of the reader understandCompany’s results of operations, as well as liquidity and capital resources for the Company'syears ended July 31, 2022 and 2021. A discussion of changes in the Company’s results of operations and financial conditionliquidity and capital resources for the three yearsyear ended July 31, 2017. 2021 from July 31, 2020 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended July 31, 2021 (the “2021 Annual Report”), which was filed with the SEC on September 24, 2021.
The MD&A should be read in conjunction with the Company'sCompany’s Consolidated Financial Statements and Notes included in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly Item 1A, "Risk Factors"“Risk Factors” and in the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 below.1995.
Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including a number of financial measures that are not defined under generally accepted accounting principles generally accepted(GAAP) in the United States of America (GAAP). U.S. Excluding foreign currency translation from net sales and net earnings (i.e. constant currency) are not measures of financial performance under GAAP; however, the Company believes they are useful in understanding its financial results and provide comparable measures for understanding the operating results of the Company between different fiscal periods. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
Overview
Founded in 1915, Donaldson Company, Inc. is a worldwide manufacturerglobal leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Donaldson’s diverse, skilled employees at over 140 locations, 74 of which are manufacturing and distribution centers, on six continents partner with customers — from small business owners to the world’s biggest OEM brands — to solve complex filtration systemschallenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements, natural replacement change cycles and replacement parts. need for reliability.
The Company’s core strengthsoperating segments are leading filtration technology, strong customer relationships and its global presence. The Company operates through two reporting segments, Engine Products and Industrial Products,Products. The Engine segment is organized based on a combination of customers and offersproducts and consists of the Off-Road, On-Road, Aftermarket and Aerospace and Defense business units. Within these business units, Engine products consist of replacement partsfilters for both air and systems for a variety of product lines includingliquid filtration applications as well as exhaust and emissions. Applications include air filtration and purification, liquid filtration for hydraulics,systems, fuel and lube systems, hydraulic applications and exhaust and emission. As a worldwideemissions systems and sensors, indicators and monitoring systems. Engine sells to OEMs in the construction, mining, agriculture, transportation, aerospace and defense end markets and to independent distributors, OEM dealer networks, private label accounts and large fleets.
The Industrial segment is organized based on product type and consists of the IFS, GTS and Special Applications business units. Within the IFS business unit, products consist of dust, fume and mist collectors, compressed air purification systems, gas and liquid filtration for food, beverage and industrial processes. The GTS business unit products consist of air filtration systems for gas turbines. Special applications products include PTFE membrane-based products as well as specialized air and gas filtration systems for applications including hard disk drives and semi-conductor manufacturing and sensors, indicators and monitoring systems. Industrial sells to various dealers, distributors, OEMs and end users.
The Company’s results of operations are affected by conditions in the global economic and geopolitical environment. Under most economic conditions, the Company’s market diversification between its diesel engine end markets, its global end markets, its diversification through technology and its OEM and replacement parts customers its diesel engine and industrial end markets and its global end markets has helped to limit the impact of weakness in any one product line, market or geography on the consolidated operating results of the Company.
Operating Environment
Russia and Ukraine
Following the Russia and Ukraine conflict, the Company complied with all sanctions, including those from the European Union, Great Britain and the U.S. and ceased direct product shipments into Russia and Belarus. In fiscal years 2022, 2021 and 2020, total revenues associated with customers in these areas were less than 2% of the Company’s net sales in the Consolidated Statements of Earnings. In the fourth quarter of fiscal 2022, the Company recorded a related charge of $3.4 million which was included in corporate and unallocated. The Company recorded $2.4 million in operating expenses, primarily related to accounts receivables, and recorded $1.0 million in cost of sales related to inventory in the Consolidated Statement of Earnings.
Supply Chain Disruptions
The Company continues to experience supply chain disruptions, including global logistics and labor challenges and constrained supplies of steel, petrochemical products and filter media. These disruptions have increased the Company’s input costs significantly and extended lead times. The Company has undertaken steps to mitigate these negative impacts, such as increasing prices, carrying a higher level of inventories, evaluating alternative supply chain options, qualifying additional suppliers and making strategic raw material purchases. This dynamic impacted results throughout fiscal 2022 and is expected to continue into fiscal 2023.
Inflation
In connection with the supply chain disruptions described above, the Company has experienced the effects of inflation related to raw materials and other expenses, including freight, labor and energy. These inflationary pressures have had an adverse impact on profit margins. The Company continues to negotiate price increases with its customers and is working with its suppliers to mitigate these cost increases. Inflation impacted results throughout fiscal 2022 and is expected to continue into fiscal 2023.
Consolidated Results of Operations
Operating Results
Operating results were as follows (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | | | |
| | 2022 | | % of net sales | | 2021 | | % of net sales | | | | |
| Net sales | | $ | 3,306.6 | | | | | $ | 2,853.9 | | | | | | | |
| Cost of sales | | 2,239.2 | | | 67.7 | % | | 1,882.2 | | | 66.0 | % | | | | |
| Gross profit | | 1,067.4 | | | 32.3 | | | 971.7 | | | 34.0 | | | | | |
| Selling, general and administrative | | 554.8 | | | 16.8 | | | 519.2 | | | 18.2 | | | | | |
| Research and development | | 69.1 | | | 2.1 | | | 67.8 | | | 2.4 | | | | | |
| Operating expenses | | 623.9 | | | 18.9 | | | 587.0 | | | 20.6 | | | | | |
| Operating income | | 443.5 | | | 13.4 | | | 384.7 | | | 13.5 | | | | | |
| Interest expense | | 14.9 | | | 0.4 | | | 13.0 | | | 0.5 | | | | | |
| Other income, net | | (9.8) | | | (0.3) | | | (9.3) | | | (0.3) | | | | | |
| Earnings before income taxes | | 438.4 | | | 13.3 | | | 381.0 | | | 13.3 | | | | | |
| Income taxes | | 105.6 | | | 3.2 | | | 94.1 | | | 3.3 | | | | | |
| Net earnings | | $ | 332.8 | | | 10.1 | % | | $ | 286.9 | | | 10.1 | % | | | | |
| | | | | | | | | | | | |
| Net earnings per share (EPS) – diluted | | $ | 2.66 | | | | | $ | 2.24 | | | | | | | |
Geographic Net Sales by Origination
Net sales, generally disaggregated by location where the customer’s order was received, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | | | |
| | 2022 | | % of net sales | | 2021 | | % of net sales | | | | |
| U.S. and Canada | | $ | 1,336.8 | | | 40.5 | % | | $ | 1,084.2 | | | 38.0 | % | | | | |
| EMEA | | 963.6 | | | 29.1 | | | 865.7 | | | 30.3 | | | | | |
| APAC | | 669.0 | | | 20.2 | | | 649.2 | | | 22.8 | | | | | |
| LATAM | | 337.2 | | | 10.2 | | | 254.8 | | | 8.9 | | | | | |
| Total Company | | $ | 3,306.6 | | | 100.0 | % | | $ | 2,853.9 | | | 100.0 | % | | | | |
Impact of Foreign Currency Translation on Net Sales
Net sales were impacted by fluctuations in foreign currency exchange rates. The impact was as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| Prior year net sales | | $ | 2,853.9 | | | $ | 2,581.8 | |
| Change in net sales excluding translation | | 539.8 | | | 194.1 | |
Impact of foreign currency translation(1) | | (87.1) | | | 78.0 | |
| Current year net sales | | $ | 3,306.6 | | | $ | 2,853.9 | |
(1)The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year.
Net Sales
Net sales for the year ended July 31, 2017 were $2,371.92022 increased $452.7 million, asor 15.9% from fiscal 2021, reflecting higher sales in the Engine Products segment of $345.0 million, or 17.6%, and the Industrial Products segment of $107.7 million, or 12.0%. Foreign currency translation decreased net sales by $87.1 million compared to the prior fiscal year, reflecting decreases in the Engine Products and Industrial Products segments of $55.1 million and $32.0 million, respectively. In fiscal 2022, the Company’s net sales increased from strong, broad-based end-market demand and higher pricing.
Cost of Sales and Gross Margin
Cost of sales for the year ended July 31, 2022 was $2,239.2 million, compared with $2,220.3$1,882.2 million for the year ended July 31, 2016,2021, an increase of $151.6$357.0 million, or 6.8%19.0%. Net sales were negatively impacted by foreign currency translation, which decreased sales by $8.2 million. On a constant currency basis, net sales for the year ended July 31, 2017 increased 7.2% from the prior fiscal year.
Net earnings for the year ended July 31, 2017 were $232.8 million, as compared with $190.8 million for the year ended July 31, 2016, an increase of $42.0 million, or 22.0%. Diluted earnings per share were $1.74 for the year ended July 31, 2017, as compared with $1.42 for the year ended July 31, 2016, an increase of 22.5%.
Consolidated Results of Operations
The following table summarizes consolidated results of operations for each of the three fiscal years ended July 31, 2017, 2016 and 2015 (in millions, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Percent of Net Sales |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Net sales | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | 1,548.8 |
| | 1,465.5 |
| | 1,562.6 |
| | 65.3 | % | | 66.0 | % | | 65.9 | % |
| Gross profit | | 823.1 |
| | 754.8 |
| | 808.6 |
| | 34.7 | % | | 34.0 | % | | 34.1 | % |
| Selling, general and administrative | | 439.8 |
| | 425.1 |
| | 460.1 |
| | 18.5 | % | | 19.1 | % | | 19.4 | % |
| Research and development | | 54.7 |
| | 55.5 |
| | 60.2 |
| | 2.3 | % | | 2.5 | % | | 2.5 | % |
| Operating income | | 328.6 |
| | 274.2 |
| | 288.3 |
| | 13.9 | % | | 12.3 | % | | 12.2 | % |
| Other income, net | | (12.9 | ) | | (3.9 | ) | | (15.5 | ) | | (0.5 | )% | | (0.2 | )% | | (0.7 | )% |
| Interest expense | | 19.5 |
| | 20.7 |
| | 15.2 |
| | 0.8 | % | | 0.9 | % | | 0.6 | % |
| Earnings before income taxes | | 322.0 |
| | 257.4 |
| | 288.6 |
| | 13.6 | % | | 11.6 | % | | 12.2 | % |
| Income taxes | | 89.2 |
| | 66.6 |
| | 80.5 |
| | 3.8 | % | | 3.0 | % | | 3.4 | % |
| Net earnings | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
| | 9.8 | % | | 8.6 | % | | 8.8 | % |
| | | | | | | | | | | | | |
| Net earnings per share – diluted | | $ | 1.74 |
| | $ | 1.42 |
| | $ | 1.49 |
| | | | | | |
Net Sales
Consolidated net sales for the years ended July 31, 2017, 2016 and 2015 were $2,371.9 million, $2,220.3 million and $2,371.2 million, respectively. Net sales by operating segment are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Percent of Net Sales |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Engine Products | | $ | 1,553.3 |
| | $ | 1,391.3 |
| | $ | 1,484.1 |
| | 65.5 | % | | 62.7 | % | | 62.6 | % |
| Industrial Products | | 818.6 |
| | 829.0 |
| | 887.1 |
| | 34.5 | % | | 37.3 | % | | 37.4 | % |
| Net sales | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
Consolidated net sales by geographic region for the years ended July 31, 2017, 2016 and 2015 are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Percent of Net Sales |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| United States | | $ | 990.1 |
| | $ | 937.3 |
| | $ | 1,007.3 |
| | 41.7 | % | | 42.2 | % | | 42.5 | % |
| Europe | | 638.1 |
| | 632.7 |
| | 671.3 |
| | 26.9 | % | | 28.5 | % | | 28.3 | % |
| Asia Pacific | | 500.5 |
| | 449.9 |
| | 470.7 |
| | 21.1 | % | | 20.3 | % | | 19.9 | % |
| Other | | 243.2 |
| | 200.4 |
| | 221.9 |
| | 10.3 | % | | 9.0 | % | | 9.3 | % |
| Total | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
| | 100.0 | % | | 100.0 | % | | 100.0 | % |
Although net sales excluding foreign currency translation is not a measure of financial performance under GAAP, the Company believes that it is useful in understanding its financial results and provides comparable measures for understanding the operating results of the Company between different fiscal periods. The following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure for the years ended July 31, 2017, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Prior year net sales | | $ | 2,220.3 |
| | $ | 2,371.2 |
| | $ | 2,473.5 |
|
| Change in net sales excluding translation | | 159.8 |
| | (76.7 | ) | | 32.5 |
|
| Impact of foreign currency translation (1) | | (8.2 | ) | | (74.2 | ) | | (134.8 | ) |
| Current year net sales | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
|
| |
(1) | The impact of foreign currency translation is calculated by translating current period foreign currency revenue into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year period rather than actual current period foreign currency exchange rates. |
The fiscal 2017 sales increase of $151.6 million from fiscal 2016 was primarily driven by increases in the Aftermarket and Off-Road business units within the Engine Products segment, partially offset by declining sales of Gas Turbine Systems products and On-Road. Fiscal 2017 sales increased $162.0 million in the Engine Products segment and decreased $10.4 million in the Industrial Products segment. Foreign currency exchange rate fluctuations increased sales of Engine Products by $0.6 million and decreased Industrial Products sales by $8.8 million. Fiscal 2017 sales cadence reflected typical seasonality, with a larger percent of full-year revenue realized during the second half of the fiscal year. The Company continues to face a mixed operating environment, with engine-related end markets, including global agriculture, mining and construction, exhibiting signs of stability and recovery, whereas Industrial markets remain somewhat uncertain.
Backlog
At August 31, 2017, the backlog of orders expected to be delivered within 90 days was $395.5 million. The 90-day backlog at August 31, 2016, was $323.0 million. The backlog of orders expected to be delivered within 90 days increased 25.7% for the Engine Products segment and increased 5.7% for the Industrial Products segment. The increase is due to the continued strong demand across multiple product lines. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of the receipt of orders in many of the Company’s engine OEM and industrial markets.
Cost of Sales
The principal raw materials that the Company uses are steel, filter media and petrochemical based products including plastics, rubber and adhesives. Purchased raw materials represent approximately 60% to 65% of the Company’s cost of goods sold. Steel, including fabricated parts, and filter media each represent approximately 20%. The remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2017 varied by grade, but in aggregate, increased during the fiscal year. The steel cost increase was related to import restrictions placed on foreign-made steel and on a post-election run-up in steel in U.S. markets and on upward price pressure in other geographies around the world. The Company’s cost of filter media also varies by type and increased slightly year-over-year. The Company operates ongoing continuous improvement efforts, which partially offset increases in both steel and media. The cost of petroleum-based products was relatively flat year-over-year. The Company anticipates some continuing pressure on commodity prices in fiscal 2018, as compared with fiscal 2017, specifically for steel and filter media. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its customers and the Company’s cost reduction initiatives, which include material substitution, process improvement and product redesigns.
Gross Margin
Gross margin for the year ended July 31, 2017 was 34.7%, oras a 0.7 percentage point increase from 34.0% for the year ended July 31, 2016. The fiscal 2017 rate does not include restructuring charges, which negatively affected the prior year rate by approximately 0.3 percentage points. Additionally, the fiscal 2017 rate benefited from greater absorption of fixed costs on the year-over-year sales increase, partially offset by higher variable costs, including raw materials as well as freight charges, related to meeting higher-than-expected customer demand.
Gross margin for the year ended July 31, 2016 was 34.0%, or a 0.1 percentage point decrease from 34.1% for the year ended July 31, 2015. The fiscal 2016 and fiscal 2015 gross margin rates each included a negative impact from restructuring charges,
which reduced gross margin in those fiscal years by approximately 0.3 percentage points and 0.4 percentage points, respectively. Compared with fiscal 2015, the fiscal 2016 gross margin reflects benefits from the Company’s cost-savings initiatives, including restructuring, that were offset by lower fixed cost absorption due to a decrease in sales in fiscal 2016 compared to fiscal 2015.
Operating Expenses
Operating expenses for the year ended July 31, 2017 were $494.5 million, or 20.9% of net sales, as compared with $480.6 million, or 21.6% of net sales for the year ended July 31, 2016.2022 was 32.3% compared with 34.0% for the year ended July 31, 2021, a decrease of 1.7%. The decrease in operating expensesgross margin as a percentage of net sales decrease was primarily driven by supply chain disruptions which increased input costs, higher raw material, freight, energy and labor costs as well as an inventory charge of $1.0 million related to the lack of restructuring chargesRussia and Ukraine conflict in the current fiscal year, combined with leverage gained on the year-over-year sales increase, partially offset by higher variable compensation expense thanpricing. Prior fiscal 2016.year gross margin was negatively impacted by restructuring charges of $5.8 million.
OperatingSelling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended July 31, 20162022 were $480.6$554.8 million, or 21.6%16.8% of net sales, as compared with $520.3$519.2 million, or 21.9%18.2% of net sales, for the year ended July 31, 2015.2021, an increase of $35.6 million, or 6.9%. The year-over-year140 basis point decrease in operatingselling, general and administrative expenses as a percentage of net sales was primarily drivenreflects greater leverage from higher sales, partially offset by expense savings from previous a charge of $2.4 million related to the Russia and Ukraine conflict in the current fiscal year. In addition, prior fiscal year selling, general and administrative expenses included restructuring actions combinedcharges of $9.0 million.
Research and Development Expenses
Research and development expenses for the year ended July 31, 2022 were $69.1 million, or 2.1% of net sales, compared with $67.8 million, or 2.4% of net sales, for the Company's efforts to control expenses.year ended July 31, 2021, an increase of $1.3 million, or 2.0%. Research and development expenses as a percentage of net sales reflects the Company’s continued investment in technology.
Non-Operating Items
Interest expense for the year ended July 31, 20172022 was $19.5$14.9 million, as compared with $20.7$13.0 million, for the year ended July 31, 2016,2021, an increase of $1.9 million, or 13.9%. The increase reflected a decrease of $1.2 million. The decrease is due to the average level ofhigher debt outstanding during fiscal 2017 being lower than fiscal 2016. level.
Other income, net for the year ended July 31, 20172022 was $12.9$9.8 million, as compared with $3.9$9.3 million, for the year ended July 31, 2016. 2021, an increase of $0.5 million, or 5.0%.
Income Taxes
The increase in other income, neteffective tax rates were 24.1% and 24.7% for fiscal 2017the years ended July 31, 2022 and 2021, respectively. The lower effective tax rate was primarily due to a $6.8 million favorable settlement of claims an overall increase in an escrow account associated with general representations and warranties that had been established in connection with the Company’s acquisition of Northern Technical.
Interest expense for the year ended July 31, 2016 was $20.7 million, as compared with $15.2 million for the year ended July 31, 2015, an increase of $5.5 million. The increase was due to $150.0 million of debt issued in April 2015 that was outstanding for all of fiscal 2016. Other income, net for the year ended July 31, 2016 was $3.9 million, as compared with $15.5 million for the year ended July 31, 2015. The decrease in other income, net for fiscal 2016 was primarily driven by $6.8 million of higher losses on foreign exchange compared with fiscal 2015.
Income Taxes
The effectivediscrete tax rate for the year ended July 31, 2017 was 27.7%, as compared with 25.9% for the year ended July 31, 2016. The year-over-year change was primarily driven by nonrecurring tax benefits recorded in fiscal 2016 from the favorable settlements of tax audits, which reduced the prior year effective tax rate by 1.7 percentage points.
The effective tax rate for the year ended July 31, 2016 was 25.9%, as compared with 27.9% for the year ended July 31, 2015. The year-over-year change was primarily driven by nonrecurring tax benefits recorded in fiscal 2016 from the favorable settlements of tax audits and the mix of earnings between tax jurisdictions.benefits.
Net Earnings
Net earnings for the year ended July 31, 20172022 were $232.8$332.8 million, as compared with $190.8$286.9 million for the year ended July 31, 2016,2021, an increase of $42.0$45.9 million, or 22.0%16.0%. Diluted earnings per shareEPS were $1.74$2.66 for the year ended July 31, 2017, as2022, compared with $1.42$2.24 for the year ended July 31, 2016, an increase of 22.5%.2021.
Net earnings were impacted by fluctuations in foreign currency exchange rates. The impact of these fluctuations on net earnings was as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| Prior year net earnings | | $ | 286.9 | | | $ | 257.0 | |
| Change in net earnings excluding translation | | 56.8 | | | 19.1 | |
Impact of foreign currency translation(1) | | (10.9) | | | 10.8 | |
| Current year net earnings | | $ | 332.8 | | | $ | 286.9 | |
(1)The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net earnings into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year.
Restructuring
In the second quarter of fiscal 2021, the Company initiated activities to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $14.8 million. Charges of $5.8 million were included in cost of sales and $9.0 million were included in operating expenses in the Consolidated Statement of Earnings for the year ended July31, 2016 were $190.8 million, as compared with $208.1 million for the year ended July 31, 2015, a decrease of $17.3 million, or 8.3%. Diluted net earnings per share were $1.42 for the year ended July 31, 2016, as compared with $1.49 for the year ended July 31, 2015, a decrease of 4.7%.
Although net earnings excluding foreign currency translation is not a measure of financial performance under GAAP, the Company believes that it is useful in understanding its financial results and provides a comparable measure for understanding the operating results of the Company between different fiscal periods. The following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure for the years ended July 31, 2017, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Prior year net earnings | | $ | 190.8 |
| | $ | 208.1 |
| | $ | 260.2 |
|
| Change in net earnings excluding translation | | 43.3 |
| | (9.4 | ) | | (37.8 | ) |
| Impact of foreign currency translation (1) | | (1.3 | ) | | (7.9 | ) | | (14.3 | ) |
| Current year net earnings | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
|
| |
(1) | The impact of foreign currency translation is calculated by translating current period foreign currency net earnings into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year period rather than actual current period foreign currency exchange rates. |
Restructuring Activities
2021. The Company did not incur anyexpects approximately $8 million in annualized savings from these restructuring or impairment charges during fiscal 2017. The Company incurred $16.1 million of restructuring changes in fiscal 2016 with $10.4 million recorded in operating expensesactivities, and the remaining $5.7 million recorded in cost of sales. The Engine Products segment incurred $8.8 million and the Industrial Products segment incurred $7.3 million of the restructuring charges for fiscal 2016. The Company incurred $16.9 million of restructuring and impairment charges in fiscal 2015 with $8.5 million recorded in operating expenses and the remaining $8.4 million recorded in cost of sales. The Engine Products segment incurred $9.2 million and the Industrial Products segment incurred $3.8 million of the restructuring and impairment charges for fiscal 2015. The charges for fiscal 2016 and fiscal 2015 consisted of one-time termination benefits from restructuring salaried and production workforce in all geographic regions and closing a production facility in Grinnell, Iowa. In addition, in fiscal 2015 the Company recorded the abandonment and write-off of a partially completed facility in Xuzhou, China and a $3.9 million charge related to a lump-sum settlement of its U.S. pension plan. As the Company’s restructuring actions were mainly incurred and paid in the same period, there was no material liability balance as of either of the periods presented.initiative is now substantially completed.
Segment Results of OperationOperations
Net sales and earnings before income taxes by operating segment for each of the three years ended July 31, 2017, 2016 and 2015 are summarizedwere as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | |
| | 2022 | | 2021 | | $ Change | | % Change |
| Net sales | | | | | | | | |
| Engine Products segment | | $ | 2,302.7 | | | $ | 1,957.7 | | | $ | 345.0 | | | 17.6 | % |
| Industrial Products segment | | 1,003.9 | | | 896.2 | | | 107.7 | | | 12.0 | |
| Total Company | | $ | 3,306.6 | | | $ | 2,853.9 | | | $ | 452.7 | | | 15.9 | % |
| | | | | | | | |
| Earnings before income taxes | | | | | | | | |
| Engine Products segment | | $ | 329.2 | | | $ | 289.0 | | | $ | 40.2 | | | 13.9 | % |
| Industrial Products segment | | 162.5 | | | 133.3 | | | 29.2 | | | 21.9 | |
Corporate and unallocated(1) | | (53.3) | | | (41.3) | | | (12.0) | | | 29.1 | |
| Total Company | | $ | 438.4 | | | $ | 381.0 | | | $ | 57.4 | | | 15.1 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Increase (Decrease) |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 vs 2016 |
| | 2016 vs 2015 |
|
| Net sales | | | | | | | | | | |
| Engine Products segment | | $ | 1,553.3 |
| | $ | 1,391.3 |
| | $ | 1,484.1 |
| | $ | 162.0 |
| | $ | (92.8 | ) |
| Industrial Products segment | | 818.6 |
| | 829.0 |
| | 887.1 |
| | (10.4 | ) | | (58.1 | ) |
| Total | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
| | $ | 151.6 |
| | $ | (150.9 | ) |
| | | | | | | | | | | |
| Earnings before income taxes | | | | | | | | | | |
| Engine Products segment | | $ | 219.7 |
| | $ | 163.5 |
| | $ | 186.3 |
| | $ | 56.2 |
| | $ | (22.8 | ) |
| Industrial Products segment | | 129.1 |
| | 119.0 |
| | 123.3 |
| | 10.1 |
| | (4.3 | ) |
| Corporate and Unallocated (1) | | (26.8 | ) | | (25.1 | ) | | (21.0 | ) | | (1.7 | ) | | (4.1 | ) |
| Total | | $ | 322.0 |
| | $ | 257.4 |
| | $ | 288.6 |
| | $ | 64.6 |
| | $ | (31.2 | ) |
| |
(1) | Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest income and interest expense. The Corporate and Unallocated results were determined on a consistent basis for all periods presented. |
(1)Corporate and unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest expense, restructuring charges and certain incentive compensation. In fiscal 2022, corporate and unallocated also included a charge of $3.4 million related to the Russia and Ukraine conflict.
Engine Products Segment
The following is a summary of netNet sales by product group within the Company’s Engine Products segment for the years ended July 31, 2017, 2016 and 2015were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Increase (Decrease) |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 vs 2016 |
| | 2016 vs 2015 |
|
| Engine Products segment | | | | | | | | | | |
| Off-Road | | $ | 252.1 |
| | $ | 216.6 |
| | $ | 261.1 |
| | $ | 35.5 |
| | $ | (44.5 | ) |
| On-Road | | 110.7 |
| | 127.2 |
| | 138.4 |
| | (16.5 | ) | | (11.2 | ) |
| Aftermarket | | 1,086.2 |
| | 951.5 |
| | 980.7 |
| | 134.7 |
| | (29.2 | ) |
| Aerospace and Defense | | 104.3 |
| | 96.0 |
| | 103.9 |
| | 8.3 |
| | (7.9 | ) |
| Total Engine Products segment | | $ | 1,553.3 |
| | $ | 1,391.3 |
| | $ | 1,484.1 |
| | $ | 162.0 |
| | $ | (92.8 | ) |
| | | | | | | | | | | |
| Engine Products segment earnings before income taxes | | $ | 219.7 |
| | $ | 163.5 |
| | $ | 186.3 |
| | $ | 56.2 |
| | $ | (22.8 | ) |
The Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense and truck end markets, and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include replacement filters for both air and liquid filtration applications, air filtration systems, liquid filtration systems for fuel, lube and hydraulic applications, and exhaust and emissions systems.
Fiscal 2017 compared with Fiscal 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | |
| | 2022 | | 2021 | | $ Change | | % Change |
| Off-Road | | $ | 405.8 | | | $ | 328.1 | | | $ | 77.7 | | | 23.7 | % |
| On-Road | | 136.1 | | | 138.8 | | | (2.7) | | | (2.0) | |
| Aftermarket | | 1,640.3 | | | 1,394.6 | | | 245.7 | | | 17.6 | |
| Aerospace and Defense | | 120.5 | | | 96.2 | | | 24.3 | | | 25.3 | |
| Total Engine Products segment | | $ | 2,302.7 | | | $ | 1,957.7 | | | $ | 345.0 | | | 17.6 | % |
| | | | | | | | |
| Engine Products segment earnings before income taxes | | $ | 329.2 | | | $ | 289.0 | | | $ | 40.2 | | | 13.9 | % |
Net sales for the Engine Products segment for the year ended July 31, 20172022 were $1,553.3$2,302.7 million, as compared with $1,391.3$1,957.7 million for the year ended July 31, 2016,2021, an increase of $162.0$345.0 million, or 11.6%17.6%. Sales in all product groups except On-Road increasedExcluding a $55.1 million decrease from the prior year, with increased sales in Aftermarket and Off-Road driving nearly all of the segment-level improvement. The impact of foreign currency translation, during fiscal 2017 increased Engine Products sales by $0.6 million. In constant currency, fiscal 2017 Engine Productsnet sales increased $161.320.4%.
Net sales of Aftermarket increased $245.7 million, or 11.6%.
Worldwidewhich reflected broad growth across all regions driven by pricing and continued high end-market demand. Net sales of Off-Road were $252.1increased $77.7 million an increaseprimarily due to increased pricing, equipment production levels remaining high in most regions, with the exception of 16.4% from fiscal 2016. In constant currency,mainland China, and strong sales for Exhaust and Emissions in EMEA. Aerospace and Defense increased $37.2by $24.3 million or 17.2%. Sales in fiscal 2017 benefited from the Company’s success in winning new programs for air and liquid filtration systems with innovative products, combined with improving marketas stronger economic conditions in the global mining, agriculturecommercial aerospace industry and construction industries.
Worldwide sales of On-Road were $110.7 million, a decrease of 13.0% from fiscal 2016. In constant currency, sales decreased $17.2 million, or 13.5%. Decreasing production of heavy-duty trucks in all regionsmarket share gains drove the year-over-year decline.
Worldwide sales of Aftermarket were $1,086.2 million, an increase of 14.2% from fiscal 2016. In constant currency, sales increased $132.3 million, or 13.9%. The increase was primarily driven by strength in the Company’s innovative air and liquid filtration products combined with benefits from further geographic expansion of distribution and production of aftermarket products. Aftermarket sales also included a combined benefit of approximately $21.7 million from the acquisitions of Hy-Pro and Industrias Partmo, which were both completed during fiscal 2017.
Worldwide sales of Aerospace and Defense were $104.3 million, an increase of 8.7% from fiscal 2016. In constant currency, sales increased $9.0 million, or 9.4%. The increase from fiscal 2016 was driven by sales growth of aerospace replacement parts and defense products for ground vehicles, partially offset by first-fit sales of aerospace products to rotary-wing aircraft that remained under pressure.results.
Earnings before income taxes for the Engine Products segment for the year ended July 31, 20172022 were $219.7$329.2 million, or 14.1%14.3% of Engine Products'Products’ net sales, an increasea decrease from 11.8%14.8% of net sales for the year ended July 31, 2016. Improved cost absorption on higher sales than the prior year drove the improvement, which was partially offset by incremental costs, such as freight charges, related to meeting higher-than-expected demand.
Fiscal 2016 compared with Fiscal 2015
Net sales for the Engine Products segment for the year ended July 31, 2016 were $1,391.3 million, as compared with $1,484.1 million for the year ended July 31, 2015, a decrease of $92.8 million, or 6.3%.2021. The decrease was driven by declines in all product groupssupply chain disruptions which increased input costs, higher raw material, freight, energy and the impactlabor costs, partially offset by pricing. Prior fiscal year earnings were negatively impacted by restructuring charges of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased Engine Products sales by $43.4 million, or 2.9%. In constant currency, fiscal 2016 Engine Products sales decreased $49.4 million, or 3.3%.$2.5 million.
Worldwide sales of Off-Road were $216.6 million, a decrease of 17.0% from fiscal 2015. In constant currency, sales decreased $37.3 million, or 14.3%. These decreases were driven by a continued weakness in the global agricultural, mining and construction equipment markets with decreased build rates in all regions and the negative impacts of foreign currency translation.
Worldwide sales of On-Road were $127.2 million, a decrease of 8.1% from fiscal 2015. In constant currency, sales decreased $8.5 million, or 6.1%. Growth in Asia Pacific and continued strength of medium-duty production was not enough to offset the revenue decreases associated with the slowing production of Class 8 trucks in North America, resulting in a steep decline in this business.
Worldwide sales of Aftermarket were $951.5 million, a decrease of 3.0% from fiscal 2015. In constant currency, sales increased $2.7 million, or 0.3%. The primary driver of the sales decrease from fiscal 2015 was foreign currency translation with sales in local currency remaining relatively flat compared with prior year.
Worldwide sales of Aerospace and Defense were $96.0 million, a decrease of 7.6% from fiscal 2015. In constant currency, sales decreased $6.3 million, or 6.1%. These decreases were due to Aerospace commercial slow down while Defense ground vehicle remained relatively flat. The decline in commercial aerospace was primarily in rotary-wing aircraft reflecting a slowdown in oil exploration that resulted in fewer flight hours. Many Defense platforms were delayed due to funding.
Earnings before income taxes for the Engine Products segment for the year ended July 31, 2016 were $163.5 million, or 11.8% of Engine Products' sales, a decrease from 12.6% of sales for the year ended July 31, 2015. The percentage earnings decrease was driven by lower cost absorption due to a decrease in production volumes and the impact of foreign currency translation.
Industrial Products Segment
The following is a summary of netNet sales by product group within the Company’s Industrial Products segment for the years ended July 31, 2017, 2016 and 2015were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended July 31, | | Increase (Decrease) |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2017 vs 2016 |
| | 2016 vs 2015 |
|
| Industrial Products segment: | | | | | | | | | | |
| Industrial Filtration Solutions | | $ | 533.2 |
| | $ | 517.9 |
| | $ | 529.0 |
| | $ | 15.3 |
| | $ | (11.1 | ) |
| Gas Turbine Systems | | 122.9 |
| | 149.6 |
| | 186.9 |
| | (26.7 | ) | | (37.3 | ) |
| Special Applications | | 162.5 |
| | 161.5 |
| | 171.2 |
| | 1.0 |
| | (9.7 | ) |
| Total Industrial Products segment | | $ | 818.6 |
| | $ | 829.0 |
| | $ | 887.1 |
| | $ | (10.4 | ) | | $ | (58.1 | ) |
| | | | | | | | | | | |
| Industrial Products segment earnings before income taxes | | $ | 129.1 |
| | $ | 119.0 |
| | $ | 123.3 |
| | $ | 10.1 |
| | $ | (4.3 | ) |
The Industrial Products segment sells to various dealers, distributors, OEMs of gas-fired turbines and OEMs and end users requiring clean air filtration solutions and replacement filters. Products include dust, fume and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane-based products and specialized air and gas filtration systems for applications including hard disk drives and semi-conductor manufacturing.
Fiscal 2017 compared with Fiscal 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | |
| | 2022 | | 2021 | | $ Change | | % Change |
| Industrial Filtration Solutions (IFS) | | $ | 711.2 | | | $ | 621.9 | | | $ | 89.3 | | | 14.4 | % |
| Gas Turbine Systems | | 110.2 | | | 96.2 | | | 14.0 | | | 14.6 | |
| Special Applications | | 182.5 | | | 178.1 | | | 4.4 | | | 2.5 | |
| Total Industrial Products | | $ | 1,003.9 | | | $ | 896.2 | | | $ | 107.7 | | | 12.0 | % |
| | | | | | | | |
| Industrial Products segment earnings before income taxes | | $ | 162.5 | | | $ | 133.3 | | | $ | 29.2 | | | 21.9 | % |
Net sales for the Industrial Products segment for the year ended July 31, 20172022 were $818.6$1,003.9 million, as compared with $829.0$896.2 million for the year ended July 31, 2016, a decrease2021, an increase of $10.4$107.7 million, or 1.2%12.0%. ThisExcluding a $32.0 million decrease was driven by a 17.9% decrease in Gas Turbine Systems sales and the impact offrom foreign currency translation, partially offset by year-over-yearnet sales increases for Industrial Filtration Solutions and Special Applications. The impact of foreign currency translation during fiscal 2017 decreased Industrial Products sales by $8.8 million, or 1.0%. In constant currency, fiscal 2017 Industrial Products sales decreased $1.5 million, or 0.2%increased 15.6%.
WorldwideNet sales of IFS increased $89.3 million primarily in the U.S. reflecting improved end market conditions in Industrial Air Filtration Solutions were $533.2 million, a 3.0% increase from fiscal 2016. In constant currency, sales increased $20.7 million, or 4.0%. Sales of(IAF) for both first-fit and replacement parts droveof dust collection products. EMEA had continued strength in IAF and Process Filtration within the increase, partially offset by reducedfood and beverage market. IFS includes net sales of new equipment as the market pressures related to global capital expendituresacquisitions in fiscal 2022 of Solaris and investments continuedPAIS which were immaterial for the fiscal year. All business units in IFS benefited from increased pricing. GTS increased by $14.0 million due to pressure the business.pricing and project timing.
Worldwide sales of Gas Turbine Systems were $122.9 million, a 17.9% decrease from fiscal 2016. In constant currency, sales declined $25.6 million, or 17.1%. The sales decline was primarily driven by market-related pressures, including the Company’s decision to be more selective in bidding large turbine projects. Gas Turbine Systems sales are typically large systems and, as a result, the Company's shipments and revenues fluctuate from period to period.
Worldwide sales of Special Applications were $162.5 million, a 0.6% increase from fiscal 2016. In constant currency, sales increased $3.4 million, or 2.1%. The increase was driven primarily by sales of venting solutions and products for semiconductor applications. Although the hard disk drive market remains in secular decline, temporarily favorable market conditions during fiscal 2017 combined with the Company’s efforts to increase content per drive resulted in sales of disk drive filters that were slightly higher than the prior year.
Earnings before income taxes for the Industrial Products segment for the year ended July 31, 20172022 were $129.1$162.5 million, or 15.8%16.2% of Industrial Products'Products’ net sales, an increase from 14.4%14.9% of net sales for the year ended July 31, 2016.2021. The earnings before income taxes percentage increase was driven by the benefit from the escrow settlement of $6.8 million related to the Northern Technical acquisition combined with the lack of restructuring charges in fiscal 2017 versus the prior year, during which $7.3 million were recorded.
Fiscal 2016 compared with Fiscal 2015
Nethigher sales for the Industrial Products segment for the year ended July 31, 2016 were $829.0 million, as compared with $887.1 million for the year ended July 31, 2015, a decrease of $58.1 million, or 6.5%. This decrease was driven by a 20.0% decrease in Gas Turbine Systems salesleveraging operating expenses and the impact of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased Industrial Products sales by $30.8 million, or 3.5%. In constant currency, fiscal 2016 Industrial Products sales decreased $27.3 million, or 3.1%.
Worldwide sales of Industrial Filtration Solutions were $517.9 million, a 2.1% decrease from fiscal 2015. In constant currency, fiscal 2016 sales increased $7.7 million, or 1.5%. Sales of both aftermarket and equipment were consistent with fiscal 2015.
Worldwide sales of Gas Turbine Systems were $149.6 million, a 20.0% decrease from fiscal 2015. In constant currency, fiscal 2016 sales decreased $33.9 million, or 18.1%. Gas Turbine Systems sales are typically large systems and, as a result, the Company's shipments and revenues fluctuate from period to period.
Worldwide sales of Special Applications were $161.5 million, a 5.7% decrease from fiscal 2015. In constant currency, fiscal 2016 sales decreased $1.1 million, or 0.6%. These decreases were driven by weakness in disk drive product sales as the business is in a secular decline as solid-state memory replaces traditional hard disk drives.
Earnings before income taxes for the Industrial Products segment for the year ended July 31, 2016 were $119.0 million, or 14.4% of Industrial Products' sales, an increase from 13.9% of sales for the year ended July 31, 2015. The fiscal 2016 earnings before income taxes percentage increase was driven by the benefits from previous restructuring actions and favorable product mixpricing, partially offset by a $3.5supply chain disruptions which increased input costs and increased raw material, freight, labor and energy costs. Prior fiscal year earnings were negatively impacted by restructuring charges of $6.5 million increase in restructuring charges..
Liquidity, and Capital Resources, Capital Requirements and Financial Condition
Capital StructureLiquidity
The Company's long-term capital structure at July 31, 2017 and July 31, 2016Liquidity is summarized as follows (in millions):
|
| | | | | | | | |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| Long-term debt | | $ | 537.3 |
| | $ | 350.2 |
|
| Shareholders' equity | | 854.5 |
| | 771.4 |
|
| Total long-term capital | | $ | 1,391.8 |
| | $ | 1,121.6 |
|
| | | | | |
| Ratio of long-term debt to total long-term capital | | 38.6 | % | | 31.2 | % |
As of July 31, 2017, long-term debt represented 38.6% of total long-term capital, defined as long-term debt plus total shareholders’ equity, compared with 31.2% at July 31, 2016.
Total long-term debt outstanding at July 31, 2017 was $537.3 million compared with $350.2 million at the prior year end, an increase of $187.1 million, primarily due to the refinancing of debt outstanding under the revolving credit facility into long-term debt in connection with the amendment and restatement of the related credit agreement.
The Company has a multi-currency revolving credit facility with a group of lenders. On July 21, 2017, the Company entered into an amended and restated credit agreement that increases the borrowing availability to $500.0 million and extends the maturity date of the credit facility to July 21, 2022. The credit facility also has an accordion feature that allows the Company to request an increase to the commitment under the facility by up to $250.0 million. At July 31, 2017 and 2016, $190.0 million and $130.0 million, respectively, was outstanding. At July 31, 2017 and 2016, $299.5 million and $262.7 million, respectively, was available for further borrowing under this facility. The amount available for further borrowing reflects the issued standby letters of credit,
as discussed in Note 16 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report, as issued standby letters of credit reduce the amounts available for borrowing under this facility. The credit facility also includes a $50.0 million term loan due July 21, 2020. Borrowings under the Company's amended revolving credit facility are automatically rolled over until the credit facility maturity date unless the agreement is terminated early or the Company is found to be in default. Therefore, beginning on July 21, 2017 (at which time $270.0 million was outstanding) and subsequent to that date, all borrowings under this credit facility are classified as long-term debt on the Company’s Consolidated Balance Sheets.
On July 22, 2016, a Japanese subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company. The debt was issued at face value of ¥1.0 billion (approximately $9.0 million at July 31, 2017), is due July 15, 2021, and bears interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2017 and 2016.
The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate purposes. There was $19.2 million outstanding at July 31, 2017 and $26.8 million outstanding at July 31, 2016, and all borrowings that were outstanding on those dates had maturities that were less than twelve months. The weighted average interest rate on the short-term borrowings outstanding at July 31, 2017 and 2016 was 2.00% and 1.25%, respectively. At July 31, 2017 and 2016, there was $45.7 million and $38.2 million, respectively, available under these two credit facilities.
The Company has a €100.0 million (approximately $117.3 million at July 31, 2017) program for issuing treasury notes for raising short-, medium- and long-term financing for its European operations. There were no amounts outstanding under this program at July 31, 2017 or 2016. Additionally, the Company’s European operations have lines of credit with an available limit of €43.5 million (approximately $51.0 million at July 31, 2017). There was no amount outstanding at July 31, 2017 or 2016.
Other international subsidiaries may borrow under various credit facilities. There was approximately $4.1 million outstanding under these credit facilities as of July 31, 2017 and $8.7 million as of July 31, 2016. All borrowings that were outstanding on those dates had maturities that were less than twelve months. At July 31, 2017 and 2016, there was approximately $39.8 million and $45.5 million available for use, respectively, under these facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2017 and 2016 was 0.32%.
At July 31, 2017 and 2016, the Company had a contingent liability for standby letters of credit totaling $10.5 million and $7.3 million, respectively, that have been issued and are outstanding. The letters of credit guarantee payment to third parties in the event the Company is in breach of insurance contract terms as detailed in each letter of credit. At July 31, 2017 and 2016, there were no amounts drawn upon these letters of credit.
Certain debt agreements, including the $500.0 million revolving credit facility, contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2017, the Company was in compliance with all such covenants.
Cash Flow Summary
The Company assesses its liquidityassessed in terms of itsthe Company’s ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are:are cash flows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchaserepurchases of outstanding shares,shares, adequacy of available bank lines of credit andfacilities and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses and remains in a strong financial position,as its primary source of liquidity, with sufficient liquidity available forto fund growth through reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
Cash flows for the years ended July 31, 2017, 2016 and 2015 are summarizedwere as follows (in millions):
| | | | | July 31, | | July 31, | | |
| | | 2017 |
| | 2016 |
| | 2015 |
| | 2022 | | 2021 | | $ Change | |
| Net cash provided by (used in): | | | | | | | Net cash provided by (used in): | | | | | | | |
| Operating activities | | $ | 310.3 |
| | $ | 286.1 |
| | $ | 212.8 |
| Operating activities | | $ | 252.8 | | | $ | 401.9 | | | $ | (149.1) | | |
| Investing activities | | (95.7 | ) | | (55.6 | ) | | (111.7 | ) | Investing activities | | (154.0) | | | (58.3) | | | (95.7) | | |
| Financing activities | | (157.7 | ) | | (175.0 | ) | | (179.0 | ) | Financing activities | | (114.2) | | | (363.3) | | | 249.1 | | |
| Effect of exchange rate changes on cash | | 8.3 |
| | (2.2 | ) | | (28.6 | ) | Effect of exchange rate changes on cash | | (14.1) | | | 5.9 | | | (20.0) | | |
| Increase (decrease) in cash and cash equivalents | | $ | 65.2 |
| | $ | 53.3 |
| | $ | (106.5 | ) | |
| Decrease in cash and cash equivalents | | Decrease in cash and cash equivalents | | $ | (29.5) | | | $ | (13.8) | | | $ | (15.7) | | |
Operating Activities
Cash provided by operating activities for the year ended July 31, 20172022 was $310.3$252.8 million, as compared with $286.1$401.9 million for the year ended July 31, 2016, an increase2021, a decrease of $24.2$149.1 million. The increasedecrease in cash generated by operating activities resulted from higher net earnings of $42.0 million, partially offset by several changes in working capital items that resulted in a net cash reduction.
Accounts receivable at July 31, 2017 was $497.7 million, as compared with $452.4 million at July 31, 2016, an increase of $45.3 million. The increase is due to increased sales in the fourth quarter of fiscal 2017, slightly offset by an improvement in days sales outstanding. Days sales outstanding was 67.2 days as of July 31, 2017, compared with 67.5 days as of July 31, 2016. The Company’s days sales outstanding is impacted by the mix of foreign sales, particularly in countries where longer payment terms are customary. Days sales outstanding is calculated using the count back method, which calculates the number of days of most recent revenue that is reflected in the net accounts receivable balance.
Inventories at July 31, 2017 was $293.5 million, as compared with $234.1 million at July 31, 2016, an increase of $59.4 million. The increase is primarily driven by increases across the regions to meet customer demand given the current sales momentum. Inventory turns were 4.5 times per year as of both July 31, 2017 and July 31, 2016. Inventory turns are calculated by taking the inventoriable portion of cost of goods sold for the trailing twelve month period divided by the average gross inventory value over the prior thirteen month period.
Cash provided by operating activities for the year ended July 31, 2016 was $286.1 million, as compared with $212.8 million for the year ended July 31, 2015,primarily driven by an increase of $73.3 million. The increase in cash generated from operating activities resulted from a $99.6 millioninventory as the Company continues to experience strengthening demand while mitigating supply chain disruptions, higher cash inflow from working capital relative to fiscal 2015,incentive compensation paid as well as increased accounts payable driven by higher business activity, partially offset by lower net earnings of $17.3 million. The higher cash outflow from working capital was primarily attributable to improvements in inventories and accounts receivable of $55.3 million and $29.2 million, respectively, compared to fiscal 2015 driven by active working capital management.earnings.
Investing Activities
CashCash used in investing activities for the year ended July 31, 20172022 was $95.7$154.0 million, as compared with $55.6$58.3 million for the year ended July 31, 2016,2021, an increase of $40.1$95.7 million. The increase in cash used in investing activities between the periods resulted from a decrease in proceeds from sales of short-term investments of $28.0 million and an increase in cash outflows for acquisitions of $19.3 million asIn fiscal 2022, the Company acquired Partmo,Solaris, Purilogics and PAIS for cash consideration of $68.9 million, net of cash acquired, and invested a leading manufacturerhigher level of replacement air, lubecapital investment in various projects, including capacity expansion, cost reduction initiatives and fuel filters in Colombiatooling for medium and heavy duty engines, and Hy-Pro, a domestic manufacturer of filtration systems and replacement filters for stationary hydraulic and industrial lubrication applications. The increase in cash utilized was partially offset by a decrease in capital expenditures of $7.0 million.
Cash used in investing activities for the year ended July 31, 2016 was $55.6 million, as compared with $111.7 million for the year ended July 31, 2015, a decrease of $56.1 million. The decrease in cash used in investing activities between the periods resulted from a decrease in cash outflows for acquisitions and capital expenditures of $92.7 million and $20.9 million, respectively, partially offset by a decrease in net proceeds from sales of short-term investments of $59.5 million.new programs.
Financing Activities
Cash flows used in financingfinancing activities generally relaterelates to the use of cash for payment of dividends and repurchases of the Company'sCompany’s common stock, and paymentnet of dividends, net borrowing activity and proceeds from the exercise of stock options. The Company's Board of Directors authorizedCash used in financing activities for the repurchase of up to 14.0 million shares of common stock under the Company’s stock repurchase plan dated May 29, 2015. This repurchase authorization is effective until terminated by the Board of Directors. As ofyear ended July 31, 2017,2022 was $114.2 million, compared with $363.3 million for the Company had remaining authorization to repurchase 7.2 million shares under this plan. year ended July 31, 2021, a decrease of $249.1 million. The decrease was driven primarily by proceeds from the issuance of new debt.
To determine the appropriate level of dividend payouts,and share repurchases, the Company considers recent and projected performance across key financial metrics, including earnings, cash flow from operations and total debt. Dividends paid for the years ended July 31, 2017, 20162022 and 20152021 were $92.4$110.1 million $91.2 million and $91.2$107.2 million, respectively.
Cash used in financing activities Share repurchases for the yearyears ended July 31, 2017 was $157.72022 and 2021 were $170.6 million as compared with $175.0 and $142.2 million, for the year ended July 31, 2016, a decreaserespectively.
Capital Resources
Additional sources of $17.3 million. The decrease was driven by increased short-term borrowingsliquidity are existing cash and long-term debt, including current maturities for the year ended July 31, 2017 compared with the prior year of $62.9 million, partially offset by higher share repurchases for the year ended July 31, 2017 compared with the prior year of $56.1 million.
available credit facilities. Cash used in financing activities for the year ended July 31, 2016 was $175.0 million, as compared with $179.0 million for the year ended July 31, 2015, a decrease of $4.0 million. The decrease resulted from lower share repurchases for the year ended July 31, 2016 compared with the prior year of $172.0 million, partially offset by lower net proceeds from short-term borrowings and long-term debt for the year ended July 31, 2016 compared with the prior year of $164.0 million.
Cash and Cash Equivalents
At July 31, 2017 and 2016, cash and cash equivalents were $308.4as of July 31, 2022 was $193.3 million, and $243.2compared with $222.8 million respectively. The majorityas of July 31, 2021. A significant portion of the Company’s cash and cash equivalents are held by its foreign subsidiariesthroughout the world as over half of the Company’s earnings occur outside the U.S. MostAdditionally, the Company has capacity of these funds$615.0 million available for further borrowing under existing credit facilities as of July 31, 2022.
Short-term borrowing capacity as of July 31, 2022 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | European Commercial Paper Program | | U.S. Credit Facilities | | European Operations Credit Facilities | | Rest of the World Credit Facilities | | Total |
| Available short-term credit facilities | | $ | 102.1 | | | $ | 100.0 | | | $ | 42.4 | | | $ | 52.8 | | | $ | 297.3 | |
| | | | | | | | | | |
| Reductions to borrowing capacity: | | | | | | | | | | |
| Outstanding borrowings | | — | | | — | | | — | | | 3.7 | | | 3.7 | |
| Other non-borrowing reductions | | — | | | — | | | 27.0 | | | 19.1 | | | 46.1 | |
| Total reductions | | — | | | — | | | 27.0 | | | 22.8 | | | 49.8 | |
| | | | | | | | | | |
| Remaining borrowing capacity | | $ | 102.1 | | | $ | 100.0 | | | $ | 15.4 | | | $ | 30.0 | | | $ | 247.5 | |
| | | | | | | | | | |
| Weighted average interest rate as of July 31, 2022 | | N/A | | N/A | | N/A | | 0.37 | % | | N/A |
Other non-borrowing reductions include financial instruments such as bank guarantees and foreign exchange instruments.
Long-term borrowing capacity is maintained through a $500.0 million revolving credit facility. Borrowings against the credit facility are considered permanently reinvested outsidereported on the U.S.,Consolidated Balance Sheets. Borrowing capacity as of July 31, 2022 was as follows (in millions):
| | | | | | | | | | |
| | | | |
| Revolving credit facility | | $ | 500.0 | | | |
| | | | |
| Reductions to borrowing capacity: | | | | |
| Outstanding borrowings | | 125.0 | | | |
| Contingent liability for standby letters of credit | | 7.5 | | | |
| Total reductions | | 132.5 | | | |
| Remaining borrowing capacity | | $ | 367.5 | | | |
| | | | |
| Weighted average interest rate as of July 31, 2022 | | 2.88 | % | | |
| | | | |
| | | | |
Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2022, the Company was in compliance with all such covenants.
Capital Requirements
The Company’s cash generatedrequirements within the next 12 months include short-term borrowings, accounts payable, accrued expenses, income taxes payable, dividends payable, purchase commitments and other current liabilities. Additionally, in fiscal 2023, the Company expects its cash paid for capital expenditures to be between $115 million and $135 million, primarily associated with capacity expansion, new products and technologies as well as infrastructure investments.
The Company’s cash requirements greater than 12 months from U.S. operations plusvarious contractual obligations and commitments primarily include:
•debt obligations and interest payments - see Note 7. Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of the Company’s debt facilities are anticipated to be sufficient forand the Company's U.S. operation’s cash needs. If additional cash was required for the Company’s operationstiming of expected future principal and interest payments; and
•operating leases - see Note 9. Leases in the U.S., it may be subjectNotes to additional U.S. taxes if funds were repatriated from certain foreign subsidiaries.Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of our lease obligations and the timing of expected future payments.
At July 31, 2017, the Company had $553.3 million available under existing credit facilities. The Company believes thatthe liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities and the expected cash generated by operating activities will be adequatesufficient to meet its cash requirements for fiscal 2018,the next 12 months and beyond, including working capital needs, debt repayments,service obligations, capital expenditures, payment of anticipated dividends, possible share repurchase activity and potential acquisitionsacquisitions.
Financial Condition
The Company’s total capitalization components and debt-to-capitalization ratio were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, |
| | 2022 | | % | | 2021 | | % |
| Short-term borrowings | | $ | 3.7 | | | 0.2 | % | | $ | 48.5 | | | 2.9 | % |
| Current maturities of long-term debt | | — | | | — | | | — | | | — | |
| Long-term debt | | 644.3 | | | 36.2 | | | 461.0 | | | 28.0 | |
| Total debt | | 648.0 | | | 36.4 | | | 509.5 | | | 30.9 | |
| | | | | | | | |
| Total stockholders’ equity | | 1,133.2 | | | 63.6 | | | 1,137.1 | | | 69.1 | |
| Total capitalization | | $ | 1,781.2 | | | 100.0 | % | | $ | 1,646.6 | | | 100.0 | % |
| | | | | | | | |
| | | | | | | | |
As of July 31, 2022, total debt, including short-term borrowings and long-term debt, represented 36.4% of total capitalization, defined as total debt plus total stockholders’ equity, compared with 30.9% as of July 31, 2021.
Long-term debt outstanding as of July 31, 2022 was $644.3 million compared with $461.0 million as of July 31, 2021, an increase of $183.3 million. In fiscal 2022, the Company received proceeds of $150.0 million of unsecured senior notes for which it had entered into an agreement in fiscal 2021, and had additional borrowings on its revolving credit facilities.
Working Capital
In order to help measure and analyze the impact of working capital expenditures.management, the Company calculates days sales outstanding as the average accounts receivable, net for the quarter, divided by net sales for the quarter multiplied by the number of days in the quarter. The Company calculates days inventory outstanding as the average inventories, net for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter, and calculates inventory turns as the cost of sales for the quarter, annualized by the ratio of the number of days in the year to the number of days in the quarter, divided by the average inventories, net for the quarter. The Company calculates days payable outstanding as the average accounts payable for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter.
Accounts receivable, net as of July 31, 2022 was $616.6 million, compared with $552.7 million as of July 31, 2021, an increase of $63.9 million. Days sales outstanding were 62 days as of July 31, 2022, a decrease from 65 days as of July 31, 2021.
Inventories, net as of July 31, 2022 was $502.4 million, compared with $384.5 million as of July 31, 2021, an increase of $117.9 million. Days inventory outstanding were 78 days as of July 31, 2022, an increase from 68 days as of July 31, 2021. Inventory turns were 4.7 times and 5.4 times per year as of July 31, 2022 and 2021, respectively.
Accounts payable as of July 31, 2022 was $338.5 million, compared with $293.9 million as of July 31, 2021, an increase of $44.6 million. Days payable outstanding were 52 days as of July 31, 2022, an increase from 51 days as of July 31, 2021.
Off-Balance Sheet Arrangements
Joint Venture Guarantee
The Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50% of certain debt of itshas an unconsolidated joint venture, with Caterpillar Inc., Advanced Filtration Systems Inc. (AFSI). As, established by the Company and Caterpillar Inc. (Caterpillar) in 1986. AFSI designs and manufactures high-efficiency fluid filters used in Caterpillar’s machinery worldwide. The Company and Caterpillar equally own the shares of July 31, 2017,AFSI, and both companies guarantee certain debt and banking services, including credit and debit cards, merchant processing and treasury management services, of the joint venture had $27.8 million ofventure. The Company accounts for AFSI as an equity method investment.
The outstanding debt ofrelating to AFSI, which the Company guarantees half. half, was $68.8 million and $37.8 million as of July 31, 2022 and 2021, respectively. AFSI has $63.0 million in revolving credit facilities which expire in 2024 and $17.0 million in an additional multi-currency revolving credit facility which terminates upon notification of either party. The Company does not believe that this guarantee will have a current or future effect on its financial condition, results of operations, liquidity or capital resources.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of July 31, 2017, for the years indicated (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| Long-term debt obligations | | $ | 586.8 |
| | $ | 50.1 |
| | $ | 64.0 |
| | $ | 198.1 |
| | $ | 274.6 |
|
| Capital lease obligations | | 1.1 |
| | 0.5 |
| | 0.6 |
| | — |
| | — |
|
| Interest on long-term debt obligations | | 116.5 |
| | 16.2 |
| | 29.6 |
| | 27.2 |
| | 43.5 |
|
| Operating lease obligations | | 22.8 |
| | 9.7 |
| | 9.3 |
| | 2.1 |
| | 1.7 |
|
| Purchase obligations (1) | | 130.1 |
| | 126.1 |
| | 0.9 |
| | 2.0 |
| | 1.1 |
|
| Pension and deferred compensation (2) | | 54.4 |
| | 7.7 |
| | 7.7 |
| | 7.4 |
| | 31.6 |
|
| Total (3) | | $ | 911.7 |
| | $ | 210.3 |
| | $ | 112.1 |
| | $ | 236.8 |
| | $ | 352.5 |
|
| |
(1) | Purchase obligations consist primarily of inventory, tooling and capital expenditures. The Company’s purchase orders for inventory are based on expected customer demand and, as a result, quantities and dollar volumes are subject to change. |
| |
(2) | Pension and deferred compensation consists of long-term pension liabilities and salary and bonus deferrals elected by certain executives under the Company’s deferred compensation plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the plan (10-year treasury bond STRIP rate plus two percent for deferrals prior to January 1, 2011 and 10-year treasury bond rates for deferrals after December 31, 2010), are approved by the Human Resources Committee of the Board of Directors and are payable at the election of the participants. |
| |
(3) | In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of $21.1 million for potential tax obligations, including accrued interest and penalties. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities. Therefore, quantification of an estimated range and timing of future payments cannot be made at this time. |
Critical Accounting PoliciesEstimates
The Company’s Consolidated Financial Statements are prepared in conformity with GAAP. Our significant accounting policies are disclosed in Note 1 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report. The preparation of these financial statementsConsolidated Financial Statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statementsConsolidated Financial Statements and the reported amounts of revenue and expenses during the periods presented. Management bases estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about recorded amounts. The Company believes its use of estimates and underlying accounting assumptions adheres to GAAP and are reasonable and consistently applied. The Company’s Critical Accounting PoliciesEstimates are those thatwhich require more significant estimatesassumptions and judgments used in the preparation of its Consolidated Financial Statements and that are the most important to aid in fully understanding its financial results. The Company'sCompany’s Critical Accounting PoliciesEstimates are as follows:
Revenue Recognition - Variable Consideration
Revenue is measured as the following:
Revenue recognition amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. The transaction price of a contract could be reduced by variable consideration including volume, purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. The Company sells a wide range of filtration solutions into many industries aroundprimarily relies on historical experience and anticipated future performance to estimate the globe.variable consideration. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when boththe contingency is resolved.
For volume, purchase rebates and discounts, management estimates are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume in quantity or mix of purchases of product ownershipduring a specified time period and expectations for changes in relevant trends in the future. Actual results may differ from estimates if competitive factors create the need to enhance or reduce sales promotion and incentive accruals or if customer usage and field inventory levels vary from historical trends. Adjustments to sales promotions and incentive accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
For product refunds and returns, estimates are based primarily on the expected number of products sold, the trend in the historical ratio of returns to sales and the riskhistorical length of loss have transferredtime between the sale and resulting return. Actual refunds and returns could be higher or lower than amounts estimated due to such factors as performance of new products or significant manufacturing or design defects not discovered until after the customer,product is delivered to customers.
Goodwill
Goodwill represents the Company has no remaining obligations, the selling price is fixed and determinable and collectability is reasonably assured. The vast majorityexcess of the Company’s sales contracts are for standard products with product ownership and riskpurchase price over the fair value of loss transferring tonet assets acquired in business combinations under the customer when the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales contracts with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms, the Company defers revenue on these product sales until the product has been delivered.
For the Company’s Gas Turbine Systems sales, which typically consist of multiple shipments of components that will comprise the entire Gas Turbine Systems project, the Company must carefully monitor the transfer of title related to each portion of a system sale. The Company defers revenue recognition until product ownership and risk of loss has transferred to the customer for all
components and when all terms specified in the contract are met, which may include requirements such as the Company delivering technical documentation to the customer or a quality inspection approved by the customer.
In limited circumstances, the Company enters into sales contracts that involve multiple elements (such as equipment, replacement filter elements and installation services). In these instances, the Company determines if the multiple elements in the arrangement represent separate unitspurchase method of accounting. If separate units of accounting exist, the price of the entire arrangement is allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was sold separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same period revenue is recognized.
Goodwill Goodwill is assessed for impairment annually or more frequently if an event occurs or circumstances change that would indicate the assetcarrying amount may be impaired. The Company performed its annual impairment assessment forduring the third quarter of fiscal 2022. The goodwill impairment assessment is doneconducted at a reporting unit level, which is one level below the operating segment level. level, and utilizes either a qualitative or quantitative assessment. The Company determined the fair value for all its reporting units was substantially in excess of their respective carrying values and there were no indicators of impairment for any of the reporting units evaluated. An impairment loss would be recognized when the carrying amount of thea reporting unit’s net assets exceeds the estimated fair value of the reporting unit.
The optional qualitative assessment evaluates general economic, industry and entity-specific factors that could impact the reporting units’ fair values. For reporting units evaluated using a qualitative assessment, if it is determined the fair value more likely than not exceeds the carrying value, no further assessment is necessary. The Company has elected this option for certain reporting units. For reporting units evaluated using a quantitative assessment, the fair values are determined using an income approach, a market approach or a weighting of the two. Significant estimates and assumptions are utilized in the valuations, including prices investors paid for the stocks of comparable, publicly traded companies and discounted, projected cash flows.
The Company performed its annual impairment assessment during the third quarter of fiscal 2017. The results of this assessment were that the estimated fair values of the reporting units to which goodwill is assigned continued to exceed the corresponding carrying values of the reporting units, resulting in no goodwill impairment. Of the Company's five reporting units that contain goodwill, the estimated fair values exceeded the respective carrying values by at least 60% for all but the Gas Turbine Systems reporting unit, for which the estimated fair value exceeded the carrying amount by approximately 15%.
Goodwill associated with the Gas Turbine Systems reporting unit was $60.4 million as of the annual impairment assessment and is included in the Industrial Products segment. The Company completed its Gas Turbine Systems goodwill impairment assessment using a weighting of the fair values as determined under a market approach and an income approach to determine the estimated fair value of the reporting unit. The public company method of the market approach estimateddetermines fair value based on discounted cash flow models derived from the reporting units’ long-term forecasts. The market approach determines fair value based on earnings multiples derived from prices investors paid for the stocks of comparable publicly traded companies. The income approach estimated fair value based onEstimates and assumptions are utilized in the valuations, including discounted projected cash flows, from the reporting unit's financial forecast. Aearnings before interest, taxes, depreciation and amortization margins, terminal value growth rate of 3.0% was used, as well as a discount rate of 11.5% reflecting the relative risk of achieving cash flows and any other specific risks or factors related to the Gas Turbine Systems reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in a reasonable estimate of the reporting unit's fair value. The Company performed a sensitivity analysis to determine how the assumptions impact the results of the impairment assessment under this valuation approach. Holding all other assumptions constant, zerorates, revenue growth or below for fiscal years 2019-2026 would resultrates, discount rates and the determination of comparable, publicly traded companies. Changes in impairment. Additionally, a decrease inthese estimates and assumptions could materially affect the terminal growth ratedetermination of 3.0% to zero or below, or an increase in the discount rate by 1.5% or more, would result infair value and goodwill impairment. While these projections supported no impairment of goodwill of this reporting unit, given the sensitivities to the assumptions used in the calculations of the projected cash flows, it is possible that impairment could be incurred in the future. The Company will continue to monitor results and projected cash flows to assess whether goodwill impairment in the Gas Turbine Systems reporting unit may be necessary.
Income taxesTaxes
Management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating actual current tax exposure and assessing future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. These deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are anticipated to reverse based on future taxable income projections and the impact of tax planning strategies. The Company intends to indefinitely reinvest undistributed earnings for certain of its non-U.S. subsidiaries and thus has not provided for U.S. income taxes on these earnings.
Additionally, benefits of tax return positions are recognized in the financial statementsConsolidated Financial Statements when the position is “more-likely-than-not”more likely than not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company'sCompany’s judgment is greater than 50% likely to be realized. The Company maintains a reserve for uncertain tax benefits that are currently unresolved and routinely monitors the potential impact of such situations. The liability for unrecognized tax benefits, accrued interest and penalties was $21.1$16.3 million and $17.5$20.3 million as of July 31, 20172022 and 2016,2021, respectively.
The Company believes it is remote that any adjustment necessary to the reserve for income taxes for the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the Company’s reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.
Defined benefit pension plansBenefit Pension Plans
The Company incurs expenses for employee benefits provided through defined benefit pension plans. In accounting for these defined benefit pension plans, management must make a variety of estimates and assumptions including mortality rates, discount rates overall Company compensation increases and expected return on plan assets. The Company considers current and historical data as well as current facts and circumstances and uses a third-party specialist to assist management in determining these estimates.
To develop the assumption for the expected long-term rate of return on assets for its U.S. pension plans, the Company considered historical returns and future expected returns for each asset class, as well as the target asset allocation of the pension portfolio. The expected return on plan assets assumption for the plans outside the U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. The Company utilized a 6.58% and 6.90% asset-based weighted average expected return on plan assets for its U.S. plans for the years ended July 31, 2017 and 2016, respectively. The Company utilized a 4.19% and 3.93% asset-based weighted average expected return on plan assets for its non-U.S. plans for the years ended July 31, 2017 and 2016, respectively. The expected returns on plan assets are used to develop the following years' expense for the plans.Discount Rates
The Company’s objective in selecting a discount rate for its pension plans is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income investments currently available and expected to be available, during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans. The Company utilized a 3.94%4.62% and 3.65%2.55% weighted average discount rate for its U.S. plans for the years ended July 31, 20172022 and 2016,2021, respectively. The Company utilizedused a 2.40%3.26% and 2.08%1.55% weighted average discount rate for its non-U.S. plans for the years ended July 31, 20172022 and 2016,2021, respectively.
Beginning withExpected Long-Term Rate of Return on Plan Assets
The Company considers historical returns and future expected returns for each asset class, as well as the target asset allocation to develop the assumption for each of its U.S. pension plans. The assumption for non-U.S. pension plans reflects the investment allocation and expected total portfolio returns specific to each plan and country.
The Company utilized a 5.41% and 5.33% asset-based weighted average expected return on plan assets for its U.S. plans for the years ended July 31, 2016 measurement date,2022 and 2021, respectively. The Company utilized a 3.40% and 3.13% asset-based weighted average expected return on plan assets for its non-U.S. plans for the years ended July 31, 2022 and 2021, respectively. The expected returns on plan assets are used to develop the following fiscal years’ expense for the plans.
Alternative Assumptions
If the Company changed the method usedwere to estimate the service and interest costsuse alternative assumptions for its pension benefits. The new method utilizesplans as of July 31, 2022, a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. Historically, the Company had utilized a single weighted average discount rate applied to projected cash outflows. The Company made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rate on the yield curve. The change does not impact the measurement of the plans' obligations and did not have a material impact on the Company's pension expense beginning in fiscal 2017. The Company has accounted for this change as aone percentage point change in accounting estimate.the assumptions would impact fiscal 2022 net periodic benefit cost as follows (in millions):
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| | | | | | +1% | | (1)% |
| Rate of return | | | | | | $ | (4.8) | | | $ | 4.8 | |
| Discount rate | | | | | | $ | (0.7) | | | $ | 1.8 | |
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The Company’s net periodic benefit cost recognized in the Consolidated Statements of Earnings was $3.3$2.8 million, $17.8$5.3 million and $21.6$7.2 million for the years ended July 31, 2017, 20162022, 2021 and 2015,2020, respectively. While changes to the Company’s pension plan assumptions would not be expected to impact its net periodic benefit cost by a material amount, such changes could significantly impact the Company’s projected benefit obligation.
Business Combinations
The Company allocates the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, where applicable, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, customer retention rates, discount rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.
The Company estimates the fair value of acquired customer relationships using the multi-period excess earnings method. This approach is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group which includes the particular asset. Fair value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the economic returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated economic returns from contributory assets. Assumptions used in these calculations include same-customer revenue growth rates, estimated earnings and customer attrition rates.
The Company estimates the fair value of trade names and/or trademarks using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including reputation and recognition within the industry.
While, the Company uses its best estimates and assumptions, especially at the acquisition date, including its estimates for intangible assets, pre-acquisition contingencies and any contingent consideration, where applicable, the fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Earnings. The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income.
New Accounting StandardsStandard Not Yet Adopted
For the new accounting standardsstandard not yet adopted, refer to Note 1 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
Safe Harbor Statement underUnder the Private Securities Litigation Reform Act of 1995
The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and expectations, such as forecasts, plans, trends and projections relating to the Company’s business and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Part I, Item 1A, "Risk Factors"“Risk Factors” of this Annual Report, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases such as “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast”“forecast,” “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.
Readers are cautioned not to place undue reliance on these
These forward-looking statements which speak only as of the date such statements are made. In addition, the Company wishesmade and are subject to advise readersrisks and uncertainties that the factors listed in Part I, Item 1A, "Risk Factors" of this Annual Report, as well as other factors, could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, worldchallenges in global operations; impacts of global economic, industrial and industrial market conditions;political conditions on product demand, including the Company's abilityRussia and Ukraine conflict; impacts from unexpected events, including the COVID-19 pandemic; effects of unavailable raw materials or material cost inflation; inability to attract and retain qualified personnel; inability to meet customer demand; inability to maintain certain competitive advantages over competitors;advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressures; the Company's abilitypressure; exposure to protect and enforce its intellectual property rights; the Company's dependence on global operations; customer concentration in certain cyclical industries; commodity availabilityinability to manage productivity improvements; results of execution of any acquisition, divestiture and pricing; the Company's ability to develop newother strategic transactions; vulnerabilities associated with information technology systems and maintainsecurity; inability to protect and upgrade existing systems; information security and data breaches; foreign currency fluctuations;enforce intellectual property rights; costs associated with governmental laws and regulations; changes in tax laws, regulationsimpacts of foreign currency fluctuations; and resultseffects of examinations; the Company's ability to attract and retain key personnel; changes in capital and credit markets; execution of the Company's acquisition strategy; the possibility of asset impairment; execution of restructuring plans; the Company's ability to maintain an effective system of internal control over financial reportingmarkets. These and other factors includedare described in Part I, Item 1A, "Risk Factors"
“Risk Factors” of this Annual Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Item 7A. Quantitative and Qualitative Disclosures aboutAbout Market Risk
The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates pension assumptions and commodity prices. See further discussionTo manage these risks, the Company employs certain strategies to mitigate the effect of these market risks below.
Foreign currency The Company manages foreign currency market risk from time to time through the use of a variety of financial and derivative instruments.fluctuations. The Company does not enter into any of these instruments for trading or speculative trading purposes. Rather, the Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The Company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value resulting from existing recognized foreign currency denominated asset and liability balances and also for anticipated foreign currency transactions. The Company also naturally hedges foreign currency through its production in the countries in which it sells its products.
During fiscal 2017, the U.S. dollar was generally stronger than in fiscal 2016 compared with many of the currencies of the foreign countries in which the Company operates. The overall strength of the dollar had a negative impact on the Company’s international net sales results because the foreign denominated revenues translated into fewer U.S. dollars.
It is not possible to determine the exact impact of foreign currency translation changes. However, the direct effect on reported net sales and net earnings can be estimated. For the year ended July 31, 2017, the estimated impact of foreign currency translation resulted in an overall decrease in reported net sales of $8.2 million and a decrease in reported net earnings of approximately $1.3 million. Foreign currency translation had a negative impact in many regions around the world.
The Company maintains significant assets and operations in Europe, Asia Pacific, Latin America and South Africa,outside the U.S., resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign currency exposure is naturally hedged by incurring liabilities, including bank debt, denominated in the local currency in which the Company’s foreign subsidiaries are located.
The foreign subsidiariesDuring fiscal 2022, the U.S. dollar was generally stronger than in fiscal 2021 compared with many of the currencies of the foreign countries in which the Company generally purchaseoperates. The overall stronger dollar had a negative impact on the majorityCompany’s international net sales and net earnings because the foreign denominated revenues translated into less U.S. dollars in many regions around the world. The estimated impact of their input costsforeign currency translation for the year ended July 31, 2022 resulted in an overall decrease in reported net sales of $87.1 million and then sella decrease in reported net earnings of $10.9 million.
Derivative Fair Value Measurements
The Company enters into derivative instrument agreements, including foreign currency forward contracts, net investment hedges and interest rate swaps, to manymanage risk in connection with changes in foreign currency and interest rates. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit. See Notes 12, 15 and 16 in the Notes to Consolidated Financial Statements in Item 8 of theirthis Annual Report.
Foreign Currency Forward Contracts - Cash Flow Hedges and Derivatives Not Designated as Hedging Instruments
The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in the sameforeign countries. Those transactions can be denominated in those customers’ local currency. However, the Company still may be exposed to cost increases relative to local currenciesBoth of these transaction types can create volatility in the markets to which it sells. To mitigate such adverse trends, theCompany’s financial statements. The Company from time to time, enters into forward exchange contracts and other hedging activities. Additionally,uses foreign currency positionsforward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are partially offsettingdesignated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges as of July 31, 2022 and are netted against one another2021 were $158.0 million and $117.2 million, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges as of July 31, 2022 and 2021 were $151.6 million and $154.2 million, respectively.
Net Investment Hedges
The Company uses fixed-to-fixed cross-currency swap agreements to reduce exposure.hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method for designating these contracts as net investment hedges.
Some products made byThe total notional amount of net investment hedges as of July 31, 2022 and 2021 were €80 million, or $88.8 million, and €50 million, or $55.8 million, respectively. The maturity dates range from 2027 to 2029.
Based on the Company in the U.S. are sold internationally. Asnet investment hedges outstanding as of July 31, 2022, a result, sales of such products are affected by the value10% appreciation of the U.S. dollar relativecompared to other currencies. Any long-term strengtheningthe Euro, would result in a net gain of the U.S. dollar could depress these sales. Also, competitive conditions$7.8 million in the Company’s markets may limit its ability to increase product pricing in the facefair value of adverse currency movements.these contracts.
Interest Rates
The Company’s exposure to market risk for changes in interest rates primarily relates primarily to debt obligations that are at variablesvariable rates, as well as the potential increase in the fair value of long-term debt resulting from a potential decrease in interest rates. As of July 31, 2017,2022, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $240.0$125.0 million outstanding on the Company'sCompany’s revolving credit facility, and€80.0 million, or $81.7 million of a variable rate term loan, ¥2.65and ¥2.0 billion, or $24.0$15.0 million, of variable rate long-term debt and $23.3 millionsenior notes. As of July 31, 2022, additional short-term debt outstanding.borrowings outstanding consisted of $3.7 million. Assuming a hypothetical 0.5 percentage point increase of one-half percent in short-term interest rates, with all other variables remaining constant, interest expense would have increased approximately $1.1 million and interest income would have increased $1.5 millionby an immaterial amount in fiscal 2017.2022. Interest rate changes would also affect the fair market value of thefixed-rate debt. As of July 31, 2017,2022, the estimated fair valuevalues of fixed interest rate long-term debt with fixed interest rates was $330.6were $396.9 million compared to itsthe carrying valuevalues of $325.0$425.0 million. The fair value isvalues are estimated by discounting the projected cash flows using the rate thatinterest rates at which similar amounts of debt could currently be borrowed.
Pensions TheIn addition, the Company is exposed to market return fluctuations onrisk for changes in interest rates for the impact to its qualified defined benefit pension plans. InThe plans’ projected benefit obligation is inversely related to changes in interest rates. Consistent with published bond indices, in fiscal 2017,2022, the Company reducedincreased its long-termweighted average discount rate of return from 6.90%2.55% to 6.58%4.62% on its U.S. plans and increased its weighted average discount rate from 3.93%1.55% to 4.19%3.26% on its non-U.S. plans. To protect against declines in interest rates, the pension plans to reflect its future expectation for returns. Consistent with published bond indices, the Company increased its discount rate from 3.65% to 3.94% on its U.S. plans and increased itshold high-quality, long-duration bonds. The rates from 2.08% to 2.40% for its non-U.S. plans. The plans were underfunded by $50.0 million at July 31, 2017, sinceimpact both the projected benefit obligation exceededand the fair value of the plan assets.assets, and hence, the funded status of the plans. The plans were overfunded by $17.2 million as of July 31, 2022, since the fair value of the plan assets exceeded the projected benefit obligation.
Commodities Commodity Prices
The Company is exposed to market risk from fluctuating market prices of certain purchased commodity raw materials, including steel, filter media and petrochemical basedpetrochemical-based products including plastics, rubber and adhesives. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its
customers and the Company’s cost reduction initiatives, which include material substitution, process improvement and product redesigns. However, an increase in commodity prices could result in lower operating margins.gross profit.
Bankers’ Acceptance Notes
Consistent with common business practice in APAC, the Company has subsidiaries which accept bankers’ acceptance notes from their customers in settlement of certain customer billed accounts receivable. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity dates of bankers’ acceptance notes vary, but it is the Company’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of the Company’s receipt of such draft. As of July 31, 2022 and 2021, the Company owned $12.6 million and $14.1 million, respectively, of these bankers’ acceptance notes and includes them in accounts receivable on the Consolidated Balance Sheets.
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017.2022. In making its assessment of internal control over financial reporting, management used the criteria described in Internal Control - Integrated Framework - version 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of July 31, 20172022 based on criteria in Internal Control-Integrated Framework issued by the COSO. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017,2022, as stated in its report, which appears herein.
| | | | | | | | |
| /s/ Tod E. Carpenter | | /s/ Scott J. Robinson |
| | |
/s/ Tod E. Carpenter | | /s/ Scott J. Robinson |
| | |
Tod E. Carpenter | | Scott J. Robinson |
| Chairman, President and Chief Executive Officer | | Senior Vice President and Chief Financial Officer |
September 22, 201723, 2022 | | September 22, 201723, 2022 |
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and Board of Directors of Donaldson Company, Inc.
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Donaldson Company, Inc. and its subsidiaries (the “Company”) as of July 31, 2022 and 2021, and the related consolidated statements of earnings, of comprehensive income, of changes in shareholders’stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Donaldson Company, Inc. and its subsidiariesas of July 31, 2017and 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 20172022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of July 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 8.Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred income taxes on its consolidated balance sheet in 2017.Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Reporting Unit within the Industrial Products Segment
As described in Note 6 to the consolidated financial statements, the Company’s consolidated goodwill balance and goodwill balance for the Industrial Products segment was $345.8 million and $262.1 million, respectively, as of July 31, 2022. As disclosed, management conducts a goodwill impairment test during the third quarter of each fiscal year. For reporting units evaluated using a quantitative assessment, the fair values are determined using an income approach, a market approach or a weighting of the two. The income approach determines fair value based on discounted cash flow models derived from the reporting units’ long-term forecasts. The market approach determines fair value based on earnings multiples derived from prices investors paid for the stocks of comparable, publicly traded companies. An impairment loss would be recognized when the carrying amount of a reporting unit’s net assets exceeds the estimated fair value of the reporting unit. Estimates and assumptions are utilized in the valuations, including discounted projected cash flows, terminal value growth rates, revenue growth rates, earnings before interest, taxes, depreciation and amortization (EBITDA) margins, discount rates, and the determination of comparable, publicly traded companies.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of one reporting unit within the Industrial Products segment is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in applying procedures relating to the goodwill impairment assessment due to the significant judgment by management when developing the fair value measurement of the reporting unit and (ii) significant audit effort was necessary to perform procedures and evaluate audit evidence related to the revenue growth rates and EBITDA margins assumptions utilized in the income approach.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment for the reporting unit, including controls over the development of the revenue growth rates and EBITDA margins assumptions, utilized in the income approach. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the valuation model used in management’s estimate; (iii) testing the completeness, accuracy, and relevance of underlying data used in the model; and (iv) evaluating the reasonableness of the revenue growth rates and EBITDA margins assumptions used by management. Evaluating management’s assumptions related to the revenue growth rates and EBITDA margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 22, 201723, 2022
We have served as the Company’s auditor since 2002.
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of EarningsDONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
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| | | | | | | | | | | | |
| | | Year ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Net sales | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
|
| Cost of sales | | 1,548.8 |
| | 1,465.5 |
| | 1,562.6 |
|
| Gross profit | | 823.1 |
| | 754.8 |
| | 808.6 |
|
| Selling, general and administrative | | 439.8 |
| | 425.1 |
| | 460.1 |
|
| Research and development | | 54.7 |
| | 55.5 |
| | 60.2 |
|
| Operating income | | 328.6 |
| | 274.2 |
| | 288.3 |
|
| Other income, net | | (12.9 | ) | | (3.9 | ) | | (15.5 | ) |
| Interest expense | | 19.5 |
| | 20.7 |
| | 15.2 |
|
| Earnings before income taxes | | 322.0 |
| | 257.4 |
| | 288.6 |
|
| Income taxes | | 89.2 |
| | 66.6 |
| | 80.5 |
|
| Net earnings | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
|
| | | | | | | |
| Weighted average shares – basic | | 132.6 |
| | 133.8 |
| | 137.8 |
|
| Weighted average shares – diluted | | 134.1 |
| | 134.8 |
| | 139.4 |
|
| Net earnings per share – basic | | $ | 1.76 |
| | $ | 1.43 |
| | $ | 1.51 |
|
| Net earnings per share – diluted | | $ | 1.74 |
| | $ | 1.42 |
| | $ | 1.49 |
|
| | | | | | | |
| Cash dividends paid per share | | $ | 0.700 |
| | $ | 0.685 |
| | $ | 0.665 |
|
See Notes to Consolidated Financial Statements.
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions)
|
| | | | | | | | | | | | |
| | | Year ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Net earnings | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
|
| Other comprehensive income (loss) | | | | | | |
| Foreign currency translation income (loss) | | 30.5 |
| | (18.5 | ) | | (119.1 | ) |
| Pension liability adjustment, net of deferred taxes of $(11.2), $14.4 and $(0.2), respectively | | 20.7 |
| | (25.2 | ) | | 3.4 |
|
| (Loss) gain on hedging derivatives, net of deferred taxes of $1.2, $(0.1) and $0.4, respectively | | (2.6 | ) | | 0.1 |
| | (0.5 | ) |
| Net other comprehensive income (loss) | | 48.6 |
| | (43.6 | ) | | (116.2 | ) |
| Comprehensive income | | $ | 281.4 |
| | $ | 147.2 |
| | $ | 91.9 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Net sales | | $ | 3,306.6 | | | $ | 2,853.9 | | | $ | 2,581.8 | |
| Cost of sales | | 2,239.2 | | | 1,882.2 | | | 1,710.2 | |
| Gross profit | | 1,067.4 | | | 971.7 | | | 871.6 | |
| Selling, general and administrative | | 554.8 | | | 519.2 | | | 470.3 | |
| Research and development | | 69.1 | | | 67.8 | | | 61.2 | |
| Operating expenses | | 623.9 | | | 587.0 | | | 531.5 | |
| Operating income | | 443.5 | | | 384.7 | | | 340.1 | |
| Interest expense | | 14.9 | | | 13.0 | | | 17.4 | |
| Other income, net | | (9.8) | | | (9.3) | | | (12.5) | |
| Earnings before income taxes | | 438.4 | | | 381.0 | | | 335.2 | |
| Income taxes | | 105.6 | | | 94.1 | | | 78.2 | |
| Net earnings | | $ | 332.8 | | | $ | 286.9 | | | $ | 257.0 | |
| | | | | | |
| Weighted average shares – basic | | 123.7 | | | 126.4 | | | 126.9 | |
| Weighted average shares – diluted | | 125.2 | | | 128.2 | | | 128.3 | |
| | | | | | |
| Net earnings per share – basic | | $ | 2.69 | | | $ | 2.27 | | | $ | 2.03 | |
| Net earnings per share – diluted | | $ | 2.66 | | | $ | 2.24 | | | $ | 2.00 | |
See Notes to Consolidated Financial Statements.
Donaldson Company, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except share amounts)
|
| | | | | | | |
| | As of July 31, |
| | 2017 |
| | 2016 |
|
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 308.4 |
| | $ | 243.2 |
|
| Accounts receivable, less allowance of $8.7 and $8.6, respectively | 497.7 |
| | 452.4 |
|
| Inventories, net | 293.5 |
| | 234.1 |
|
| Deferred income taxes | — |
| | 29.0 |
|
| Prepaids and other current assets | 51.4 |
| | 51.0 |
|
| Total current assets | 1,151.0 |
| | 1,009.7 |
|
| Property, plant and equipment, net | 484.6 |
| | 469.8 |
|
| Goodwill | 238.1 |
| | 229.3 |
|
| Intangible assets, net | 40.6 |
| | 38.5 |
|
| Deferred income taxes | 30.3 |
| | 7.8 |
|
| Other long-term assets | 35.1 |
| | 31.9 |
|
| Total assets | $ | 1,979.7 |
| | $ | 1,787.0 |
|
| | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
| Current liabilities: | | | |
| Short-term borrowings | $ | 23.3 |
| | $ | 165.5 |
|
| Current maturities of long-term debt | 50.6 |
| | 51.2 |
|
| Trade accounts payable | 194.0 |
| | 143.3 |
|
| Accrued employee compensation and related taxes | 100.0 |
| | 61.0 |
|
| Accrued liabilities | 31.1 |
| | 37.5 |
|
| Other current liabilities | 85.1 |
| | 85.3 |
|
| Total current liabilities | 484.1 |
| | 543.8 |
|
| Long-term debt | 537.3 |
| | 350.2 |
|
| Deferred income taxes | 3.6 |
| | 3.1 |
|
| Other long-term liabilities | 100.2 |
| | 118.5 |
|
| Total liabilities | 1,125.2 |
| | 1,015.6 |
|
| | | | |
| Commitments and contingencies (Note 17) |
|
| |
|
|
| | | | |
| Shareholders’ equity: | | | |
| Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued | — |
| | — |
|
| Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued | 758.2 |
| | 758.2 |
|
| Retained earnings | 1,041.2 |
| | 905.1 |
|
| Non-controlling interest | 4.4 |
| | 4.0 |
|
| Stock compensation plans | 15.7 |
| | 16.7 |
|
| Accumulated other comprehensive loss | (157.0 | ) | | (205.6 | ) |
| Treasury stock, 21,037,353 and 18,750,503 shares, respectively, at cost | (808.0 | ) | | (707.0 | ) |
| Total shareholders’ equity | 854.5 |
| | 771.4 |
|
| Total liabilities and shareholders’ equity | $ | 1,979.7 |
| | $ | 1,787.0 |
|
See Notes to Consolidated Financial Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
|
| | | | | | | | | | | | |
| | | Year ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Operating Activities | | | | | | |
| Net earnings | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
|
| Adjustments to reconcile net earnings to net cash provided by operating activities | | | | | | |
| Depreciation and amortization | | 75.2 |
| | 74.9 |
| | 74.3 |
|
| Equity in earnings of affiliates, net of distributions | | (0.5 | ) | | (0.3 | ) | | (1.1 | ) |
| Deferred income taxes | | (10.6 | ) | | (3.3 | ) | | (5.6 | ) |
| Tax benefit of equity plans | | (4.9 | ) | | (2.7 | ) | | (6.8 | ) |
| Stock compensation plan expense | | 9.1 |
| | 7.3 |
| | 10.7 |
|
| Other, net | | 5.1 |
| | 11.7 |
| | 25.1 |
|
| Changes in operating assets and liabilities, excluding effect of acquired businesses | | | | | | |
| Accounts receivable | | (31.8 | ) | | 8.5 |
| | (20.7 | ) |
| Inventories | | (42.4 | ) | | 29.1 |
| | (26.2 | ) |
| Prepaids and other current assets | | 12.8 |
| | 0.8 |
| | (27.8 | ) |
| Trade accounts payable and other accrued expenses | | 65.5 |
| | (30.7 | ) | | (17.2 | ) |
| Net cash provided by operating activities | | 310.3 |
| | 286.1 |
| | 212.8 |
|
| Investing Activities | | | | | | |
| Purchases of property, plant and equipment | | (65.9 | ) | | (72.9 | ) | | (93.8 | ) |
| Proceeds from sale of property, plant and equipment | | 2.4 |
| | 2.2 |
| | 0.2 |
|
| Purchases of short-term investments | | — |
| | — |
| | (27.0 | ) |
| Proceeds from sale of short-term investments | | — |
| | 28.0 |
| | 114.5 |
|
| Acquisitions, net of cash acquired | | (32.2 | ) | | (12.9 | ) | | (105.6 | ) |
| Net cash used in investing activities | | (95.7 | ) | | (55.6 | ) | | (111.7 | ) |
| Financing Activities | | | | | | |
| Proceeds from long-term debt | | — |
| | 9.6 |
| | 150.0 |
|
| Repayments of long-term debt | | (81.7 | ) | | (1.4 | ) | | (4.2 | ) |
| Change in short-term borrowings | | 129.2 |
| | (23.6 | ) | | 2.8 |
|
| Purchase of treasury stock | | (140.4 | ) | | (84.3 | ) | | (256.3 | ) |
| Dividends paid | | (92.4 | ) | | (91.2 | ) | | (91.2 | ) |
| Tax benefit of equity plans | | 4.9 |
| | 2.7 |
| | 6.8 |
|
| Exercise of stock options | | 22.7 |
| | 13.2 |
| | 13.1 |
|
| Net cash used in financing activities | | (157.7 | ) | | (175.0 | ) | | (179.0 | ) |
| Effect of exchange rate changes on cash | | 8.3 |
| | (2.2 | ) | | (28.6 | ) |
| Increase (decrease) in cash and cash equivalents | | 65.2 |
| | 53.3 |
| | (106.5 | ) |
| Cash and cash equivalents, beginning of year | | 243.2 |
| | 189.9 |
| | 296.4 |
|
| Cash and cash equivalents, end of year | | $ | 308.4 |
| | $ | 243.2 |
| | $ | 189.9 |
|
| | | | | | | |
| Supplemental Cash Flow Information | | | | | | |
| Cash paid during the year for: | | | | | | |
| Income taxes | | $ | 88.0 |
| | $ | 67.8 |
| | $ | 85.6 |
|
| Interest | | $ | 19.9 |
| | $ | 19.7 |
| | $ | 14.7 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Net earnings | | $ | 332.8 | | | $ | 286.9 | | | $ | 257.0 | |
| Other comprehensive income: | | | | | | |
| Foreign currency translation (loss) income | | (99.6) | | | 30.0 | | | 18.7 | |
| Pension liability adjustment, net of deferred taxes of $(2.1), $(11.5) and $3.3, respectively | | 7.2 | | | 35.3 | | | (11.0) | |
| Derivatives: | | | | | | |
| Gains on hedging derivatives, net of deferred taxes of $(2.0), $(0.2) and $0.0, respectively | | 7.2 | | | 0.8 | | | 0.6 | |
| Reclassifications of (gains) losses on hedging derivatives to net earnings, net of taxes of $0.5, $(0.1) and $(0.4), respectively | | (2.2) | | | (0.3) | | | 0.6 | |
| Total derivatives | | 5.0 | | | 0.5 | | | 1.2 | |
| Net other comprehensive (loss) income | | (87.4) | | | 65.8 | | | 8.9 | |
| Comprehensive income | | $ | 245.4 | | | $ | 352.7 | | | $ | 265.9 | |
See Notes to Consolidated Financial Statements.
Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ EquityDONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Non- Controlling Interest | | Stock Compensation Plans | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
| Balance July 31, 2014 | $ | 758.2 |
| | $ | — |
| | $ | 702.4 |
| | $ | — |
| | $ | 19.6 |
| | $ | (45.8 | ) | | $ | (432.0 | ) | | $ | 1,002.4 |
|
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 208.1 |
| | | | | | | | | | 208.1 |
|
| Foreign currency translation | | | | | | | | | | | (119.1 | ) | | | | (119.1 | ) |
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | 3.4 |
| | | | 3.4 |
|
| Loss on hedging derivatives, net of deferred taxes | | | | | | | | | | | (0.5 | ) | | | | (0.5 | ) |
| Comprehensive income | | | | | | | | | | | | | | | 91.9 |
|
| Purchase of IFIL | | | | | | | 3.9 |
| | | | | | | | 3.9 |
|
| Treasury stock acquired | | | | | | | | | | | | | (256.3 | ) | | (256.3 | ) |
| Stock options exercised | | | (5.7 | ) | | (13.1 | ) | | | | | | | | 30.2 |
| | 11.4 |
|
| Deferred stock and other activity | | | (1.9 | ) | | (0.7 | ) | | | | (1.1 | ) | | | | 3.0 |
| | (0.7 | ) |
| Performance awards | | | (0.1 | ) | | (0.1 | ) | | | | (0.6 | ) | | | | 0.6 |
| | (0.2 | ) |
| Stock option expense | | | | | 9.5 |
| | | | | | | | | | 9.5 |
|
| Tax reduction - employee plans | | | 7.7 |
| | | | | | | | | | | | 7.7 |
|
| Dividends ($0.67 per share) | | | | | (90.9 | ) | | | | | | | | | | (90.9 | ) |
| Balance July 31, 2015 | 758.2 |
| | — |
| | 815.2 |
| | 3.9 |
| | 17.9 |
| | (162.0 | ) | | (654.5 | ) | | 778.7 |
|
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 190.8 |
| | | | | | | | | | 190.8 |
|
| Foreign currency translation | | | | | | | | | | | (18.5 | ) | | | | (18.5 | ) |
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | (25.2 | ) | | | | (25.2 | ) |
| Gain on hedging derivatives, net of deferred taxes | | | | | | | | | | | 0.1 |
| | | | 0.1 |
|
| Comprehensive income | | | | | | | | | | | | | | | 147.2 |
|
| Treasury stock acquired | | | | | | | | | | | | | (84.3 | ) | | (84.3 | ) |
| Stock options exercised | | | (1.4 | ) | | (14.7 | ) | | | | | | | | 29.0 |
| | 12.9 |
|
| Deferred stock and other activity | | | (1.3 | ) | | (1.4 | ) | | 0.1 |
| | (0.7 | ) | | | | 2.5 |
| | (0.8 | ) |
| Performance awards | | | | | | | | | (0.5 | ) | | | | 0.3 |
| | (0.2 | ) |
| Stock option expense | | | | | 6.7 |
| | | | | | | | | | 6.7 |
|
| Tax reduction - employee plans | | | 2.7 |
| | | | | | | | | | | | 2.7 |
|
| Dividends ($0.69 per share) | | | | | (91.5 | ) | | | | | | | | | | (91.5 | ) |
| Balance July 31, 2016 | 758.2 |
| | — |
| | 905.1 |
| | 4.0 |
| | 16.7 |
| | (205.6 | ) | | (707.0 | ) | | 771.4 |
|
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 232.8 |
| | | | | | | | | | 232.8 |
|
| Foreign currency translation | | | | | | | | | | | 30.5 |
| | | | 30.5 |
|
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | 20.7 |
| | | | 20.7 |
|
| Loss on hedging derivatives, net of deferred taxes | | | | | | | | | | | (2.6 | ) | | | | (2.6 | ) |
| Comprehensive income | | | | | | | | | | | | | | | 281.4 |
|
| Treasury stock acquired | | | | | | | | | | | | | (140.4 | ) | | (140.4 | ) |
| Stock options exercised | | | (3.4 | ) | | (10.2 | ) | | | | | | | | 35.8 |
| | 22.2 |
|
| Deferred stock and other activity | | | (1.9 | ) | | (1.4 | ) | | 0.4 |
| | (0.8 | ) | | | | 3.5 |
| | (0.2 | ) |
| Performance awards | | | | | | | | | (0.2 | ) | | | | 0.1 |
| | (0.1 | ) |
| Stock option expense | | | | | 7.5 |
| | | | | | | | | | 7.5 |
|
| Tax reduction - employee plans | | | 5.3 |
| | | | | | | | | | | | 5.3 |
|
| Dividends ($0.71 per share) | | | | | (92.6 | ) | | | | | | | | | | (92.6 | ) |
| Balance July 31, 2017 | $ | 758.2 |
| | $ | — |
| | $ | 1,041.2 |
| | $ | 4.4 |
| | $ | 15.7 |
| | $ | (157.0 | ) | | $ | (808.0 | ) | | $ | 854.5 |
|
| | | | | | | | | | | |
| As of July 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 193.3 | | | $ | 222.8 | |
| Accounts receivable, less allowances of $7.6 and $7.0, respectively | 616.6 | | | 552.7 | |
| Inventories, net | 502.4 | | | 384.5 | |
| Prepaid expenses and other current assets | 94.2 | | | 84.0 | |
| Total current assets | 1,406.5 | | | 1,244.0 | |
| Property, plant and equipment, net | 594.4 | | | 617.8 | |
| | | |
| Goodwill | 345.8 | | | 322.5 | |
| Intangible assets, net | 99.8 | | | 61.6 | |
| | | |
| Other long-term assets | 153.8 | | | 154.3 | |
| Total assets | $ | 2,600.3 | | | $ | 2,400.2 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Short-term borrowings | $ | 3.7 | | | $ | 48.5 | |
| | | |
| Accounts payable | 338.5 | | | 293.9 | |
| Accrued employee compensation and related taxes | 113.8 | | | 126.8 | |
| Income taxes payable | 31.8 | | | 17.7 | |
| Dividend payable | 28.3 | | | 27.6 | |
| Other current liabilities | 113.5 | | | 92.1 | |
| Total current liabilities | 629.6 | | | 606.6 | |
| Long-term debt | 644.3 | | | 461.0 | |
| Non-current income taxes payable | 69.4 | | | 80.7 | |
| Deferred income taxes | 32.7 | | | 26.6 | |
| Other long-term liabilities | 91.1 | | | 88.2 | |
| Total liabilities | 1,467.1 | | | 1,263.1 | |
| | | |
| Commitments and contingencies (Note 18) | | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued | — | | | — | |
| Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued | 758.2 | | | 758.2 | |
| Additional paid-in capital | 13.7 | | | 5.8 | |
| Retained earnings | 1,830.4 | | | 1,608.4 | |
| | | |
| Stock-based compensation plans | 18.6 | | | 12.8 | |
| Accumulated other comprehensive loss | (205.6) | | | (118.2) | |
| Treasury stock, 29,089,612 and 26,620,560 shares, respectively, at cost | (1,282.1) | | | (1,129.9) | |
| Total stockholders’ equity | 1,133.2 | | | 1,137.1 | |
| Total liabilities and stockholders’ equity | $ | 2,600.3 | | | $ | 2,400.2 | |
See Notes to Consolidated Financial Statements.
Donaldson Company, Inc. and SubsidiariesDONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) | | | | | | | | | | | | | | | | | | | | |
| | | Year ended July 31, |
| | | 2022 | | 2021 | | 2020 |
| Operating Activities | | | | | | |
| Net earnings | | $ | 332.8 | | | $ | 286.9 | | | $ | 257.0 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 93.8 | | | 95.3 | | | 87.6 | |
| Equity in earnings of affiliates, net of distributions | | 0.3 | | | (2.1) | | | (2.7) | |
| Deferred income taxes | | (1.4) | | | (5.9) | | | 2.7 | |
| Stock-based compensation expense | | 20.4 | | | 14.2 | | | 15.2 | |
| Other, net | | 10.6 | | | 19.6 | | | 23.9 | |
| Changes in operating assets and liabilities, excluding effect of acquired businesses: | | | | | | |
| Accounts receivable, net | | (100.8) | | | (92.7) | | | 77.1 | |
| Inventories, net | | (147.8) | | | (56.3) | | | 11.9 | |
| Prepaid expenses and other current assets | | (10.5) | | | (5.3) | | | 1.4 | |
| Accounts payable | | 51.1 | | | 106.6 | | | (43.5) | |
| Income taxes payable | | 4.9 | | | (3.6) | | | (13.1) | |
| Accrued employee compensation and related taxes and other current liabilities | | (0.6) | | | 45.2 | | | (30.5) | |
| Net cash provided by operating activities | | 252.8 | | | 401.9 | | | 387.0 | |
| | | | | | |
| Investing Activities | | | | | | |
| Purchases of property, plant and equipment | | (85.5) | | | (59.0) | | | (124.4) | |
| Proceeds from sale of property, plant and equipment | | 0.4 | | | 0.7 | | | 2.0 | |
| | | | | | |
| | | | | | |
| Acquisitions, net of cash acquired | | (68.9) | | | — | | | (6.5) | |
| Net cash used in investing activities | | (154.0) | | | (58.3) | | | (128.9) | |
| | | | | | |
| Financing Activities | | | | | | |
| Proceeds from long-term debt | | 289.3 | | | 7.9 | | | 262.4 | |
| Repayments of long-term debt | | (90.0) | | | (170.4) | | | (281.0) | |
| Change in short-term borrowings | | (43.9) | | | 45.2 | | | 0.9 | |
| Purchase of non-controlling interests | | — | | | (14.4) | | | — | |
| Purchase right exercised in finance lease | | — | | | (13.8) | | | — | |
| Purchase of treasury stock | | (170.6) | | | (142.2) | | | (94.3) | |
| Dividends paid | | (110.1) | | | (107.2) | | | (106.4) | |
| Tax withholding for stock compensation transactions | | (1.8) | | | (4.2) | | | (6.3) | |
| Exercise of stock options | | 12.9 | | | 35.8 | | | 25.2 | |
| Net cash used in financing activities | | (114.2) | | | (363.3) | | | (199.5) | |
| Effect of exchange rate changes on cash | | (14.1) | | | 5.9 | | | 0.2 | |
| (Decrease) increase in cash and cash equivalents | | (29.5) | | | (13.8) | | | 58.8 | |
| Cash and cash equivalents, beginning of year | | 222.8 | | | 236.6 | | | 177.8 | |
| Cash and cash equivalents, end of year | | $ | 193.3 | | | $ | 222.8 | | | $ | 236.6 | |
| | | | | | |
| Supplemental Cash Flow Information | | | | | | |
| | | | | | |
| Income taxes paid | | $ | 102.4 | | | $ | 105.9 | | | $ | 90.7 | |
| Interest paid | | $ | 12.2 | | | $ | 10.9 | | | $ | 17.1 | |
| Supplemental Disclosure of Non-Cash Operating and Investing Transactions | | | | | | |
| Accrued property, plant and equipment additions | | $ | 16.3 | | | $ | 7.0 | | | $ | 9.5 | |
| Leased assets obtained in exchange for new operating lease liabilities | | $ | 17.0 | | | $ | 12.4 | | | $ | 33.1 | |
| Transfer of operating lease asset and operating lease liability | | $ | — | | | $ | (9.2) | | | $ | — | |
| | | | | | |
See Notes to Consolidated Financial StatementsStatements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Non-
Controlling
Interest | | Stock-Based Compensation Plans | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock | | Total |
| Balance July 31, 2019 | $ | 758.2 | | | $ | — | | | $ | 1,281.5 | | | $ | 5.4 | | | $ | 21.7 | | | $ | (192.9) | | | $ | (981.2) | | | $ | 892.7 | |
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 257.0 | | | | | | | | | | | 257.0 | |
| Foreign currency translation | | | | | | | | | | | 18.7 | | | | | 18.7 | |
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | (11.0) | | | | | (11.0) | |
| Gains on hedging derivatives, net of deferred taxes | | | | | | | | | | | 0.6 | | | | | 0.6 | |
| Reclassification of losses on hedging derivatives to net earnings | | | | | | | | | | | 0.6 | | | | | 0.6 | |
| Comprehensive income | | | | | | | | | | | | | | | 265.9 | |
| Treasury stock acquired | | | | | | | | | | | | | (94.3) | | | (94.3) | |
| Stock options exercised | | | | | (9.1) | | | | | | | | | 34.0 | | | 24.9 | |
| Stock compensation expense | | | | | 11.9 | | | | | 3.4 | | | | | (0.1) | | | 15.2 | |
| Deferred stock and other activity | | | | | (5.2) | | | 0.4 | | | (9.2) | | | | | 8.6 | | | (5.4) | |
| Dividends declared ($0.84 per share) | | | | | (106.1) | | | | | | | | | | | (106.1) | |
| Balance July 31, 2020 | 758.2 | | | — | | | 1,430.0 | | | 5.8 | | | 15.9 | | | (184.0) | | | (1,033.0) | | | 992.9 | |
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 286.9 | | | | | | | | | | | 286.9 | |
| Foreign currency translation | | | | | | | | | | | 30.0 | | | | | 30.0 | |
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | 35.3 | | | | | 35.3 | |
| Gains on hedging derivatives, net of deferred taxes | | | | | | | | | | | 0.8 | | | | | 0.8 | |
| Reclassification of gains on hedging derivatives to net earnings | | | | | | | | | | | (0.3) | | | | | (0.3) | |
| Comprehensive income | | | | | | | | | | | | | | | 352.7 | |
| Treasury stock acquired | | | | | | | | | | | | | (142.2) | | | (142.2) | |
| Stock options exercised | | | | | (5.9) | | | | | | | | | 41.5 | | | 35.6 | |
| Stock compensation expense | | | 3.6 | | 8.8 | | | | | 1.9 | | | | | (0.1) | | | 14.2 | |
| Deferred stock and other activity | | | | | (3.3) | | | 0.1 | | | (5.0) | | | | | 3.9 | | | (4.3) | |
| Purchase of non-controlling interests | | | 2.2 | | | | | (5.9) | | | | | | | | | (3.7) | |
| Dividends declared ($0.86 per share) | | | | | (108.1) | | | | | | | | | | | (108.1) | |
| Balance July 31, 2021 | 758.2 | | | 5.8 | | | 1,608.4 | | | — | | | 12.8 | | | (118.2) | | | (1,129.9) | | | 1,137.1 | |
| Comprehensive income | | | | | | | | | | | | | | | |
| Net earnings | | | | | 332.8 | | | | | | | | | | | 332.8 | |
| Foreign currency translation | | | | | | | | | | | (99.6) | | | | | (99.6) | |
| Pension liability adjustment, net of deferred taxes | | | | | | | | | | | 7.2 | | | | | 7.2 | |
| Gains on hedging derivatives, net of deferred taxes | | | | | | | | | | | 7.2 | | | | | 7.2 | |
| Reclassification of gains on hedging derivatives to net earnings | | | | | | | | | | | (2.2) | | | | | (2.2) | |
| Comprehensive income | | | | | | | | | | | | | | | 245.4 | |
| Treasury stock acquired | | | | | | | | | | | | | (170.6) | | | (170.6) | |
| Stock options exercised | | | | | (2.5) | | | | | | | | | 15.8 | | | 13.3 | |
| Stock compensation expense | | | 7.9 | | | 5.4 | | | | | 7.2 | | | | | (0.1) | | | 20.4 | |
| Deferred stock and other activity | | | | | (3.0) | | | | | (1.4) | | | | | 2.7 | | | (1.7) | |
| Dividends declared ($0.90 per share) | | | | | (110.7) | | | | | | | | | | | (110.7) | |
| Balance July 31, 2022 | $ | 758.2 | | | $ | 13.7 | | | $ | 1,830.4 | | | $ | — | | | $ | 18.6 | | | $ | (205.6) | | | $ | (1,282.1) | | | $ | 1,133.2 | |
See Notes to Consolidated Financial Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTENote 1. Summary of Significant Accounting Policies
Description of Business
Donaldson Company, Inc. (the Company) is a worldwide manufacturer ofglobal leader in technology-led filtration systemsproducts and replacement parts.solutions. The Company’s core strengths areinclude leading filtration technology, strong customer relationshipsdiverse business and itsa global presence. Products are manufactured at 44 plantsand sold around the world and through three joint ventures. Products are sold to OEMs,original equipment manufacturers (OEMs), distributors, dealers and directly to end users.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Donaldsonthe Company Inc. and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.eliminated. The Company’s three joint ventures are not majority-owned and are accounted for under the equity method. Certain reclassifications to previously reported financial information on the Consolidated Balance Sheet have been made to conform to the current period presentation.
Use of Estimates
The preparation of the Consolidated Financial StatementsCompany’s financial statements in conformity with GAAPgenerally accepted accounting principles (GAAP) in the United States (U.S.) requires management to make estimates and assumptions that affect the amount of assets and liabilities and the disclosures regarding contingent assets and liabilities at period end and the reported amounts reported inof revenue and expenses during the financial statements and accompanying notes.reporting period. Actual results could differ from those estimates.
Operating Environment
Russia and Ukraine
Following the Russia and Ukraine conflict, the Company complied with all sanctions, including those from the European Union, Great Britain and the U.S. and ceased direct product shipments into Russia and Belarus. In fiscal years 2022, 2021 and 2020, total revenues associated with customers in these areas were less than 2% of the Company’s net sales in the Consolidated Statements of Earnings. In the fourth quarter of fiscal 2022, the Company recorded a related charge of $3.4 million which was included in corporate and unallocated. The Company recorded $2.4 million in operating expenses, primarily related to accounts receivables, and recorded $1.0 million in cost of sales related to inventory in the Consolidated Statement of Earnings.
Supply Chain Disruptions
The Company continues to experience supply chain disruptions, including global logistics and labor challenges and constrained supplies of steel, petrochemical products and filter media. These disruptions have increased the Company’s input costs significantly and extended lead times. The Company has undertaken steps to mitigate these negative impacts, such as increasing prices, carrying a higher level of inventories, evaluating alternative supply chain options, qualifying additional suppliers and making strategic raw material purchases. This dynamic impacted results throughout fiscal 2022 and is expected to continue into fiscal 2023.
Inflation
In connection with the supply chain disruptions described above, the Company has experienced the effects of inflation related to raw materials and other expenses, including freight, labor and energy. These inflationary pressures have had an adverse impact on profit margins. The Company continues to negotiate price increases with its customers and is working with its suppliers to mitigate these cost increases. Inflation impacted results throughout fiscal 2022 and is expected to continue into fiscal 2023.
Foreign Currency Translation
For most foreign operations, local currencies are considered the functional currency. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at year-endfiscal year end exchange rates and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss inon the Consolidated Balance Sheets. Elements of the Consolidated Statements of Earnings are translated at average exchange rates in effect during the fiscal year. Foreign currency transaction gains (losses)losses are included in other income, net in the Consolidated Statements of Earnings and were $(4.0)were $6.3 million, $(4.7)$2.9 million and $2.1$4.7 million in the years ended July 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Cash Equivalents
The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost thatwhich approximates market value.
Revenue Recognition
Revenue is measured as the amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. The transaction price of a contract could be reduced by variable consideration including volume, purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. The Company primarily relies on historical experience and anticipated future performance to estimate the variable consideration. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when the contingency is resolved. The Company accounts for amounts billed to customers for reimbursement of shipping and handling costs by recording these amounts as revenue and accruing costs when the related revenue is recognized.
For most customer contracts, the Company recognizes revenue at a point in time when control of the goods or services is transferred to the customer. For product sales, control is typically deemed to have transferred in accordance with the shipping terms, either at the time of shipment from the plants or distribution centers or the time of delivery to the customers. Revenue is recognized for services upon completion of those services. Payment terms vary by customer and the geographic location of the customer. The Company’s contracts with customers do not include significant financing components or non-cash consideration.
The Company has some contracts with customers where the performance obligations are satisfied over time. Certain customer contracts provide the Company with an enforceable right to payment of the transaction price for performance completed to date and the Company uses an output method of production to measure the progress towards the completion of the performance obligation in these arrangements. The timing of revenue recognized from these products is slightly accelerated compared to revenue recognized at the time of shipment or delivery.
The Company generally does not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. The Company may incur certain fulfillment costs such as initial design or mobilization costs which are capitalized if they relate directly to the contract, if they are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract, and if they are expected to be recovered through revenues generated under the contract. Such costs, which are amortized over the life of the respective project, were not material for any period presented.
The Company does not pay upfront sales commissions on contracts when the related contract period is greater than one year, thus has not capitalized any amounts as of July 31, 2022 and 2021, see Note 3.
Shipping and Handling
Shipping and handling costs on products sold of $96.4 million, $79.2 million and $68.1 million are classified as a component of operating expenses in the Consolidated Statements of Earnings for the years ended July 31, 2022, 2021 and 2020, respectively.
Accounts Receivable, Net and Allowance for Doubtful AccountsTrade accounts receivables
Accounts receivable, net are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in its existing accounts receivable. The Company determines the allowance based on utilization of a combination of aging schedules with reserve rates applied to both current and aged receivables using historical write-off experience, in the industry, regional economic data and evaluation of specific customer accounts for risk of loss.loss and changes in current or projected conditions to calculate the allowances related to accounts receivable, net. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All otherAccount balances are reviewed on a pooled basis by reporting unit and geographic region. Account balancesregion and are reserved when the Company determines it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers.reduces the receivable and corresponding allowance when it confirms an account is uncollectible.
Inventories
Inventories are stated at the lower of cost or market.and net realizable value. U.S. inventories are valued using the last-in, first-out (LIFO) method while the non-U.S. inventories are valued using the first-in, first-out (FIFO) method. Inventories valued at LIFO were approximately 27.2%approximately 31.6% and 29.0%30.4% of total inventories atas of July 31, 20172022 and 2016,2021, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by $37.1$59.7 million and $39.8$40.6 million atas of July 31, 20172022 and 2016,2021, respectively. Results of operations for all periods presented were not materially affected byby the liquidation of LIFO inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions, improvements or major renewals are capitalized while expenditures that do not enhance or extend the asset’s useful life are charged to expenseexpensed as incurred. Depreciation is computed using the straight-line method. Depreciation expense was $68.8$85.1 million $68.8, $87.1 million and $66.9$79.3 million in the years ended July 31, 2017, 20162022, 2021 and 2015,2020, respectively. The estimated useful lives of property, plant and equipment are ten10 to forty40 years for buildings, including building improvements, and three to ten10 years for machinery and equipment.equipment, see Note 5.
Internal-Use Software and Cloud Computing Arrangements
The Company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of five to seven years and are reported as a component of machinery and equipment within property, plant and equipment.
The Company capitalizes certain costs incurred during the application development stage of implementation of internal-use software in cloud computing arrangements. Amounts capitalized are amortized on a straight-line basis over a period of five to 10 years and are reported as a component of other long-term assets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Other intangible assets, comprised of customer relationships and lists, patents, trademarks and technology, are amortized on a straight-line basis over their estimated useful lives of three to twenty years. Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company performed its annual impairment assessment forduring the third quarter of fiscal 2022. The goodwill impairment assessment is doneconducted at a reporting unit level. Reporting units are level, which is one level below the operating segment level, but can be combined whenand utilizes either a qualitative or quantitative assessment. The Company determined the fair value for all its reporting units withinwas substantially in excess of their respective carrying values and there were no indicators of impairment for any of the same operating segment have similar economic characteristics.reporting units evaluated. An impairment loss would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit.unit, see Note 6.
Intangible assets, comprised of customer relationships, patents, trademarks and technology, are amortized on a straight-line basis over their estimated useful lives of five to 20 years.
Business Combinations
The Company allocates the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, where applicable, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, customer retention rates, discount rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.
During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Earnings.
Recoverability of Long-Lived Assets
The Company reviews its long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying value is reduced to the fair market value. The Company recorded an impairment charge of $2.9 million in fiscal 2016 for a partially completed facility in Xuzhou, China. There were no indicators of impairment or impairment charges recorded in fiscal 2017 or fiscal 2015.for the years ended July 31, 2022, 2021 and 2020.
Income Taxes
The provision for income taxes is computed based on the pretax income reported for financial statement purposes. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are anticipated to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not thatmore likely than not a tax benefit will not be realized.
The Company maintains a reserve for uncertain tax benefits. Benefits of tax return positions are recognized in the financial statements when the position is “more-likely-than-not”more likely than not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50% likely to be realized.realized, in the Company’s judgment, see Note 8.
Leases
The Company determines whether an arrangement that provides control over the use of an asset to the Company is a lease. The Company recognizes a lease liability and corresponding right-of-use asset on the Consolidated Balance Sheets based on the present value of future lease payments and recognizes lease expense on a straight-line basis over the lease term. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term (or at fair values in the case of those leases assumed in an acquisition). Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term. Variable lease expense is immaterial and primarily includes leases with payments indexed to inflation when the index changes after lease commencement.
The Company has elected to separate payments for lease components from non-lease components for all asset classes. Lease agreements may include extension, termination or purchase options, all of which are considered in calculating the lease liability and right-of-use asset when it is reasonably certain the Company will exercise an option. The Company’s incremental borrowing rate on the commencement date is used to calculate the present value of future payments for most leases since the rate implicit in the lease is generally not readily determinable. These rates are assessed on a quarterly basis for measurement of new lease obligations, see Note 9.
Stock-Based Compensation
Stock-based compensation expense is recognized using the fair value method for all awards, see Note 13.
Treasury Stock
Repurchased common stock is stated at cost, (determineddetermined on an average cost basis)basis, and is presented as a reduction of shareholders’ equity.stockholders’ equity on the Consolidated Balance Sheets.
Research and Development Expense Expenses
Research and development expenses include basic scientific research costs such as salaries, facility costs, testing, technical information technology and administrative expenditures. Research and development expenses are for the application of scientific advances to the development of new and improved products and their usesuses. Substantially all research and development is performed in-house. Expenses are charged against earnings in the year incurred.
ShippingForeign Currency Forward Contracts - Cash Flow Hedges and Handling Shipping and handling costs of $61.4 million, $56.3 million and $63.2 million are classifiedDerivatives Not Designated as a component of selling, general and administrative expenses for the years ended July 31, 2017, 2016 and 2015, respectively.Hedging Instruments
Equity Based Compensation The Company offers stock-based employee compensation plans,buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are more fully describedrelated to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments, see Notes 12, 15 and 16.
Net Investment Hedges
The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Note 10. Stock-based employee compensation expense is recognized usingEurope. The Company has elected the fair-valuespot method for all awards.designating these contracts as net investment hedges. The maturity dates range from 2027 to 2029, see Notes 12, 15 and 16.
Revenue Recognition Interest Rate Swaps - Cash Flow Hedges
The Company sells a wide range of filtration solutions into many industries around the globe. Revenue is recognized when both product ownership and the risk of loss have transferreduses swap agreements to the customer, the Company has no remaining obligations, the selling price is fixed and determinable and collectability is reasonably assured. The vast majority of the Company’s sales contracts are for standard products with product ownership and risk of loss transferring to the customer when the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales contracts with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms, the Company defers revenue on these product sales until the product has been delivered.
For the Company’s Gas Turbine Systems sales, which typically consist of multiple shipments of components that will comprise the entire Gas Turbine Systems project, the Company must carefully monitor the transfer of titlehedge exposure related to each portion of a system sale.interest expense and to manage its exposure to interest rate movements. The Company defers revenue recognition until product ownership and risk of loss has transferred to the customer for all components and when all terms specified in the contract are met, which may include requirements such as the Company delivering technical documentation to the customer or a quality inspection approved by the customer.
In limited circumstances, the Company enters into sales contracts that involve multiple elements (suchinterest rate swap agreements designated as equipment, replacement filter elementscash flow hedges to hedge future fixed-rate debt issuances, which effectively fix a portion of interest payments. The Company entered into and installation services). In these instances,terminated agreements within the Company determines if the multiple elements in the arrangement represent separate units of accounting. If separate units of accounting exist, the price of the entire arrangement is allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was sold separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.prior fiscal year, see Notes 12, 15 and 16.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same period revenue is recognized.
Product Warranties
The Company provides for estimated warranty expense at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty expense on certain products at the time of sale using quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues. For a reconciliation of warranty reserves,issues, see Note 8.18.
Derivative Instruments and Hedging Activities The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges are adjusted to fair value through income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in shareholders’ equity through other
comprehensive loss until the hedged item is recognized. Gains or losses related to the ineffective portion of any hedge are recognized through earnings in the current period.
New Accounting Standards Recently Adopted
In August 2014,June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Presentation2016-13, Measurement of Credit Losses on Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going ConcernInstruments (ASU 2016-13). The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. This accounting guidance was effective for the Company beginning in the second quarter of fiscal 2017 and did not have an impact on its Consolidated Financial Statements.
In April 2015,November 2018, the FASB issued an update, ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying2018-19, that clarifies the Presentation of Debt Issuance Costs (ASU 2015-03), which amended guidance requiring the issuance of debt costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amountscope of the debt liability, consistent with debt discountsstandard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable and premiums. This accounting guidance was effective for theother financial assets measured at amortized cost and other off-balance sheet credit exposures. The Company beginningadopted ASU 2016-13 in the first quarter of fiscal 2017.2021 using the modified retrospective approach. The adoption of ASU 2015-03 was applied retrospectively and resulted in a reclassification of $1.6 million of debt issuance costs from other long-term assets to long-term debt on the July 31, 2016 Consolidated Balance Sheet. The Consolidated Balance Sheet as of July 31, 2017 is also presented in accordance with the guidance of this new standard.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (ASU 2015-07), which amended guidance requiring a company to categorize investments for which fair values are measured using the net asset value (NAV) per share practical expedient. ASU 2015-07 also limits the disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. This accounting guidance was effective for the Company beginning in the first quarter of fiscal 2017 and did not have an impact on its Consolidated Financial Statements but did result in additional disclosures in Note 11.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends (Topic 805) Business Combinations. This ASU requires that acquiring entities recognize measurement period adjustments in the reporting period the amounts are determined, including earnings adjustments that would have been recorded in previous periods if the adjustments were known at the acquisition date. Acquiring entities are no longer required to retrospectively adjust amounts in comparative periods. The adjustment amounts and reasons are still disclosed. This accounting guidance was effective for the Company beginning in the first quarter of fiscal 2017 and did not have an impact on its Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which amended the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified balance sheet. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is permitted. The Company adopted this accounting guidance prospectively beginning in the first quarter of fiscal 2017, which affected the Company's classification of deferred tax assets and liabilities on the Consolidated Balance Sheets presented. Consistent with the prospective method of adopting this new standard, the Company did not reclassify deferred tax assets and liabilities on its July 31, 2016 Consolidated Balance Sheet.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for the Company beginning in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU 2017-04 in the third quarter of fiscal 2017 with its annual goodwill impairment tests. The adoption of ASU 2017-04 did not have an impact on the Company's Consolidated Financial Statements.
New Accounting Standards Not Yet Adopted In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance
obligations and accounting for licenses of intellectual property. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted. The amendments in this update are to be applied on a retrospective basis, either to each prior reporting period presented or by presenting the cumulative effect of applying the update recognized at the date of initial application. The Company has begun an evaluation of the impact of the adoption of the standard on its Consolidated Financial Statements. A project team has been established and will be conducting surveys of the reporting units and performing revenue contract analyses to gather information and identify where potential differences could result in applying the requirements of the new standard. Based on the results of the surveys and contract analyses, the Company will assess the financial impact of the new standard on its Consolidated Financial Statements and determine the method of adoption.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which amended the guidance requiring companies not using the last-in, first-out (LIFO) method to measure inventory at the lower of cost and net realizable value rather than the lower of cost or market. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2018. The Company does not expect the adoption of ASU 2015-11 will have a material impact on its Consolidated Financial Statements.
In February 2016,April 2019, the FASB issued ASU 2016-02, Leases2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815 Derivatives and Hedging and Topic 825, Financial Instruments (ASU 2019-04). This guidance clarifies the standards on credit losses (Topic 842) (ASU 2016-02)326), which amends the guidance requiring companies to recognize assetsderivatives and liabilities for leases with lease termshedging (Topic 815) and recognition and measurement of more than twelve months.financial instruments (Topic 825). The new guidance will require companies to record both capital and operating leases on the balance sheet. This accounting guidance is effective for the Company beginningadopted ASU 2019-04 in the first quarter of fiscal 2020 on a2021 using the modified retrospective basis and earlyapproach. The adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning in the first quarter of fiscal 2018. The Company is evaluating the impact of the adoption of ASU 2016-09 on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company doesdid not expect the application of ASU 2016-15 will have a material impact on its Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (ASU 2017-01). The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments provide more consistency in applying the guidance, reduce the costs of application and make the definition of a business more operable. ASU 2017-01 is effective for the Company beginning in the first quarter of fiscal 2019. The Company does not expect the application of ASU 2017-01 will have a material impact on its Consolidated Financial Statements.
New Accounting Standard Not Yet Adopted
The Company considers the applicability and impact of the FASB’s ASUs issued but not yet adopted. The Company assessed ASUs not listed above and determined they were either not applicable or were not expected to have a material impact on the Company’s financial reporting.
In March 2017,October 2021, the FASB issued ASU 2017-07, Compensation - Retirement Benefits2021-08, Business Combinations (Topic 715) (ASU 2017-07).805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The new guidance requires employers to disaggregate and present separately the current service cost component from the other components of net benefit cost within the consolidated statement of earnings. ASU 2017-07 is effective for fiscal years beginning after December 15, 2022, with early application permitted. This ASU is applicable to the CompanyCompany’s fiscal year beginning in the first quarter of fiscal 2019. Early adoption is permitted.2024. The Company is currently evaluating the impact of the adoption of ASU 2017-07will have on its Consolidated Statements of Earnings.financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) (ASU 2017-09). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2017-09 on its Consolidated Financial Statements.
NOTENote 2. Acquisitions
Purilogics, LLC (Purilogics)
On May 1, 2017,June 13, 2022, the Company acquired 100%Purilogics, headquartered in Greenville, South Carolina, for cash consideration of approximately $19.9 million, net of cash acquired. The transaction included a maximum payout of $29.0 million in contingent consideration related to developing manufacturing capabilities, creating future technologies and attaining certain business performance results. The contingent consideration accrued as of July 31, 2022 was $23.0 million and is included in other current and other long-term liabilities on the sharesConsolidated Balance Sheet. Goodwill of Hy-Pro Corporation (Hy-Pro). Hy-Pro designs and manufactures filtration systems and replacement filters$12.9 million is expected to be deductible for stationary hydraulic and industrial lubrication applications. Hy-Pro has manufacturing locations in Anderson, Indiana and Vancouver, Washington. Total considerationtax purposes. Purilogics is a biotechnology company that leverages a novel technology platform for the transaction was $22.7 million.development of membrane chromatography products. Purilogics offers a broad portfolio of purification tools for a wide range of biologics. Purilogics’ proprietary formulations and processes create membranes that have significant competitive advantages, enabling faster and more cost-effective production of increasingly complex biologic drugs. Purilogics is reported within the Company’s Industrial Filtration Solutions (IFS) business in the Industrial Products segment. Net sales of Purilogics were immaterial to the Consolidated Statement of Earnings for the year ended July 31, 2022. The purchase price allocation for this acquisition is preliminary pending the outcome of the final valuation of the net assets acquired. Management expects to finalize the purchase accounting for this acquisition by the fourth quarter of fiscal 2023.
Solaris Biotechnology S.r.l. (Solaris)
On August 31, 2016,November 22, 2021, the Company acquired Solaris, headquartered in Porto Mantovano, Italy, with U.S. operations based in Berkeley, California, for cash consideration of approximately €41 million, or $45.7 million, net of cash acquired. Solaris designs and manufactures bioprocessing equipment, including bioreactors, fermenters and tangential flow filtration systems for use in food and beverage, biotechnology and other life sciences markets. Solaris is reported within the netCompany’s IFS business in the Industrial Products segment. Goodwill and intangible assets acquired are not deductible for tax purposes. Purchase accounting was finalized in the fourth quarter of Industrias Partmo S.A. (Partmo) in Colombia. Partmo is a leading manufacturerfiscal 2022. Net sales of replacement air, lube and fuel filters in Colombia for medium and heavy duty engines. The total considerationSolaris were immaterial to the Consolidated Statement of Earnings for the transaction was $12.1 million.year ended July 31, 2022.
Pearson Arnold Industrial Services (PAIS)
For the two acquisitions that occurred in fiscal 2017,On November 1, 2021, the Company acquired $19.5PAIS, headquartered in the U.S., for cash consideration of approximately $3.3 million, net of net tangible assets, $8.6 million ofcash acquired. PAIS provides equipment, parts and services for dust, mist and fume collection systems, industrial fans and compressed air systems. PAIS is reported within the Company’s IFS business in the Industrial Products segment. Goodwill and intangible assets that had estimated useful lives ranging from sevenacquired are deductible for tax purposes. Purchase accounting was finalized in the fourth quarter of fiscal 2022. Net sales of PAIS were immaterial to twenty years at the timeConsolidated Statement of Earnings for the year ended July 31, 2022.
Purchase Price Summary
The components of acquisitions, net of cash acquired, as of each acquisition and $6.7 million of goodwill.date (in millions):
On August 31, 2015, the Company acquired 100% of the shares of Engineered Products Company (EPC), a leading designer and manufacturer of indicators, gauges, switches and sensors for engine air and liquid filtration systems. On June 30, 2015, the Company acquired a majority stake in IFIL USA, a manufacturer of pleated bag filters for industrial dust collection. On September 30, 2014, the Company acquired 100% of the voting interest of Northern Technical, L.L.C. (Northern Technical), a manufacturer of gas turbine inlet air filtration systems and replacement filters. | | | | | |
| Intangible assets: | |
| Technology | $ | 45.9 | |
| Trademarks and tradenames | 4.0 | |
| Customer relationships | 3.0 | |
| Non-competition agreements | 0.6 | |
| Backlog | 0.2 | |
| Intangible assets acquired | 53.7 | |
| Tangible liabilities, net | (2.7) | |
| Assets acquired, net | 51.0 | |
| Goodwill | 42.8 | |
| Aggregate purchase price | 93.8 | |
| Less contingent consideration | (24.6) | |
| Less cash acquired | (0.3) | |
| Acquisitions, net of cash acquired | $ | 68.9 | |
During fiscal 2017, the Company reached a $6.8 million favorable settlement of claims associated with amounts held in an escrow account that had been established in connection with the Company’s acquisition of Northern Technical. Because this settlement was related to claims associated with general representations and warranties and occurred subsequent to one year after the closing of the acquisition, the Company recorded the impact of the $6.8 million settlement as a component of other income, net in its Consolidated Statements of Operations.Pro forma Financial Information
Pro forma financial information for these acquisitions havehas not been presented because they arethe acquisitions were not material to the Company's consolidated resultsCompany’s Consolidated Statement of operations.Earnings. See Note 6 for goodwill and intangible assets acquired.
BOFA International LTD (BOFA) NOTE 3. SupplementalIn fiscal 2021, the Company acquired the remaining 9.0% of the shares of BOFA, headquartered in the United Kingdom, for $8.0 million. In fiscal 2019, the Company acquired 91.0% of the shares of BOFA for cash consideration of $101.3 million, less cash acquired of $2.2 million. BOFA designs, develops and manufactures fume extraction systems across a wide range of industrial air filtration applications. The acquisition allowed the Company to accelerate its global growth in the fume collection business and added additional filtration technology to the Company’s existing product lines.
Contingent Compensation and Consideration
Purilogics
The Company’s acquisition purchase agreement with Purilogics includes deferred payment provisions representing potential milestone payments for its former owners. The provisions are made up of two general types of arrangements, contingent compensation and contingent consideration. The contingent compensation arrangement is contingent on the former owner’s future employment with the Company, and the related amounts are recognized over the required employment period. The contingent consideration is not contingent on employment and is recorded as purchase consideration in both other current and other long-term liabilities on the Consolidated Balance Sheet Informationat the time of the initial acquisition based on the fair value of the estimated liability. The amounts are paid over a three to five year period, contingent on the achievement of certain revenue and manufacturing milestones.
The componentstotal contingent compensation arrangement liability was $0.1 million as of inventoryJuly 31, 2022, which was included in other long-term liabilities on the Consolidated Balance Sheet. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.0 million, inclusive of the $0.1 million accrued as of July 31, 2022.
The Company primarily determines the contingent consideration liability based on the forecasted probability of achieving certain milestones. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. The total contingent consideration liability was $23.0 million as of July 31, 2022, and was included in other current and other long-term liabilities, respectively, on the Consolidated Balance Sheet. The maximum payout of the contingent consideration was $29.0 million, inclusive of the $23.0 million accrued as of July 31, 2022. For additional discussion regarding the fair value of the Company’s contingent consideration liability, see Note 16.
Other Acquisitions
For other acquisitions, the total contingent compensation arrangement liability was $0.3 million as of July 31, 2022, which was included in other long-term liabilities on the Consolidated Balance Sheet. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.1 million, which terminates in five years, inclusive of the $0.3 million accrued as of July 31, 2022.
The total contingent consideration liability was $1.7 million as of July 31, 2022, of which, $0.3 million was included in other current liabilities and $1.4 million was included in other long-term liabilities on the Consolidated Balance Sheet. The maximum payout of the contingent consideration was $1.7 million, which terminates in three years and was fully accrued as of July 31, 2022.
Note 3. Revenue
The Company recognizes revenue on a wide range of filtration solutions sold to customers in many industries around the globe. Most of the Company’s performance obligations within customer sales contracts are for manufactured filtration systems and replacement parts. The Company also performs limited services and installation. Customer contracts may include multiple performance obligations and the transaction price is allocated to each distinct performance obligation based on its relative standalone selling price.
Revenue Disaggregation
Net sales, generally disaggregated by location where the customer’s order was placed, were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended July 31, |
| 2022 | | 2021 | | 2020 |
| U.S. and Canada | $ | 1,336.8 | | | $ | 1,084.2 | | | $ | 1,059.9 | |
| Europe, Middle East and Africa (EMEA) | 963.6 | | | 865.7 | | | 760.2 | |
| Asia Pacific (APAC) | 669.0 | | | 649.2 | | | 553.2 | |
| Latin America (LATAM) | 337.2 | | | 254.8 | | | 208.5 | |
| Total net sales | $ | 3,306.6 | | | $ | 2,853.9 | | | $ | 2,581.8 | |
See Note 19 for net sales disaggregated by segment and business unit.
Contract Assets and Liabilities
The satisfaction of performance obligations and the resulting recognition of revenue typically correspond with billing of the customer. In limited circumstances, the customer may be billed at a time later than when revenue is recognized, resulting in contract assets, which are reported in other current assets on the Consolidated Balance Sheets. Contract assets were $17.7 million and $14.9 million as of July 31, 2022 and 2021, respectively. In other limited circumstances, the customer may make a payment at a time earlier than when revenue is recognized and prior to the satisfaction of performance obligations, resulting in contract liabilities, which are reported in other current liabilities on the Consolidated Balance Sheets. Contract liabilities were $22.3 million and $12.2 million as of July 31, 2022 and 2021, respectively.
The Company will recognize revenue in future periods related to remaining performance obligations for certain open contracts. Generally, these contracts have terms of one year or less. The amount of revenue related to unsatisfied performance obligations in which the original duration of the contract is greater than one year is not significant. None of the Company’s contracts contained a significant financing component.
|
| | | | | | | | |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| Raw materials | | $ | 96.3 |
| | $ | 92.5 |
|
| Work in process | | 19.7 |
| | 18.4 |
|
| Finished products | | 177.5 |
| | 123.2 |
|
| Net inventories | | $ | 293.5 |
| | $ | 234.1 |
|
Note 4. Inventories, Net
The components of inventories, net were as follows (in millions):
| | | | | | | | | | | | | | |
| | July 31, |
| | 2022 | | 2021 |
| Raw materials | | $ | 197.6 | | | $ | 148.1 | |
| Work in process | | 56.1 | | | 43.2 | |
| Finished products | | 248.7 | | | 193.2 | |
| Total inventories, net | | $ | 502.4 | | | $ | 384.5 | |
Note 5. Property, Plant and Equipment, Net
The components of property, plant and equipment, arenet were as follows (in millions):
| | | | | | | | | | | | | | |
| | July 31, |
| | 2022 | | 2021 |
| Land | | $ | 25.6 | | | $ | 27.1 | |
| Buildings | | 396.2 | | | 410.8 | |
| Machinery and equipment | | 940.1 | | | 972.0 | |
| Computer software | | 141.0 | | | 144.3 | |
| Construction in progress | | 72.1 | | | 40.6 | |
| Less accumulated depreciation | | (980.6) | | | (977.0) | |
| Total property, plant and equipment, net | | $ | 594.4 | | | $ | 617.8 | |
Note 6. Goodwill and Intangible Assets
Goodwill
The Company allocates goodwill to reporting units within its Engine Products and Industrial Products segments. There were no dispositions or impairment charges recorded during the years ended July 31, 2022, 2021 and 2020.
Goodwill by reportable segment was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Engine Products Segment | | Industrial Products Segment | | Total |
| Balance as of July 31, 2020 | $ | 84.8 | | | $ | 232.0 | | | $ | 316.8 | |
| Goodwill acquired | — | | | — | | | — | |
| Foreign currency translation | (0.1) | | | 5.8 | | | 5.7 | |
| Balance as of July 31, 2021 | 84.7 | | | 237.8 | | | 322.5 | |
| Goodwill acquired | — | | | 42.8 | | | 42.8 | |
| Foreign currency translation | (1.0) | | | (18.5) | | | (19.5) | |
| Balance as of July 31, 2022 | $ | 83.7 | | | $ | 262.1 | | | $ | 345.8 | |
Intangible Assets
Preliminary intangible assets recognized from the Purilogics acquisition were $29.9 million, of which $28.6 million was technology with a 20 year useful life, trademarks and tradenames were $0.7 million with a 10 year useful life and non-competition agreements were $0.6 million with a five year useful life.
Intangible assets recognized from other acquisitions were $23.8 million, of which technology was $17.3 million with a 15 year useful life, trademarks and tradenames were $3.3 million with a 10 year useful life, customer relationships were $3.0 million with a 20 year useful life and backlog was $0.2 million with a six month useful life.
The weighted average useful lives for customer relationships and patents, trademarks and technology were 11.4 and 19.6 years, respectively, as of July 31, 2022.
|
| | | | | | | | |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| Land | | $ | 20.6 |
| | $ | 20.0 |
|
| Buildings | | 292.5 |
| | 280.4 |
|
| Machinery and equipment | | 866.8 |
| | 810.9 |
|
| Construction in progress | | 48.9 |
| | 39.3 |
|
| Less: accumulated depreciation | | (744.2 | ) | | (680.8 | ) |
| Net property, plant and equipment | | $ | 484.6 |
| | $ | 469.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer Relationships | | Patents, Trademarks and Technology | | |
| Gross Carrying Amount | | Accumulated Amortization | | Total Net Value | | Gross Carrying Amount | | Accumulated Amortization | | Total Net Value | | Total |
| Balance as of July 31, 2020 | $ | 105.2 | | | $ | (50.0) | | | $ | 55.2 | | | $ | 23.7 | | | $ | (11.6) | | | $ | 12.1 | | | $ | 67.3 | |
| Intangible assets acquired | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Amortization expense | — | | | (6.1) | | | (6.1) | | | — | | | (2.1) | | | (2.1) | | | (8.2) | |
| Foreign currency translation | 2.3 | | | (0.3) | | | 2.0 | | | 0.6 | | | (0.1) | | | 0.5 | | | 2.5 | |
| Balance as of July 31, 2021 | 107.5 | | | (56.4) | | | 51.1 | | | 24.3 | | | (13.8) | | | 10.5 | | | 61.6 | |
| Intangible assets acquired | 3.2 | | | — | | | 3.2 | | | 50.5 | | | — | | | 50.5 | | | 53.7 | |
| Amortization expense | — | | | (6.0) | | | (6.0) | | | — | | | (3.2) | | | (3.2) | | | (9.2) | |
| Foreign currency translation | (6.1) | | | 2.1 | | | (4.0) | | | (2.9) | | | 0.6 | | | (2.3) | | | (6.3) | |
| Balance as of July 31, 2022 | $ | 104.6 | | | $ | (60.3) | | | $ | 44.3 | | | $ | 71.9 | | | $ | (16.4) | | | $ | 55.5 | | | $ | 99.8 | |
Amortization expense is included in operating expenses in the Consolidated Statements of Earnings. Amortization expense relating to existing intangible assets as of July 31, 2022 was as follows (in millions):
| | | | | | | | |
| | |
| 2023 | | $ | 8.9 | |
| 2024 | | 8.5 | |
| 2025 | | 8.4 | |
| 2026 | | 8.1 | |
| 2027 | | 7.8 | |
| Thereafter | | 58.1 | |
| Total amortization expense | | $ | 99.8 | |
Note 7. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings
Short-term borrowings were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | European Commercial Paper Program | | U.S. Credit Facilities | | European Operations Credit Facilities | | Rest of the World Credit Facilities | | Total |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Available credit facilities | | $ | 102.1 | | | $ | 118.2 | | | $ | 100.0 | | | $ | 100.0 | | | $ | 42.4 | | | $ | 54.3 | | | $ | 52.8 | | | $ | 64.1 | | | $ | 297.3 | | | $ | 336.6 | |
| Reductions to borrowing capacity: | | | | | | | | | | | | | | | | | | | | |
| Outstanding borrowings | | — | | | — | | | — | | | 48.5 | | | — | | | — | | | 3.7 | | | — | | | 3.7 | | | 48.5 | |
| Other non-borrowing reductions | | — | | | — | | | — | | | — | | | 27.0 | | | 30.6 | | | 19.1 | | | 19.6 | | | 46.1 | | | 50.2 | |
| Total reductions | | — | | | — | | | — | | | 48.5 | | | 27.0 | | | 30.6 | | | 22.8 | | | 19.6 | | | 49.8 | | | 98.7 | |
| Remaining borrowing capacity | | $ | 102.1 | | | $ | 118.2 | | | $ | 100.0 | | | $ | 51.5 | | | $ | 15.4 | | | $ | 23.7 | | | $ | 30.0 | | | $ | 44.5 | | | $ | 247.5 | | | $ | 237.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average interest rate as of July 31, 2022 and 2021 | | N/A | | N/A | | N/A | | 0.96 | % | | N/A | | N/A | | 0.37 | % | | N/A | | N/A | | N/A |
Other non-borrowing reductions include financial instruments such as bank guarantees and foreign currency exchange instruments. Commitment fees for the years ended July 31, 2022 and 2021 were not material.
Long-Term Debt
Long-term debt was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Interest Rate | | Outstanding Balance
(in millions) |
| Financial Instrument | | Fixed or Variable | | Amount | | Maturity Date | | July 31, 2022 | | July 31, 2021 | | July 31, 2022 | | July 31, 2021 |
| Unsecured senior notes | | Fixed | | $125.0 million | | March 27, 2024 | | 3.72 | % | | 3.72 | % | | $ | 125.0 | | | $ | 125.0 | |
| Unsecured senior notes | | Fixed | | $125.0 million | | June 17, 2030 | | 3.18 | % | | 3.18 | % | | 125.0 | | | 125.0 | |
| Unsecured revolving credit facility | | Variable | | $500.0 million | | May 21, 2026 | | 2.88 | % | | 1.10 | % | | 125.0 | | | 75.0 | |
| Unsecured senior notes | | Fixed | | $100.0 million | | August 5, 2031 | | 2.50 | % | | 2.50 | % | | 100.0 | | | — | |
| Unsecured term loan | | Variable | | €80.0 million | | October 28, 2024 | | 0.91 | % | | 0.70 | % | | 81.7 | | | 95.1 | |
| Unsecured senior notes | | Fixed | | $50.0 million | | November 5, 2028 | | 2.12 | % | | 2.12 | % | | 50.0 | | | — | |
| Unsecured senior notes | | Fixed | | $25.0 million | | April 16, 2025 | | 2.93 | % | | 2.93 | % | | 25.0 | | | 25.0 | |
| Unsecured term loan | | Variable | | ¥1.0 | billion | | May 20, 2024 | | 0.41 | % | | 0.42 | % | | 7.5 | | | 9.1 | |
| Unsecured term loan | | Variable | | ¥1.0 | billion | | July 15, 2026 | | 0.49 | % | | 0.47 | % | | 7.5 | | | 9.1 | |
| Debt issuance costs, net | | | | | | | | | | | | (2.4) | | | (2.3) | |
| Subtotal | | | | | | | | | | | | 644.3 | | | 461.0 | |
| Less current maturities | | | | | | | | | | | | — | | | — | |
| Total long-term debt | | | | | | | | | | $ | 644.3 | | | $ | 461.0 | |
The Company’s $500.0 million revolving credit facility is with a group of lenders and allows for borrowings in multiple currencies. The interest rate is calculated using the appropriate benchmark rate plus the applicable rate. The borrowing availability can be reduced or the agreement terminated early at the option of the Company. The Company can request to increase the revolving credit facility by up to $250.0 million, subject to terms of the credit facility agreement, including written notification and lender acceptance, through an accordion feature. Borrowings are automatically rolled over until the credit facility maturity date, unless the agreement is terminated early or the Company is found to be in default. The total facility includes a commitment fee of 0.08% to 0.25%, depending on the Company’s leverage ratio.
Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2022, the Company was in compliance with all such covenants.
The Company has long-term borrowing capacity of $367.5 million available for further borrowing under existing credit facilities as of July 31, 2022. The remaining borrowing capacity has been reduced for standby letters of credit as discussed in Note 17.
Future maturities of the Company’s long-term debt as of July 31, 2022 were as follows (in millions):
| | | | | | | | |
| | |
| 2023 | | $ | — | |
| 2024 | | 214.2 | |
| 2025 | | 25.0 | |
| 2026 | | 132.5 | |
| 2027 | | — | |
| Thereafter | | 275.0 | |
| Total future maturities payments | | 646.7 | |
| Less debt issuance costs, net | | (2.4) | |
| Total future maturities payments, net of debt issuance costs | | $ | 644.3 | |
Note 8. Income Taxes
The components of earnings before income taxes were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| U.S. | | $ | 132.8 | | | $ | 114.1 | | | $ | 112.8 | |
| Foreign | | 305.6 | | | 266.9 | | | 222.4 | |
| Total | | $ | 438.4 | | | $ | 381.0 | | | $ | 335.2 | |
The components of the provision for income taxes were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Current | | | | | | |
| Federal | | $ | 17.4 | | | $ | 13.2 | | | $ | 9.7 | |
| State | | 4.9 | | | 3.9 | | | 3.1 | |
| Foreign | | 84.7 | | | 82.9 | | | 62.7 | |
| Total current | | 107.0 | | | 100.0 | | | 75.5 | |
| | | | | | |
| Deferred | | | | | | |
| Federal | | 2.8 | | | (1.9) | | | 4.1 | |
| State | | (0.3) | | | (0.2) | | | 0.2 | |
| Foreign | | (3.9) | | | (3.8) | | | (1.6) | |
| Total deferred | | (1.4) | | | (5.9) | | | 2.7 | |
| | | | | | |
| Total provision for income taxes | | $ | 105.6 | | | $ | 94.1 | | | $ | 78.2 | |
The reconciliation of the U.S. statutory federal income tax rate with the effective income tax rate was as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. statutory federal income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes | | 0.9 | | | 0.8 | | | 0.9 | |
| Foreign operations | | 3.6 | | | 4.4 | | | 3.5 | |
| Global Intangible Low Tax Income | | 0.3 | | | 0.6 | | | 0.2 | |
| Foreign Derived Intangible Income | | (0.6) | | | (0.7) | | | (1.4) | |
| Research and development credit | | (0.6) | | | (0.7) | | | (0.7) | |
| Change in unrecognized tax benefits | | (0.8) | | | 0.2 | | | 0.6 | |
| Tax benefits on stock-based compensation | | (0.5) | | | (1.0) | | | (1.2) | |
| | | | | | |
| Other | | 0.8 | | | 0.1 | | | 0.4 | |
| Effective income tax rate | | 24.1 | % | | 24.7 | % | | 23.3 | % |
The tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows (in millions): | | | | | | | | | | | | | | |
| | July 31, |
| | 2022 | | 2021 |
| Deferred tax assets | | | | |
| Accrued expenses | | $ | 11.6 | | | $ | 12.8 | |
| Compensation and retirement plans | | 26.4 | | | 28.3 | |
| Net operating loss (NOL) and tax credit carryforwards | | 6.4 | | | 7.9 | |
| Inventory reserves | | 2.3 | | | 2.6 | |
| Operating lease assets | | 11.6 | | | 12.7 | |
| Other | | 4.1 | | | 7.7 | |
| Gross deferred tax assets | | 62.4 | | | 72.0 | |
| Valuation allowance | | (3.4) | | | (4.6) | |
| Deferred tax assets, net of valuation allowance | | 59.0 | | | 67.4 | |
| Deferred tax liabilities | | | | |
| Depreciation and amortization | | (57.0) | | | (57.0) | |
| Operating lease liabilities | | (11.6) | | | (12.7) | |
| Other | | (2.4) | | | (3.5) | |
| Deferred tax liabilities | | (71.0) | | | (73.2) | |
| Net deferred tax liability | | $ | (12.0) | | | $ | (5.8) | |
The activity in the NOL and tax credit valuation allowances was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Balance as of beginning of year | | $ | (4.6) | | | $ | (8.1) | | | $ | (4.4) | |
| Additions charged to costs and expenses | | (0.9) | | | (0.8) | | | (3.7) | |
| | | | | | |
| Deductions from reserves | | 2.1 | | | 4.3 | | | — | |
| Balance as of end of year | | $ | (3.4) | | | $ | (4.6) | | | $ | (8.1) | |
As of July 31, 2022, the Company had deferred tax assets related to U.S. federal foreign tax credits of $3.0 million and state research and development credits of $3.4 million. The U.S. federal tax credits will expire after 10 years. The state portion will expire after one to 20 years. As of July 31, 2022, the Company had provided $3.4 million for a valuation allowance against certain of these deferred tax assets based on management’s determination it is more likely than not the tax benefits related to these assets will not be realized.
As of July 31, 2022, the total undistributed earnings of the Company’s non-U.S. subsidiaries were $1.1 billion, of which $888.5 million was not considered indefinitely reinvested. The Company is subject to foreign withholding taxes on a small portion of these earnings distributable in the future in the form of dividends. Thus, the Company provides for foreign withholding taxes payable upon future dividend distributions of the earnings not considered indefinitely reinvested annually. For the year ended July 31, 2022, the Company recognized a tax charge of $6.4 million related to these foreign withholding taxes. The remaining $224.8 million of earnings are considered indefinitely reinvested, and it is not practicable to estimate, within any reasonable range, the additional taxes that may be payable on the potential distribution of the portion of the undistributed earnings considered indefinitely reinvested.
The transition tax related to the U.S. Tax Cuts and Jobs Act of 2017 on undistributed earnings was accrued in fiscal 2018, and it is payable over an eight year period. The portion not due within 12 months classified in non-current income taxes payable on the Consolidated Balance Sheets as of July 31, 2022 was $53.1 million.
The reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Balance as of beginning of year | | $ | 18.7 | | | $ | 16.9 | | | $ | 15.5 | |
| Additions for tax positions of the current year | | 2.7 | | | 4.7 | | | 2.8 | |
| Additions for tax positions of prior years | | — | | | 2.7 | | | 0.2 | |
| Reductions for tax positions of prior years | | (1.1) | | | (1.0) | | | (0.1) | |
| | | | | | |
| Reductions due to lapse of applicable statute of limitations | | (5.1) | | | (4.6) | | | (1.5) | |
| Balance as of end of year | | $ | 15.2 | | | $ | 18.7 | | | $ | 16.9 | |
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes in the Consolidated Statements of Earnings. As of July 31, 2022 and 2021, accrued interest and penalties on a gross basis were $1.1 million and $1.6 million, respectively. During the year ended July 31, 2022, the Company recognized interest expense, net of tax benefit, of $0.4 million. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of five years, up to $3.1 million of the unrecognized tax benefits could potentially expire in the next 12 months, unless extended by an audit.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed examinations of the Company’s U.S. federal income tax returns through 2018. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2017.
The Company believes it is remote that any adjustment necessary to the reserve for income taxes over the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.
Note 9. Leases
The Company enters into operating leases primarily for office, production and warehouse facilities, production and non-production equipment, automobiles and computer equipment. As of July 31, 2022 and 2021, the Company had no financing lease obligations.
The Company’s operating lease costs were as follows (in millions): | | | | | | | | | | | | | | | | |
| | Year Ended July 31, | | |
| | 2022 | | 2021 | | |
| Operating lease cost | | $ | 21.4 | | | $ | 25.6 | | | |
| Short-term lease cost | | 3.1 | | | 2.4 | | | |
| | | | | | |
| Total lease costs | | $ | 24.5 | | | $ | 28.0 | | | |
Supplemental balance sheet information for the Company was as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | | | July 31, |
| | Balance Sheet Location | | 2022 | | 2021 |
| Right-of-use lease assets | | Other long-term assets | | $ | 44.7 | | | $ | 51.2 | |
| Current lease liabilities | | Other current liabilities | | $ | 16.3 | | | $ | 18.1 | |
| Long-term lease liabilities | | Other long-term liabilities | | $ | 28.5 | | | $ | 33.7 | |
Additional information related to operating leases was as follows: | | | | | | | | | | | | | | |
| | July 31, |
| | 2022 | | 2021 |
| Weighted average remaining lease term (years) | | 3.4 | | 4.6 |
| Weighted average discount rate | | 3.17 | % | | 3.26 | % |
Remaining payments for operating leases having initial terms of more than one year as of July 31, 2022 were as follows (in millions):
| | | | | | | | |
| | |
| 2023 | | $ | 18.8 | |
| 2024 | | 12.8 | |
| 2025 | | 7.1 | |
| 2026 | | 4.5 | |
| 2027 | | 2.7 | |
| Thereafter | | 2.8 | |
| Total future lease payments | | 48.7 | |
| Less imputed interest | | 3.9 | |
| Present value of future lease payments | | $ | 44.8 | |
NOTE 4.Note 10. Earnings Per Share
The Company’s basicBasic net earnings per share (EPS) is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s dilutedDiluted net earnings per shareEPS is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relatedrelating to stock options and other stock incentive plans. Certain outstanding options are excluded from the
Basic and diluted net earningsEPS calculations were as follows (in millions, except per share calculations because theiramounts): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Net earnings | | $ | 332.8 | | | $ | 286.9 | | | $ | 257.0 | |
| | | | | | |
| Weighted average common shares outstanding | | | | | | |
| Weighted average common shares – basic | | 123.7 | | | 126.4 | | | 126.9 | |
| Dilutive impact of stock-based awards | | 1.5 | | | 1.8 | | | 1.4 | |
| Weighted average common shares – diluted | | 125.2 | | | 128.2 | | | 128.3 | |
| | | | | | |
| Net EPS – basic | | $ | 2.69 | | | $ | 2.27 | | | $ | 2.03 | |
| Net EPS – diluted | | $ | 2.66 | | | $ | 2.24 | | | $ | 2.00 | |
| Stock options excluded from net EPS calculation | | 1.6 | | 0.8 | | 1.7 |
Note 11. Stockholders’ Equity
Share Repurchases
The Company’s Board of Directors has authorized the repurchase of up to 13.0 million shares of common stock under the Company’s stock repurchase plan. This repurchase authorization is effective until terminated by the Board of Directors. During the year ended July 31, 2022, the Company repurchased 2.9 million shares for $170.6 million. During the year ended July 31, 2021, the Company repurchased 2.4 million shares for $142.2 million. As of July 31, 2022, the Company had remaining authorization to repurchase 5.4 million shares under this plan.
Treasury stock share activity was as follows:
| | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| Balance as of beginning of year | | 26,620,560 | | | 25,304,515 | |
| Stock repurchases | | 2,900,000 | | | 2,416,741 | |
| Net issuance upon exercise of stock options | | (360,448) | | | (1,004,298) | |
| Issuance under compensation plans | | (52,678) | | | (82,998) | |
| Other activity | | (17,822) | | | (13,400) | |
| Balance as of end of year | | 29,089,612 | | | 26,620,560 | |
Dividends Paid and Declared
Dividends paid were 89.0 cents and 85.0 cents per common share for the years ended July 31, 2022 and 2021, respectively. On July 29, 2022, the Company’s Board of Directors declared a cash dividend in the amount of 23.0 cents per common share, payable August 31, 2022, to stockholders of record as of August 16, 2022.
Note 12. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended July 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign
Currency
Translation
Adjustment | | Pension
Benefits | | Derivative
Financial
Instruments | | Total | |
| Balance as of July 31, 2021, net of tax | | $ | (44.0) | | | $ | (74.7) | | | $ | 0.5 | | | $ | (118.2) | | |
| Other comprehensive (loss) income before reclassifications and tax | | (99.6) | | | (6.2) | | (1) | 9.2 | | | (96.6) | | |
| Tax benefit (expense) | | — | | | 1.4 | | | (2.0) | | | (0.6) | | |
| Other comprehensive (loss) income before reclassifications, net of tax | | (99.6) | | | (4.8) | | | 7.2 | | | (97.2) | | |
| | | | | | | | | |
| Reclassifications, before tax | | — | | | 15.5 | | (2) | (2.7) | | | 12.8 | | |
| Tax (expense) benefit | | — | | | (3.5) | | | 0.5 | | | (3.0) | | |
| Reclassifications, net of tax | | — | | | 12.0 | | | (2.2) | | (3) | 9.8 | | |
| Other comprehensive (loss) income, net of tax | | (99.6) | | | 7.2 | | | 5.0 | | | (87.4) | | |
| Balance as of July 31, 2022, net of tax | | $ | (143.6) | | | $ | (67.5) | | | $ | 5.5 | | | $ | (205.6) | | |
| | | | | | | | | |
| Balance as of July 31, 2020, net of tax | | $ | (74.0) | | | $ | (110.0) | | | $ | — | | | $ | (184.0) | | |
| Other comprehensive income before reclassifications and tax | | 30.0 | | | 36.8 | | (1) | 1.0 | | | 67.8 | | |
| Tax expense | | — | | | (9.3) | | | (0.2) | | | (9.5) | | |
| Other comprehensive income before reclassifications, net of tax | | 30.0 | | | 27.5 | | | 0.8 | | | 58.3 | | |
| | | | | | | | | |
| Reclassifications, before tax | | — | | | 10.0 | | (2) | (0.2) | | | 9.8 | | |
| Tax expense | | — | | | (2.2) | | | (0.1) | | | (2.3) | | |
| Reclassifications, net of tax | | — | | | 7.8 | | | (0.3) | | (3) | 7.5 | | |
| Other comprehensive income, net of tax | | 30.0 | | | 35.3 | | | 0.5 | | | 65.8 | | |
| Balance as of July 31, 2021, net of tax | | $ | (44.0) | | | $ | (74.7) | | | $ | 0.5 | | | $ | (118.2) | | |
(1)In fiscal 2022 and 2021, pension settlement accounting was triggered. In addition, pension curtailment accounting was triggered in fiscal 2021. Remeasurements of the Company’s pension obligations resulted in an increase of $6.2 million and a decrease of $36.8 million in fiscal 2022 and 2021, respectively, to accumulated other comprehensive loss on the Consolidated Balance Sheets, see Note 14.
(2)Amounts include reclassifications of $3.0 million and $2.8 million, a foreign currency translation loss of $4.9 million and gain of $1.5 million and net amortization of prior service costs and actuarial losses of $7.6 million and $8.7 million in fiscal 2022 and 2021, respectively. Amounts are included in other income, net in the Consolidated Statements of Earnings, see Note 14.
(3)Relates to designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Consolidated Balance Sheets to net sales, cost of sales and operating expenses in the Consolidated Statements of Earnings, see Note 15.
Note 13. Stock-Based Compensation
The Company recognizes compensation expense for all stock-based awards based on the grant date fair value of the award. Stock-based awards consist primarily of non-qualified stock options, performance-based awards, restricted stock awards and restricted stock units. Grants related to restricted stock awards and restricted stock units are immaterial. The Company issues treasury shares for stock options and performance-based awards.
Stock Options
The exercise prices are greater thanprice of options granted is equal to the average market price of the Company’s common stock during those periods. Options excluded from the diluted net earnings per share calculation were 1,030,050, 3,164,159 and 977,824 for the years ended July 31, 2017, 2016 and 2015, respectively.
The following table presents the information necessary to calculate basic and diluted earnings per share (in millions, except per share amounts):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Net earnings for basic and diluted earnings per share computation | | $ | 232.8 |
| | $ | 190.8 |
| | $ | 208.1 |
|
| | | | | | | |
| Weighted average common shares – basic | | 132.6 |
| | 133.8 |
| | 137.8 |
|
| Dilutive impact of stock-based awards | | 1.5 |
| | 1.0 |
| | 1.6 |
|
| Weighted average common shares – diluted | | 134.1 |
| | 134.8 |
| | 139.4 |
|
| | | | | | | |
| Net earnings per share: | | | | | | |
| Basic | | $ | 1.76 |
| | $ | 1.43 |
| | $ | 1.51 |
|
| Diluted | | $ | 1.74 |
| | $ | 1.42 |
| | $ | 1.49 |
|
NOTE 5. Goodwill and Other Intangible Assets
The Company has allocated goodwill to reporting units within its Engine Products and Industrial Products segments. During the years ended July 31, 2017 and 2016, the Company acquired Hy-Pro on May 1, 2017, Partmo on August 31, 2016 and EPC on August 31, 2015 and recorded goodwill for these transactions. See Note 2 for additional discussion of acquisitions. There was no disposition activity during the years ended July 31, 2017 and 2016.
The Company performed its annual impairment assessment during the third quarter of fiscal 2017. The results of this assessment were that the estimated fair values of the reporting units to which goodwill is assigned continued to exceed the corresponding carrying values of the reporting units, resulting in no goodwill impairment. Of the Company's five reporting units that contain goodwill, the estimated fair values exceeded the respective carrying values by at least 60% for all but the Gas Turbine Systems reporting unit, for which the estimated fair value exceeded the carrying amount by approximately 15%.
Goodwill associated with the Gas Turbine Systems reporting unit was $60.4 million as of the annual impairment assessment and is included in the Industrial Products segment. The Company completed its Gas Turbine Systems goodwill impairment assessment using a weighting of the fair values as determined under a market approach and an income approach to determine the estimated fair value of the reporting unit. The public company method of the market approach estimated fair value based on prices investors paid for the stocks of comparable, publicly traded companies. The income approach estimated fair value based on discounted, projected cash flows from the reporting unit's financial forecast. A terminal growth rate of 3.0% was used, as well as a discount rate of 11.5% reflecting the relative risk of achieving cash flows and any other specific risks or factors related to the Gas Turbine Systems reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in a reasonable estimate of the reporting unit's fair value. The Company performed a sensitivity analysis to determine how the assumptions impact the results of the impairment assessment under this valuation approach. Holding all other assumptions constant, zero revenue growth or below for fiscal years 2019-2026 would result in impairment. Additionally, a decrease in the terminal growth rate of 3.0% to zero or below, or an increase in the discount rate by 1.5% or more, would result in impairment. While these projections supported no impairment of goodwill of this reporting unit, given the sensitivities to the assumptions used in the calculations of the projected cash flows, it is possible that impairment could be incurred in the future. The Company will continue to monitor results and projected cash flows to assess whether goodwill impairment in the Gas Turbine Systems reporting unit may be necessary.
The following is a reconciliation of goodwill for the years ended July 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | |
| | | Engine Products | | Industrial Products | | Total Goodwill |
| Balance as of July 31, 2015 | | $ | 71.0 |
| | $ | 152.7 |
| | $ | 223.7 |
|
| Goodwill acquired | | 6.3 |
| | — |
| | 6.3 |
|
| Foreign exchange translation | | — |
| | (0.7 | ) | | (0.7 | ) |
| Balance as of July 31, 2016 | | 77.3 |
| | 152.0 |
| | 229.3 |
|
| Goodwill acquired | | 6.7 |
| | — |
| | 6.7 |
|
| Foreign exchange translation | | 0.3 |
| | 1.8 |
| | 2.1 |
|
| Balance as of July 31, 2017 | | $ | 84.3 |
| | $ | 153.8 |
| | $ | 238.1 |
|
No goodwill impairment was recorded during the years ended July 31, 2017 and 2016.
The following is a reconciliation of intangible assets for the years ended July 31, 2017 and 2016 (in millions):
|
| | | | | | | | | | | | |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Intangible Assets |
| Balance as of July 31, 2015 | | $ | 87.1 |
| | $ | (49.2 | ) | | $ | 37.9 |
|
| Intangibles acquired | | 6.6 |
| | — |
| | 6.6 |
|
| Amortization expense | | — |
| | (6.1 | ) | | (6.1 | ) |
| Foreign exchange translation | | 3.1 |
| | (3.0 | ) | | 0.1 |
|
| Balance as of July 31, 2016 | | 96.8 |
| | (58.3 | ) | | 38.5 |
|
| Intangibles acquired | | 8.6 |
| | — |
| | 8.6 |
|
| Amortization expense | | — |
| | (6.4 | ) | | (6.4 | ) |
| Foreign exchange translation | | 1.2 |
| | (1.3 | ) | | (0.1 | ) |
| Balance as of July 31, 2017 | | $ | 106.6 |
| | $ | (66.0 | ) | | $ | 40.6 |
|
Net intangible assets consist of customer relationships and lists of $30.8 million and $30.7 million and patents, trademarks and technology of $9.8 million and $7.8 million, as of July 31, 2017 and 2016, respectively. As of July 31, 2017, customer relationships and lists had a weighted average remaining life of 11.9 years, and patents, trademarks and technology had a weighted average remaining life of 8.1 years. Expected amortization expense relating to existing intangible assets is as follows (in millions):
|
| | | | |
| Year Ending July 31, | | Amount |
| 2018 | | $ | 5.4 |
|
| 2019 | | 5.2 |
|
| 2020 | | 4.9 |
|
| 2021 | | 4.7 |
|
| 2022 | | 3.6 |
|
| Thereafter | | 16.8 |
|
| Total expected amortization expense | | $ | 40.6 |
|
NOTE 6. Short-Term Borrowings
The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate purposes. There was $19.2 million outstanding at July 31, 2017 and $26.8 million outstanding at July 31, 2016, and all borrowings that were outstanding on those dates had maturities that were less than twelve months. The weighted average interest rate on the short-term borrowings outstanding at July 31, 2017 and 2016 was 2.00% and 1.25%, respectively. At July 31, 2017 and 2016, there was $45.7 million and $38.2 million, respectively, available under these two credit facilities.
The Company has a €100.0 million (approximately $117.3 million at July 31, 2017) program for issuing treasury notes for raising short-, medium- and long-term financing for its European operations. There were no amounts outstanding under this program at July 31, 2017 or 2016. Additionally, the Company’s European operations have lines of credit with an available limit of €43.5 million (approximately $51.0 million at July 31, 2017). There were no amounts outstanding at July 31, 2017 or 2016.
Other international subsidiaries may borrow under various credit facilities. There was approximately $4.1 million outstanding under these credit facilities as of July 31, 2017 and $8.7 million as of July 31, 2016. All borrowings that were outstanding on those dates had maturities that were less than twelve months. At July 31, 2017 and 2016, there was approximately $39.8 million and $45.5 million available for use, respectively, under these facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 2017 and 2016 was 0.32%.
As of July 31, 2016, the Company had $130.0 outstanding on a revolving credit facility, described further in Note 7, that was classified as short-term borrowings.
NOTE 7. Long-Term Debt
Long-term debt consists of the following (in millions):
|
| | | | | | | | |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| 5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $50.0 million due June 1, 2017 | | $ | — |
| | $ | 50.0 |
|
| 5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due September 28, 2017 | | 25.0 |
| | 25.0 |
|
| 5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due November 30, 2017 | | 25.0 |
| | 25.0 |
|
| 3.72% Unsecured senior notes, interest payable semi-annually, principal payment of $125.0 million due March 27, 2024 | | 125.0 |
| | 125.0 |
|
| 2.93% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due April 16, 2025 | | 25.0 |
| | 25.0 |
|
| 3.18% Unsecured senior notes, interest payable semi-annually, principal payment of $125.0 million due June 17, 2030 | | 125.0 |
| | 125.0 |
|
| Variable rate committed, unsecured $500.0 million revolving credit facility due July 21, 2022 and an interest rate of 2.24% as of July 31, 2017 | | 190.0 |
| | — |
|
| Variable rate committed, unsecured $50.0 million term loan due July 21, 2020 and an interest rate of 2.24% as of July 31, 2017 | | 50.0 |
| | — |
|
| Variable rate guaranteed senior note, interest payable quarterly, principal payment of ¥1.65 billion due May 19, 2019 and an interest rate of 0.40% as of July 31, 2017 | | 15.0 |
| | 16.0 |
|
| Variable rate guaranteed senior note, interest payable quarterly, principal payment of ¥1.00 billion due July 15, 2021 and an interest rate of 0.25% as of July 31, 2017 | | 9.0 |
| | 9.7 |
|
| Capitalized lease obligations and other, with various maturity dates and interest rates | | 1.1 |
| | 1.9 |
|
| Terminated interest rate swap contracts | | — |
| | 0.4 |
|
| Debt issuance costs | | (2.2 | ) | | (1.6 | ) |
| Subtotal | | 587.9 |
| | 401.4 |
|
| Less: current maturities | | 50.6 |
| | 51.2 |
|
| Total long-term debt | | $ | 537.3 |
| | $ | 350.2 |
|
The estimated future maturities of the Company's long-term debt as of July 31, 2017, are as follows (in millions):
|
| | | | |
| Year Ended July 31, | | Amount |
| 2018 | | $ | 50.6 |
|
| 2019 | | 14.9 |
|
| 2020 | | 49.7 |
|
| 2021 | | 8.6 |
|
| 2022 | | 189.5 |
|
| Thereafter | | 274.6 |
|
| Total estimated future maturities | | $ | 587.9 |
|
The Company has a multi-currency revolving credit facility with a group of lenders. On July 21, 2017, the Company entered into an amended and restated credit agreement that increases the borrowing availability to $500.0 million and extends the maturity date of the credit facility to July 21, 2022. The credit facility also has an accordion feature that allows the Company to request an increase to the commitment under the facility by up to $250.0 million. At July 31, 2017 and 2016, $299.5 million and $262.7 million, respectively, was available for further borrowing under this facility. The amount available for further borrowing reflects the issued standby letters of credit, as discussed in Note 16, as issued standby letters of credit reduce the amounts available for borrowing under this facility. The credit facility also includes a $50.0 million term loan due July 21, 2020. Borrowings under the Company's amended revolving credit facility are automatically rolled over until the credit facility maturity date unless the agreement is terminated early or the Company is found to be in default. Therefore, beginning on July 21, 2017 (at which time $270.0 million was outstanding) and subsequent to that date, all borrowings under this credit facility are classified as long-term debt on the Company’s Consolidated Balance Sheets.
On July 22, 2016, a Japanese subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company. The debt was issued at face value of ¥1.0 billion (approximately $9.0 million at July 31, 2017), is due July 15, 2021, and bears interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2017 and 2016.
Certain debt agreements, including the $500.0 million revolving credit facility, contain financial covenants related to interest coverage and leverage ratios. As of July 31, 2017, the Company was in compliance with all such covenants.
NOTE 8. Warranty
The Company estimates warranty expense on certain products at the time of sale. The following is a reconciliation of warranty reserves for the years ended July 31, 2017 and 2016 (in millions):
|
| | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
|
| Balance at beginning of period | | $ | 11.9 |
| | $ | 8.6 |
|
| Accruals for warranties issued during the reporting period | | 4.7 |
| | 4.6 |
|
| Accruals related to pre-existing warranties (including changes in estimates) | | 3.6 |
| | 2.9 |
|
| Less settlements made during the period | | (5.6 | ) | | (4.2 | ) |
| Balance at end of period | | $ | 14.6 |
| | $ | 11.9 |
|
There were no material specific warranty matters accrued for or significant settlements made during the years ended July 31, 2017 and 2016. The Company's warranty matters are not expected to have a material impact on the Company’s results of operations, liquidity or financial position.
NOTE 9. Restructuring Charges
The Company did not incur any restructuring or impairment charges during fiscal 2017. The Company incurred $16.1 million of restructuring changes in fiscal 2016 with $10.4 million recorded in operating expenses and the remaining $5.7 million recorded in cost of sales. The Engine Products segment incurred $8.8 million and the Industrial Products segment incurred $7.3 million of the restructuring charges for fiscal 2016. The Company incurred $16.9 million of restructuring and impairment charges in fiscal 2015 with $8.5 million recorded in operating expenses and the remaining $8.4 million recorded in cost of sales. The Engine Products segment incurred $9.2 million and the Industrial Products segment incurred $3.8 million of the restructuring and impairment charges for fiscal 2015. The charges for fiscal 2016 and fiscal 2015 consisted of one-time termination benefits from restructuring salaried and production workforce in all geographic regions and closing a production facility in Grinnell, Iowa. In addition, in fiscal 2015 the Company recorded the abandonment and write-off of a partially completed facility in Xuzhou, China and a $3.9 million charge related to a lump-sum settlement of its U.S. pension plan. As the Company’s restructuring actions were mainly incurred and paid in the same period, there was no material liability balance as of either of the periods presented.
NOTE 10. Equity Based Compensation
In November 2010, the shareholders approved the 2010 Master Stock Incentive Plan (the Plan). The Plan extends through September 2020 and allows for the granting of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. Options under the Plan are granted to key employees whereby the option exercise price is equivalent to the market price of the Company's common stock at the date of the grant. Options are generally exercisable for up to 10 years from the date of grant. The Plan also allowsgrant and vest in equal increments over three years.
Pretax stock-based compensation expense associated with options was $11.6 million, $10.8 million and $10.4 million for the grantingyears ended July 31, 2022, 2021 and 2020, respectively.
Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted during the years ended July 31, 2022, 2021 and 2020 was $14.24, $10.23 and $10.93 per share, respectively.
The fair value of performancethese awards to a limitedwas determined using the following inputs:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Risk-free interest rate | | 1.2% - 1.8% | | 0.5% - 1.3% | | 0.8% - 1.9% |
| Expected volatility | | 26.0% - 27.0% | | 25.4% - 26.6% | | 21.0% - 23.7% |
| Expected dividend yield | | 1.6 | % | | 1.6 | % | | 1.6 | % |
| | | | | | |
| Expected life: | | | | | | |
| Director grants | | 8 years | | 8 years | | 8 years |
| Officer grants | | 7 years | | 8 years | | 8 years |
| Non-officer grants | | 7 years | | 7 years | | 7 years |
Option activity was as follows:
| | | | | | | | | | | | | | |
| | | Options | | Weighted
Average Exercise
Price |
| Balance outstanding as of July 31, 2019 | | 6,531,250 | | | $ | 39.66 | |
| Granted | | 944,094 | | | 51.94 | |
| Exercised | | (845,086) | | | 30.35 | |
| Expired/forfeited | | (96,279) | | | 52.72 | |
| Balance outstanding as of July 31, 2020 | | 6,533,979 | | | 42.44 | |
| Granted | | 1,004,631 | | | 46.61 | |
| Exercised | | (1,030,938) | | | 36.00 | |
| Expired/forfeited | | (62,929) | | | 49.95 | |
| Balance outstanding as of July 31, 2021 | | 6,444,743 | | | 44.05 | |
| Granted | | 898,726 | | | 59.18 | |
| Exercised | | (365,267) | | | 37.02 | |
| Expired/forfeited | | (51,041) | | | 53.15 | |
| Balance outstanding as of July 31, 2022 | | 6,927,161 | | | $ | 46.32 | |
The total intrinsic value of options exercised during the years ended July 31, 2022, 2021 and 2020 was $7.8 million, $22.6 million and $18.3 million, respectively.
The number of key executives. shares authorized as of July 31, 2022 for outstanding options and future grants was 9,793,539. Forfeited options are recorded as an offset to operating expenses in the Consolidated Statements of Earnings in the period in which they occur.
Outstanding and exercisable stock options as of July 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of Exercise Prices | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life (Years) | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Remaining
Contractual
Life (Years) | | Weighted
Average
Exercise
Price |
| $28.00 to $38.99 | | 1,596,910 | | | 2.5 | | $ | 33.38 | | | 1,596,910 | | | 2.5 | | $ | 33.38 | |
| $39.00 to $44.99 | | 1,255,615 | | | 3.2 | | 42.51 | | | 1,255,615 | | | 3.2 | | 42.51 | |
| $45.00 to $50.99 | | 1,567,885 | | | 6.9 | | 45.98 | | | 960,561 | | | 6.1 | | 45.89 | |
| $51.00 to $56.99 | | 867,614 | | | 7.2 | | 51.82 | | | 547,355 | | | 7.2 | | 51.71 | |
| $57.00 and above | | 1,639,137 | | | 7.7 | | 59.24 | | | 757,247 | | | 6.2 | | 59.13 | |
| | 6,927,161 | | | 5.4 | | $ | 46.32 | | | 5,117,688 | | | 4.4 | | $ | 43.74 | |
As administered byof July 31, 2022, the Human Resources Committeeaggregate intrinsic value of stock options outstanding and exercisable was $64.0 million and $58.2 million, respectively.
For the Company’s Boardyear ended July 31, 2022, activity for non-vested stock options that contain vesting provisions was as follows:
| | | | | | | | | | | | | | |
| | Options | | Weighted
Average Grant
Date Fair
Value |
| Balance outstanding as of beginning of year | | 1,844,890 | | | $ | 10.79 | |
| Granted | | 898,726 | | | 14.24 | |
| Vested | | (893,304) | | | 11.15 | |
| Forfeited | | (40,839) | | | 11.88 | |
| Balance outstanding as of end of year | | 1,809,473 | | | $ | 12.31 | |
As of DirectorsJuly 31, 2022, there was $6.8 million of total unrecognized compensation expense related to date, these performancenon-vested stock options, which is expected to be recognized over the remaining vesting period during fiscal 2023, 2024 and 2025.
Performance-Based Awards
Performance-based awards are payable in common stock and are based on a formula that measures Company performance over a three year period. These awards are settled after three years with payouts ranging from 0% to 200% of the Company over a three-year period. Performancetarget award depending on achievement. Pretax performance-based awards expense under these plans totaled $0.9was $7.2 million, $0.3$1.9 million and $0.1 million in the years ended July 31, 2017, 2016 and 2015, respectively.
Stock options are exercisable in equal increments over three years. For the years ended July 31, 2017, 2016 and 2015, the Company recorded pretax stock-based compensation expense associated with stock options of $7.5 million, $6.7 million and $9.5 million, respectively. The Company also recorded tax benefits associated with this compensation expense of $2.2 million, $2.1 million and $3.1$3.4 million for the years ended July 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Stock-based employee compensation expense is recognized using the fair-value method for all awards. The Company determined the fair value of these awards using the Black-Scholes option pricing model with the following assumptions:
|
| | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Risk-free interest rate | | 2.5 - 2.6% |
| | 1.6 - 2.3% |
| | 0.05 - 2.3% |
|
| Expected volatility | | 20.8 - 24.1% |
| | 21.8 - 25.9% |
| | 18.6 - 26.7% |
|
| Expected dividend yield | | 1.7 | % | | 1.7 | % | | 1.6 | % |
| | | | | | | |
| Expected life: | | | | | | |
| Director and officer grants | | 8 years |
| | 8 years |
| | 8 years |
|
| Non-officer original grants | | 7 years |
| | 7 years |
| | 7 years |
|
| Reload grants (1) | | N/A |
| | N/A |
| | ≤4 years |
|
| |
(1) | Grants made to officers or directors who exercised a reloadable option during the fiscal year and made payment of the purchase price using shares of previously owned Company stock. The reload grant is for the number of shares equal to the shares used in payment of the purchase price and/or withheld for minimum tax withholding. Options with a reload provision were no longer issued to officers with more than five years of service, and all directors beginning in fiscal 2006. The Company continued to issue options with a reload provision to officers with less than five years of service until fiscal 2011 when this provision was discontinued. |
The weighted average grant date fair value related to the Company’s performance-based awards was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Weighted average grant date fair value | | $ | 59.40 | | | $ | 46.06 | | | $ | 51.61 | |
Performance-based awards for options granted during the years ended July 31, 2017, 2016 and 2015 was $10.09, $7.10 and $9.94 per share, respectively, using the Black-Scholes pricing model.non-vested activity were as follows:
The following table summarizes stock option activity for the years ended July 31, 2017, 2016 and 2015:
|
| | | | | | | |
| | | Options Outstanding | | Weighted Average Exercise Price |
| Outstanding at July 31, 2014 | | 7,197,882 |
| | $ | 26.84 |
|
| Granted | | 1,023,836 |
| | 38.58 |
|
| Exercised | | (916,566 | ) | | 18.54 |
|
| Canceled | | (113,710 | ) | | 38.67 |
|
| Outstanding at July 31, 2015 | | 7,191,442 |
| | 29.38 |
|
| Granted | | 969,450 |
| | 28.19 |
|
| Exercised | | (916,789 | ) | | 19.39 |
|
| Canceled | | (421,713 | ) | | 36.95 |
|
| Outstanding at July 31, 2016 | | 6,822,390 |
| | 30.09 |
|
| Granted | | 888,500 |
| | 42.65 |
|
| Exercised | | (978,193 | ) | | 24.04 |
|
| Canceled | | (47,146 | ) | | 36.51 |
|
| Outstanding at July 31, 2017 | | 6,685,551 |
| | 32.60 |
|
The total intrinsic value of options exercised during the years ended July 31, 2017, 2016 and 2015 was $18.3 million, $11.6 million and $18.8 million, respectively.
The number of shares reserved at July 31, 2017 for outstanding options and future grants was 9,683,708. Shares reserved consist of shares available for grant plus all outstanding options.
The following table summarizes information concerning outstanding and exercisable options as of July 31, 2017:
|
| | | | | | | | | | | | | | | | |
| Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price |
| $0.00 to $22.69 | | 1,209,231 |
| | 1.92 | | $ | 19.63 |
| | 1,209,231 |
| | $ | 19.63 |
|
| $22.70 to $28.69 | | 981,995 |
| | 7.57 | | 27.54 |
| | 387,755 |
| | 26.72 |
|
| $28.70 to $34.69 | | 1,457,982 |
| | 4.40 | | 31.61 |
| | 1,440,251 |
| | 31.61 |
|
| $34.70 to $40.69 | | 1,447,048 |
| | 6.14 | | 37.03 |
| | 1,161,545 |
| | 36.66 |
|
| $40.70 and above | | 1,589,295 |
| | 8.02 | | 42.47 |
| | 706,244 |
| | 42.24 |
|
| | | 6,685,551 |
| | 5.65 | | 32.60 |
| | 4,905,026 |
| | 31.00 |
|
At July 31, 2017, the aggregate intrinsic value of shares outstanding and exercisable was $99.6 million and $80.9 million, respectively.
The following table summarizes the status of options that contain vesting provisions:
|
| | | | | | | |
| | | Options | | Weighted Average Grant Date Fair Value |
| Non-vested at July 31, 2016 | | 1,762,856 |
| | $ | 8.70 |
|
| Granted | | 888,500 |
| | 10.09 |
|
| Vested | | (834,806 | ) | | 9.41 |
|
| Canceled | | (36,025 | ) | | 8.61 |
|
| Non-vested at July 31, 2017 | | 1,780,525 |
| | 9.06 |
|
The total fair value of options vested during years ended July 31, 2017, 2016 and 2015, was $39.6 million, $30.0 million and $29.3 million, respectively. | | | | | | | | | | | | | | |
| | Performance Shares | | Weighted
Average Grant
Date Fair
Value |
| Balance outstanding as of July 31, 2021 | | 200,567 | | | $ | 48.76 | |
| Granted | | 88,400 | | | 59.40 | |
| Vested | | (97,181) | | | 51.61 | |
| Forfeited | | (3,580) | | | 53.23 | |
| Balance outstanding as of July 31, 2022 | | 188,206 | | | $ | 52.20 | |
As of July 31, 2017,2022, there was $7.4$7.9 million of total unrecognized compensation expense related to non-vested stock options granted under the Plan. This unvested expenseperformance-based awards, which is expected to be recognized over the remaining vesting period during fiscal years 2018, 20192023, 2024 and 2020.
NOTE 11. Employee Benefit Plans
Defined Benefit Pension Plans
The Company and certain of its international subsidiaries have defined benefit pension plans for many of their hourly and salaried employees. There2025. Forfeited performance-based awards are two types of U.S. plans. The first type of U.S. plan (Hourly Pension Plan) is a traditional defined benefit pension plan for union production employees. The second plan (Salaried Pension Plan) is for some salaried and non-union production employees that provides defined benefits pursuantrecorded as an offset to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The Company no longer allows entrants into the U.S. Salaried Pension Plan. Effective August 1, 2016, employees in this plan no longer continue to accrue Company contribution credits under the plan. The freeze of the plan resultedoperating expenses in the participants no longer being active. As a result, actuarial losses will be amortized over the estimated average remaining life expectancyConsolidated Statements of the inactive participants, rather than the estimated average remaining service period of the active participants. Employees are instead eligible for a 3.0% annual Company retirement contribution to their 401(k) in addition to the Company's normal 401(k) match. The non-U.S. plans generally provide pension benefits based on years of service and compensation level.
Net periodic pension costs and amounts recognized in other comprehensive income for the Company’s pension plans include the following components (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Service cost | | $ | 8.3 |
| | $ | 18.4 |
| | $ | 20.4 |
|
| Interest cost | | 13.5 |
| | 18.9 |
| | 19.1 |
|
| Expected return on assets | | (26.4 | ) | | (28.8 | ) | | (29.5 | ) |
| Prior service cost and transition amortization | | 0.6 |
| | 0.8 |
| | 0.6 |
|
| Actuarial loss amortization | | 7.3 |
| | 8.5 |
| | 7.1 |
|
| Settlement loss | | — |
| | — |
| | 3.9 |
|
| Net periodic benefit costs | | 3.3 |
| | 17.8 |
| | 21.6 |
|
| Other changes recognized in other comprehensive income: | | | | | | |
| Net actuarial (gain) loss | | (21.7 | ) | | 53.6 |
| | 3.5 |
|
| Amortization of asset obligations | | (0.2 | ) | | (0.4 | ) | | (0.2 | ) |
| Amortization of prior service cost | | (0.4 | ) | | (0.4 | ) | | (0.4 | ) |
| Amortization of net actuarial loss | | (7.3 | ) | | (8.5 | ) | | (11.0 | ) |
| Total recognized in other comprehensive income | | (29.6 | ) | | 44.3 |
| | (8.1 | ) |
| Total recognized in net periodic benefit costs and other comprehensive income | | $ | (26.3 | ) | | $ | 62.1 |
| | $ | 13.5 |
|
The changes in projected benefit obligations, fair value of plan assets and funded status of the Company’s pension plans for the years ended July 31, 2017 and 2016 are summarized as follows (in millions):
|
| | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
|
| Change in projected benefit obligation: | | | | |
| Projected benefit obligation, beginning of year | | $ | 537.3 |
| | $ | 498.7 |
|
| Service cost | | 8.3 |
| | 18.4 |
|
| Interest cost | | 13.5 |
| | 18.9 |
|
| Participant contributions | | 0.8 |
| | 1.0 |
|
| Actuarial (gain) loss | | (22.3 | ) | | 50.0 |
|
| Currency exchange rates | | 2.7 |
| | (17.2 | ) |
| Benefits paid | | (25.2 | ) | | (32.5 | ) |
| Projected benefit obligation, end of year | | $ | 515.1 |
| | $ | 537.3 |
|
| Change in fair value of plan assets: | | | | |
| Fair value of plan assets, beginning of year | | $ | 455.5 |
| | $ | 478.5 |
|
| Actual return on plan assets | | 28.4 |
| | 22.2 |
|
| Company contributions | | 3.1 |
| | 4.2 |
|
| Participant contributions | | 0.8 |
| | 1.0 |
|
| Currency exchange rates | | 2.5 |
| | (17.9 | ) |
| Benefits paid | | (25.2 | ) | | (32.5 | ) |
| Fair value of plan assets, end of year | | $ | 465.1 |
| | $ | 455.5 |
|
| Funded status: | | | | |
| Projected benefit obligation in excess of plan assets at end of fiscal year | | $ | (50.0 | ) | | $ | (81.8 | ) |
| | | | | |
| Amounts recognized on the Consolidated Balance Sheets consist of: | | | | |
| Other long-term assets | | $ | 5.7 |
| | $ | 1.4 |
|
| Other current liabilities | | (1.6 | ) | | (1.5 | ) |
| Other long-term liabilities | | (54.1 | ) | | (81.7 | ) |
| Net recognized liability | | $ | (50.0 | ) | | $ | (81.8 | ) |
The net underfunded status of $50.0 million and $81.8 million at July 31, 2017 and 2016, respectively, is recognizedEarnings in the accompanying Consolidated Balance Sheets. The pension-related accumulated other comprehensive loss at July 31, 2017 and 2016 (prior to the consideration of income taxes) was $147.7 million and $179.6 million, respectively, and consisted primarily of unrecognized actuarial losses. The loss expected to be recognized in net periodic pension expense during the year ending July 31, 2018 is $4.6 million. The accumulated benefit obligation for all defined benefit pension plans was $495.3 million and $519.0 million at July 31, 2017 and 2016, respectively.
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $416.8 million and $361.1 million, respectively, as of July 31, 2017, and $433.1 million and $350.0 million, respectively, as of July 31, 2016.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $360.4 million, $360.1 million and $311.0 million, respectively, as of July 31, 2017 and $375.5 million, $377.4 million and $304.4 million, respectively, as of July 31, 2016.
Assumptions
The weighted-average discount rate and rates of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation are as follows:
|
| | | | | | |
| Projected Benefit Obligation | | Year Ended July 31, |
| Weighted average actuarial assumptions | | 2017 |
| | 2016 |
|
| All U.S. plans: | | |
| | |
|
| Discount rate | | 3.94 | % | | 3.65 | % |
| Rate of compensation increase (1) | | N/A |
| | 2.56 | % |
| Non-U.S. plans: | | |
| | |
|
| Discount rate | | 2.40 | % | | 2.08 | % |
| Rate of compensation increase | | 2.70 | % | | 2.69 | % |
(1) Compensation increase is no longer applicable due to the freeze of the Salaried Pension Plan effective August 1, 2016.
The weighted-average discount rates, expected returns on plan assets and rates of increase in future compensation levels used to determine the net periodic benefit cost are as follows:
|
| | | | | | | | | |
| Net Periodic Benefit Cost | | Year Ended July 31, |
| Weighted average actuarial assumptions | | 2017 |
| | 2016 |
| | 2015 |
|
| All U.S. plans: | | |
| | |
| | |
|
| Discount rate | | 3.65 | % | | 4.33 | % | | 4.33 | % |
| Expected return on plan assets | | 6.90 | % | | 6.99 | % | | 7.14 | % |
| Rate of compensation increase | | 2.56 | % | | 2.56 | % | | 2.61 | % |
| Non-U.S. plans: | | |
| | |
| | |
|
| Discount rate | | 2.08 | % | | 3.14 | % | | 3.64 | % |
| Expected return on plan assets | | 3.93 | % | | 4.83 | % | | 5.41 | % |
| Rate of compensation increase | | 2.69 | % | | 2.68 | % | | 2.79 | % |
Discount Rates The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at rates of return on high-quality, fixed-income investments currently available, and expected to be available, during the period to maturity of the benefits. This process includes looking at the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans.
Beginning with its July 31, 2016 measurement date, the Company changed the method used to estimate the service and interest costs for pension and postretirement benefits. The new method utilizes a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. Historically, the Company utilized a single weighted average discount rate applied to projected cash outflows. The Company made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plans' liability cash flows to the corresponding spot rate on the yield curve. The change does not impact the measurement of the plans'
obligations and did not have a material impact on the Company's pension expense beginning in fiscal 2017. The Company has accounted for this change as a change in accounting estimate.
Expected Long-Term Rate of Return To develop the expected long-term rate of return on assets assumption, the Company considers the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation for each plan. Based on portfolio performance, as of the measurement date of July 31, 2017, the Company's long-term rate of return for the U.S. and non-U.S. pension plans is an asset-based weighted average of 6.58% and 4.19%, respectively. The expected long-term rate of return on assets shown in the pension benefit disclosure for U.S. and non-U.S. plans is an asset-based weighted average of all plans for each category.
Fair Value of Plan Assets
The estimated fair value of U.S. pension plan assets and their respective levels in the fair value hierarchy at July 31, 2017 and 2016 by asset category are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | U.S Pension Plans |
| Asset Category | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Measured Using NAV Per Share as Practical Expedient | | Total |
| July 31, 2017 | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 1.8 |
| | $ | 3.7 |
| | $ | — |
| | $ | — |
| | $ | 5.5 |
|
| Global Equity Securities | | 60.9 |
| | — |
| | — |
| | 80.3 |
| | 141.2 |
|
| Fixed Income Securities | | 34.9 |
| | 82.5 |
| | — |
| | 34.6 |
| | 152.0 |
|
| Real Assets | | — |
| | — |
| | — |
| | 5.3 |
| | 5.3 |
|
| Total U.S. Assets | | $ | 97.6 |
| | $ | 86.2 |
| | $ | — |
| | $ | 120.2 |
| | $ | 304.0 |
|
| | | | | | | | | | | |
| July 31, 2016 | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 1.2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.2 |
|
| Global Equity Securities | | 62.2 |
| | — |
| | — |
| | 100.2 |
| | 162.4 |
|
| Fixed Income Securities | | 72.2 |
| | — |
| | — |
| | 47.3 |
| | 119.5 |
|
| Real Assets | | 5.9 |
| | — |
| | — |
| | 7.9 |
| | 13.8 |
|
| Total U.S. Assets | | $ | 141.5 |
| | $ | — |
| | $ | — |
| | $ | 155.4 |
| | $ | 296.9 |
|
Global Equity Securities consists primarily of publicly traded U.S. and non-U.S. equities, Europe, Australasia, Far East (EAFE) index funds, equity private placement funds, private equity investments and some cash and cash equivalents. Publicly traded equities and index funds are valued at the closing price reported in the active market in which the individual securities are traded. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured/distressed debt, growth equity, mezzanine/subordinated debt, real estate, special situation partnerships and venture capital investments. Partnership interests are valued at the net asset value (NAV) per share, which is a practical expedient for measuring fair value and thus not classified in the fair value hierarchy. The NAV is determined by the custodian of the fund based on the fair value of the underlying assets owned by the fund less its liabilities then divided by the number of units outstanding.
The target allocations for global equity securities investments were 45% and 40% in the Salaried and Hourly Pension Plans, respectively. The underlying global equity investment managers within the plan will invest primarily in equity securities spanning across market capitalization, geography, style (e.g. value, growth, etc.) and other diversifying characteristics. Managers may invest in common stocks or American Depository Receipts (ADRs), mutual funds, bank or trust company pooled funds, international stocks, stock options for hedging purposes, stock index futures, financial futures for purposes of replicating a major market index and private equity partnerships. The long/short equity managers within global equity may take long or short positions in equity securities and have the ability to shift exposure from net long to net short. Long/short equity managers made up about 5% of the global equity portfolio at year-end and are considered less liquid, as the funds can be partially liquidated on a quarterly basis. Long-only managers are considered liquid. The long-only investments are typically valued daily, while long/short equity is valued on a monthly basis. Private equity is considered illiquid and performance is typically valued on a quarterly basis. The underlying assets, however, may be valued less frequently, such as annually or if and when a potential buyer is identified and has submitted a bid to similar types of investments.
Fixed Income Securities consists primarily of investment and non-investment grade debt securities, debt securities issued by the U.S. Treasury and alternative fixed income-like investments. Government, corporate and other bonds and notes are valued at the closing price reported if traded on an active market or at yields currently available on comparable securities of issuers with
similar credit ratings. Alternative fixed income-like investments consist primarily of private partnership interests in hedge funds of funds. Partnership interests are valued using the NAV as determined by the administrator or custodian of the fund.
The target allocations for fixed income securities were 52% and 57% in the Salaried and Hourly Pension Plans, respectively. The Fixed Income class may invest in debt securities issued or guaranteed by the U.S., its agencies or instrumentalities (including U.S. Government Agency mortgage backed securities), or other investment grade rated debt issued by foreign governments; corporate bonds, debentures and other forms of corporate debt obligations, including equipment trust certificates; indexed notes, floaters and other variable rate obligations; bank collective funds; mutual funds; insurance company pooled funds and guaranteed investments; futures and options for the purpose of yield curve management; and private debt investments. Fixed income risk is driven by various factors including, but not limited to, interest rate levels and changes, credit risk and duration. Current fixed income securities are considered liquid, with daily pricing and liquidity. The fixed income class is also invested in a variety of alternative investments. Alternative investments cover a variety of traditional and non-traditional investments and investment strategies, spanning various levels of risk and return. These investments can be made in a broad array of non-traditional investment strategies (including, but not limited to, commodities and futures, distressed securities, short/long—or both—fixed income, international opportunities and relative value) with multiple hedge fund managers. Alternative investments are considered less liquid to illiquid. The liquidity ranges from quarterly to semi-annually and illiquid. Alternative investments are typically valued on a quarterly basis.
Real Assets consists of funds and interests in partnerships that invest in private real estate, commodities and timber investments. Interests in partnerships are valued using the NAV from the most recent partnership statement, updated for any subsequent partnership interests’ cash flows. Funds are valued at the closing price reported in the active market in which it is traded.
The target allocation for real assets was 2% for both the Salaried and Hourly Pension Plans. The fund invests in real assets to provide a hedge against unexpected inflation, to capture unique sources of returns and to provide diversification benefits. The fund pursues a real asset strategy through a fund of funds, private investments and/or a direct investment program that may invest long, short or both, in assets including, but not limited to, domestic and international properties, buildings and developments, timber and/or commodities. Real asset manager performance is typically reported quarterly, though underlying assets may be valued less frequently.
The target allocation for cash and cash equivalents was 1% for both the Salaried and Hourly Pension Plans. Cash and cash equivalents consist of deposit accounts and highly liquid temporary investments with an original maturity of three months or less.
The estimated fair values of non-U.S. pension plan assets and their respective levels in the fair value hierarchy at July 31, 2017 and 2016 by asset category are as follows (in millions):they occur.
|
| | | | | | | | | | | | | | | | |
| | | Non-U.S. Pension Plans |
| Asset Category | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| July 31, 2017 | | | | | | | | |
| Cash and Cash Equivalents | | $ | 0.9 |
| | $ | — |
| | $ | — |
| | $ | 0.9 |
|
| Global Equity Securities | | 79.7 |
| | — |
| | — |
| | 79.7 |
|
| Fixed Income Securities | | 11.9 |
| | 34.3 |
| | — |
| | 46.2 |
|
| Insurance Contracts | | — |
| | — |
| | 34.3 |
| | 34.3 |
|
| Total Non-U.S. Assets | | $ | 92.5 |
| | $ | 34.3 |
| | $ | 34.3 |
| | $ | 161.1 |
|
| | | | | | | | | |
| July 31, 2016 | | | | | | | | |
| Cash and Cash Equivalents | | $ | 0.5 |
| | $ | — |
| | $ | — |
| | $ | 0.5 |
|
| Global Equity Securities | | 69.2 |
| | — |
| | — |
| | 69.2 |
|
| Fixed Income Securities | | 4.6 |
| | 35.8 |
| | — |
| | 40.4 |
|
| Equity/Fixed Income | | 16.7 |
| | — |
| | 31.8 |
| | 48.5 |
|
| Total Non-U.S. Assets | | $ | 91.0 |
| | $ | 35.8 |
| | $ | 31.8 |
| | $ | 158.6 |
|
Global Equity Securities consists of publicly traded diversified growth funds invested across a broad range of traditional and alternative asset classes that may include, but are not limited to: equities, investment grade and high yield bonds, property, private equity, infrastructure, commodities and currencies. They may invest directly or hold up to 100% of the fund in other collective investment vehicles and may use exchange traded and over-the-counter financial derivatives, such as currency forwards or futures, for both investment as well as hedging purposes.
Fixed Income Securities consists primarily of investment grade debt securities and bond funds. Corporate bonds and notes are valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but can include adjustments for certain risks that may not be observable such as credit and liquidity risks. The bond funds are traded on an active market and are valued at the closing price reported. These holdings may also aim to provide liability hedging by offering interest rate and inflation protections that replicates the liability profile of a typical defined benefit pension scheme.
Insurance Contracts are individual contracts that the Company does not have any influence on the investment decisions as made by the insurer due to the specific minimum guaranteed return characteristics of this type of contract. European insurers, in general, broadly have a strategic asset allocation with 80% to 90% fixed income products and 10% to 20% equity type products (including real estate).
The following table summarizes the changes in the fair values of the non-U.S. pension plans’ Level 3 assets for the years ended July 31, 2017, 2016 and 2015 (in millions):
|
| | | | |
| | | Non-U.S. Pension Plans |
| Ending balance at July 31, 2014 | | $ | 30.5 |
|
| Unrealized gains | | 1.3 |
|
| Foreign currency exchange | | (5.5 | ) |
| Purchases | | 2.7 |
|
| Sales | | (0.8 | ) |
| Ending balance at July 31, 2015 | | $ | 28.2 |
|
| Unrealized gains | | 2.7 |
|
| Foreign currency exchange | | 0.3 |
|
| Purchases | | 2.7 |
|
| Sales | | (2.1 | ) |
| Ending balance at July 31, 2016 | | $ | 31.8 |
|
| Unrealized gains | | 1.2 |
|
| Foreign currency exchange | | 1.7 |
|
| Purchases | | 1.0 |
|
| Sales | | (1.4 | ) |
| Ending balance at July 31, 2017 | | $ | 34.3 |
|
Investment Policies and Strategies
For the Company’s U.S. pension plans, the Company uses a total return investment approach to achieve a long-term return on plan assets, with what the Company believes to be a prudent level of risk for the purpose of meeting its retirement income commitments to employees. The plans’ investments are diversified to assist in managing risk. During the year ended July 31, 2017, the Company’s asset allocation guidelines targeted an allocation of 45% global equity securities, 52% fixed income, 2% real assets (investments into funds containing commodities and real estate) and 1% cash and cash equivalents for the Salaried Pension Plan and 40% global equity securities, 57% fixed income, 2% real assets (investments in funds containing commodities and real estate) and 1% cash for the Hourly Pension Plan. These target allocation guidelines are determined in consultation with the Company’s investment consultant and through the use of modeling the risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected volatility/standard deviation of returns and expected correlations with other asset classes.
For the Company’s non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure assets of appropriate liquidity that will generate income and capital growth to meet, together with any new contributions from members and the Company, the cost of current and future benefits. Investment policy and performance is measured and monitored on an ongoing basis by the Company’s Investment Committee through its use of an investment consultant and through quarterly investment portfolio reviews.
Estimated Contributions and Future Payments
The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum tax deductible contribution. The Company made contributions of $1.6 million to its U.S. pension plans during the year ended July 31, 2017. The estimated minimum funding requirement for the Company’s U.S. plans for the year ending July 31, 2018 is $3.7 million. In
accordance with the Pension Protection Act of 2006, this contribution obligation may be met with existing credit balances that resulted from payments above the minimum obligation in prior years. The Company plans to utilize existing credit balances to meet the minimum obligation for fiscal 2018 of its U.S. pension plans. The Company made contributions of $1.5 million to its non-U.S. pension plans during the year ended July 31, 2017 and estimates that it will contribute approximately $1.3 million in the year ended July 31, 2018 based upon the local government prescribed funding requirements. Future estimates of the Company’s pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements.
The estimated future benefit payments for the Company’s U.S. and non-U.S. plans are as follows (in millions):
|
| | | | |
| Year Ending July 31, | | Estimated Future Benefit Payments |
| 2018 | | $ | 28.9 |
|
| 2019 | | 26.8 |
|
| 2020 | | 28.4 |
|
| 2021 | | 28.6 |
|
| 2022 | | 27.5 |
|
| 2022-2026 | | 144.4 |
|
Retirement Savings and Employee Stock Ownership Plan
The Company provides a contributory employee savings plan to U.S. employees that permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. Employee contributions of up to 25% of compensation are matched at a rate equaling 100% of the first 3% contributed and 50% of the next 2% contributed. In addition, the Company contributes 3.0% of compensation annually. Total contribution expense for these plans was $20.1 million, $8.2 million and $8.6 million for the years ended July 31, 2017, 2016 and 2015, respectively. This plan also includes shares from an Employee Stock Ownership Plan (ESOP). As of July 31, 2017, all shares of the ESOP have been allocated to participants. Total ESOP shares are considered to be shares outstanding for diluted earnings per share calculations.
Deferred Compensation and Other Benefit Plans
The Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows these employees to defer the receipt of all of their bonus and other stock-related compensation and up to 75% of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals that are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability of $6.5 million and $8.6 million as of July 31, 2017 and 2016, respectively, related primarily to its deferred compensation plans.
NOTE 12. Income Taxes
The components of earnings before income taxes are as follows (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Earnings before income taxes: | | | | | | |
| United States | | $ | 109.8 |
| | $ | 90.7 |
| | $ | 92.4 |
|
| Foreign | | 212.2 |
| | 166.7 |
| | 196.2 |
|
| Total | | $ | 322.0 |
| | $ | 257.4 |
| | $ | 288.6 |
|
The components of the provision for income taxes are as follows (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Income tax provision (benefit): | | | | | | |
| Current | | | | | | |
| Federal | | $ | 38.9 |
| | $ | 19.9 |
| | $ | 28.5 |
|
| State | | 4.3 |
| | 3.1 |
| | 2.9 |
|
| Foreign | | 56.6 |
| | 46.9 |
| | 54.7 |
|
| | | 99.8 |
| | 69.9 |
| | 86.1 |
|
| Deferred | | | | | | |
| Federal | | (7.7 | ) | | (0.3 | ) | | (4.2 | ) |
| State | | (0.4 | ) | | (0.2 | ) | | 0.1 |
|
| Foreign | | (2.5 | ) | | (2.8 | ) | | (1.5 | ) |
| | | (10.6 | ) | | (3.3 | ) | | (5.6 | ) |
| Total | | $ | 89.2 |
| | $ | 66.6 |
| | $ | 80.5 |
|
The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:
|
| | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Statutory U.S. federal rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes | | 0.9 | % | | 0.8 | % | | 0.9 | % |
| Foreign operations | | (8.3 | )% | | (8.1 | )% | | (7.9 | )% |
| Export, manufacturing and research credits | | (1.1 | )% | | (1.6 | )% | | (1.1 | )% |
| Change in unrecognized tax benefits | | 1.0 | % | | (1.0 | )% | | 1.3 | % |
| Other | | 0.2 | % | | 0.8 | % | | (0.3 | )% |
| Effective income tax rate | | 27.7 | % | | 25.9 | % | | 27.9 | % |
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in millions):
|
| | | | | | | | |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| Deferred tax assets: | | | | |
| Accrued expenses | | $ | 16.5 |
| | $ | 12.1 |
|
| Compensation and retirement plans | | 56.2 |
| | 59.5 |
|
| NOL and tax credit carryforwards | | 8.5 |
| | 6.5 |
|
| LIFO and inventory reserves | | 3.0 |
| | 5.4 |
|
| Other | | 6.9 |
| | 4.0 |
|
| Gross deferred tax assets | | 91.1 |
| | 87.5 |
|
| Valuation allowance | | (5.2 | ) | | (3.3 | ) |
| Net deferred tax assets | | 85.9 |
| | 84.2 |
|
| Deferred tax liabilities: | | | | |
| Depreciation and amortization | | (58.8 | ) | | (57.5 | ) |
| Other | | (0.4 | ) | | (1.2 | ) |
| Deferred tax liabilities | | (59.2 | ) | | (58.7 | ) |
| Net tax asset | | $ | 26.7 |
| | $ | 25.5 |
|
The Company has not provided for U.S. income taxes on undistributed earnings of its non-U.S. subsidiaries of approximately $1.1 billion. The Company currently intends to indefinitely reinvest these undistributed earnings as there are significant investment opportunities outside the U.S. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable. In fiscal 2017, the Company repatriated $67.1 million of cash held by its foreign subsidiaries in the form of a cash dividend, which represented total planned dividends for the current year and which consisted entirely of current year earnings.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Gross unrecognized tax benefits at beginning of fiscal year | | $ | 15.7 |
| | $ | 18.2 |
| | $ | 15.0 |
|
| Additions for tax positions of the current year | | 3.9 |
| | 3.4 |
| | 4.7 |
|
| Additions for tax positions of prior years | | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Reductions for tax positions of prior years | | (0.1 | ) | | (4.9 | ) | | (0.6 | ) |
| Settlements | | 0.3 |
| | (0.1 | ) | | — |
|
| Reductions due to lapse of applicable statute of limitations | | (1.1 | ) | | (1.0 | ) | | (1.0 | ) |
| Gross unrecognized tax benefits at end of fiscal year | | $ | 18.8 |
| | $ | 15.7 |
| | $ | 18.2 |
|
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended July 31, 2017, the Company recognized interest expense, net of tax benefit, of approximately $0.4 million. At July 31, 2017 and 2016, accrued interest and penalties on a gross basis were $2.3 million and $1.8 million, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2008. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2013. Currently, the Company is under examination by the IRS for fiscal years 2015 and 2016, and while there are not any significant adjustments proposed, the overall examination is still ongoing. At this time, the Company has not received direct information on any matters for which the Company does not believe it is already adequately reserved or for which it believes its tax positions are not supportable.
If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of approximately 5 years, up to $2.6 million of the unrecognized tax benefits could potentially expire in the next 12-month period, unless extended by audit. It is possible that quicker-than-expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in the next 12-month period. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.
NOTE 13.Note 14. Employee Benefit Plans
Defined Benefit Pension Plans
The Company has defined benefit pension plans for certain hourly and salaried employees. They consist of plans in the U.S., Belgium, Germany, Mexico and the United Kingdom. These plans generally provide pension benefits based on years of service and compensation level. Components of net periodic pension costs other than the service cost component are included in other income, net in the Consolidated Statements of Earnings.
Net periodic pension costs for the Company’s pension plans were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Net periodic pension costs | | | | | | |
| Service cost | | $ | 6.9 | | | $ | 7.5 | | | $ | 9.5 | |
| Interest cost | | 10.6 | | | 10.2 | | | 13.5 | |
| Expected return on assets | | (24.8) | | | (23.7) | | | (26.1) | |
| Prior service cost amortization | | 0.2 | | | 0.3 | | | 0.7 | |
| Actuarial loss amortization | | 6.9 | | | 8.2 | | | 6.5 | |
| Settlement charge | | 3.0 | | | 2.0 | | | 3.1 | |
| Curtailment charge | | — | | | 0.8 | | | — | |
| Net periodic pension costs | | 2.8 | | | 5.3 | | | 7.2 | |
| Other changes recognized in other comprehensive income (loss): | | | | | | |
| Net actuarial (loss) gain | | (1.3) | | | 35.9 | | | (25.2) | |
| Amortization of asset obligations | | — | | | — | | | 0.2 | |
| Amortization of prior service cost | | 0.3 | | | 1.2 | | | 0.6 | |
| Amortization of net actuarial loss | | 9.9 | | | 10.2 | | | 9.5 | |
| Total recognized in other comprehensive income (loss) | | 8.9 | | | 47.3 | | | (14.9) | |
| Total recognized in net periodic pension costs and other comprehensive income (loss) | | $ | 6.1 | | | $ | 42.0 | | | $ | (22.1) | |
The changes in projected benefit obligations, fair value of plan assets and funded status of the Company’s pension plans for the years ended July 31, 2022 and 2021 were as follows (in millions): | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| Change in projected benefit obligation | | | | |
| Projected benefit obligation, beginning of year | | $ | 579.9 | | | $ | 585.6 | |
| Service cost | | 6.9 | | | 7.5 | |
| Interest cost | | 10.6 | | | 10.2 | |
| | | | |
| Participant contributions | | 0.7 | | | 0.8 | |
| Actuarial gain | | (100.3) | | | (5.7) | |
| Foreign currency exchange rates | | (25.4) | | | 8.4 | |
| Settlements paid | | (12.9) | | | (10.7) | |
| | | | |
| Benefits paid | | (16.9) | | | (16.2) | |
| Projected benefit obligation, end of year | | 442.6 | | | 579.9 | |
| Change in fair value of plan assets | | | | |
| Fair value of plan assets, beginning of year | | 591.3 | | | 550.6 | |
| Actual return on plan assets | | (80.7) | | | 55.6 | |
| Company contributions | | 2.3 | | | 3.1 | |
| Participant contributions | | 0.7 | | | 0.8 | |
| Foreign currency exchange rates | | (24.0) | | | 8.1 | |
| Settlements paid | | (12.9) | | | (10.7) | |
| | | | |
| Benefits paid | | (16.9) | | | (16.2) | |
| Fair value of plan assets, end of year | | 459.8 | | | 591.3 | |
| | | | |
| Funded status of plans, end of year | | $ | 17.2 | | | $ | 11.4 | |
| | | | |
| Amounts recognized on the Consolidated Balance Sheets | | | | |
| Other long-term assets | | $ | 38.3 | | | $ | 37.5 | |
| Other current liabilities | | (1.8) | | | (1.3) | |
| Other long-term liabilities | | (19.3) | | | (24.8) | |
| Net recognized asset | | $ | 17.2 | | | $ | 11.4 | |
The net overfunded status of $17.2 million and $11.4 million as of July 31, 2022 and 2021, respectively, is recognized on the Consolidated Balance Sheets. The pension-related accumulated other comprehensive loss as of July 31, 2022 and 2021, prior to the consideration of income taxes, was $110.2 million and $119.1 million, respectively, and consisted primarily of unrecognized actuarial losses. The loss expected to be recognized in net periodic pension expense during the year ending July 31, 2023 is $2.2 million. The accumulated benefit obligation for all defined benefit pension plans was $424.1 million and $556.5 million as of July 31, 2022 and 2021, respectively. The decrease in the accumulated benefit obligation during fiscal 2022 is due to actuarial gains.
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $70.3 million and $49.2 million, respectively, as of July 31, 2022, and $83.6 million and $57.4 million, respectively, as of July 31, 2021.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $12.8 million, $12.8 million and $3.1 million, respectively, as of July 31, 2022 and $13.8 million, $13.8 million and $3.1 million, respectively, as of July 31, 2021.
Assumptions
The significant assumptions used in determining the actuarial present value of the projected benefit obligation were as follows:
| | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| U.S. plans | | | | |
| Discount rate | | 4.62 | % | | 2.55 | % |
| Expected rate of return on plan assets | | 5.41 | % | | 5.33 | % |
| Rate of compensation increase | | N/A | | N/A |
| | | | |
| Non-U.S. plans | | | | |
| Discount rate | | 3.26 | % | | 1.55 | % |
| Expected rate of return on plan assets | | 3.40 | % | | 3.13 | % |
| Rate of compensation increase | | 2.99 | % | | 2.86 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The weighted average discount rates, expected returns on plan assets and rates of increase in future compensation levels used to determine the net periodic pension costs were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. plans | | | | | | |
| Discount rate | | 2.55 | % | | 2.37 | % | | 3.55 | % |
| Expected rate of return on plan assets | | 5.41 | % | | 5.33 | % | | 6.08 | % |
| Rate of compensation increase | | N/A | | N/A | | N/A |
| Non-U.S. plans | | | | | | |
| Discount rate | | 1.60 | % | | 1.52 | % | | 1.85 | % |
| Expected rate of return on plan assets | | 3.40 | % | | 3.13 | % | | 3.78 | % |
| Rate of compensation increase | | 2.99 | % | | 2.86 | % | | 2.72 | % |
Discount Rates
The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income investments currently available, and expected to be available, during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans.
Expected Long-Term Rate of Return on Plan Assets
The Company considers historical returns and future expected returns for each asset class, as well as the target asset allocation to develop the assumption for each of its U.S. pension plans. The assumption for non-U.S. pension plans reflects the investment allocation and expected total portfolio returns specific to each plan and country.
Mortality Rates
The Company’s actuary uses the Pri-2012 mortality table issued by the Society of Actuaries in 2019, and the Scale MMP-2021 mortality improvement projection scale for its U.S. pension plans. These assumptions were used for determining the benefit obligations as of July 31, 2022 and for developing the annual expense for its U.S. pension plans for the fiscal year ending July 31, 2023. The Company follows the local actuaries’ recommendations for non-U.S. pension plans.
Service and Interest Costs
The Company uses a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. This method provides a precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rate on the yield curve.
Investments
Global Equity Securities
Global equity securities consist primarily of publicly traded U.S. and non-U.S. equities, mutual funds, collective investment trusts, diversified growth investment funds and private equity. Publicly traded equities and index funds are valued at the closing price reported in the active market in which the individual securities are traded. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured or distressed debt, growth equity, mezzanine or subordinated debt, real estate, special situation partnerships and venture capital investments. Interests in these funds are valued at net asset value (NAV).
Fixed Income Securities
Fixed income securities consist primarily of investment and non-investment grade debt securities, debt securities issued by the U.S. Treasury, multi-asset credit investment funds and exchange-traded funds. Government, corporate and other bonds and notes, interest rate and inflation swaps, physical inflation-linked and nominal gilts, synthetic gilts, money market instruments and cash are valued at the closing price reported if they are traded on an active market or if they are traded at yields currently available on comparable securities of issuers with similar credit ratings. Fixed income securities also include smaller allocations to alternative investments, private equity and alternative fixed income investments. Alternative investments consist primarily of private placement funds, private equity investments and alternative fixed income-like investments. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured or distressed debt, growth equity, mezzanine or subordinated debt, real estate, special situation partnerships and venture capital investments. Alternative fixed income securities consist primarily of private partnership interests in hedge funds. Interests in these funds are valued at NAV, which is determined by the administrator or custodian of the fund based on the fair value of the underlying assets owned by the fund less its liabilities.
Insurance Contracts
Insurance contracts are individual contracts whereby an insurance company offers a guaranteed minimum interest return. The Company does not have any influence on the investment decisions made by the insurer. European insurers, in general, are strictly regulated by an external control mechanism and have to invest for their guaranteed interest products within certain boundaries. Typically, they have a strategic asset allocation with 80% to 90% fixed income products and 10% to 20% equity-type products, including real estate.
Real Assets Funds
Real assets funds consist of interests in partnerships that invest in private real estate and commodities investments. Interests in partnerships are valued using NAV.
Fair Value of Plan Assets
Fair value measurements of plan assets are reported in one of three levels based on the lowest level of significant input used. For Level 1, inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. For Level 2, inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. For Level 3,inputs to the fair value measurement are unobservable inputs or are based on valuation techniques.
The estimated fair value of pension plan assets and their respective levels in the fair value hierarchy by asset category were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | | | Total |
| Balances as of July 31, 2022 | | | | | | | | | | |
| Cash and cash equivalents | | $ | 6.6 | | | $ | 0.8 | | | $ | — | | | | | $ | 7.4 | |
| Global equity securities | | 136.5 | | | — | | | — | | | | | 136.5 | |
| Fixed income securities | | 114.1 | | | 115.7 | | | — | | | | | 229.8 | |
| | | | | | | | | | |
| Insurance contracts | | — | | | — | | | 35.4 | | | | | 35.4 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total investments in the fair value hierarchy | | $ | 257.2 | | | $ | 116.5 | | | $ | 35.4 | | | | | 409.1 | |
| Investments using NAV as practical expedient | | | | | | | | | | 50.7 | |
| Total assets | | | | | | | | | | $ | 459.8 | |
| | | | | | | | | | |
| Balances as of July 31, 2021 | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2.2 | | | $ | 1.0 | | | $ | — | | | | | $ | 3.2 | |
| Global equity securities | | 184.1 | | | — | | | — | | | | | 184.1 | |
| Fixed income securities | | 134.4 | | | 158.4 | | | — | | | | | 292.8 | |
| | | | | | | | | | |
| Insurance contracts | | — | | | — | | | 37.7 | | | | | 37.7 | |
| Total investments in the fair value hierarchy | | $ | 320.7 | | | $ | 159.4 | | | $ | 37.7 | | | | | 517.8 | |
| Investments using NAV as practical expedient | | | | | | | | | | 73.5 | |
| Total assets | | | | | | | | | | $ | 591.3 | |
| | | | | | | | | | |
Certain investments, valued at NAV, had the following unfunded commitments and/or redemption restrictions (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, 2022 | | July 31, 2021 | | | | |
| | NAV | | Unfunded Commitments | | NAV | | Unfunded Commitments | | Redemption Frequency
(If Currently Eligible) | | Redemption Notice (Days) |
| | | | | | | | | | | | |
| Global equity securities | | $ | 37.0 | | | $ | 1.8 | | | $ | 50.7 | | | $ | 1.8 | | | Daily | | 0 - 5 |
| Fixed income securities | | 10.8 | | | — | | | 20.4 | | | — | | | Daily, Weekly and Quarterly | | 0 - 60 |
| | | | | | | | | | | | |
| Real asset funds | | 2.9 | | | 4.2 | | | 2.4 | | | 4.3 | | | Not eligible | | N/A |
| Total U.S. assets | | $ | 50.7 | | | $ | 6.0 | | | $ | 73.5 | | | $ | 6.1 | | | | | |
The changes in the fair values of the pension plans’ Level 3 assets were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Balance as of beginning of year | | $ | 37.7 | | | $ | 35.4 | | | $ | 30.8 | |
| Unrealized gains | | 3.5 | | | 3.6 | | | 4.1 | |
| Foreign currency exchange | | (5.6) | | | 0.1 | | | 2.1 | |
| Purchases and sales, net | | (0.2) | | | (1.4) | | | (1.6) | |
| Balance as of end of year | | $ | 35.4 | | | $ | 37.7 | | | $ | 35.4 | |
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Investment Policies and Strategies
For U.S. pension plans, the Company uses a total return on investment approach to achieve a long-term return on plan assets, with what the Company believes to be a prudent level of risk for the purpose of meeting its retirement income commitments to employees. The U.S. pension plans’ investments are diversified to assist in managing risk. During the year ended July 31, 2022, the Company’s asset allocation was as follows:
| | | | | | | | | | | | | | |
| | Salaried Pension Plan | | Hourly Pension Plan |
| Global equities | | 33 | % | | 29 | % |
| Fixed income | | 65 | | | 70 | |
| Real assets | | 1 | | | — | |
| Cash and cash equivalents | | 1 | | | 1 | |
| Total | | 100 | % | | 100 | % |
The target allocation guidelines are determined in conjunction with the Company’s investment consultant and through the use of modeling the risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected volatility/standard deviation of returns and expected correlations with other asset classes.
For non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure assets with appropriate liquidity that will generate income and capital growth to meet, together with any new contributions from members and the Company, the cost of current and future benefits. Investment policy and performance is measured and monitored on an ongoing basis.
Estimated Contributions and Future Payments
The Company’s general funding policy is to make at least the minimum required contributions as required by applicable regulations, plus any additional amounts it determines to be appropriate. The Company made contributions of $2.3 million to its pension plans during the year ended July 31, 2022. Future required pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements.
Estimated future benefit required payments for the Company’s pension plans as of July 31, 2022 were as follows (in millions):
| | | | | | | | |
| | |
| 2023 | | $ | 29.2 | |
| 2024 | | $ | 29.6 | |
| 2025 | | $ | 29.7 | |
| 2026 | | $ | 27.7 | |
| 2027 | | $ | 27.9 | |
| 2028-2032 | | $ | 147.4 | |
Retirement Savings
The Company provides a contributory employee savings plan to U.S. employees that permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. For eligible employees, employee contributions of up to 50% of compensation are matched at a rate equaling 100% of the first 3% contributed and 50% of the next 2% contributed. In addition, the Company contributes 3% of compensation annually for eligible employees. Total contribution expense for this plan was $27.2 million, $25.2 million and $22.0 million for the years ended July 31, 2022, 2021 and 2020, respectively.
Deferred Compensation and Other Benefit Plans
The Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows eligible employees to defer the receipt of all or a portion of their cash bonus and other stock-related compensation and up to 75% of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals that are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability of $2.6 million and $3.3 million as of July 31, 2022 and 2021, respectively, related primarily to its deferred compensation plans.
Note 15. Derivative Instruments and Hedging
Derivative Fair Value Measurements
The Company enters into derivative instrument agreements, including foreign currency forward contracts, net investment hedges and interest rate swaps, to manage risk in connection with changes in foreign currency and interest rates. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit. There is risk the counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors.
Contract provisions may require the posting of collateral or settlement of the contracts for various reasons, including if the Company’s credit ratings are downgraded below its investment grade credit rating by any of the major credit agencies or for cross default contractual provisions if there is a failure under other financing arrangements related to payment terms or covenants. As of July 31, 2022 and 2021, no collateral was posted.
The Company does not enter into derivative instrument agreements for trading or speculative purposes. For discussion on the fair value of the Company’s derivatives, see Note 16.
Foreign Currency Forward Contracts - Cash Flow Hedges and Derivatives Not Designated as Hedging Instruments
The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges as of July 31, 2022 and 2021 were $158.0 million and $117.2 million, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges as of July 31, 2022 and 2021 were $151.6 million and $154.2 million, respectively.
Changes in the fair value of the Company’s designated hedges are reported in accumulated other comprehensive loss on the Consolidated Balance Sheets until the related transaction occurs, see Note 12. Designated hedges are recognized as a component of net sales, cost of sales, operating expenses and other income, net in the Consolidated Statements of Earnings upon occurrence of the related hedged transaction.
Hedges which are not designated are recognized in other income, net in the Consolidated Statements of Earnings along with the related hedged transactions. Changes in the fair value of hedges which are not designated, are recognized in other income, net in the Consolidated Statements of Earnings.
Amounts related to foreign currency forward contracts designated as hedges are expected to be reclassified into earnings during the next 12 months based upon the timing of inventory purchases and sales.
Net Investment Hedges
The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method for designating these contracts as net investment hedges.
The total notional amount of net investment hedges as of July 31, 2022 and 2021 were €80 million, or $88.8 million, and €50 million, or $55.8 million, respectively. The maturity dates range from 2027 to 2029.
Gains and losses resulting from a change in fair value of the net investment hedge are offset by gains and losses on the underlying foreign currency exposure and are included in accumulated other comprehensive loss on the Consolidated Balance Sheets. Amounts related to excluded components associated with the net investment hedge are expected to be reclassified into earnings in interest expense in the Consolidated Statements of Earnings through their maturity.
Interest Rate Swaps - Cash Flow Hedges
The Company uses swap agreements to hedge exposure related to interest expense and to manage its exposure to interest rate movements. In fiscal 2021, the Company entered into interest rate swap agreements designated as cash flow hedges with aggregate notional amounts of $40.0 million and $25.0 million, respectively, hedging future fixed-rate debt issuances, which effectively fixed a portion of interest payments based on the 10 year treasury rates. Both instruments terminated in fiscal 2021, generating a realized gain of $2.6 million, and were subsequently recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. The gain is amortized in interest expense in the Consolidated Statements of Earnings over the life of the related debt. As of July 31, 2022 and 2021, there were no outstanding interest rate swap arrangements.
Cash Flows
Cash flows from derivative transactions are recorded in operating activities in the Consolidated Statements of Cash Flows.
Note 16. Fair Value Measurements
Fair value measurements of financial instruments are reported in one of three levels based on the lowest level of significant input used as follows:used. For Level 1, inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. For Level 2, inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. For Level 3,inputs to the fair value measurement are unobservable inputs or are based on valuation techniques.
Short-Term Financial Instruments |
| |
Level 1 | Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. |
Level 2 | Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. |
Level 3 | Inputs to the fair value measurement are unobservable inputs or valuation techniques. |
AtAs of July 31, 20172022 and 2016,2021, the carrying valuesvalues of cash and cash equivalents, accounts receivables,accounts receivable, short-term borrowings and trade accounts payable approximate fair value because of the short-term nature of these instruments. instruments, and are classified as Level 1 in the fair value hierarchy.
Long-Term Debt
As of July 31, 2017,2022, the estimated fair valuevalues of fixed interest rate long-term debt with fixed interest rates was $330.6were $396.9 million compared to itsthe carrying valuevalues of $325.0$425.0 million. As of July 31, 2016,2021, the estimated fair valuevalues of fixed interest rate long-term debt with fixed interest rates was $394.4were $297.4 million compared to itsthe carrying valuevalues of $375.0$275.0 million. The fair value isvalues are estimated by discounting the projected cash flows using the rate thatinterest rates at which similar amounts of debt could currently be borrowed. The carrying values of total variable interest rate long-term debt were $221.7 million and $188.3 million as of July 31, 2022 and 2021, respectively, and approximate their fair values. Long-term debt would beis classified as Level 2 in the fair value hierarchy.
Equity Method Investments
The Company holds equity method investments in its joint ventures, which are included in other long-term assets on the Consolidated Balance Sheets. The aggregate carrying valuesamount of long-term debt with variable interest rates approximatethese investments was $22.4 million and $24.2 million as of July 31, 2022 and 2021, respectively. These equity method investments are measured at fair value.
value on a non-recurring basis. The fair value of the Company’s equity method investments has not been adjusted as there have been no triggering events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event these investments are required to be measured, they would fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities.
Derivative contracts are reported at their fair values based on third-party quotes. Fair Value Measurements
The fair values of the Company’s financial assetsforeign currency forward contracts, net investment hedges and liabilities listed belowinterest rate swaps reflect the amounts that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date (exit price). The fair values are based on inputs other than quoted prices that are observable for the asset or liability.liability and are determined by standard calculations and models that use readily observable market parameters. These inputs include foreign currency exchange rates and interest rates. The financial assets and liabilities are primarily valued using standard calculations and models that use as their basis readily observable market parameters. Industry standard data providers are the primary source for forward and spot rate information for both interest rates and foreign currency exchange rates.
The following summarizesfair values of the Company’s foreign currency forward contracts, net investment hedges and interest rate swaps are classified as Level 2 in the fair value hierarchy. For discussion of outstanding derivative contracts at July 31, 2017the Company’s derivatives and 2016, included in the accompanying Consolidated Balance Sheets (in millions):hedging, see Note 15.
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| | | | | | | | |
| | | Significant Other Observable Inputs (Level 2) |
| | | July 31, |
| | | 2017 |
| | 2016 |
|
| Assets | | | | |
| Prepaids and other current assets | | | | |
| Foreign exchange contracts | | $ | 2.1 |
| | $ | 1.1 |
|
| Liabilities | | | | |
| Other current liabilities | | | | |
| Foreign exchange contracts | | (5.5 | ) | | (2.4 | ) |
| Forward exchange contracts - net liability position | | $ | (3.4 | ) | | $ | (1.3 | ) |
The Company holds equity method investments, which are classified in other long-term assets in the accompanying Consolidated Balance Sheets. The aggregate carrying amount of these investments was $19.0 million and $18.7 million as of July 31, 2017 and 2016, respectively. These equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s equity method investments has not been estimatedderivative contracts, recorded on the Consolidated Balance Sheets, was as there have been no identified eventsfollows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | Assets | | Liabilities |
| | | | | | July 31, | | July 31, |
| Instruments | | Balance Sheet Location | | | | | | 2022 | | 2021 | | 2022 | | 2021 |
| Designated as hedging instruments | | | | | | | | | | | | | | |
Foreign currency forward contracts | | Other current assets, other long-term assets | | | | | | $ | 0.3 | | | $ | 1.0 | | | $ | 2.7 | | | $ | 1.2 | |
| Net investment hedges | | Other current assets, other long-term assets and other long-term liabilities | | | | | | 8.2 | | | 1.1 | | | — | | | 2.0 | |
| | | | | | | | | | | | | | |
| Total designated | | | | | | | | 8.5 | | | 2.1 | | | 2.7 | | | 3.2 | |
| | | | | | | | | | | | | | |
| Not designated as hedging instruments | | | | | | | | | | | | | | |
Foreign currency forward contracts | | Other current liabilities | | | | | | 1.7 | | | 0.5 | | | 2.5 | | | 0.4 | |
| Total not designated | | | | | | | | 1.7 | | | 0.5 | | | 2.5 | | | 0.4 | |
| Total | | | | | | | | $ | 10.2 | | | $ | 2.6 | | | $ | 5.2 | | | $ | 3.6 | |
| | | | | | | | | | | | | | |
Fair Value of Contingent Consideration
The fair value of the contingent consideration liability is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market, and thus, represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows or earnings generally represent the only significant unobservable inputs. The contingent consideration liability is measured at fair value each reporting period and changes in circumstance that would have had an adverse impact on theestimates of fair value of these investments. In the event that these investments were required to be measured, these investments would fall within Level 3are recognized in earnings.
A reconciliation of the fair value hierarchy, due toof the Company’s contingent consideration liability that use of significant unobservable inputs, to determine fair value,was as the investments are in privately-held entities or divisionsfollows (in millions):
| | | | | | | | | | | | |
| | | | | | |
| | |
| | | | | | |
| Balance as of July 31, 2021 | | $ | — | | | | | |
| Issuances | | 24.6 | | | | | |
| | | | | | |
| Adjustments to fair value | | 0.1 | | | | | |
| Balance as of July 31, 2022 | | $ | 24.7 | | | | | |
| | | | | | |
| Maximum potential payout | | $ | 30.7 | | | | | |
There was no contingent consideration as of public companies without quoted market prices.
Goodwill is assessed for impairment annually or more frequently if an event occurs or circumstances change that would indicate the asset may be impaired. Definite-lived intangible assets are subject to impairment assessments as triggering events occur that could indicate that the asset may be impaired. The Company’s goodwill and intangible assets are not recorded at fair value as there have been no events or circumstances that would have an adverse impact on the value of these assets. In the event that an impairment was recognized, the fair value would be classified within Level 3 of the fair value hierarchy. Refer to Note 5 for further discussion of the annual goodwill impairment analysis and carrying values of goodwill and other intangible assets.
The Company assesses the impairment of property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant and equipment assets may not be recoverable. There were no material impairment charges recorded during the years ended July 31, 2017, 2016 and 2015.
NOTE 14. Shareholders’ Equity
Stock Compensation Plans The Stock Compensation Plans in the Consolidated Statements of Changes in Shareholders’ Equity consist of amounts payable to eligible participants for stock compensation that was deferred to a Rabbi Trust pursuant to the provisions of the 2010 Master Stock Incentive Plan, as well as performance awards payable in common stock discussed further in Note 10.
Treasury Stock The Company's Board of Directors authorized the repurchase of up to 14.0 million shares of common stock under the Company’s stock repurchase plan dated May 29, 2015. This repurchase authorization is effective until terminated by the Board of Directors. As of July 31, 2017, the Company had remaining authorization to repurchase 7.2 million shares under this plan. Treasury stock share activity for the years ended July 31, 20172021 and 2016 is summarized as follows:2020, see Note 2.
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| | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
|
| Beginning balance | | 18,750,503 |
| | 17,044,950 |
|
| Stock repurchases | | 3,330,357 |
| | 2,540,000 |
|
| Net issuance upon exercise of stock options | | (944,556 | ) | | (764,756 | ) |
| Issuance under compensation plans | | (91,817 | ) | | (59,787 | ) |
| Other activity | | (7,134 | ) | | (9,904 | ) |
| Ending balance | | 21,037,353 |
| | 18,750,503 |
|
NOTE 15. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the years ended July 31, 2017 and 2016 are as follows (in millions):
|
| | | | | | | | | | | | | | | | | |
| | | Foreign currency translation adjustment (1) | | Pension benefits | | Derivative financial instruments | | Total | |
| Balance as of July 31, 2016, net of tax | | $ | (89.3 | ) | | $ | (115.8 | ) | | $ | (0.5 | ) | | $ | (205.6 | ) | |
| Other comprehensive income (loss) before reclassifications and tax | | 30.5 |
| | 24.8 |
| | (2.4 | ) | | 52.9 |
| |
| Tax (expense) benefit | | — |
| | (8.7 | ) | | 0.8 |
| | (7.9 | ) | |
| Other comprehensive income (loss) before reclassifications, net of tax | | 30.5 |
| | 16.1 |
| | (1.6 | ) | | 45.0 |
| |
| Reclassifications, before tax | | — |
| | 7.1 |
| | (1.4 | ) | | 5.7 |
|
|
| Tax (expense) benefit | | — |
| | (2.5 | ) | | 0.4 |
| | (2.1 | ) | |
| Reclassifications, net of tax | | — |
| | 4.6 |
| (3) | (1.0 | ) | (2) | 3.6 |
| |
| Other comprehensive income (loss), net of tax | | 30.5 |
| | 20.7 |
| | (2.6 | ) | | 48.6 |
| |
| Balance as of July 31, 2017, net of tax | | $ | (58.8 | ) | | $ | (95.1 | ) | | $ | (3.1 | ) | | $ | (157.0 | ) | |
| | | | | | | | | | |
| Balance as of July 31, 2015, net of tax | | $ | (70.8 | ) | | $ | (90.6 | ) | | $ | (0.6 | ) | | $ | (162.0 | ) | |
| Other comprehensive loss before reclassifications and tax | | (18.5 | ) | | (55.4 | ) | | (0.4 | ) | | (74.3 | ) | |
| Tax benefit | | — |
| | 19.4 |
| | 0.1 |
| | 19.5 |
| |
| Other comprehensive loss before reclassifications, net of tax | | (18.5 | ) | | (36.0 | ) | | (0.3 | ) | | (54.8 | ) | |
| Reclassifications, before tax | | — |
| | 15.8 |
| | 0.6 |
| | 16.4 |
|
|
| Tax expense | | — |
| | (5.0 | ) | | (0.2 | ) | | (5.2 | ) | |
| Reclassifications, net of tax | | — |
| | 10.8 |
| (3) | 0.4 |
| (2) | 11.2 |
| |
| Other comprehensive (loss) income, net of tax | | (18.5 | ) | | (25.2 | ) | | 0.1 |
| | (43.6 | ) | |
| Balance as of July 31, 2016, net of tax | | $ | (89.3 | ) | | $ | (115.8 | ) | | $ | (0.5 | ) | | $ | (205.6 | ) | |
| |
(1) | Taxes are not provided on cumulative translation adjustments as substantially all translation adjustments relate to earnings that are intended to be indefinitely reinvested outside the U.S. |
| |
(2) | Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to other income, net (see Note 1). |
| |
(3) | Primarily includes net amortization of prior service costs and actuarial losses included in net periodic benefit cost (see Note 11) that were reclassified from accumulated other comprehensive loss to operating expenses or cost of sales. |
NOTE 16. GuaranteesLetters of Credit
The Company and Caterpillar Inc. equally own the shares of Advanced Filtration Systems Inc. (AFSI), an unconsolidated joint venture and guarantee certain debt of the joint venture. As of July 31, 2017 and 2016, AFSI had $27.8 million and $24.8 million, respectively, of outstanding debt, of which the Company guarantees half. In addition, during the years ended July 31, 2017, 2016 and 2015, the Company recorded earnings (losses) from this equity method investment of $2.1 million, $(0.7) million and $2.3 million and royalty income of $5.9 million, $5.1 million and $5.8 million, respectively.
At July 31, 2017 and 2016, the Company had a contingent liability for standbyhas letters of credit totaling $10.5 million and $7.3 million, respectively, that have been issued and are outstanding. The letters of creditwhich guarantee payment to third parties in the event the Company is in breach of contract terms as detailed in each letter of credit. AtThe outstanding debt contingent liability for standby letters of credit was as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 |
| Contingent liability for standby letters of credit issued under the Company’s revolving credit facility | | $ | 7.5 | | | $ | 7.7 | |
| Amounts drawn for letters of credit under the Company’s revolving credit facility | | $ | — | | | $ | — | |
| | | | |
Advanced Filtration Systems Inc. (AFSI)
The Company has an unconsolidated joint venture, AFSI, established by the Company and Caterpillar Inc. (Caterpillar) in 1986. AFSI designs and manufactures high-efficiency fluid filters used in Caterpillar’s machinery worldwide. The Company and Caterpillar equally own the shares of AFSI, and both companies guarantee certain debt and banking services, including credit and debit cards, merchant processing and treasury management services, of the joint venture. The Company accounts for AFSI as an equity method investment.
The outstanding debt relating to AFSI, which the Company guarantees half, was $68.8 million and $37.8 million as of July 31, 20172022 and 2016, there2021, respectively. AFSI has $63.0 million in a revolving credit facility which expires in 2024 and $17.0 million in an additional multi-currency revolving credit facility which terminates upon notification of either party.
Earnings from AFSI, which are recorded in other income, net in the Consolidated Statements of Earnings were no amounts drawn upon these letters$8.1 million and $8.7 million as of credit.July 31, 2022 and 2021, respectively.
NOTE 17.Note 18. Commitments and Contingencies
Operating Leases The Company enters into operating leases primarily for office and warehouse facilities, production and non-production equipment, automobiles and computer equipment. Total expense recorded under operating leases for years ended July 31, 2017, 2016 and 2015, was $28.7 million, $25.4 million and $28.1 million, respectively.
As of July 31, 2017, the estimated future minimum lease payments under operating leases are as follows (in millions):
|
| | | | |
| Year Ending July 31, | | Operating Leases |
| 2018 | | $ | 9.7 |
|
| 2019 | | 6.2 |
|
| 2020 | | 3.1 |
|
| 2021 | | 1.4 |
|
| 2022 | | 0.7 |
|
| Thereafter | | 1.7 |
|
| Total future minimum lease payments | | $ | 22.8 |
|
Litigation The Company records provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuitslitigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the recorded estimated liability in its Consolidated Financial Statements for claims or litigation is adequate in light ofand appropriate for the probable and estimable outcomes. TheLiabilities recorded liabilities were not material to the Company’s financial position, results of operations liquidity or financial position and theliquidity. The Company believes it is remote that the settlement of any of the currently identified claims or litigation will be materially in excess of what is accrued.
The Company estimates warranty expense on certain products at the time of sale using quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues. There were no individually or collectively material specific warranty matters accrued for, or significant settlements made, during the years ended July 31, 2022 and 2021. The Company’s accrued warranty reserves were $4.9 million and $6.1 million as of July 31, 2022 and 2021, respectively.
NOTE 18.Note 19. Segment Reporting
The Company has identified twoCompany’s reportable segments:segments are Engine Products and Industrial Products. Segment determination is based onProducts. The Company determines its operating segments consistent with the internal organization structure, management ofmanner in which it manages its operations and evaluates performance evaluation by managementfor internal review and decision-making. Corporate and unallocated includes corporate expenses determined to be non-allocable to the Company’s Boardsegments, such as interest expense, restructuring charges and certain incentive compensation. In fiscal 2022, corporate and unallocated also included a charge of Directors.$3.4 million related to the Russia and Ukraine conflict.
The Engine Products segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road, Aftermarket and Aerospace and Defense business units. Within these business units, Engine products consist of replacement filters for both air and liquid filtration applications as well as exhaust and emissions. Applications include air filtration systems, fuel and lube systems, hydraulic applications and exhaust and emissions systems and sensors, indicators and monitoring systems. Engine sells to OEMs in the construction, mining, agriculture, transportation, aerospace defense and truckdefense end markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include replacement filters for both air and liquid filtration applications, air filtration systems, liquid filtration systems for fuel, lube and hydraulic applications, and exhaust and emissions systems.
The Industrial Products segment sells to various dealers, distributors, OEMsis organized based on product type and consists of gas-fired turbinesthe IFS, Gas Turbine Systems (GTS) and OEMs and end users requiring clean air filtration solutions and replacement filters. Products includeSpecial Applications business units. Within the IFS business unit, products consist of dust, fume and mist collectors, compressed air purification systems, gas and liquid filtration for food, beverage and industrial processes. The GTS business unit products consist of air filtration systems for gas turbines, PTFEturbines. Special applications products include polytetrafluoroethylene membrane-based products andas well as specialized air and gas filtration systems for applications including hard disk drives and semi-conductor manufacturing.
Corporatemanufacturing and Unallocated includes corporate expenses determinedsensors, indicators and monitoring systems. Industrial sells to be non-allocable to the segments, such as interest incomevarious dealers, distributors, OEMs and interest expense. Assets included in Corporate and Unallocated are principally cash and cash equivalents, inventory reserves, certain prepaids, certain investments, other assets and assets allocated to general corporate purposes.end users.
The Company has an internal measurement system to evaluate performance and allocate resources based on earnings before income taxes. The Company’s manufacturing facilities that serve both reportingof its reportable segments. Therefore,As such, asset and capital expenditure information by reportable segment has not been provided, since the Company uses an allocation methodology to assign costsdoes not produce or utilize such information internally. In addition, although depreciation and assets to the segments. A certain amountamortization expense is a component of costs and assets relate to general corporate purposes and areeach reportable segment’s operating results, it is not assigned to either segment. The accounting policy applied to inventory for the reportable segments differs from that
described in the summary of significant accounting policies. The reportable segments account for inventory on a standard cost basis, which is consistent with the Company's internal reporting.
Segment allocated assets are primarily accounts receivable, inventories, property, plant and equipment and goodwill. Reconciling items included in Corporate and Unallocated are created based on accounting differences between segment reporting and the consolidated external reporting as well as internal allocation methodologies.discretely identifiable.
The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the earnings before income taxes and other financial information shownas stated below.
Segment detail is summarizeddetails were as follows (in millions):
| | | | | | | | | | | | Engine
Products Segment | | Industrial
Products Segment | | Corporate and
Unallocated | | Total
Company |
| Year ended July 31, 2022 | | Year ended July 31, 2022 | | | | | | | | |
| Net sales | | Net sales | | $ | 2,302.7 | | | $ | 1,003.9 | | | $ | — | | | $ | 3,306.6 | |
| | | Engine Products | | Industrial Products | | Corporate and Unallocated | | Total Company | |
| Fiscal 2017 | | | | | | | | | |
| Net sales | | $ | 1,553.3 |
| | $ | 818.6 |
| | $ | — |
| | $ | 2,371.9 |
| |
| Depreciation and amortization | | 33.9 |
| | 26.7 |
| | 14.6 |
| | 75.2 |
| |
| Equity earnings in unconsolidated affiliates | | 4.4 |
| | 0.6 |
| | — |
| | 5.0 |
| Equity earnings in unconsolidated affiliates | | $ | 1.7 | | | $ | — | | | $ | — | | | $ | 1.7 | |
| Earnings (loss) before income taxes | | 219.7 |
| | 129.1 |
| | (26.8 | ) | | 322.0 |
| Earnings (loss) before income taxes | | $ | 329.2 | | | $ | 162.5 | | | $ | (53.3) | | | $ | 438.4 | |
| Assets | | 849.6 |
| | 638.3 |
| | 491.8 |
| | 1,979.7 |
| |
| | Equity investments in unconsolidated affiliates | | 14.8 |
| | 4.2 |
| | — |
| | 19.0 |
| Equity investments in unconsolidated affiliates | | $ | 22.4 | | | $ | — | | | $ | — | | | $ | 22.4 | |
| Capital expenditures | | 29.7 |
| | 23.4 |
| | 12.8 |
| | 65.9 |
| |
| Fiscal 2016 | | |
| | |
| | |
| | |
| |
| | | Year ended July 31, 2021 | | Year ended July 31, 2021 | |
| Net sales | | $ | 1,391.3 |
| | $ | 829.0 |
| | $ | — |
| | $ | 2,220.3 |
| Net sales | | $ | 1,957.7 | | | $ | 896.2 | | | $ | — | | | $ | 2,853.9 | |
| Depreciation and amortization | | 38.5 |
| | 28.1 |
| | 8.3 |
| | 74.9 |
| |
| | Equity earnings in unconsolidated affiliates | | 1.0 |
| | 1.2 |
| | — |
| | 2.2 |
| Equity earnings in unconsolidated affiliates | | $ | 4.2 | | | $ | — | | | $ | — | | | $ | 4.2 | |
| Earnings (loss) before income taxes | | 163.5 |
| | 119.0 |
| | (25.1 | ) | | 257.4 |
| Earnings (loss) before income taxes | | $ | 289.0 | | | $ | 133.3 | | | $ | (41.3) | | | $ | 381.0 | |
| Assets | | 841.4 |
| | 646.9 |
| | 298.7 |
| | 1,787.0 |
| |
| | Equity investments in unconsolidated affiliates | | 14.3 |
| | 4.4 |
| | — |
| | 18.7 |
| Equity investments in unconsolidated affiliates | | $ | 24.2 | | | $ | — | | | $ | — | | | $ | 24.2 | |
| Capital expenditures | | 37.5 |
| | 27.3 |
| | 8.1 |
| | 72.9 |
| |
| Fiscal 2015 | | |
| | |
| | |
| | |
| |
| | | Year ended July 31, 2020 | | Year ended July 31, 2020 | |
| Net sales | | $ | 1,484.1 |
| | $ | 887.1 |
| | $ | — |
| | $ | 2,371.2 |
| Net sales | | $ | 1,727.5 | | | $ | 854.3 | | | $ | — | | | $ | 2,581.8 | |
| Depreciation and amortization | | 43.3 |
| | 26.4 |
| | 4.6 |
| | 74.3 |
| |
| | Equity earnings in unconsolidated affiliates | | 4.1 |
| | 1.0 |
| | — |
| | 5.1 |
| Equity earnings in unconsolidated affiliates | | $ | 4.7 | | | $ | 0.5 | | | $ | — | | | $ | 5.2 | |
| Earnings (loss) before income taxes | | 186.3 |
| | 123.3 |
| | (21.0 | ) | | 288.6 |
| Earnings (loss) before income taxes | | $ | 229.3 | | | $ | 124.9 | | | $ | (19.0) | | | $ | 335.2 | |
| Assets | | 887.7 |
| | 634.0 |
| | 285.8 |
| | 1,807.5 |
| |
| | Equity investments in unconsolidated affiliates | | 15.1 |
| | 3.2 |
| | — |
| | 18.3 |
| Equity investments in unconsolidated affiliates | | $ | 21.7 | | | $ | — | | | $ | — | | | $ | 21.7 | |
| Capital expenditures | | 54.6 |
| | 33.4 |
| | 5.8 |
| | 93.8 |
| |
|
Net sales by product group within the Engine Products segment and Industrial Products segment is summarizedbusiness unit were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 31, |
| | 2022 | | 2021 | | 2020 |
| Engine Products segment | | | | | | |
| Off-Road | | $ | 405.8 | | | $ | 328.1 | | | $ | 256.5 | |
| On-Road | | 136.1 | | | 138.8 | | | 124.4 | |
| Aftermarket | | 1,640.3 | | | 1,394.6 | | | 1,228.9 | |
| Aerospace and Defense | | 120.5 | | | 96.2 | | | 117.7 | |
| Total Engine Products segment | | 2,302.7 | | | 1,957.7 | | | 1,727.5 | |
| | | | | | |
| Industrial Products segment | | | | | | |
| Industrial Filtration Solutions | | 711.2 | | | 621.9 | | | 581.2 | |
| Gas Turbine Systems | | 110.2 | | | 96.2 | | | 101.6 | |
| Special Applications | | 182.5 | | | 178.1 | | | 171.5 | |
| Total Industrial Products segment | | 1,003.9 | | | 896.2 | | | 854.3 | |
| Total Company | | $ | 3,306.6 | | | $ | 2,853.9 | | | $ | 2,581.8 | |
|
| | | | | | | | | | | | |
| | | Year Ended July 31, |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| Engine Products segment: | | | | | | |
| Off-Road | | $ | 252.1 |
| | $ | 216.6 |
| | $ | 261.1 |
|
| On-Road | | 110.7 |
| | 127.2 |
| | 138.4 |
|
| Aftermarket | | 1,086.2 |
| | 951.5 |
| | 980.7 |
|
| Aerospace and Defense | | 104.3 |
| | 96.0 |
| | 103.9 |
|
| Total Engine Products segment | | 1,553.3 |
| | 1,391.3 |
| | 1,484.1 |
|
| Industrial Products segment: | | | | | | |
| Industrial Filtration Solutions | | 533.2 |
| | 517.9 |
| | 529.0 |
|
| Gas Turbine Systems | | 122.9 |
| | 149.6 |
| | 186.9 |
|
| Special Applications | | 162.5 |
| | 161.5 |
| | 171.2 |
|
| Total Industrial Products segment | | 818.6 |
| | 829.0 |
| | 887.1 |
|
| Total Company | | $ | 2,371.9 |
| | $ | 2,220.3 |
| | $ | 2,371.2 |
|
Net sales, generally disaggregated by originationlocation where the customer’s order was received, and property, plant and equipment, net by geographic region are summarizedwere as follows (in millions):
| | | | | | | | | | | | | | |
| | Net Sales | | Property, Plant and Equipment, Net |
| Year ended July 31, 2022 | | | | |
| U.S. and Canada | | $ | 1,336.8 | | | $ | 218.1 | |
| EMEA | | 963.6 | | | 184.3 | |
| APAC | | 669.0 | | | 59.5 | |
| LATAM | | 337.2 | | | 132.5 | |
| Total | | $ | 3,306.6 | | | $ | 594.4 | |
| | | | |
| | | | |
| Year ended July 31, 2021 | | | | |
| U.S. and Canada | | $ | 1,084.2 | | | $ | 214.0 | |
| EMEA | | 865.7 | | | 220.4 | |
| APAC | | 649.2 | | | 60.4 | |
| LATAM | | 254.8 | | | 123.0 | |
| Total | | $ | 2,853.9 | | | $ | 617.8 | |
| | | | |
| | | | |
| Year ended July 31, 2020 | | | | |
| U.S. and Canada | | $ | 1,059.9 | | | $ | 229.0 | |
| EMEA | | 760.2 | | | 229.4 | |
| APAC | | 553.2 | | | 59.8 | |
| LATAM | | 208.5 | | | 113.4 | |
| Total | | $ | 2,581.8 | | | $ | 631.6 | |
|
| | | | | | | | |
| | | Net Sales (1) | | Property, Plant and Equipment, Net |
| Fiscal 2017 | | | | |
| United States | | $ | 990.1 |
| | $ | 192.7 |
|
| Europe | | 638.1 |
| | 163.3 |
|
| Asia Pacific | | 500.5 |
| | 55.3 |
|
| Other | | 243.2 |
| | 73.3 |
|
| Total | | $ | 2,371.9 |
| | $ | 484.6 |
|
| | | | | |
| Fiscal 2016 | | |
| | |
|
| United States | | $ | 937.3 |
| | $ | 192.9 |
|
| Europe | | 632.7 |
| | 148.1 |
|
| Asia Pacific | | 449.9 |
| | 60.1 |
|
| Other | | 200.4 |
| | 68.7 |
|
| Total | | $ | 2,220.3 |
| | $ | 469.8 |
|
| | | | | |
| Fiscal 2015 | | |
| | |
|
| United States | | $ | 1,007.3 |
| | $ | 209.0 |
|
| Europe | | 671.3 |
| | 141.7 |
|
| Asia Pacific | | 470.7 |
| | 63.8 |
|
| Other | | 221.9 |
| | 56.1 |
|
| Total | | $ | 2,371.2 |
| | $ | 470.6 |
|
| |
(1) | Net sales by origination is based on the country of the Company's legal entity where the customer's order was placed. |
Concentrations There were no customers that accounted for over 10% of net sales duringfor the years ended July 31, 2017, 20162022, 2021 or 2015.2020. There were no customers that accounted for over 10% of gross accounts receivable atas of July 31, 20172022 or July 31, 2016.
2021.
NOTE 19. Quarterly Financial Information (Unaudited)Note 20. Restructuring
Unaudited consolidated quarterly financial informationIn the second quarter of fiscal 2021, the Company initiated activities to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $14.8 million. Charges of $5.8 million were included in cost of sales and $9.0 million were included in operating expenses in the Consolidated Statement of Earnings for the yearsyear ended July 31, 2017 and 20162021. This initiative is as follows (in millions, except pernow substantially completed.
Note 21. Subsequent Event
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 was signed into U.S. law. Under this law, there is a new 15% corporate minimum tax, which will not have an impact on the Company. In addition, beginning after December 31, 2022 there will be a 1% excise tax on certain share amounts):repurchases, which is not expected to have a material impact on the Company’s Consolidated Financial Statements. There are other aspects within this new law that the Company is evaluating but none are expected to have a material impact on the Company’s Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Fiscal 2017 | | | | | | | | |
| Net sales | | $ | 553.0 |
| | $ | 550.6 |
| | $ | 608.2 |
| | $ | 660.1 |
|
| Gross profit | | 194.2 |
| | 187.9 |
| | 211.5 |
| | 229.5 |
|
| Net earnings | | 58.0 |
| | 46.5 |
| | 60.1 |
| | 68.2 |
|
| Net earnings per share – basic | | 0.43 |
| | 0.35 |
| | 0.45 |
| | 0.52 |
|
| Net earnings per share – diluted | | 0.43 |
| | 0.35 |
| | 0.45 |
| | 0.51 |
|
| Dividends declared per share | | 0.175 |
| | 0.175 |
| | 0.175 |
| | 0.180 |
|
| Dividends paid per share | | 0.175 |
| | 0.175 |
| | 0.175 |
| | 0.175 |
|
| | | | | | | | | |
| Fiscal 2016 | | | | | | | | |
| Net sales | | $ | 538.0 |
| | $ | 517.2 |
| | $ | 571.3 |
| | $ | 593.8 |
|
| Gross profit | | 178.1 |
| | 170.8 |
| | 196.6 |
| | 209.3 |
|
| Net earnings | | 38.5 |
| | 38.0 |
| | 54.8 |
| | 59.5 |
|
| Net earnings per share – basic | | 0.29 |
| | 0.28 |
| | 0.41 |
| | 0.44 |
|
| Net earnings per share – diluted | | 0.29 |
| | 0.28 |
| | 0.41 |
| | 0.44 |
|
| Dividends declared per share | | 0.170 |
| | 0.170 |
| | 0.175 |
| | 0.175 |
|
| Dividends paid per share | | 0.170 |
| | 0.170 |
| | 0.170 |
| | 0.175 |
|
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period. Based on their evaluation, as of the end of the period covered, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective. The Company’s disclosure controls and procedures are designed so that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in the Company'sCompany’s internal control over financial reporting (as defined by Rules 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 31, 2017,2022, that has materially affected, or is reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
See Management’s Report on Internal Control over Financial Reporting under Item 8 of this Annual Report.
Report of Independent Registered Public Accounting Firm
See Report of Independent Registered Public Accounting Firm under Item 8 of this Annual Report.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the captions “Item 1: Election of Directors”;Directors,” “Director Selection Process,” “Audit Committee,” “Audit Committee Expertise; Complaint-Handling Procedures,” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” of the 20172022 Proxy Statement is incorporated herein by reference. Information on the Executive Officers of the Company is found under the caption “Executive Officers of the Registrant”Officers” in Part I of this Annual Report.
The Company has adopted a code of business conduct and ethics in compliance with applicable rules of the Securities and Exchange CommissionSEC that applies to its Principal Executive Officer, its Principal Financial Officer and its Principal Accounting Officer or Controller or persons performing similar functions. A copy of the code of business conduct and ethics is posted on the Company’s website at ir.donaldson.com. The code of business conduct and ethics is available in print, free of charge, to any shareholderstockholder who requests it. The Company will disclose any amendments to or waivers of the code of business conduct and ethics for the Company’s Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer on the Company’s website.
Item 11. Executive Compensation
The information under the captions “Executive Compensation” and “Director Compensation” of the 20172022 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information asunder the captions “Security Ownership” and “Equity Compensation Plan Information” of July 31, 2017, regarding the Company’s equity compensation plans:2022 Proxy Statement is incorporated herein by reference.
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted – average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders: | | |
| | |
| | |
|
| 1980 Master Stock Compensation Plan: | | |
| | |
| | |
|
| Deferred Stock Gain Plan | | 20,853 |
| | $ | 9.63 |
| | — |
|
| 1991 Master Stock Compensation Plan: | | |
| | |
| | |
|
| Deferred Stock Option Gain Plan | | 437,585 |
| | $ | 21.41 |
| | — |
|
| Deferred LTC/Restricted Stock | | 167,105 |
| | $ | 14.18 |
| | — |
|
| 2001 Master Stock Incentive Plan: | | |
| | |
| | |
|
| Stock Options | | 1,065,623 |
| | $ | 20.20 |
| | — |
|
| Deferred LTC/Restricted Stock | | 100,690 |
| | $ | 20.50 |
| | — |
|
| 2010 Master Stock Incentive Plan: | | |
| | |
| | |
|
| Stock Options | | 4,421,302 |
| | $ | 35.79 |
| | (1) |
|
| Deferred LTC/Restricted Stock | | 1,888 |
| | $ | 37.47 |
| | — |
|
| Stock Options for Non-Employee Directors | | 934,300 |
| | $ | 35.23 |
| | — |
|
| Long-Term Compensation | | 40,862 |
| | $ | 36.80 |
| | — |
|
Subtotal for plans approved by security holders | | 7,190,208 |
| | $ | 31.75 |
| | |
|
Equity compensation plans not approved by security holders: | | |
| | |
| | |
|
Non-qualified Stock Option Program for Non-Employee Directors | | 264,326 |
| | $ | 19.98 |
| | — |
|
| ESOP Restoration | | 12,380 |
| | $ | 9.15 |
| | (2) |
|
Subtotal for plans not approved by security holders | | 276,706 |
| | $ | 19.50 |
| | |
|
| Total | | 7,466,914 |
| | $ | 31.29 |
| | |
|
| |
(1) | The 2010 Master Stock Incentive Plan limits the number of shares authorized for issuance to 9,200,000 during the 10-year term of the plan in addition to any shares forfeited under the 2001 plan. The plan allows for the granting of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. There are currently 2,998,157 shares of the authorization remaining. |
| |
(2) | The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990, to supplement the benefits for executive employees under the Company’s Employee Stock Ownership Plan that would otherwise be reduced because of the compensation limitations under the Internal Revenue Code. The ESOP’s 10-year term was completed on July 31, 1997, and the only ongoing benefits under the ESOP Restoration Plan are the accrual of dividend equivalent rights to the participants in the plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions “Policy and Procedures Regarding Transactions with Related Persons” and “Board Oversight and Director Independence” of the 20172022 Proxy Statement is incorporated herein by reference.
Item 14. Principal AccountingAccountant Fees and Services
The information under the captions “Independent Registered Public Accounting Firm Fees” and “Audit Committee Pre-Approval Policies and Procedures” of the 20172022 Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Documents filed with this report:
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| | | | |
| (1) | Financial Statements |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) |
| Consolidated Statements of Earnings — years ended July 31, 2017, 20162022, 2021 and 20152020 |
| Consolidated Statements of Comprehensive Income — years ended July 31, 2017, 20162022, 2021 and 20152020 |
| Consolidated Balance Sheets — July 31, 20172022 and 20162021 |
| Consolidated Statements of Cash Flows — years ended July 31, 2017, 20162022, 2021 and 20152020 |
| Consolidated Statements of Changes in Shareholders’Stockholders’ Equity — years ended July 31, 2017, 20162022, 2021 and 20152020 |
| Notes to Consolidated Financial Statements |
| (2) | Financial Statement Schedules |
| |
| All other schedules (Schedules I, II, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange CommissionSEC are not required under the related instruction, or are inapplicable, and therefore have been omitted.omitted or the required information is shown in the consolidated financial statements or the accompanying notes to the consolidated financial statements. |
| (3) | Exhibits |
| The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Exhibit Index |
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| | DONALDSON COMPANY, INC. |
| | | |
Date: | September 22, 2017 | | By: | /s/ Tod E. Carpenter |
| | | — | Tod E. Carpenter
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 22, 2017.
|
| | | |
/s/ Tod E. Carpenter | | President, Chief Executive Officer |
Tod E. Carpenter | | (Principal Executive Officer) |
/s/ Scott J. Robinson | | Vice President and Chief Financial Officer |
Scott J. Robinson | | (Principal Financial Officer) |
/s/ Melissa A. Osland | | Controller |
Melissa A. Osland | | (Principal Accounting Officer) |
* | | Chairman of the Board |
Jeffrey Noddle | | |
* | | Director |
Andrew Cecere | | |
* | | Director |
Michael J. Hoffman | | |
* | | Director |
Douglas A. Milroy | | |
* | | Director |
Willard D. Oberton | | |
* | | Director |
James J. Owens | | |
* | | Director |
Ajita G. Rajendra | | |
* | | Director |
Trudy A. Rautio | | |
* | | Director |
John P. Wiehoff | | |
*By: | /s/ Amy C. Becker | | |
Amy C. Becker | | |
As attorney-in-fact | | |
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
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*3-A | — | |
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*10-A | — | |
*10-B4-B | — | ** |
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*10-D | — | |
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*10-F | — | |
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*10-H | — | |
*10-I | — | |
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*10-K | — | |
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*10-O | — | |
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*10-AA | — | |
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*10-CC | — | |
*10-DD | — | |
*10-EE | — | |
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*10-GG | — | |
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| — | First Amendment, dated as of October 28, 2014, to Credit Agreement, dated as of December 7, 2012, among Registrant, each of the lenders from time to time parties to the Credit Agreement and Wells Fargo Bank, National Association, as administrative agent and letter of credit issuerCompensation Plan for Non-Employee Directors, effective January 1, 2018 (Filed as Exhibit 10.110-A to Form 10-Q for the second quarter ended January 31, 2018)*** |
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21 | — | |
23 | — | |
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| 101 | — | The following financial information from the Donaldson Company, Inc. Annual Report on Form 10-K for the fiscal year ended July 31, 2017 as filed with the Securities and Exchange Commission,2022, formatted in ExtensibleInline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) the Consolidated Statements of Earnings, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iii)(iv) the Consolidated Statements of Cash Flows, (iv)(v) the Consolidated StatementStatements of Changes in Shareholders’Stockholders’ Equity and (v)(vi) the Notes to Consolidated Financial Statements.Statements |
| 104 | — | The cover page from the Donaldson Company, Inc. Annual Report on Form 10-K for the fiscal year ended July 31, 2022, formatted in iXBRL (included as Exhibit 101) |
__________________
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| | | | | | | |
| * | | Exhibit has previously been filed with the Securities and Exchange CommissionSEC and is incorporated herein by reference as an exhibit. |
| ** | | Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A), copies of instruments defining the rights of holders of certain long-term debts of the Registrant and its subsidiaries are not filed and in lieu thereof the Registrant agrees to furnish a copy thereof to the Securities and Exchange CommissionSEC upon request. |
| *** | | Denotes compensatory plan or management contract. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | DONALDSON COMPANY, INC. |
| | | |
| Date: | September 23, 2022 | | By: | /s/ Tod E. Carpenter |
| | | | Tod E. Carpenter
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 23, 2022.
| | | | | | | | | | | |
| /s/ Tod E. Carpenter | | Chairman, President and Chief Executive Officer |
| Tod E. Carpenter | | (Principal Executive Officer) |
| | |
| /s/ Scott J. Robinson | | Senior Vice President and Chief Financial Officer |
| Scott J. Robinson | | (Principal Financial Officer) |
| | |
| /s/ Andrew J. Cebulla | | Corporate Controller |
| Andrew J. Cebulla | | (Principal Accounting Officer) |
| | |
| * | | Director |
| Pilar Cruz | | |
| | |
| * | | Director |
| Christopher M. Hilger | | |
| | |
| * | | Director |
| Michael J. Hoffman | | |
| | |
| * | | Director |
| Douglas A. Milroy | | |
| | |
| * | | Director |
| Willard D. Oberton | | |
| | |
| * | | Director |
| Richard M. Olson | | |
| | |
| * | | Director |
| James J. Owens | | |
| | |
| * | | Director |
| Ajita G. Rajendra | | |
| | |
| * | | Director |
| Trudy A. Rautio | | |
| | |
| * | | Director |
| Jacinth C. Smiley | | |
| | |
| * | | Director |
| John P. Wiehoff | | |
| | |
| *By: /s/ Amy C. Becker | | |
| Amy C. Becker | | |
| As attorney-in-fact | | |
