10-K
DONALDSON Co INC (DCI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| ☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 31, 2022 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)
| Delaware | 41-0222640 |
|---|---|
| (State or other jurisdiction of<br>incorporation or organization) | (I.R.S. Employer<br>Identification No.) |
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:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common Stock, $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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
|---|---|---|---|
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
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, 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 $6,840,687,805 (based on the closing price of $55.66 as reported on the New York Stock Exchange as of that date).
As of September 9, 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 2022 annual meeting of stockholders (the “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
| Page | ||
|---|---|---|
| PART I | ||
| Item 1. | Business | 1 |
| Item 1A. | Risk Factors | 7 |
| Item 1B. | Unresolved Staff Comments | 11 |
| Item 2. | Properties | 11 |
| Item 3. | Legal Proceedings | 11 |
| Item 4. | Mine Safety Disclosures | 11 |
| Executive Officers | 12 | |
| PART II | ||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13 |
| Item 6. | [Reserved] | 14 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| Item 7A. | Quantitative and Qualitative DisclosuresAbout Market Risk | 25 |
| Item 8. | Financial Statements and Supplementary Data | 27 |
| Item 9. | Changes in and DisagreementsWith Accountants on Accounting and Financial Disclosure | 63 |
| Item 9A. | Controls and Procedures | 64 |
| Item 9B. | Other Information | 64 |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 64 |
| PART III | ||
| Item 10. | Directors, Executive Officers and Corporate Governance | 64 |
| Item 11. | Executive Compensation | 64 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 64 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 64 |
| Item 14. | PrincipalAccountantFees and Services | 64 |
| PART IV | ||
| Item 15. | ExhibitsandFinancial Statement Schedules | 65 |
| Item 16. | Form 10-K Summary | 67 |
| Signatures | 68 |
Item 1. Business
The Company
Founded in 1915, Donaldson Company, Inc. (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 world’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 based on a combination of customer 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 and defense end markets and to independent distributors, OEM dealer networks, private label accounts and large fleets.
The Industrial segment represents 30.4% of net sales, is organized based on product type and consists of the Industrial Filtration 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. Special applications products include polytetrafluoroethylene (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.
Diverse Product Groups
The Company sells a diverse group of products within each segment and the business 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.
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 world. 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 filtration for diesel-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 engine impacted include fuel injectors, valves, pumps, bearings and 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.
The Duramax® filter, the Company’s primary mobile hydraulics filter, is renowned for its achievement of higher pressure in a spin-on configuration, allowing it to be designed on systems where other more costly, harder-to-service options were previously used. The Duramax® filter is combined with Synteq®™ XP media, a synthetic option for high performance.
Hydraulic 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 design, installation, use, maintenance and repair of the equipment. Technology and features 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 better connect Donaldson with its end market customers, enabling additional service opportunities. Donaldson is expanding its presence in the industrial 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 strengthen 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 the life sciences market. During fiscal 2022, the Company acquired 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 life sciences markets. Purilogics is headquartered in Greenville, South Carolina, and is a biotechnology company that leverages a novel technology platform for the 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.
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 the fabrication, tool and point-of-use locations in semiconductor production; and
•PTFE membranes are the core 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 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 pulse system, inlet hood components, filter retention hardware and accessories. GTS filtration components are in power plants, oil and gas delivery systems, and other industrial applications and refining and processing machinery.
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 participates 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 in the Aftermarket 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 range from large global competitors to 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 the Company uses are steel, filter media and petrochemical-based products including plastic, rubber and adhesive products. Purchased raw materials represent approximately 70% of the Company’s cost of sales. 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.
Manufacturing and Backlog
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 the timing of the receipt of orders, as 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 replacement 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
Investment in research and development strengthens the Company’s material science capabilities and supports development of new and improved products and solutions. Research and development expenses include 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 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.
Intellectual Property
The Company owns 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 experience any material effect on its capital expenditures, results of operations or financial condition, due to compliance with government rules regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, nor does it expect such impact during fiscal 2023.
Human 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 is 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 customers 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 employees 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 world, the Company offers competitive financial compensation packages that may include both base pay and bonus elements in addition to social programs specific to the countries in which it operates. To help employees provide and prepare for the future, 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 Company’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 knowledge 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 reference into this Annual Report and should not be considered as part of this report.
Item 1A. Risk Factors
The Company’s (we, our or us) business is subject to various risks and uncertainties. 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 the 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 may 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 events have and 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 business, results of operations, financial condition and cash 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 Ukraine are highly unpredictable, the conflict could lead to substantial market disruptions, including counter-sanctions, volatility in the credit available to us and our 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, 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 obtain 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 ensure they meet required quality and delivery standards. An unanticipated delay in delivery by our suppliers could result in the inability to deliver our products on time and 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.
Personnel - our success has been, and could in the 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 workforce 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 of operations, financial condition and cash flows.
Products - maintaining a competitive advantage requires consistent 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 to improve the design and performance of their products and to introduce new products that could be competitive in both price and performance. We believe we have certain technological advantages over our competitors, but maintaining these advantages requires us to consistently invest in research and development, sales and marketing and customer service and support. There is no guarantee we will be successful in maintaining these 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 we will be successful in completing development or achieving sales of these products or that the margins on such products will be acceptable. A competitor’s successful product innovation could reach the market before ours or gain broader market 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 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, technology, performance, reliability and availability, geographic coverage and customer service. Our customers continue to seek technological innovation, productivity gains, competitive prices, reliability and availability from us and their other suppliers. Additionally, we sell 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 business, 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 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. Where possible, we seek to preserve our intellectual property rights 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 unfavorable 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, which could adversely impact our business and results of operations, financial condition and cash flows.
Legal and Regulatory - costs associated with lawsuits, investigations or complying with laws and 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 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) and data protection and privacy. It is not possible to predict the outcome of investigations and lawsuits, and we could incur 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, 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.
Financial Risks
Currency - an unfavorable fluctuation in foreign currency exchange rates could impact our results of operations.
We have operations in many countries, with a substantial portion of our annual revenue earned in currencies other than the U.S. dollar. We face transactional and translational risks associated with the fluctuations in foreign currency exchange rates. Transactional risk arises from changes in the value of cash flows denominated in different currencies. This can be caused by supply chains that cross borders resulting in revenues and costs being in different currencies. Translational risk arises from the remeasurement of our financial statements. In addition, decreased value of local currency may make it difficult for some of our customers, distributors and end users to purchase our products. Each of our subsidiaries reports its results of operations 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. 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 to support strategic initiatives.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. There can be no assurance 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s corporate headquarters and research facilities are located in Minneapolis, Minnesota. The Company also has administrative and engineering offices and research facilities in the regions of EMEA, APAC and LATAM. The Company’s manufacturing and distribution activities are located throughout the world, and the Company considers its properties to be suitable for their present purposes, well-maintained and in good operating condition.
Item 3. Legal Proceedings
The Company records provisions when it is probable 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 Company as of August 31, 2022 were as follows:
| Name | Age | Positions and Offices Held | First Year<br>Appointed as an<br>Executive Officer |
|---|---|---|---|
| Amy C. Becker | 57 | Vice President, General Counsel and Secretary | 2014 |
| Tod E. Carpenter | 63 | Chairman, President and Chief Executive Officer | 2008 |
| Sheila G. Kramer | 63 | Vice President, Human Resources | 2015 |
| Richard B. Lewis | 51 | Senior Vice President, Global Operations | 2017 |
| Scott J. Robinson | 55 | Senior Vice President and Chief Financial Officer | 2015 |
| Thomas R. Scalf | 56 | Senior Vice President, Engine Products | 2014 |
| Jeffrey E. Spethmann | 57 | Senior Vice President, Industrial Products | 2016 |
| Wim Vermeersch | 56 | Vice President, Europe, Middle East and Africa | 2012 |
Ms. Becker 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 Systems; General Manager, Gas Turbine Systems; General Manager, Industrial Filtration Systems; Vice President, Global Industrial Filtration Systems; Vice President, Europe and Middle East; and Senior Vice President, Engine Products. Mr. Carpenter was appointed Chief Operating Officer in April 2014 and President and Chief Executive 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. During her 22 years at Lifetouch, Inc., Ms. Kramer held various human resources roles including Corporate Vice President, Human Resources from 2009 to 2013.
Mr. Lewis 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 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 data storage and information security company, 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; General Manager of Exhaust and Emissions; General Manager of Industrial Filtration Solutions; and Vice President of Global Industrial Air Filtration.
Mr. Spethmann was appointed Senior Vice President, Industrial Products in April 2016. Mr. Spethmann joined the Company in 2013 and has held various positions, including Vice President, Exhaust and Emissions and Vice President, Global Industrial Air Filtration. Prior to joining the Company, Mr. Spethmann held positions of General Manager and President of Blow Molded Specialties, Inc., from 1999 to 2012.
Mr. Vermeersch was appointed Vice President, Europe, Middle East and Africa in January 2012. Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, Gas Turbine Systems, Asia Pacific; Manager, Aftermarket and Service Industrial Filtration Solutions, Belgium; Manager, Industrial Filtration Solutions, Belgium; Director, Gas Turbine Systems, Europe, Middle East and North Africa; and Director, Engine, Europe, Middle East and North Africa.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock, par value $5.00 per share, is traded on the New York Stock Exchange under the symbol “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.
Information 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, 2022 was as follows:
| Period | Total Number of<br><br>Shares Purchased | Average Price<br>Paid per Share | Total Number of<br>Shares Purchased<br>as Part of Publicly<br>Announced Plans<br>or Programs | Maximum Number<br>of Shares that May<br>Yet Be Purchased<br>Under the Plans or<br>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 |
On May 31, 2019, the Board of Directors authorized the repurchase of up to 13.0 million shares of the Company’s common stock. This repurchase authorization is effective until terminated by the Board of Directors. The Company has remaining authorization to repurchase 5.4 million shares under this plan. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the three months ended July 31, 2022. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under stock-based awards to cover the withholding of taxes due as a result of exercising stock options or payment of stock-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 stockholder 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 S&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 FIVE 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 |
Item 6. [Reserved]
Reserved.
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) provides a comparison of the Company’s results of operations, as well as liquidity and capital resources for the years ended July 31, 2022 and 2021. A discussion of changes in the Company’s results of operations and liquidity and capital resources for the year ended July 31, 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’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” and in the Safe Harbor Statement under the Private Securities Litigation Reform Act of 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 (GAAP) in the 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 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 world’s biggest 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 Company’s operating segments are Engine Products and Industrial Products. The Engine 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 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 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, 2022 increased $452.7 million, or 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 $1,882.2 million for the year ended July 31, 2021, an increase of $357.0 million, or 19.0%. Gross margin as a percentage of net sales for the year ended July 31, 2022 was 32.3% compared with 34.0% for the year ended July 31, 2021, a decrease of 1.7%. The gross margin as a percentage of net sales decrease was 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 Russia and Ukraine conflict in the current fiscal year, partially offset by pricing. Prior fiscal year gross margin was negatively impacted by restructuring charges of $5.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended July 31, 2022 were $554.8 million, or 16.8% of net sales, compared with $519.2 million, or 18.2% of net sales, for the year ended July 31, 2021, an increase of $35.6 million, or 6.9%. The 140 basis point decrease in selling, general and administrative expenses as a percentage of net sales reflects greater leverage from higher sales, partially offset by 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 charges 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 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, 2022 was $14.9 million, compared with $13.0 million, for the year ended July 31, 2021, an increase of $1.9 million, or 13.9%. The increase reflected a higher debt level.
Other income, net for the year ended July 31, 2022 was $9.8 million, compared with $9.3 million, for the year ended July 31, 2021, an increase of $0.5 million, or 5.0%.
Income Taxes
The effective tax rates were 24.1% and 24.7% for the years ended July 31, 2022 and 2021, respectively. The lower effective tax rate was primarily due to an overall increase in discrete tax benefits.
Net Earnings
Net earnings for the year ended July 31, 2022 were $332.8 million, compared with $286.9 million for the year ended July 31, 2021, an increase of $45.9 million, or 16.0%. Diluted EPS were $2.66 for the year ended July 31, 2022, compared with $2.24 for the year ended July 31, 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 July 31, 2021. The Company expects approximately $8 million in annualized savings from these restructuring activities, and the initiative is now substantially completed.
Segment Results of Operations
Net sales and earnings before income taxes were as follows (in millions):
| Year Ended July 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | % Change | ||||
| Net sales | |||||||
| Engine Products segment | $ | 2,302.7 | $ | 1,957.7 | 17.6 | % | |
| Industrial Products segment | 1,003.9 | 896.2 | 107.7 | 12.0 | |||
| Total Company | $ | 3,306.6 | $ | 2,853.9 | 15.9 | % | |
| Earnings before income taxes | |||||||
| Engine Products segment | $ | 329.2 | $ | 289.0 | 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 | 15.1 | % |
All values are in US Dollars.
(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
Net sales were as follows (in millions):
| Year Ended July 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | % Change | ||||
| Off-Road | $ | 405.8 | $ | 328.1 | 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 | 17.6 | % | |
| Engine Products segment earnings before income taxes | $ | 329.2 | $ | 289.0 | 13.9 | % |
All values are in US Dollars.
Net sales for the Engine Products segment for the year ended July 31, 2022 were $2,302.7 million, compared with $1,957.7 million for the year ended July 31, 2021, an increase of $345.0 million, or 17.6%. Excluding a $55.1 million decrease from foreign currency translation, net sales increased 20.4%.
Net sales of Aftermarket increased $245.7 million, which reflected broad growth across all regions driven by pricing and continued high end-market demand. Net sales of Off-Road increased $77.7 million primarily due to increased pricing, equipment production levels remaining high in most regions, with the exception of mainland China, and strong sales for Exhaust and Emissions in EMEA. Aerospace and Defense increased by $24.3 million as stronger economic conditions in the commercial aerospace industry and market share gains drove results.
Earnings before income taxes for the Engine Products segment for the year ended July 31, 2022 were $329.2 million, or 14.3% of Engine Products’ net sales, a decrease from 14.8% of net sales for the year ended July 31, 2021. The decrease was driven by supply chain disruptions which increased input costs, higher raw material, freight, energy and labor costs, partially offset by pricing. Prior fiscal year earnings were negatively impacted by restructuring charges of $2.5 million.
Industrial Products Segment
Net sales were as follows (in millions):
| Year Ended July 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | % Change | ||||
| Industrial Filtration Solutions (IFS) | $ | 711.2 | $ | 621.9 | 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 | 12.0 | % | |
| Industrial Products segment earnings before income taxes | $ | 162.5 | $ | 133.3 | 21.9 | % |
All values are in US Dollars.
Net sales for the Industrial Products segment for the year ended July 31, 2022 were $1,003.9 million, compared with $896.2 million for the year ended July 31, 2021, an increase of $107.7 million, or 12.0%. Excluding a $32.0 million decrease from foreign currency translation, net sales increased 15.6%.
Net sales of IFS increased $89.3 million primarily in the U.S. reflecting improved end market conditions in Industrial Air Filtration (IAF) for both first-fit and replacement parts of dust collection products. EMEA had continued strength in IAF and Process Filtration within the food and beverage market. IFS includes net sales related to acquisitions in fiscal 2022 of Solaris and PAIS which were immaterial for the fiscal year. All business units in IFS benefited from increased pricing. GTS increased by $14.0 million due to pricing and project timing.
Earnings before income taxes for the Industrial Products segment for the year ended July 31, 2022 were $162.5 million, or 16.2% of Industrial Products’ net sales, an increase from 14.9% of net sales for the year ended July 31, 2021. The increase was driven by higher sales leveraging operating expenses and pricing, partially offset by supply 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.
Liquidity, Capital Resources, Capital Requirements and Financial Condition
Liquidity
Liquidity is assessed in terms of the Company’s ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, adequacy of available credit facilities and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses as its primary source of liquidity, with sufficient liquidity available to fund growth through reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
Cash flows were as follows (in millions):
| July 31, | |||||
|---|---|---|---|---|---|
| 2022 | 2021 | Change | |||
| Net cash provided by (used in): | |||||
| Operating activities | $ | 252.8 | $ | 401.9 | |
| Investing activities | (154.0) | (58.3) | (95.7) | ||
| Financing activities | (114.2) | (363.3) | 249.1 | ||
| Effect of exchange rate changes on cash | (14.1) | 5.9 | (20.0) | ||
| Decrease in cash and cash equivalents | $ | (29.5) | $ | (13.8) |
All values are in US Dollars.
Operating Activities
Cash provided by operating activities for the year ended July 31, 2022 was $252.8 million, compared with $401.9 million for the year ended July 31, 2021, a decrease of $149.1 million. The decrease in cash provided by operating activities was primarily driven by an increase in inventory as the Company continues to experience strengthening demand while mitigating supply chain disruptions, higher incentive compensation paid as well as increased accounts payable driven by higher business activity, partially offset by higher earnings.
Investing Activities
Cash used in investing activities for the year ended July 31, 2022 was $154.0 million, compared with $58.3 million for the year ended July 31, 2021, an increase of $95.7 million. In fiscal 2022, the Company acquired Solaris, Purilogics and PAIS for cash consideration of $68.9 million, net of cash acquired, and invested a higher level of capital investment in various projects, including capacity expansion, cost reduction initiatives and tooling for new programs.
Financing Activities
Cash used in financing activities generally relates to the use of cash for payment of dividends and repurchases of the Company’s common stock, net of borrowing activity and proceeds from the exercise of stock options. Cash used in financing activities for the year ended July 31, 2022 was $114.2 million, compared with $363.3 million for the 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 level of dividend 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, 2022 and 2021 were $110.1 million and $107.2 million, respectively. Share repurchases for the years ended July 31, 2022 and 2021 were $170.6 million and $142.2 million, respectively.
Capital Resources
Additional sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of July 31, 2022 was $193.3 million, compared with $222.8 million as of July 31, 2021. A significant portion of the Company’s cash and cash equivalents are held by subsidiaries throughout the world as over half of the Company’s earnings occur outside the U.S. Additionally, the Company has capacity of $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 reported on the 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 requirements 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 various 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 and the timing of expected future principal and interest payments; and
•operating leases - see Note 9. Leases 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 our lease obligations and the timing of expected future payments.
The Company believes the liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities will be sufficient to meet its cash requirements for the next 12 months and beyond, including working capital needs, debt service obligations, capital expenditures, payment of anticipated dividends, share repurchase activity and potential acquisitions.
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 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 has an unconsolidated joint venture, Advanced Filtration Systems Inc. (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, 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 this guarantee will have a current or future effect on its financial condition, results of operations, liquidity or capital resources.
Critical Accounting Estimates
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 Consolidated Financial Statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities at the date of the Consolidated 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 Estimates are those which require more significant assumptions and judgments used in the preparation of its Consolidated Financial Statements and are the most important to aid in fully understanding its financial results. The Company’s Critical Accounting Estimates are as follows:
Revenue Recognition - Variable Consideration
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.
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 during 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 historical length of time 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 product is delivered to customers.
Goodwill
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. 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 during the third quarter of fiscal 2022. The goodwill impairment assessment is conducted at a reporting unit level, which is one level below the operating segment 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 a 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. 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. Estimates and assumptions are utilized in the valuations, including discounted projected cash flows, earnings before interest, taxes, depreciation and amortization margins, terminal value growth rates, revenue growth rates, discount rates and the determination of comparable, publicly traded companies. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment.
Income Taxes
Management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating 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 income taxes on these earnings.
Additionally, benefits of tax return positions are recognized in the Consolidated Financial Statements when the position is 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. 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 $16.3 million and $20.3 million as of July 31, 2022 and 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 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 discount rates and expected return on plan assets. The Company considers current and historical data and uses a third-party specialist to assist management in determining these estimates.
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. The Company utilized a 4.62% and 2.55% weighted average discount rate for its U.S. plans for the years ended July 31, 2022 and 2021, respectively. The Company used a 3.26% and 1.55% weighted average discount rate for its non-U.S. plans for the years ended July 31, 2022 and 2021, respectively.
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.
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, 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 were to use alternative assumptions for its pension plans as of July 31, 2022, a one percentage point change in the assumptions would impact fiscal 2022 net periodic benefit cost as follows (in millions):
| +1% | (1)% | |||
|---|---|---|---|---|
| Rate of return | $ | (4.8) | $ | 4.8 |
| Discount rate | $ | (0.7) | $ | 1.8 |
The Company’s net periodic benefit cost recognized in the Consolidated Statements of Earnings was $2.8 million, $5.3 million and $7.2 million for the years ended July 31, 2022, 2021 and 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 Standard Not Yet Adopted
For the new accounting standard 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 Under 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” 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,” “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E 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.
These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that 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, challenges in global operations; impacts of global economic, industrial and political conditions on product demand, including the Russia 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 competitive advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressure; exposure to customer concentration in certain cyclical industries; inability to manage productivity improvements; results of execution of any acquisition, divestiture and other strategic transactions; vulnerabilities associated with information technology systems and security; inability to protect and enforce intellectual property rights; costs associated with governmental laws and regulations; impacts of foreign currency fluctuations; and effects of changes in capital and credit markets. These and other factors are described in Part I, Item 1A, “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 About Market Risk
The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. To manage these risks, the Company employs certain strategies to mitigate the effect of these fluctuations. The Company does not enter into any of these instruments for trading or speculative purposes.
The Company maintains significant assets and operations 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.
During 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 operates. The overall stronger dollar had a negative impact on the Company’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 foreign currency translation for the year ended July 31, 2022 resulted in an overall decrease in reported net sales of $87.1 million and a 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 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. See Notes 12, 15 and 16 in the Notes to Consolidated Financial Statements in Item 8 of this 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 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.
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.
Based on the net investment hedges outstanding as of July 31, 2022, a 10% appreciation of the U.S. dollar compared to the Euro, would result in a net gain of $7.8 million in the fair value of these contracts.
Interest Rates
The Company’s exposure to market risk for changes in interest rates primarily relates to debt obligations that are at variable 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, 2022, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $125.0 million outstanding on the Company’s revolving credit facility, €80.0 million, or $81.7 million of a variable rate term loan, and ¥2.0 billion, or $15.0 million, of variable rate senior notes. As of July 31, 2022, additional short-term borrowings outstanding consisted of $3.7 million. Assuming a hypothetical 0.5 percentage point increase 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 by an immaterial amount in fiscal 2022. Interest rate changes would also affect the fair market value of fixed-rate debt. As of July 31, 2022, the estimated fair values of fixed interest rate long-term debt were $396.9 million compared to the carrying values of $425.0 million. The fair values are estimated by discounting the projected cash flows using the interest rates at which similar amounts of debt could currently be borrowed.
In addition, the Company is exposed to market risk for changes in interest rates for the impact to its qualified defined benefit pension plans. The plans’ projected benefit obligation is inversely related to changes in interest rates. Consistent with published bond indices, in fiscal 2022, the Company increased its weighted average discount rate from 2.55% to 4.62% on its U.S. plans and increased its weighted average discount rate from 1.55% to 3.26% on its non-U.S. plans. To protect against declines in interest rates, the pension plans hold high-quality, long-duration bonds. The rates impact both the projected benefit obligation and the fair value of the plan 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.
Commodity Prices
The Company is exposed to market risk from fluctuating prices of purchased commodity raw materials, including steel, filter media and petrochemical-based products including plastics, rubber and adhesives. On an ongoing basis, the Company enters into selective supply arrangements 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 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, 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, 2022 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, 2022, as stated in its report, which appears herein.
| /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 23, 2022 | September 23, 2022 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Donaldson Company, Inc.
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 stockholders’ equity and of cash flows for each of the three years in the period ended July 31, 2022, 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’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. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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.
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 23, 2022
We have served as the Company’s auditor since 2002.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
| 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 STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| 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 BALANCE SHEETS
(In millions, except share and per share amounts)
| 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 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 Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
| Additional<br>Paid-in<br>Capital | Retained<br>Earnings | Non-<br>Controlling<br>Interest | Stock-Based Compensation Plans | Accumulated<br>Other<br>Comprehensive<br>Loss | Treasury<br>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 | — | 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 | 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 |
All values are in US Dollars.
See Notes to Consolidated Financial Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
Donaldson Company, Inc. (the Company) is a global leader in technology-led filtration products and solutions. The Company’s core strengths include leading filtration technology, diverse business and a global presence. Products are manufactured and sold around the world to original equipment manufacturers (OEMs), distributors, dealers and directly to end users.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and all its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s 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 Company’s financial statements in conformity with generally 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 of revenue and expenses during the 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 fiscal 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 on 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 losses are included in other income, net in the Consolidated Statements of Earnings and were $6.3 million, $2.9 million and $4.7 million in the years ended July 31, 2022, 2021 and 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 which 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 Accounts
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, regional economic data and evaluation of specific customer accounts for risk of 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. Account balances are reviewed on a pooled basis by reporting unit and geographic region and are reserved when the Company determines it is probable the receivable will not be recovered. The Company reduces the receivable and corresponding allowance when it confirms an account is uncollectible.
Inventories
Inventories are stated at the lower of cost 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 31.6% and 30.4% of total inventories as of July 31, 2022 and 2021, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by $59.7 million and $40.6 million as of July 31, 2022 and 2021, respectively. Results of operations for all periods presented were not materially affected by 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 expensed as incurred. Depreciation is computed using the straight-line method. Depreciation expense was $85.1 million, $87.1 million and $79.3 million in the years ended July 31, 2022, 2021 and 2020, respectively. The estimated useful lives of property, plant and equipment are 10 to 40 years for buildings, including building improvements, and three to 10 years for machinery and 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 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 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. 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 during the third quarter of fiscal 2022. The goodwill impairment assessment is conducted at a reporting unit level, which is one level below the operating segment 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 the reporting unit’s net assets exceeds the estimated fair value of the reporting 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 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. There were no indicators of impairment or impairment charges recorded 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 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 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 is greater than 50% likely to be 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, determined on an average cost basis, and is presented as a reduction of stockholders’ equity on the Consolidated Balance Sheets.
Research and Development Expenses
Research and development expenses include 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 research and development is performed in-house. Expenses are charged against earnings in the year incurred.
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, 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 Europe. The Company has elected the spot method for designating these contracts as net investment hedges. The maturity dates range from 2027 to 2029, see Notes 12, 15 and 16.
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. The Company enters into interest rate swap agreements designated as cash flow hedges to hedge future fixed-rate debt issuances, which effectively fix a portion of interest payments. The Company entered into and terminated agreements within the prior fiscal year, see Notes 12, 15 and 16.
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, see Note 18.
New Accounting Standards Recently Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). In November 2018, the FASB issued an update, ASU 2018-19, that clarifies the scope of the standard 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 other financial assets measured at amortized cost and other off-balance sheet credit exposures. The Company adopted ASU 2016-13 in the first quarter of fiscal 2021 using the modified retrospective approach. The adoption did not have a material impact on its Consolidated Financial Statements.
In April 2019, the FASB issued ASU 2019-04, 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 326), derivatives and hedging (Topic 815) and recognition and measurement of financial instruments (Topic 825). The Company adopted ASU 2019-04 in the first quarter of fiscal 2021 using the modified retrospective approach. The adoption did not 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 October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 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 guidance is effective for fiscal years beginning after December 15, 2022, with early application permitted. This ASU is applicable to the Company’s fiscal year beginning in the first quarter of fiscal 2024. The Company is currently evaluating the impact the adoption will have on its financial statements.
Note 2. Acquisitions
Purilogics, LLC (Purilogics)
On June 13, 2022, the Company acquired 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 Consolidated Balance Sheet. Goodwill of $12.9 million is expected to be deductible for tax purposes. Purilogics is a biotechnology company that leverages a novel technology platform for the 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 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 Company’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 fiscal 2022. Net sales of Solaris were immaterial to the Consolidated Statement of Earnings for the year ended July 31, 2022.
Pearson Arnold Industrial Services (PAIS)
On November 1, 2021, the Company acquired PAIS, headquartered in the U.S., for cash consideration of approximately $3.3 million, net of cash 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 acquired are deductible for tax purposes. Purchase accounting was finalized in the fourth quarter of fiscal 2022. Net sales of PAIS were immaterial to the Consolidated 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 date (in millions):
| 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 |
Pro forma Financial Information
Pro forma financial information for these acquisitions has not been presented because the acquisitions were not material to the Company’s Consolidated Statement of Earnings. See Note 6 for goodwill and intangible assets acquired.
BOFA International LTD (BOFA)
In 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 at 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 total contingent compensation arrangement liability was $0.1 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 $3.0 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.
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, net 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.
Intangible asset classes were as follows (in millions):
| 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<br>(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 | May 20, 2024 | 0.41 | % | 0.42 | % | 7.5 | 9.1 | ||
| Unsecured term loan | Variable | 1.0 | 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 |
All values are in US Dollars.
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 10. Earnings Per Share
Basic net earnings per share (EPS) is computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net EPS is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options and other stock incentive plans.
Basic and diluted net EPS calculations were as follows (in millions, except per share amounts):
| 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<br>Currency<br>Translation<br>Adjustment | Pension<br>Benefits | Derivative<br>Financial<br>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 price of options granted is equal 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 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 years 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 these awards was 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<br>Average Exercise<br>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 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<br>Outstanding | Weighted<br>Average<br>Remaining<br>Contractual<br>Life (Years) | Weighted<br>Average<br>Exercise<br>Price | Number<br>Exercisable | Weighted<br>Average<br>Remaining<br>Contractual<br>Life (Years) | Weighted<br>Average<br>Exercise<br>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 of July 31, 2022, the aggregate intrinsic value of stock options outstanding and exercisable was $64.0 million and $58.2 million, respectively.
For the year ended July 31, 2022, activity for non-vested stock options that contain vesting provisions was as follows:
| Options | Weighted<br>Average Grant<br>Date Fair<br>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 July 31, 2022, there was $6.8 million of total unrecognized compensation expense related to non-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 target award depending on achievement. Pretax performance-based awards expense was $7.2 million, $1.9 million and $3.4 million for the years ended July 31, 2022, 2021 and 2020, respectively.
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 non-vested activity were as follows:
| Performance Shares | Weighted<br>Average Grant<br>Date Fair<br>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, 2022, there was $7.9 million of total unrecognized compensation expense related to non-vested performance-based awards, which is expected to be recognized over the remaining vesting period during fiscal 2023, 2024 and 2025. Forfeited performance-based awards are recorded as an offset to operating expenses in the Consolidated Statements of Earnings in the period in which they occur.
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 <br>(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 |
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. 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
As of July 31, 2022 and 2021, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments, and are classified as Level 1 in the fair value hierarchy.
Long-Term Debt
As of July 31, 2022, the estimated fair values of fixed interest rate long-term debt were $396.9 million compared to the carrying values of $425.0 million. As of July 31, 2021, the estimated fair values of fixed interest rate long-term debt were $297.4 million compared to the carrying values of $275.0 million. The fair values are estimated by discounting the projected cash flows using the interest 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 is 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 amount of these 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 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 Fair Value Measurements
The fair values of the Company’s foreign currency forward contracts, net investment hedges and interest 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 and are determined by standard calculations and models that use readily observable market parameters. These inputs include foreign currency exchange rates and interest rates. Industry standard data providers are the primary source for forward and spot rate information for both interest rates and foreign currency exchange rates. The fair 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 the Company’s derivatives and hedging, see Note 15.
Fair Value of Derivatives Contracts
The fair value of the Company’s derivative contracts, recorded on the Consolidated Balance Sheets, was as follows (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 estimates of fair value are recognized in earnings.
A reconciliation of the fair value of the Company’s contingent consideration liability that use unobservable inputs, was as follows (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 and for the years ended July 31, 2021 and 2020, see Note 2.
Note 17. Guarantees
Letters of Credit
The Company has letters of credit which guarantee payment to third parties in the event the Company is in breach of contract terms as detailed in each letter of credit. The 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, 2022 and 2021, 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 $8.1 million and $8.7 million as of July 31, 2022 and 2021, respectively.
Note 18. Commitments and Contingencies
The Company records provisions when it is probable 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.
Warranty Reserves
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 19. Segment Reporting
The Company’s reportable segments are Engine Products and Industrial Products. The Company determines its operating segments consistent with the manner in which it manages its operations and evaluates performance for internal review and decision-making. 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.
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 and defense end markets and to independent distributors, OEM dealer networks, private label accounts and large fleets.
The Industrial Products is organized based on product type and consists of the IFS, Gas Turbine 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. Special applications products include polytetrafluoroethylene 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 has manufacturing facilities that serve both of its reportable segments. As such, asset and capital expenditure information by reportable segment has not been provided, since the Company does not produce or utilize such information internally. In addition, although depreciation and amortization expense is a component of each reportable segment’s operating results, it is not 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 these segments, if operated independently, would report earnings before income taxes and other financial information as stated below.
Segment details were as follows (in millions):
| Engine<br>Products Segment | Industrial<br>Products Segment | Corporate and<br>Unallocated | Total<br>Company | |||||
|---|---|---|---|---|---|---|---|---|
| Year ended July 31, 2022 | ||||||||
| Net sales | $ | 2,302.7 | $ | 1,003.9 | $ | — | $ | 3,306.6 |
| Equity earnings in unconsolidated affiliates | $ | 1.7 | $ | — | $ | — | $ | 1.7 |
| Earnings (loss) before income taxes | $ | 329.2 | $ | 162.5 | $ | (53.3) | $ | 438.4 |
| Equity investments in unconsolidated affiliates | $ | 22.4 | $ | — | $ | — | $ | 22.4 |
| Year ended July 31, 2021 | ||||||||
| Net sales | $ | 1,957.7 | $ | 896.2 | $ | — | $ | 2,853.9 |
| Equity earnings in unconsolidated affiliates | $ | 4.2 | $ | — | $ | — | $ | 4.2 |
| Earnings (loss) before income taxes | $ | 289.0 | $ | 133.3 | $ | (41.3) | $ | 381.0 |
| Equity investments in unconsolidated affiliates | $ | 24.2 | $ | — | $ | — | $ | 24.2 |
| Year ended July 31, 2020 | ||||||||
| Net sales | $ | 1,727.5 | $ | 854.3 | $ | — | $ | 2,581.8 |
| Equity earnings in unconsolidated affiliates | $ | 4.7 | $ | 0.5 | $ | — | $ | 5.2 |
| Earnings (loss) before income taxes | $ | 229.3 | $ | 124.9 | $ | (19.0) | $ | 335.2 |
| Equity investments in unconsolidated affiliates | $ | 21.7 | $ | — | $ | — | $ | 21.7 |
Net sales by business 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 |
Net sales, generally disaggregated by location where the customer’s order was received, and property, plant and equipment, net by geographic region were 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 |
Concentrations
There were no customers that accounted for over 10% of net sales for the years ended July 31, 2022, 2021 or 2020. There were no customers that accounted for over 10% of gross accounts receivable as of July 31, 2022 or 2021.
Note 20. 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 July 31, 2021. This initiative is now 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 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.
Item 9. Changes in and Disagreements With 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 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 information required to be disclosed by the issuer in the reports 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 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’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, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’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,” “Director Selection Process,” “Audit Committee,” “Audit Committee Expertise; Complaint-Handling Procedures,” and “Delinquent Section 16(a) Reports” of the 2022 Proxy Statement is incorporated herein by reference. Information on the Executive Officers of the Company is found under the caption “Executive 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 SEC 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 stockholder 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 2022 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the captions “Security Ownership” and “Equity Compensation Plan Information” of the 2022 Proxy Statement is incorporated herein by reference.
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 2022 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information under the captions “Independent Registered Public Accounting Firm Fees” and “Audit Committee Pre-Approval Policies and Procedures” of the 2022 Proxy Statement is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
Documents filed with this report:
| (1) | Financial Statements |
|---|---|
| Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | |
| Consolidated Statements of Earnings — years ended July 31, 2022, 2021 and 2020 | |
| Consolidated Statements of Comprehensive Income — years ended July 31, 2022, 2021 and 2020 | |
| Consolidated Balance Sheets — July 31, 2022 and 2021 | |
| Consolidated Statements of Cash Flows — years ended July 31, 2022, 2021 and 2020 | |
| Consolidated Statements of Changes in Stockholders’ Equity — years ended July 31, 2022, 2021 and 2020 | |
| 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 SEC are not required under the related instruction, or are inapplicable, and therefore have been omitted or the required information is shown in the consolidated financial statements or the accompanying notes to the consolidated financial statements. | |
| (3) | Exhibits |
Exhibit Index
__________________
| * | Exhibit has previously been filed with the SEC 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 SEC 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<br>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 |
68
Document
Exhibit 10-AL
DONALDSON COMPANY, INC.
COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
Amended on January 26, 2022
I. Introduction
The Board of Directors of Donaldson Company, Inc. (the “Company”) has adopted stock ownership guidelines attached hereto as Exhibit A because it believes that it is in the best interests of the Company and its stockholders for non-employee directors of the Company to have a significant equity interest in the Company in order to align their financial interests with those of the Company’s stockholders. The Company has previously established an automatic equity grant program and a deferred compensation program for non-employee directors, both of which are intended to assist non-employee directors in meeting the Company’s stock ownership guidelines. Set forth in writing below are the provisions of both programs combined into one restated plan document entitled the Donaldson Company, Inc. Compensation Plan for Non-Employee Directors (hereinafter, the “Plan”).
All equity awards granted hereunder, as well as any amounts deferred that are payable in shares of the Company’s common stock, par value of US$5.00 per share (“Common Stock”) are subject to the terms, conditions, and restrictions set forth in under the Company’s 2019 Master Stock Incentive Plan (the “Master Stock Plan”). In the event of any inconsistency between the terms contained herein and in the Plan, the Master Stock Plan shall govern. All capitalized terms that are not defined herein have the meanings set forth in the Master Stock Plan.
II. Plan Year
The Plan shall operate on a calendar year basis.
III. Eligibility
All members of the Board of Directors who are not employees of the Company (“Eligible Directors”) are eligible for the Plan.
IV. Automatic Equity Grant Program
1.Annual Award Grants
(a)Stock Options. On the first day following January 1 that the New York Stock Exchange is open for trading (the “First Trading Day”), each Eligible Director shall automatically be granted a Non-Qualified Stock Option with a fair market value (computed as of the date of grant in accordance with applicable financial
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accounting rules) equal to $75,000 (the “Annual Option Grant”). The number of shares subject to the Annual Option Grant shall be determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares. With respect to an individual who becomes an Eligible Director during a calendar year after the First Trading Day, such Eligible Director’s Annual Option Grant for that year shall have a fair market value obtained by multiplying $75,000 by a fraction, the numerator of which is the number of whole calendar months remaining in the calendar year and the denominator of which is twelve. Such prorated grant shall be made upon the first trading day of the calendar month, within the Company’s open trading window, following the date such individual becomes an Eligible Director, with the number of shares determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares.
(b)Restricted Stock Unit. On the First Trading Day, each Eligible Director shall automatically be granted a Restricted Stock Unit Award with a fair market value (computed as of the date of grant in accordance with applicable financial accounting rules) equal to $75,000 (the “Annual Restricted Stock Unit Grant”). The number of shares subject to the Annual Restricted Stock Unit Grant shall be determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares. With respect to an individual who becomes an Eligible Director during a calendar year after the First Trading Day, such Eligible Director’s Annual Restricted Stock Unit Grant for that year shall have a fair market value obtained by multiplying $75,000 by a fraction, the numerator of which is the number of whole calendar months remaining in the calendar year and the denominator of which is twelve. Such prorated grant shall be made upon the first trading day of the calendar month, within the Company’s open trading window, following the date such individual becomes an Eligible Director, with the number of shares determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares.
2.Award Terms
(a)Options. All Non-Qualified Stock Options granted under the Plan shall have: (i) a per share exercise price equal to the closing price of the Common Stock on the day on which such options are granted; and (ii) vesting, expiration and such other terms as provided in the Company’s form of Non-Employee Director Non-Qualified Stock Option Agreement attached hereto as Exhibit B.
(b)Restricted Stock Units. All Restricted Stock Units granted under the Plan shall have vesting and such other terms as provided in the Company’s form of Non-Employee Director Restricted Stock Unit Award Agreement attached hereto as Exhibit C.
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V. Director Deferred Compensation Program
1.Compensation Covered by the Plan
Eligible Director compensation covered by this Plan includes annual retainers payable in quarterly installments at the beginning of each calendar quarter (hereinafter “Eligible Fees”). For avoidance of doubt, the term “retainer” includes any committee chair retainers. The first installment shall be made on the first day following January 1 that the New York Stock Exchange is open for trading, and the remaining installments shall be made on the first Friday in April, July and October (or if such Friday is a holiday, on the next business day). The Plan permits Eligible Directors to elect to receive this compensation in one or more of the following methods:
(a)In cash on a current basis;
(b)In cash on a deferred basis (a “Deferred Cash Election”); or
(c)In Company stock on a deferred basis (a “Deferred Stock Election”).
No other compensation or fees otherwise payable to an Eligible Director shall be eligible for an election under this Plan.
2.Election to Defer
An Eligible Director may elect to defer payment of Eligible Fees under Section V.3 or V.4 of this Plan by filing, no later than the last day of a Plan Year (or by such earlier date as the Plan administrator shall determine), an irrevocable election with the administrator on a form provided for that purpose. The Annual Deferral Election shall be effective with respect to the Eligible Fees payable during the following Plan Year. The Deferral Election Form shall specify an amount to be deferred expressed as a percentage of the Eligible Director’s annual retainer, as provided in the form attached hereto as Exhibit D.
That portion of Eligible Fees for which a valid form has not been timely received by the Company will be paid in cash in accordance with the Company’s customary practice of paying such Eligible Fees. Once a Plan Year has commenced, all Deferral Elections under this Plan for such Plan Year shall be irrevocable.
3.Deferral Elections
(a)Deferred Cash Election
For Eligible Directors who make an Annual Deferred Cash Election, the Company will establish a bookkeeping account for cash deferred for that Plan Year (an “Annual Deferred Cash Account”) and will credit to the Annual Deferred Cash Account the amount of the Eligible Fees earned and deferred by him/her as of the date such fees would normally be payable by the Company (the “Credit Date”). Amounts credited to an Eligible Director’s Annual Deferred Cash Account will be adjusted for gains and/or losses to the same extent that equal
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amounts would have been adjusted if they had been invested in one or more notional investments designated by the Company. The use of notional investments herein is solely as a device for computing the amount of benefits to be paid under the Plan, and the Company shall not be required to purchase such investments.
(b)Deferred Stock Election
Eligible Directors may elect to exchange part or all of their Eligible Fees for a Plan Year for the Company’s commitment to issue to such Eligible Directors a fixed number of shares of common stock of the Company at a future date. The Company’s commitment to issue shares shall be referred to as “Phantom Shares” held in an “Annual Deferred Stock Account”.
As of the Credit Date, an Eligible Director shall receive a credit to his or her Annual Deferred Stock Account. The amount of the credit shall be the number of Phantom Shares (rounded to the nearest whole Share) determined by dividing (i) an amount equal to Eligible Fees payable to the Eligible Director on the Credit Date and specified for deferral, by (ii) the fair market value of one share of Common Stock on such date.
For purposes of this paragraph (b), the following rules shall apply:
(i)Fair Market Value
The fair market value of each share of Common Stock shall be equal to the closing price of one share of the Company’s common stock on the New York Stock Exchange-Composite Transactions on the Credit Date as of which Phantom Shares are credited to the Eligible Director’s Deferred Stock Account.
(ii)No Actual Shares Prior to Distribution
No actual shares of Common Stock shall be issued until the distribution date described below. The Phantom Shares shall not be considered issued and outstanding shares for purposes of stockholder voting rights.
(iii)Dividend Credit
Each time a dividend is paid on Common Stock, an Eligible Director shall receive a credit to his or her Deferred Stock Account equal to that number of shares of common stock (rounded to the nearest whole share) having a fair market value on the dividend payment date equal to the amount of the dividend payable on the number of Phantom Shares credited to the Eligible Director’s Deferred Stock Account on the dividend record date.
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(iv)Restrictions on Phantom Shares
All Phantom Shares issued under and subject to the terms of this Plan will be issued under the Master Stock Plan (and/or its successor plans) and shall be deemed to be “other stock-based awards” for purposes of such plan; provided, that any Phantom Shares credited before November 22, 2019 are subject to the Donaldson Company, Inc. 2010 Master Stock Incentive Plan, and any Phantom Shares credited before November 19, 2010 are subject to the Donaldson Company, Inc. 2001 Master Stock Incentive Plan.
4.Distributions of Annual Deferred Accounts
(a)Timing of Distributions
At the time an Eligible Director’s Annual Deferral Election is made for a Plan Year, each Eligible Director shall specify the time and manner in which his/her Annual Deferred Cash Account and/or Annual Deferred Stock Account shall be distributed. If an Eligible Director does not specify an election for the timing and manner of a distribution, the balance of an Eligible Director’s Annual Deferred Accounts shall be distributed in a lump sum in accordance with option (i) below. The Eligible Director shall be entitled to receive, or to commence receiving, his/her Annual Deferred Accounts as soon as practicable after the following:
(i)the first anniversary of his/her separation from service (as that term is defined under Section 409A of the Code) with the Company; or
(ii)a specified calendar year set by him/her (actual payment will occur within the first sixty (60) days of the specified year).
(b)Manner of Distribution
Each Eligible Director shall be entitled to receive the balance in his/her Annual Deferred Accounts in any one of the following manners:
(i)in a lump sum; or
(ii)in annual installments over a period of years stipulated by him/her not to exceed ten (10). The amount of the installments will be determined by annually dividing the value of the benefits in the Account by the number of installments remaining to be paid.
Notwithstanding anything to the contrary above, the Company may make an immediate lump sum payment of the Eligible Director’s Annual Deferral Accounts if the balance of such Accounts, combined with any other amounts required to be treated as deferred under a single plan pursuant to Section 409A of the Code, does not exceed the applicable dollar amount under Section 402(g)(1)(B) of the Code, provided any other such aggregated amounts are also distributed in a lump sum at the same time.
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Each Eligible Director’s Annual Deferred Stock Account shall be distributed in Common Stock.
(c)Distribution in Event of Death
In the event of the Eligible Director’s death, either before or after commencement of payments, distribution of the Eligible Director’s entire Account balance will be made in a single lump sum to the beneficiary named by the Eligible Director (on such form or forms prescribed by the Plan administrator) or to that person who would have a right to receive such distribution by will or by the applicable laws of descent and distribution.
(d)Distribution to Specified Employees
Notwithstanding any other provision in this Plan, in the event that an Eligible Director in this Plan is determined to be a “specified employee” (as that term is defined under Section 409A of the Code), any distribution to the Eligible Director on account of the Eligible Director’s separation from service shall be delayed as necessary to comply with the requirements of Section 409A of the Code.
(e)Distribution in Event of Change of Control
Notwithstanding any other provision of this Plan, in the event of a Change of Control (as defined below), each Eligible Director who separates from service with the Company for any reason during the two (2) year period following such Change of Control shall receive within ten (10) business days after the date of separation the following:
(i)If a Eligible Director has a balance in an Annual Deferred Cash Account, a lump sum payment of the entire balance contained in his/her Annual Deferred Cash Account, together with applicable earnings adjustment, on the average daily balance in such Deferral Account for the period since the last earnings adjustment through the date of separation; and
(ii)If an Eligible Director has a balance in an Annual Deferred Stock Account, a distribution of the number of shares represented by the Phantom Shares issued pursuant to such election; and
Notwithstanding paragraph (e)(i) above, with respect to any Eligible Director who separated from service before the date of a Change of Control, the balance of the Annual Deferred Accounts shall be paid at the time and in the manner as elected by the Eligible Director (and shall not be commuted to a lump sum or otherwise accelerated by the Change of Control). For purposes of this section, a “Change of Control” shall have the meaning ascribed to that term in the Company’s 401(k) Excess Plan, as may be amended from time to time.
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VI. General Provisions
1.Unsecured Obligation
The amounts credited to each Eligible Director’s Account shall not be held by the Company in a trust, escrow or similar fiduciary capacity, and neither the Eligible Director, nor any legal representative, shall have any right against the Company with respect to any portion of the Account except as a general unsecured creditor of the Company.
2.Administration of the Plan
The Plan shall be administered by the Human Resources Committee of the Board of Directors.
3.Amendment, Termination and Governing Law
This Plan may be amended or terminated at any time by the Board of Directors or the Human Resources Committee of the Board of Directors. This Plan shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law.
4.Cautionary Statement
Eligible Directors should be aware that their participation in the Plan involves the following risks, among others:
(a)Balances in the Annual Deferred Accounts represent unfunded, unsecured general obligations of the Company. If the Company is unable to pay its debts as they become due, Eligible Directors may not be able to collect the balances in their Annual Deferral Accounts.
(b)The value of an Eligible Director’s Non-Qualified Stock Options, Restricted Stock Unit and Phantom Shares will depend on the value of the Company’s Common Stock. An investment in the Company’s Common Stock involves risk. Eligible Directors are encouraged to review the Company’s filings with the U.S. Securities and Exchange Commission for a description of some of the risk factors associated with an investment in the Company’s Common Stock.
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EXHIBIT A
DONALDSON COMPANY, INC. STOCK OWNERSHIP GUIDELINES FOR NON-EMPLOYEE DIRECTORS
Amended January 25, 2019
Purpose
The Board of Directors of Donaldson Company, Inc. (the “Company”) has adopted these stock ownership guidelines because it believes that it is in the best interests of the Company and its stockholders for Non-Employee Directors of the Company to have a significant equity interest in the Company in order to align their financial interests with those of the Company’s stockholders.
Applicability
These guidelines are applicable to all Non-Employee Directors of the Company (“Covered Individuals”).
Minimum Ownership Guidelines
Each Covered Individual is expected to own shares of the Company’s common stock with a value at least equal to the amount shown in the following schedule:
| Position | Value of Shares |
|---|---|
| Non-Employee Director | $ 400,000 |
Determining Share Ownership
Shares to be counted for purposes of the ownership guidelines will be all shares owned by the Covered Individual, including shares owned jointly with, or separately by, the Covered Individual’s immediate family members residing in the same household and shares held in trust for the benefit of the Covered Individual or his or her immediate family members residing in the same household. Additionally, the following rules apply to determining which shares are counted: (i) all outstanding shares “beneficially owned” for purposes of Section 16 of the Securities Exchange Act are included, (ii) all time-based restricted stock and restricted stock units, regardless of whether vested, less any estimated shares required to cover the assumed withholding tax amount upon vesting (iii) all “in-the-money” unexercised vested stock options, less any estimated shares required to cover the assumed withholding tax amount upon exercise, are included, (iv) all shares in the Company’s deferred compensation programs are included, and (v) all unvested performance-based restricted stock and restricted stock units (including performance units) are excluded.
Valuation Methodology
The value of the shareholdings of a Covered Individual is based on the historical three-month average closing price of Donaldson stock at the time of valuation.
Exh A-1
Achieving Compliance
A Covered Individual has five years from the date he or she becomes subject to these ownership guidelines to achieve compliance with the ownership guidelines. Until a Covered Individual has achieved compliance with these ownership guidelines, the Covered Individual must retain 100% of the “net profit shares” resulting from any option exercise or from the exercise, vesting, or settlement of any other form of equity-based compensation award. For these purposes, “net profit shares” refers to that portion of the number of shares subject to the exercise, vesting, or settlement of an award that the Covered Individual would receive had he or she authorized the Company to withhold shares otherwise deliverable in order to satisfy any applicable exercise price or withholding taxes.
Administration
The Human Resources Committee of the Board shall be responsible for monitoring the application of these stock ownership guidelines. In its discretion, the Human Resources Committee may alter the amount or form of compensation for any Covered Individual who fails to comply with the ownership guidelines, including the retention requirements described above.
Exh A-2
EXHIBIT B
NON-EMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
This Stock Option Award Agreement (the “Agreement”) is made as of the date specified in the individual grant summary by and between Donaldson Company, Inc., a Delaware corporation (hereinafter, together with its subsidiaries, called “Donaldson” or “Company”), and the person specified in the individual grant summary, a non-Employee Director of Donaldson (hereinafter called the “Participant”).
Donaldson has adopted the 2019 Master Stock Incentive Plan (the “Plan”) which permits issuance of stock options for the purchase of shares of common stock, par value US $5.00 per share, of Donaldson (“Common Stock”). Donaldson is now granting this option under the Plan.
1. Grant of Option. Donaldson grants the Participant the right and option (the “Option”) to purchase all or any part of an aggregate of the number of shares of Common Stock specified in the grant summary, at the Option purchase price specified in the grant summary (which shall be 100% of the Fair Market Value of the Common Stock on the date the award is granted). The Option shall be subject to the terms and conditions in this Agreement and in the Plan. Capitalized terms not defined in this Agreement shall have the meaning ascribed to such terms in the Plan. The Participant acknowledges receipt of a copy of the Plan and the Plan Prospectus. The grant date is the date specified in the individual grant summary (the “Grant Date”). The Option terminates at the close of business ten (10) years from the Grant Date unless terminated at an earlier time in accordance with this Agreement or the Plan. The Option is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code.
2. Vesting of Option Right. The Option may be exercised by the Participant under the following schedule except as otherwise provided in this Agreement. The Option may not be exercised for a period of one (1) year from the Grant Date. Following that one-year period, the Option vests and becomes exercisable in equal one-third increments: one-third vests on the one-year anniversary of the Grant Date; one-third vests on the two-year anniversary of the Grant Date; and one-third vests on the three-year anniversary of the Grant Date. The Option may be exercised as to any portion of the Option that is vested. An unvested portion of the Option shall only vest so long as:
(a)the Participant remains a Director of the Company on the date that the Option vests,
(b)the Participant retires or resigns from service as a Director of the Company in accordance with the age and term limits of the Corporate Governance Guidelines of the Company, or
(c)the Participant’s service as a Director of the Company is terminated for any other reason and a majority of the members of the Board of Directors other than the eligible Director consent to the continued vesting of such portion of the Option in accordance with the original vesting schedule.
The vesting of the Option also is subject to acceleration in the event of a Change in Control (as defined in the Plan).
3. Exercise of Option. Once vested, the Participant may exercise this Option, in whole or in part, at any time during the term as specified above but not after ten (10) years from the Date of Grant; provided, that if the Participant dies, this Option, if vested, may be exercised within three (3) years after
Exh B-1
death, but not after ten (10) years from the Date of Grant, by the Participant’s estate or by the person or persons who acquire the right to exercise this Option by bequest, inheritance or otherwise by reason of such death. Donaldson and the Participant recognize that this Agreement in no way restricts the right of Donaldson to terminate the Participant’s membership consistent with applicable Delaware laws.
4. Method of Exercise of Option. The vested portion of the Option may be exercised only during the term of the Option by delivery of a notice of exercise in such form as may designated by the Committee from time to time. The notice must state the number of shares being exercised and include payment in full of the purchase price and all required tax withholding (if applicable). Payment of the purchase price and any applicable tax-related items shall be made (i) in cash, (ii) by delivery of unencumbered shares of Common Stock previously acquired having a Fair Market Value equal to the exercise price and tax-related items, (iii) by a combination of cash and shares under (i) and (ii) above; (iv) by withholding of shares of Common Stock that would otherwise be issued upon such exercise having a Fair Market Value on the date of exercise equal to the exercise price and tax-related items or (v) by a cashless (broker-assisted) exercise that complies with all applicable laws.
5. Acceleration of Exercisability Upon Change in Control. In the event of a Change in Control (as defined in the Plan), any outstanding Option granted under this Agreement not previously vested and exercisable shall become fully vested and exercisable and shall remain exercisable thereafter until they are either exercised or expire by their terms.
6. Miscellaneous.
(a)Donaldson shall not be liable for any foreign exchange rate fluctuation, where applicable, between the Participant’s local currency and the United States dollar that may affect the value of the Option or any amounts due to the Participant pursuant to the exercise of the Option or the subsequent sale of any shares of Common Stock acquired upon exercise.
(b)The exercise of all or any parts of the Option shall only be effective at such time that the sale of shares of Common Stock pursuant to such exercise will not violate any U.S. federal, state or foreign securities or other laws.
(c)It is understood and agreed that the Option price is the per share market value of a share of Common Stock on the Date of Grant. The Option is not intended to be an Incentive Option within the meaning of Section 422 of the Code. The Option is issued pursuant to the Plan and is subject to its terms.
(d)If all or any portion of the Option is exercised subsequent to any stock dividend or split, recapitalization, consolidation, or the like, occurring after the date hereof, as a result of which securities of any class shall be issued in respect of outstanding shares of Common Stock, or shares of Common Stock shall be changed into the same or a different number of shares or other securities of the same or other class or classes, then the Board of Directors shall determine if any equitable adjustment is necessary to protect the Participant against dilution and shall determine the terms of such adjustment, if any. In the case of any stock dividend or split effected after the date hereof, the number of shares of Common Stock to be granted hereunder shall be automatically adjusted to prevent dilution of the potential benefits intended to be made available hereunder.
(e)This Option grant shall be effective only after the Participant agrees to the terms and conditions of the Agreement.
Exh B-2
(f)The Option may not be transferable in any manner (including without limitation, sale, alienation, anticipation, pledge, encumbrance, or assignment) other than by will or by laws of descent and distribution, unless otherwise determined by the Committee in accordance with the Plan. All rights with respect to the Option shall be exercisable during the lifetime of the Participant only by the Participant or his or her guardian or legal representative or permitted transferee, if applicable.
(g)This agreement shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law. The Participant consents to the exclusive jurisdiction of the state and federal courts of the state of Minnesota in connection with any controversies relating to or arising out of this Agreement, and agrees that any and all litigation relating to or arising out of this Agreement shall be venued in Hennepin County, Minnesota.
(h)As a condition of the grant of this Option, the Participant agrees to repatriate all payments attributable to the shares of Common Stock and/or cash acquired under the Plan (including, but not limited to, dividends and any proceeds derived from the sale of the shares of Common Stock acquired pursuant to the Option) in accordance with local foreign exchange rules and regulations in the Participant’s country of residence. In addition, the Participant also agrees to take any and all actions, and consents to any and all actions taken by Donaldson, as may be required to allow Donaldson to comply with local laws, rules and regulations in the Participant’s country of residence. Finally, the Participant agrees to take any and all actions as may be required to comply with the Participant’s personal legal and tax obligations under local laws, rules and regulations in the Participant’s country of residence.
(i)Donaldson, in its sole discretion, may decide to deliver any documents related to the Option or other awards granted to the Participant under the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Donaldson or a third party designated by Donaldson.
(j)The Participant acknowledges and agrees that it is the Participant’s express intent that this Agreement, the Plan and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the grant of this Option, be drawn up in English. If the Participant has received this Agreement, the Plan or any other documents related to the Option translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version shall control.
(k)Notwithstanding any provisions in this Agreement to the contrary, this Option shall be subject to any special terms and conditions for the Participant’s country of residence, as set forth in the applicable addendum to this Agreement, if any. Further, if the Participant transfers residency to another country reflected in an addendum to this Agreement, the special terms and conditions for such country will apply to the Participant to the extent Donaldson determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Option and the Plan (or Donaldson may establish alternative terms and conditions as may be necessary or advisable to accommodate the Participant’s transfer). Any applicable addendum shall constitute part of this Agreement.
Exh B-3
(l)Donaldson reserves the right to impose other requirements on this Option, any shares of Common Stock acquired pursuant to this Option, and the Participant’s participation in the Plan, to the extent Donaldson determines, in its sole discretion, that such other requirements are necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Option and the Plan. Such requirements may include (but are not limited to) requiring the Participant to sign any agreements or undertakings that may be necessary to accomplish the foregoing.
(m)If the Participant is resident outside the United States, the grant of the Option is not intended to be a public offering of securities in the Participant’s country of residence. Donaldson has not submitted any registration statement, prospectus or other filings with the local securities authorities (unless otherwise required under local law), and the grant of the Option is not subject to the supervision of the local securities authorities. No employee of Donaldson or any Affiliate is permitted to advise the Participant on whether the Participant should acquire shares of Common Stock by exercising the Option under the Plan. Investment in shares of Common Stock involves a degree of risk. Before deciding to acquire shares of Common Stock by exercising the Option, the Participant should carefully review all of the materials related to the Option and the Plan. In addition, the Participant should consult with the Participant’s personal advisor for professional investment advice.
(n)The Participant’s country of residence may have insider trading and/or market abuse laws that may affect the Participant’s ability to acquire or sell shares of Common Stock under the Plan during such times the Participant is considered to have “inside information” (as defined in the laws in Participant’s country of residence). These laws may be the same or different from any Donaldson insider trading policy. The Participant acknowledges that it is the Participant’s responsibility to be informed of and compliant with such regulations, and the Participant is advised to speak to his / her personal advisor on this matter.
(o)The invalidity or unenforceability of any provision of the Plan or this Agreement will not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement will be severable and enforceable to the extent permitted by law.
7. Data Privacy. Pursuant to applicable personal data protection laws, Donaldson hereby notifies the Participant of the following in relation to the Participant’s personal data and the collection, use, processing and transfer of such data in relation to Donaldson’s grant of this Option and the Participant’s participation in the Plan. The collection, use, processing and transfer of the Participant’s personal data is necessary for Donaldson’s administration of the Plan and the Participant’s participation in the Plan, and the Participant’s denial and/or objection to the collection, use, processing and transfer of personal data may affect the Participant’s participation in the Plan. As such, the Participant hereby voluntarily acknowledges and consents (where required under applicable law) to the collection, use, processing and transfer of personal data as described in this paragraph.
Donaldson holds certain personal information about the Participant, including the Participant’s name, home address, email address and telephone number, date of birth, social security number, passport number or other employee identification number, salary, nationality, job title, any shares of Common Stock or directorships held in Donaldson, details of all stock options or any other entitlement to shares of Common Stock awarded, canceled, purchased, vested, unvested or outstanding in the Participant’s favor, for the purpose of managing and administering the Plan (“Data”). Data may be provided by the Participant or collected, where lawful, from third parties, and Donaldson will process Data for the
Exh B-4
exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Data processing will take place through electronic and non-electronic means according to logics and procedures strictly correlated to the purposes for which Data are collected and with confidentiality and security provisions as set forth by applicable laws and regulations in the Participant’s country of residence. Data processing operations will be performed minimizing the use of personal and identification data when such operations are unnecessary for the processing purposes sought. Data will be accessible within Donaldson’s organization only by those persons requiring access for purposes of the implementation, administration and operation of the Plan and for the Participant’s participation in the Plan.
Donaldson will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of the Participant’s participation in the Plan, and Donaldson may each further transfer Data to any third parties assisting Donaldson in the implementation, administration and management of the Plan. As permitted by applicable personal data protection laws, if Donaldson becomes involved in a merger, acquisition, sale of assets, joint venture, securities offering, bankruptcy, reorganization, liquidation, dissolution, or other transaction or if the ownership of all or substantially all of Donaldson otherwise changes, Donaldson may transfer Data to a third party or parties in connection therewith. The Participant hereby authorizes (where required under applicable law) them to receive, possess, use, retain and transfer Data, in electronic or other form, for purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of Common Stock on the Participant’s behalf to a broker or other third party with whom the Participant may elect to deposit any shares of Common Stock acquired pursuant to the Plan.
The Participant may, at any time, exercise his or her rights provided under applicable personal data protection laws, which may include the right to (a) obtain confirmation as to the existence of Data, (b) verify the content, origin and accuracy of Data, (c) request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of Data, and (d) to oppose, for legal reasons, the collection, processing or transfer of Data which is not necessary or required for the implementation, administration and/or operation of the Plan and the Participant’s participation in the Plan. The Participant may seek to exercise these rights by contacting privacy@donaldson.com. The Participant understands that he or she is providing the consent herein on a purely voluntary basis. If the Participant does not consent or later seeks to remove his or her consent, the Participant’s remuneration from or service with Donaldson will not be affected; the only consequence of refusing or withdrawing his or her consent is that Donaldson would not be able to grant the Participant Restricted Stock Units or other equity awards or participation in the Plan.
By executing this Agreement as of the Date of Grant, the Participant hereby accepts and agrees to be bound by all terms and conditions of this Agreement and the Plan.
PARTICIPANT:
SIGNED BY ELECTRONIC SIGNATURE*
* BY ELECTRONICALLY ACCEPTING THE OPTION, THE PARTICIPANT AGREES THAT (i) SUCH ACCEPTANCE CONSTITUTES THE PARTICIPANT’S ELECTRONIC SIGNATURE IN EXECUTION OF THE AGREEMENT; (ii) THE PARTICIPANT AGREES TO BE BOUND BY THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iii) THE PARTICIPANT HAS REVIEWED THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY) IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO ACCEPTING THE OPTION AND FULLY UNDERSTANDS ALL OF THE PROVISIONS OF THE PLAN, THE AGREEMENT
Exh B-5
AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iv) THE PARTICIPANT HAS BEEN PROVIDED WITH A COPY OR ELECTRONIC ACCESS TO A COPY OF THE U.S. PROSPECTUS FOR THE PLAN AND THE TAX SUPPLEMENT TO THE U.S. PROSPECTUS FOR THE PARTICIPANT’S COUNTRY, IF APPLICABLE; AND (v) THE PARTICIPANT HEREBY AGREES TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE HUMAN RESOURCES COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY).
Exh B-6
EXHIBIT C
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT
This Restricted Stock Unit Award Agreement (the “Agreement”) is made as of the date specified in the individual grant summary by and between Donaldson Company, Inc., a Delaware corporation (hereinafter, together with its subsidiaries, called “Donaldson” or “Company”), and the person specified in the individual grant summary, a non-Employee Director of Donaldson (hereinafter called the “Participant”).
Donaldson has adopted the 2019 Master Stock Incentive Plan (the “Plan”) which permits the grant of an award of Restricted Stock Units representing the right to receive shares of common stock, par value US $5.00 per share, of Donaldson (“Common Stock”) and dividend equivalent amounts corresponding to such shares. Donaldson is now granting this award under the Plan.
1. Grant of Restricted Stock Units. Donaldson hereby grants to the Participant the number Restricted Stock Units specified in the grant summary for no cash consideration. The Restricted Stock Units shall be subject to the terms and conditions in this Agreement and the Plan. The Participant acknowledges receipt of a copy of the Plan and the Plan Prospectus. Capitalized terms not defined in this Agreement shall have the meaning ascribed to such terms in the Plan. The grant date shall be as specified on the Participant’s individual grant summary (“Grant Date”) and subject to the following terms and conditions:
(a)Neither the Restricted Stock Units, nor the shares of Common Stock to which the units relate, may be sold, assigned, hypothecated or transferred (including without limitation, transfer by gift or donation) until the first anniversary of the Grant Date (“Restriction Period”). Restricted Stock Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book-keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of shares of Common Stock to be issued to or in respect of the Participant pursuant to this Agreement.
(b)The Restricted Stock Units subject to the Award shall be forfeited to Donaldson if, at any time within the Restriction Period, the Participant’s service as a Director of the Company is terminated for any reason unless:
(i)the Participant’s termination is due to retirement or resignation from service as a Director of the Company in accordance with the age and term limits of the Corporate Governance Guidelines of the Company; or
(ii)a majority of the members of the Board of Directors other than the eligible Director consent to the continued vesting of the Restricted Stock in accordance with the original vesting schedule.
(c)Upon the expiration of the Restriction Period, the Company shall cause to be issued to the Participant, or to the Participant’s designated beneficiary or estate in the event of the Participant’s death, one share of Common Stock in payment and settlement of each vested Restricted Stock Unit. The Company shall cause the shares issuable in connection with the vesting of any such Restricted Stock Units to be issued as soon as practicable after the Restriction Period, but in all events no later than 30 days after the Restriction
Exh C-1
Period, and the Participant shall have no power to affect the timing of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer agent of the Company and shall be in complete settlement and satisfaction of such vested Restricted Stock Units.
(d)Notwithstanding anything herein to the contrary such restrictions shall lapse and all of the shares of Common Stock shall become fully vested in the event of a Change in Control (as defined in the 2019 Master Stock Incentive Plan).
2. Vesting upon Change in Control. In the event of a Change in Control (as defined in the 2019 Master Stock Incentive Plan), the Restricted Stock Units shall immediately become fully vested and the shares subject to the Award shall be delivered to the Participant. Notwithstanding the foregoing, if any payment due under this Section 2 is deferred compensation subject to Section 409A of the Code, and if the Change in Control is not a “change in control event” that serves as a permissible payment event under Treasury Regulation § 1.409A-3(i)(5) or such other regulation or guidance issued under Section 409A of the Code, then the Restricted Stock Units shall vest upon the Change in Control as provided above but delivery of the shares subject to the Award shall be delayed until the end of the Restriction Period.
3. Miscellaneous.
(a)The Restricted Stock Units do not entitle the Participant to any rights of a stockholder of Donaldson with respect to shares of Common Stock underlying the Restricted Stock Units until such shares have been issued to the Participant upon settlement of the Restricted Stock Units. Notwithstanding the foregoing, the Participant shall accumulate an unvested right to dividend equivalent amounts on the shares of Common Stock underlying Restricted Stock Units if cash dividends are declared by Donaldson on the shares on or after the Grant Date. Each time a dividend is paid on the shares of Common Stock, the Participant shall accrue an additional number of Restricted Stock Units (rounded to the nearest whole share) having a Fair Market Value on the dividend payment date equal to the amount of the dividend payable on the Participant’s Restricted Stock Units on the dividend record date. The additional Restricted Stock Units shall be subject to the same vesting, forfeiture and share delivery terms in Sections 2, 3, 4 and 6 above as if they had been awarded on the Grant Date. The Participant shall not be entitled to dividend equivalents with respect to dividends declared prior to the Grant Date. All dividend equivalents accumulated with respect to forfeited Restricted Stock Units shall also be irrevocably forfeited. As of the date of issuance of shares underlying Restricted Stock Units, the Participant shall have all of the rights of a stockholder of Donaldson with respect to any shares issued pursuant hereto.
(b)This Award shall be effective only after the Participant agrees to the terms and conditions of the Agreement.
(c)This agreement shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law. The Participant consents to the exclusive jurisdiction of the state and federal courts of the state of Minnesota in connection with any controversies relating to or arising out of this Agreement, and agrees that any and all litigation relating to or arising out of this Agreement shall be venued in Hennepin County, Minnesota.
(d)As a condition of the grant of this Award, the Participant agrees to repatriate all payments attributable to the shares of Common Stock and/or cash acquired under the Plan (including, but not limited to, dividends and any proceeds derived from the sale of the
Exh C-2
shares of Common Stock) in accordance with local foreign exchange rules and regulations in the Participant’s country of residence. In addition, the Participant also agrees to take any and all actions, and consents to any and all actions taken by Donaldson, as may be required to allow Donaldson to comply with local laws, rules and regulations in the Participant’s country of residence. Finally, the Participant agrees to take any and all actions as may be required to comply with the Participant’s personal legal and tax obligations under local laws, rules and regulations in the Participant’s country of residence.
(e)Donaldson, in its sole discretion, may decide to deliver any documents related to the Restricted Stock Units or other Awards granted to the Participant under the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Donaldson or a third party designated by Donaldson.
(f)The Participant acknowledges and agrees that it is the Participant’s express intent that this Agreement, the Plan and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the grant of this Award, be drawn up in English. If the Participant has received this Agreement, the Plan or any other documents related to the Award translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version shall control.
(g)Notwithstanding any provisions in this Agreement to the contrary, this Award shall be subject to any special terms and conditions for the Participant’s country of residence, as set forth in the applicable addendum to this Agreement, if any. Further, if the Participant transfers residency to another country reflected in an addendum to this Agreement, the special terms and conditions for such country will apply to the Participant to the extent Donaldson determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Award and the Plan (or Donaldson may establish alternative terms and conditions as may be necessary or advisable to accommodate the Participant’s transfer). Any applicable addendum shall constitute part of this Agreement.
(h)Donaldson reserves the right to impose other requirements on this Award, any shares of Common Stock underlying the Award, and the Participant’s participation in the Plan, to the extent Donaldson determines, in its sole discretion, that such other requirements are necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Award and the Plan. Such requirements may include (but are not limited to) requiring the Participant to sign any agreements or undertakings that may be necessary to accomplish the foregoing.
(i)If the Participant is resident outside the United States, the grant of the Award is not intended to be a public offering of securities in the Participant’s country of residence. Donaldson has not submitted any registration statement, prospectus or other filings with the local securities authorities (unless otherwise required under local law), and the grant of the Award is not subject to the supervision of the local securities authorities. Investment in shares of Common Stock involves a degree of risk. The Participant should consult with the Participant’s personal advisor for professional investment advice.
(j)The Participant’s country of residence may have insider trading and/or market abuse laws that may affect the Participant’s ability to acquire or sell shares of Common Stock under
Exh C-3
the Plan during such times the Participant is considered to have “inside information” (as defined in the laws in Participant’s country of residence). These laws may be the same or different from any Donaldson insider trading policy. The Participant acknowledges that it is the Participant’s responsibility to be informed of and compliant with such regulations, and the Participant is advised to speak to his / her personal advisor on this matter.
(k)The invalidity or unenforceability of any provision of the Plan or this Agreement will not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement will be severable and enforceable to the extent permitted by law.
4. Data Privacy. Pursuant to applicable personal data protection laws, Donaldson hereby notifies the Participant of the following in relation to the Participant’s personal data and the collection, use, processing and transfer of such data in relation to Donaldson’s grant of this Award and the Participant’s participation in the Plan. The collection, use, processing and transfer of the Participant’s personal data is necessary for Donaldson’s administration of the Plan and the Participant’s participation in the Plan, and the Participant’s denial and/or objection to the collection, use, processing and transfer of personal data may affect the Participant’s participation in the Plan. As such, the Participant hereby voluntarily acknowledges and consents (where required under applicable law) to the collection, use, processing and transfer of personal data as described in this paragraph.
Donaldson holds certain personal information about the Participant, including the Participant’s name, home address, email address and telephone number, date of birth, social security number, passport number or other employee identification number, salary, nationality, job title, any shares of Common Stock or directorships held in Donaldson, details of all stock awards or any other entitlement to shares of Common Stock awarded, canceled, purchased, vested, unvested or outstanding in the Participant’s favor, for the purpose of managing and administering the Plan (“Data”). Data may be provided by the Participant or collected, where lawful, from third parties, and Donaldson will process Data for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Data processing will take place through electronic and non-electronic means according to logics and procedures strictly correlated to the purposes for which Data are collected and with confidentiality and security provisions as set forth by applicable laws and regulations in the Participant’s country of residence. Data processing operations will be performed minimizing the use of personal and identification data when such operations are unnecessary for the processing purposes sought. Data will be accessible within Donaldson’s organization only by those persons requiring access for purposes of the implementation, administration and operation of the Plan and for the Participant’s participation in the Plan.
Donaldson will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of the Participant’s participation in the Plan, and Donaldson may each further transfer Data to any third parties assisting Donaldson in the implementation, administration and management of the Plan. As permitted by applicable personal data protection laws, if Donaldson becomes involved in a merger, acquisition, sale of assets, joint venture, securities offering, bankruptcy, reorganization, liquidation, dissolution, or other transaction or if the ownership of all or substantially all of Donaldson otherwise changes, Donaldson may transfer Data to a third party or parties in connection therewith. The Participant hereby authorizes (where required under applicable law) them to receive, possess, use, retain and transfer Data, in electronic or other form, for purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of Common Stock on the Participant’s behalf to a broker or other third party with whom the Participant may elect to deposit any shares of Common Stock acquired pursuant to the Plan.
Exh C-4
The Participant may, at any time, exercise his or her rights provided under applicable personal data protection laws, which may include the right to (a) obtain confirmation as to the existence of Data, (b) verify the content, origin and accuracy of Data, (c) request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of Data, and (d) to oppose, for legal reasons, the collection, processing or transfer of Data which is not necessary or required for the implementation, administration and/or operation of the Plan and the Participant’s participation in the Plan. The Participant may seek to exercise these rights by contacting privacy@donaldson.com. The Participant understands that he or she is providing the consent herein on a purely voluntary basis. If the Participant does not consent or later seeks to remove his or her consent, the Participant’s remuneration from or service with Donaldson will not be affected; the only consequence of refusing or withdrawing his or her consent is that Donaldson would not be able to grant the Participant Restricted Stock Units or other equity awards or participation in the Plan.
By execution of this Agreement as of the Grant Date, the Participant hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan.
PARTICIPANT:
SIGNED BY ELECTRONIC SIGNATURE*
* BY ELECTRONICALLY ACCEPTING THIS AWARD, THE PARTICIPANT AGREES THAT (i) SUCH ACCEPTANCE CONSTITUTES THE PARTICIPANT’S ELECTRONIC SIGNATURE IN EXECUTION OF THE AGREEMENT; (ii) THE PARTICIPANT AGREES TO BE BOUND BY THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iii) THE PARTICIPANT HAS REVIEWED THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY) IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO ACCEPTING THIS AWARD AND FULLY UNDERSTANDS ALL OF THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iv) THE PARTICIPANT HAS BEEN PROVIDED WITH A COPY OR ELECTRONIC ACCESS TO A COPY OF THE U.S. PROSPECTUS FOR THE PLAN AND THE TAX SUPPLEMENT TO THE U.S. PROSPECTUS FOR THE PARTICIPANT’S COUNTRY, IF APPLICABLE; AND (v) THE PARTICIPANT HEREBY AGREES TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE HUMAN RESOURCES COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY).
Exh C-5
EXHIBIT D
DONALDSON COMPANY, INC. COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
20___ ANNUAL RETAINER ELECTION FORM
Name: __________________________________
| Retainer Election |
|---|
| Annual Retainer: I elect to receive my annual retainer for calendar year 20__ as follows (total must add up to 100%): |
| % in Cash: _____________%<br><br>% in Deferred Stock: _____________%<br><br>% in Deferred Cash: _____________% |
| Deferred Stock Payment Election |
| --- |
| I elect to receive my deferred stock account of shares of company stock beginning on (choose one):<br><br>One year after I cease to be a director<br><br>A specified calendar year: _________________ (payment to occur within first 60 days of year) |
| I elect to receive my deferred stock account of shares of company stock in the following form of payment:<br><br>Lump Sum Annual Installments for ______ years (maximum of 10 years) |
| Deferred Cash Payment Election |
| --- |
| I elect to receive my deferred cash account beginning on (choose one):<br><br>One year after I cease to be a director<br><br>A specified calendar year: _________________ (payment to occur within first 60 days of year) |
| I elect to receive my deferred cash account in the following form of payment:<br><br>Lump Sum Annual Installments for ______ years (maximum of 10 years) |
NOTE: Changes to this election may only be made under certain specific circumstances described in the Plan document.
Payments pursuant to this agreement shall be reduced for the amount of any applicable tax withholdings. I understand that this Agreement is covered by the terms of the Company’s Compensation Plan for Non-Employee Directors and the 2019 Master Stock Incentive Plan. I understand that this Agreement form must be returned to the Company before the beginning of the calendar year in which I wish the Agreement to take effect. I understand that the deferral account shall not be held by the Company in a fiduciary capacity and that I or my representative has no right with respect to such account, except as a general unsecured creditor of the Company.
By: __________________________________________ Date: _________________
Document
Exhibit 21
Wholly Owned Subsidiaries, Joint Ventures and Partnerships
Wholly Owned Subsidiaries
| Name of Company | Where Organized |
|---|---|
| BOFA Americas Inc. | Staunton, Illinois, USA |
| BOFA International Ltd. | Poole, United Kingdom |
| Donaldson Australasia Pty. Ltd. | Wyong, Australia |
| Donaldson Belgie, b.v.b.a. | Leuven, Belgium |
| Donaldson Canada, Inc. | Toronto, Ontario, Canada |
| Donaldson Chile, Ltd. | Santiago, Chile |
| Donaldson China Holding Co., Ltd. | Shanghai, China Mainland |
| Donaldson China Trading Co., Ltd. | Wuxi, China Mainland |
| Donaldson Colombia S.A.S. | Bogotá, Colombia |
| Donaldson Czech Republic s.r.o. | Klasterec nad Ohri, Czech Republic |
| Donaldson do Brasil Equipamentos Industriais Ltda | Atibaia, São Paulo, Brazil |
| Donaldson Education Investment Company RF (Pty) Ltd. | Modderfontein, South Africa |
| Donaldson Europe b.v. | Leuven, Belgium |
| Donaldson Far East Ltd. | Hong Kong, S.A.R. |
| Donaldson Filter Components Ltd. | Hull, United Kingdom |
| Donaldson Filtration (Asia Pacific) Pte. Ltd. | Changi, Singapore |
| Donaldson Filtration Deutschland GmbH | Haan, Germany |
| Donaldson Filtration (GB) Ltd. | Leicester, United Kingdom |
| Donaldson Filtration Magyarorszag Kft. | Budapest, Hungary |
| Donaldson Filtration Malaysia Sdn. Bhd. | Selangor Darul Ehsan, Malaysia |
| Donaldson Filtration Norway a.s. | Moss, Norway |
| Donaldson Filtration Österreich, GmbH | Vienna, Austria |
| Donaldson Filtration Slovensko s.r.o. | Bratislava, Slovakia |
| Donaldson Filtration Sub Saharan Africa (Pty) Ltd. | Modderfontein, South Africa |
| Donaldson Filtration Systems (Pty) Ltd. | Cape Town, South Africa |
| Donaldson Filtration (Thailand) Ltd. | Nonthaburi, Thailand |
| Donaldson Filtre Sistemleri Ticaret Ltd. Sirketi | Istanbul, Turkey |
| Donaldson France S.A.S. | Paris, France |
| Donaldson Ibèrica Soluciones en Filtracion s.l. | Barcelona, Spain |
| Donaldson India Filter Systems Pvt. Ltd. | New Delhi, India |
| Donaldson Industrial CR s.r.o. | Kadan, Czech Republic |
| Donaldson Italia s.r.l. | Ostiglia, Italy |
| Donaldson Korea Co., Ltd. | Seoul, South Korea |
| Donaldson Middle East Filtration System LLC | Abu Dhabi, United Arab Emirates |
| Donaldson Nederland B.V. | Almere, Netherlands |
| Donaldson Peru s.a.c. | Lima, Peru |
| Donaldson Polska Sp. z.o.o. | Warsaw, Poland |
| Donaldson S.A. de C.V. | Aguascalientes, Mexico |
| Donaldson S.A.S. | Domjean, France |
| Donaldson Scandinavia a.p.s. | Hørsholm, Denmark |
| Donaldson Schweiz GmbH | Zurich, Switzerland |
| Donaldson Taiwan Inc. | Taipei, Taiwan |
| Name of Company | Where Organized |
| --- | --- |
| Donaldson (Thailand) Ltd. | Rayong, Thailand |
| Donaldson UK Holding Ltd. | Hull, United Kingdom |
| Donaldson (Wuxi) Filters Co. Ltd. | Wuxi, China Mainland |
| Filtros Partmo S.A.S. | Bogotá, Colombia |
| Le Bozec Filtration Systems, S.A.S. | Paris, France |
| Nippon Donaldson Ltd. | Tachikawa, Tokyo, Japan |
| Pearson Arnold Industrial Services | New Hope, Minnesota, USA |
| P.T. Donaldson Filtration Indonesia | Jakarta, Indonesia |
| Purilogics, LLC | Greenville, South Carolina, USA |
| Shoo 788AA Ltd. | Poole, United Kingdom |
| Solaris Biotech USA, Inc. | Berkeley, California, USA |
| Solaris Biotechnology S.r.l. | Porto Mantovano, Italy |
| Solaris Industrial S.r.l. | Porto Mantovano, Italy |
| Solaris Lab S.r.l. | Porto Mantovano, Italy |
| Ultrafilter S.A.S. | Vigny, France |
Joint Ventures and Partnerships
| Name of Company | Where Organized |
|---|---|
| Advanced Filtration Systems Inc. | Champaign, Illinois, USA |
| AFSI Europe s.r.o. | Most, Czech Republic |
| P.T. Panata Jaya Mandiri | Jakarta, Indonesia |
| Rashed Al-Rashed & Sons - Donaldson Company Ltd. | Dammam, Saudi Arabia |
Document
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-235394, 333-238901, 333-170729, 333-97771, 33-27086 and 33-44624) of Donaldson Company, Inc. of our report dated September 23, 2022 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 23, 2022
Document
Exhibit 24
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Amy C. Becker and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Tod E. Carpenter |
|---|
| Signature |
| Tod E. Carpenter |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Pilar Cruz |
|---|
| Signature |
| Pilar Cruz |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Christopher M. Hilger |
|---|
| Signature |
| Christopher M. Hilger |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Michael J. Hoffman |
|---|
| Signature |
| Michael J. Hoffman |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Douglas A. Milroy |
|---|
| Signature |
| Douglas A. Milroy |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Willard D. Oberton |
|---|
| Signature |
| Willard D. Oberton |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Richard M. Olson |
|---|
| Signature |
| Richard M. Olson |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ James J. Owens |
|---|
| Signature |
| James J. Owens |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Ajita G. Rajendra |
|---|
| Signature |
| Ajita G. Rajendra |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Trudy A. Rautio |
|---|
| Signature |
| Trudy A. Rautio |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ Jacinth C. Smiley |
|---|
| Signature |
| Jacinth C. Smiley |
| Print Name |
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint Tod E. Carpenter, Amy C. Becker, and Andrew J. Cebulla the undersigned’s attorneys-in-fact and agents, individually and separately, for the purpose of signing in the undersigned’s name and on the undersigned’s behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2022, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned’s behalf said report so signed for filing with the Securities and Exchange Commission.
Dated: September 23, 2022
| /s/ John P. Wiehoff |
|---|
| Signature |
| John P. Wiehoff |
| Print Name |
Document
Exhibit 31-A
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Tod E. Carpenter, certify that:
1.I have reviewed this Annual Report on Form 10-K of Donaldson Company, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | September 23, 2022 | By: | /s/ Tod E. Carpenter |
|---|---|---|---|
| Tod E. Carpenter<br><br>Chairman, President and Chief Executive Officer |
Document
Exhibit 31-B
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Scott J. Robinson, certify that:
1.I have reviewed this Annual Report on Form 10-K of Donaldson Company, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | September 23, 2022 | By: | /s/ Scott J. Robinson |
|---|---|---|---|
| Scott J. Robinson<br>Senior Vice President and Chief Financial Officer |
Document
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes–Oxley Act of 2002, the following certifications are being made to accompany the Annual Report on Form 10-K for the fiscal year ended July 31, 2022 for Donaldson Company, Inc.:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Tod E. Carpenter, Chief Executive Officer of Donaldson Company, Inc., certify that:
1.The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2022, (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.
| Date: | September 23, 2022 | By: | /s/ Tod E. Carpenter |
|---|---|---|---|
| Tod E. Carpenter<br><br>Chairman, President and Chief Executive Officer |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Scott J. Robinson, Chief Financial Officer of Donaldson Company, Inc., certify that:
1.The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2022, (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.
| Date: | September 23, 2022 | By: | /s/ Scott J. Robinson |
|---|---|---|---|
| Scott J. Robinson<br>Senior Vice President and Chief Financial Officer |