Business context and reporting period
Donaldson Company, Inc. manufactures filtration systems and replacement parts through its Engine Products and Industrial Products segments. This Form 10-Q covers the fiscal third quarter and nine months ended April 30, 2021; comparisons are with the periods ended April 30, 2020. Amounts are in U.S. dollars.
Financial performance
| Metric | Quarter 2021 | Quarter 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $765.0M | $629.7M | $2,080.8M | $1,964.4M |
| Gross margin | 33.7% | 33.2% | 33.9% | 33.8% |
| Operating income | $109.4M | $84.5M | $272.7M | $257.6M |
| Operating margin | 14.3% | 13.4% | 13.1% | 13.1% |
| Net earnings | $84.4M | $63.4M | $202.6M | $192.9M |
| Diluted EPS | $0.66 | $0.50 | $1.58 | $1.50 |
- Quarter sales rose 21.5% year over year; net earnings rose $21.0M. Nine-month sales increased 5.9% and net earnings increased $9.7M.
- Quarter gross-margin improvement reflected higher-volume leverage and better pricing, partly offset by commodity and freight costs and sales mix. Nine-month margins also included $14.8M of restructuring charges.
- Quarter Engine Products sales increased 26.3% and segment pretax earnings were $84.4M, versus $56.5M. Industrial Products sales increased 11.8%, but its pretax margin declined to 16.1% from 16.6%. For nine months, Industrial Products pretax earnings fell to $90.9M from $98.8M.
- Foreign currency translation added $27.9M to quarterly sales and $51.1M to nine-month sales; management estimated the nine-month translation benefit to net earnings at approximately $7.1M.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $305.6M, up from $265.2M. Capital expenditures were $40.2M, versus $106.2M, and financing used $295.5M, primarily for debt repayment, dividends, share repurchases and the BOFA minority-interest purchase.
- Cash was $215.3M at April 30, 2021, compared with $236.6M at July 31, 2020. Current assets were $1,198.7M and current liabilities $548.8M.
- Long-term debt was $454.6M, down from $617.4M; short-term borrowings and current maturities totaled $44.5M. Debt was 30.2% of total capitalization, versus 38.7% at July 31, 2020. The company reported covenant compliance and $799.0M of available borrowing capacity at quarter-end.
- Receivables increased to $541.3M from $455.3M; days sales outstanding improved to 60 from 63. Inventory increased to $360.1M from $322.7M, while inventory turns improved to 5.7 from 4.9.
- Dividends paid were $79.5M and share repurchases were $78.7M during the nine months. The company repurchased 1.41M shares and had authorization for 9.3M more at April 30.
Outlook, risks and notable items
- No broad revenue or earnings forecast is provided in the filing. Management expected no additional fiscal 2021 restructuring expense and estimated $8.0M in annualized savings once the program is completed by the beginning of fiscal Q3 2022.
- COVID-19 continued to create logistics and production-timing constraints; management said future impacts were uncertain. It also cited higher commodity and freight costs, supply availability, demand variability and foreign-exchange exposure as risks.
- On May 21, 2021, after quarter-end, Donaldson replaced its $500M revolving credit facility with a new five-year $500M facility maturing in 2026, with an option to increase it by up to $250M. A separate $100M 364-day facility expired May 17 and was not renewed. The company also issued commitments for $150M of senior notes, with proceeds scheduled for August and November 2021 at fixed rates of 2.5% and 2.12%, respectively.
- The company recorded $14.8M of restructuring charges, primarily severance, in fiscal Q2; $12.8M remained accrued at April 30. Pension remeasurement increased other comprehensive income, including a $25.4M adjustment over the nine-month period; a $1.1M pension settlement charge was recorded in the quarter. No goodwill impairment was recorded.
- Management considered accrued litigation liabilities adequate and said identified claims were not material. The company guarantees half of certain joint-venture debt; the joint venture’s outstanding debt was $34.2M at April 30. Tax examinations or disputes could change reserves, though management considered a material near-term reserve adjustment remote.
Key facts for investors to verify
- Whether sales momentum and the quarter’s margin improvement persist as commodity, freight and supply-chain pressures evolve.
- Whether the Industrial Products segment can recover its year-to-date profitability and how much of reported growth reflects currency effects.
- Progress, cash costs and realization of the restructuring program’s estimated $8.0M annual savings.
- Debt and liquidity after the new credit facility, expiration of the 364-day facility and scheduled note proceeds.
- The duration and operational effects of COVID-19-related constraints, and any changes in tax, litigation, pension or joint-venture exposures.