Donaldson Company, Inc. (NYSE: DCI) — FY2021 Form 10-K
Reporting period: Fiscal year ended July 31, 2021. This filing reports full-year results; it does not provide standalone fourth-quarter financial results. Donaldson manufactures filtration systems and replacement parts through its Engine Products and Industrial Products segments.
Financial performance
Unless stated otherwise, amounts are in U.S. dollars and millions. FY2021 comparisons are with FY2020.
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $2,853.9 | $2,581.8 | +10.5% reported; +7.5% constant currency |
| Gross profit / margin | $971.7 / 34.0% | $871.6 / 33.8% | Margin +0.2 percentage points |
| Operating income / margin | $384.7 / 13.5% | $340.1 / 13.2% | Income +13.1% |
| Net earnings | $286.9 | $257.0 | +11.6% |
| Diluted EPS | $2.24 | $2.00 | +12.0% |
| Cash from operating activities | $401.9 | $387.0 | +$14.9 |
Gross margin improvement reflected higher sales and pricing, partly offset by raw-material and freight inflation, unfavorable mix, and restructuring charges. The effective tax rate increased to 24.7% from 23.3%, primarily due to fewer discrete tax benefits. Currency translation added $78.0 million to sales and approximately $10.8 million to net earnings.
Segments and demand
- Engine Products: Sales of $1,957.7 million, up 13.3%; segment pretax earnings of $289.0 million, up 26.0%. Growth was broad in Off-Road, On-Road and Aftermarket. Aerospace and Defense sales fell 18.3%, mainly reflecting weak commercial aerospace replacement-part demand.
- Industrial Products: Sales of $896.2 million, up 4.9%; segment pretax earnings of $133.3 million, up 6.7%. Industrial Filtration Solutions grew 7.0%; Gas Turbine Systems declined 5.3%.
- Backlog expected to be delivered within 90 days was $626.0 million at year-end, versus $362.4 million a year earlier. The company cautions backlog is not necessarily indicative of future results.
Cash, debt and liquidity
- Cash and cash equivalents were $222.8 million at July 31, 2021, down from $236.6 million. Operating cash flow was $401.9 million; investing activities used $58.3 million and financing activities used $363.3 million.
- Total debt was $509.5 million, down from $626.9 million; debt was 30.9% of capitalization versus 38.7%. Long-term debt was $461.0 million. The company reported $237.9 million of remaining short-term borrowing capacity and $417.3 million under its revolving credit facility.
- Management said available cash, expected operating cash generation and credit facilities should cover requirements for the next 12 months. The company was in compliance with its debt covenants at year-end.
- Dividends paid were $107.2 million and share repurchases were $142.2 million. Capital expenditures were $59.0 million.
Outlook, commentary and risks
- Management expected supply-chain constraints—including labor shortages, freight limitations and delays in raw materials—to continue into FY2022, limiting the ability to meet strengthening demand and extending lead times.
- Raw-material and operating-cost inflation affected FY2021 results and was expected to continue in FY2022. Management warned that margin pressure may persist because some customer contracts delay price adjustments and competitive conditions may constrain pass-through.
- FY2022 capital expenditures were expected to be $100 million to $120 million, primarily to enhance production capabilities. The company expected approximately $8 million in annualized savings from its restructuring program once completed by the beginning of the third quarter of FY2022.
- FY2021 restructuring charges were $14.8 million, primarily severance and mainly related to EMEA cost and manufacturing changes; $10.3 million remained accrued at year-end.
- Principal risks include persistent supply-chain disruption and inflation, inability to satisfy demand, cyclical end markets, foreign exchange exposure, competition and pricing pressure, cybersecurity, regulatory and legal matters, and technology shifts such as equipment electrification. COVID-19’s future effects were described as uncertain.
- Legal and litigation liabilities recorded were not material, and management considered materially adverse excess settlements remote. No goodwill impairment was recorded; the auditor identified the valuation of one Industrial Products reporting unit as a critical audit matter due to judgment over growth and margin assumptions.
Most important facts for investors to verify
- Whether demand, backlog conversion and delivery performance hold up as supply and labor constraints evolve.
- Whether pricing and productivity can offset raw-material, freight and wage inflation without materially eroding margins.
- Progress and realized savings from the restructuring plan, including completion timing and remaining accrued costs.
- Cash generation, working-capital needs, capital spending and the effects of dividends and repurchases on leverage and liquidity.
- Assumptions supporting Industrial Products goodwill valuation and any subsequent impairment indicators.
- Terms and funding status of the new senior notes: $100 million at 2.50% due 2031, with proceeds received in August 2021, and $50 million at 2.12% due 2028, with proceeds expected in November 2021.