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.
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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.
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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.
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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.
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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.
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Executive Officers
Our executive officers of the Company as of August 31, 2022 were as follows:
Name Age Positions and Offices Held First YearAppointed as anExecutive 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.
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PART II
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:
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.
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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,
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.
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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.
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Consolidated Results of Operations
Operating Results
Operating results were as follows (in millions, except per share amounts):
Year Ended July 31,
Other income, net (9.8) (0.3) (9.3) (0.3)
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,
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,
Change in net sales excluding translation 539.8 194.1
Impact of foreign currency translation(1) (87.1) 78.0
(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.
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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,
Change in net earnings excluding translation 56.8 19.1
Impact of foreign currency translation(1) (10.9) 10.8
Current year net earnings $ 332.8 $ 286.9
(1)The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net earnings into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year.
Restructuring
In the second quarter of fiscal 2021, the Company initiated activities to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $14.8 million. Charges of $5.8 million were included in cost of sales and $9.0 million were included in operating expenses in the Consolidated Statement of Earnings for the year ended July31, 2021. The Company expects approximately $8 million in annualized savings from these restructuring activities, and the initiative is now substantially completed.
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Segment Results of Operations
Net sales and earnings before income taxes were as follows (in millions):
Year Ended July 31,
Net sales
Earnings before income taxes
(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,
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.
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Industrial Products Segment
Net sales were as follows (in millions):
Year Ended July 31,
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):
Net cash provided by (used in):
Effect of exchange rate changes on cash (14.1) 5.9 (20.0)
Decrease in cash and cash equivalents $ (29.5) $ (13.8) $ (15.7)
Operating Activities
Cash provided by operating activities for the year ended July 31, 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.
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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):
Reductions to borrowing capacity:
Outstanding borrowings — — — 3.7 3.7
Other non-borrowing reductions — — 27.0 19.1 46.1
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.
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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):
Short-term borrowings $ 3.7 0.2 % $ 48.5 2.9 %
Current maturities of long-term debt — — — —
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.
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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.
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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.
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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):
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.
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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.
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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.
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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
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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.
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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.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
Year ended July 31,
Other income, net (9.8) (9.3) (12.5)
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.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year ended July 31,
Other comprehensive income:
Foreign currency translation (loss) income (99.6) 30.0 18.7
Derivatives:
Net other comprehensive (loss) income (87.4) 65.8 8.9
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
As of July 31,
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
Prepaid expenses and other current assets 94.2 84.0
Property, plant and equipment, net 594.4 617.8
Intangible assets, net 99.8 61.6
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings $ 3.7 $ 48.5
Accrued employee compensation and related taxes 113.8 126.8
Other current liabilities 113.5 92.1
Non-current income taxes payable 69.4 80.7
Deferred income taxes 32.7 26.6
Other long-term liabilities 91.1 88.2
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued — —
Additional paid-in capital 13.7 5.8
Stock-based compensation plans 18.6 12.8
Accumulated other comprehensive loss (205.6) (118.2)
Total liabilities and stockholders’ equity $ 2,600.3 $ 2,400.2
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year ended July 31,
Operating Activities
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
Prepaid expenses and other current assets (10.5) (5.3) 1.4
Income taxes payable 4.9 (3.6) (13.1)
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
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) —
Tax withholding for stock compensation transactions (1.8) (4.2) (6.3)
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
Supplemental Disclosure of Non-Cash Operating and Investing Transactions
Accrued property, plant and equipment additions $ 16.3 $ 7.0 $ 9.5
Transfer of operating lease asset and operating lease liability $ — $ (9.2) $ —
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
Comprehensive income
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)
Deferred stock and other activity (5.2) 0.4 (9.2) 8.6 (5.4)
Comprehensive income
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
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)
Comprehensive income
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
Deferred stock and other activity (3.0) (1.4) 2.7 (1.7)
See Notes to Consolidated Financial Statements.
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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.
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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.
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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.
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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.
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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.
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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
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.
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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,
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.
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Note 4. Inventories, Net
The components of inventories, net were as follows (in millions):
Note 5. Property, Plant and Equipment, Net
The components of property, plant and equipment, net were as follows (in millions):
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
Goodwill acquired — — —
Foreign currency translation (0.1) 5.8 5.7
Foreign currency translation (1.0) (18.5) (19.5)
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.
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Intangible asset classes were as follows (in millions):
Customer Relationships Patents, Trademarks and Technology
Intangible assets acquired — — — — — — —
Amortization expense — (6.1) (6.1) — (2.1) (2.1) (8.2)
Amortization expense — (6.0) (6.0) — (3.2) (3.2) (9.2)
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):
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):
Year Ended July 31,
Reductions to borrowing capacity:
Outstanding borrowings — — — 48.5 — — 3.7 — 3.7 48.5
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.
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Long-Term Debt
Long-term debt was as follows:
Interest Rate Outstanding Balance(in millions)
Debt issuance costs, net (2.4) (2.3)
Less current maturities — —
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):
Total future maturities payments 646.7
Less debt issuance costs, net (2.4)