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Text: During today's call we will reference non-GAAP metrics.
We had an excellent finish to a strong year.
We achieved another quarterly sales record and earnings per share was up 32% in fourth quarter, resulting in full year sales and earnings per share that were both near the high end of our guidance ranges.
As we look ahead, conditions will likely become more challenging, particularly in the first half of fiscal '22.
We are already facing supply chain disruptions primarily due to labor shortages in the Americas and raw materials inflation puts significant pressure on gross margin.
While the magnitude of these issues are greater than what we have experienced in recent years, our playbook for addressing them is time-tested.
We are pursuing growth opportunities in our Advance and Accelerate businesses, we are raising prices to mitigate the impact of cost increases and we are leveraging our strong relationships to remediate and overcome the current supply chain challenges.
When we roll these things together, we feel good about where we land.
Our plan reflects continued progress on our strategic initiatives and we expect to deliver record levels of sales and record profit in fiscal '22.
We will share more details about that later in the call.
So I will now provide some context on fourth quarter sales.
Total sales were $773 million, which is up 25% from last year as we compare it against the toughest patch from the pandemic.
If you normalize the trend with a two-year stack comparison, fourth quarter is right in line with what we had in the third quarter, suggesting we are maintaining sales momentum.
In Engine, total sales were up 28% and the increase was again led by our first-fit businesses.
Fourth quarter sales in Off-Road were up 58%, including about 15 points of growth from Exhaust and Emissions.
We won a significant amount of new business over the past few years in anticipation of a new emission standard in Europe.
These programs were slower to launch due in part to COVID and we are now seeing a dramatic ramp-up in demand.
It is worth noting, these sales create mix pressure for us.
We are enhancing the Exhaust and Emissions cost structure to reduce the impact on margin, but based on the nature of this business that will only get us part of the way.
Staying with Off-Road, we continue to have strong growth in our innovative razor to sell razor blade products.
These products make up about one-third of Off-Road filter sales and they grew substantially faster than their non-proprietary counterparts in fourth quarter.
This trend continues to reinforce that our strategy is working.
We develop value-added products that drive aftermarket retention for our customers and us.
We are experiencing similar trends in On-Road.
Fourth quarter sales were up 36% from prior year and innovative products, which make up nearly half the business, grew twice as fast as the non-proprietary counterparts.
In the US, fourth quarter On-Road sales continued to benefit from higher Class 8 truck production and there was also an impact from a strategic choice we made.
During the quarter, we stopped selling some directed-buy equipment to a large OEM customer.
If we adjust our current and prior-year sales to exclude these products, the like-for-like growth in the US is about 35% and we are left with a more profitable business that allows us to focus on what we do best, technology-led filtration.
I also want to call out Latin America where fourth-quarter sales of On-Road tripled versus the year ago.
The growth was from large OEM customers in Brazil.
And although it is exciting to see the sharp growth, I want to note that is on a very small base.
In Engine aftermarket sales were up almost 26%.
In fact, fourth quarter sales of $376 million were the highest ever, beating the record we set last quarter.
Supplier constraints are one of the more challenging parts of the aftermarket business right now and those issues seem to be more severe in the Americas.
Despite that pressure, independent channel sales grew in the high 20% range and fourth-quarter sales in the aftermarket OE channel were up in the low 20% range.
Innovative products remain a strong contributor to growth in aftermarket.
These razor blade products accounted for more than a quarter of total aftermarket sales and they grew in the mid 20% range during fourth quarter.
I would be remiss if I did not mention PowerCore.
We launched the brand almost 20 years ago and sales of these products have grown every year since at least 2010.
We finished fiscal '21 at another record and we anticipate a long runway for continued growth.
We are compounding aftermarket growth with share gains in less-developed markets like Latin America, Russia and South Africa.
These were some of our fastest-growing markets and we believe our strong distribution and comprehensive product offering position us for long-term success in these regions.
In Aerospace and Defense fourth quarter sales declined 8%.
Commercial aerospace remains under pressure from the pandemic, particularly in Europe.
That decrease was partially offset by higher sales of ground defense equipment.
As always Aerospace and Defense sales can be lumpy quarter to quarter, but we are optimistic about returning to growth in the new fiscal year.
Before turning to the Industrial segment, I want to make a point about our Engine business in China.
One year ago, Engine sales in China were up almost 25%, while the rest of the region suffered through the pandemic.
Fourth quarter Engine sales were up again this year by about 2%.
The strategy in China continues to do well as we win new programs with local manufacturers, but it's the one place in the world where we face the tough comparison from last year, so I wanted to point that out.
The Industrial segment also had a solid quarter with total sales growing 19.5%.
Sales in Industrial Filtration Solutions, or IFS, were up more than 23% in fourth quarter, reflecting strong growth in new equipment and replacement parts.
New equipment makes up nearly half of IFS sales and these products grew in the mid-teens last quarter, which builds on the recovery that began six months ago.
There is still a cautious tone in the market, but we see some signs of improvement and our order intake trends add to our confidence.
The replacement parts of dust collection are a more optimistic story with fourth quarter sales up nearly 40%.
Activity continues to accelerate factories and we continue to gain share with our proprietary dust collection products.
Another growth engine within IFs is Process Filtration, which serves the food and beverage market.
Fourth quarter sales were up almost 20%, reflecting growth in new equipment and replacement parts.
The market opportunity for Process Filtration is fantastic and new high-growth areas like plant-based food and beverages only increase our opportunities.
Consequently, we will continue to expand the team and look for another year of strong growth in fiscal '22.
Sales of Special Applications grew 27% in fourth quarter with strong contributions from both Disk Drive and Venting Solutions.
Disk Drive benefited from timing and Venting Solutions continued to make ground with automotive customers.
Fourth quarter sales of venting products grew 50% with almost two-thirds of the increase coming from Asia-Pacific.
With our high-tech powertrain and battery vents, we are winning new programs and expanding with existing customers across the world, resulting in another year of growth for Venting Solutions.
Fourth quarter sales of Gas Turbine Systems, or GTS, were down 11%.
The decline came from the US, which is typically our largest GTS market as sales to small turbines were under pressure.
We continue to operate this business with discipline.
So our focus in GTS remains squarely on growing replacement parts, while being selective in which new turbine projects we pursue.
Overall, the theme of discipline comes into everything we do and that gave us a significant advantage during the pandemic.
We achieved record sales in each of the last two quarters and our full year earnings per share is an all-time high.
We did that work safely.
We focused on our people.
We implemented protocols that made sense based on local conditions and our employees acted as one team to deliver outstanding results.
We plan to follow that up with another year of record sales and record profit in fiscal '22 and I'm excited about what we can accomplish.
Every way you look at it, fiscal '21 was a solid year.
We generated strong sales despite the pandemic hanging over us and margin growth contributed to record full year EPS.
What was more impressive was how our people operated.
The level of teamwork was unbelievable and I am inspired by the commitment they showed.
Before getting to the details of the new year, let me share some 2021 highlights.
Fourth quarter sales grew 25%, operating income was up 36% and earnings per share of $0.66 was 32% above the prior year.
As I know you've heard me say, we are committed to increasing levels of profitability on increasing sales and we did that in 2021.
I want to add a short disclaimer that commitment is over time and it won't be easy to achieve in the first half of fiscal '22.
I'll touch on that in a few minutes.
So back to the fourth quarter recap.
Fourth quarter operating margin was 14.5%, an increase of 110 basis points from the prior year.
Most of the increase was from gross margin, which grew 70 basis points to 34.4%.
Strong volume leverage and initial pricing benefits more than offset the impact from higher raw material costs and mix headwinds.
The impact from raw materials increased throughout the quarter, as inflation has begun coming through in full force.
We were in front of this impact of price increases in certain businesses, while increases in areas with supply agreements that had index clauses tend to lag the market.
That's true when prices go up or down so it works out over time.
Leverage and pricing also accounted for higher fourth quarter gross margin in both segments.
However, challenges from inflation and an unfavorable mix will likely be the themes in fiscal '22.
Operating expenses at a rate of sales was favorable at 40 basis points driven primarily by volume leverage.
That was true in both segments with industrial gaining a lot of improvement from leverage.
The strong volume leverage was partially offset by higher incentive compensation due in part to a soft comparison last year and incremental investments in our strategic growth priorities, which will continue in fiscal '22.
I also want to touch on corporate and unallocated line in our segment reporting.
The fourth quarter increase of almost $10 million reflects a couple of factors [Indecipherable] expense, which includes additional incentive compensation and higher benefit costs and a much easier comparison in the prior year.
Moving down the P&L, fourth quarter other income was $5 million.
While the amount itself is not material, I bring it up because we ended the year above our guidance.
So in case there are questions, the favorability reflects a handful of non-recurring items including a tax settlement in Brazil and lower loss on foreign exchange.
In terms of our other financial metrics, fourth quarter was in line with expectations.
Therefore, our full year interest expense and tax rate were both consistent with guidance.
Fiscal '21 capital expenditures were also in line with our forecast and way down from 2020 as we took a planned pause following the investment cycle over the past three years.
We directed about $0.25 billion to shareholders in fiscal '21.
We repurchased 1.9% of our outstanding shares for $142 million and we paid dividend of $107 million, including the 5% increase we announced earlier this year.
We are on pace for more than 25 years in a row of annual dividend increases, which is a trend we are extremely proud of.
I also want to highlight the fiscal '21 adjusted cash conversion of 116%.
Our DSO and DPO metrics were both favorable versus the prior year.
Inventory churns improved and capex was down.
While strong net income obviously helped our cash conversion, I am pleased with the way we managed our balance sheet.
We continue to have the flexibility we need to invest in our strategic priorities, including organic and inorganic growth.
That's the setup for fiscal '22.
We begin the year on solid ground and we are well positioned to deliver our objectives.
Based on that we use wide ranges for total and segment-level guidance to reflect the realities.
Of course, we will tighten things up as the year progresses.
With that, fiscal '22 sales are expected to grow between 5% and 10% with currency translation being negligible.
Engine is also planned to up between 5% and 10% and Industrial is a bit higher at 6% to 11%.
Within Engine, sales of our first-fit businesses are expected to remain healthy, particularly in the first half of the year.
Fiscal '22 On-Road sales are planned up in the low single digits, while Off-Road sales are projected up in the low double digits.
The Off-Road first-fit growth also includes benefits from new programs in Exhaust and Emissions, which gives us top line leverage and gross margin mix headwinds.
For Engine aftermarket, we expect full year sales growth in the mid-single digits with equipment utilization being complemented by share gains from our innovative products and under-penetrated markets.
We anticipate low double-digit growth in Aerospace and Defense due in large part to comparing against the challenges of fiscal '21.
Sales of Industrial Filtration Solutions are firm [Phonetic] up in the low double digit range, reflecting a few things.
We expect a rebound in sales of new equipment, particularly for dust collection and continued growth in dust collection replacement parts.
We also expect another year of strong growth in process filtration, which reflects benefits from further investments to expand the team.
Fiscal '22 sales in GTS are planned up in the high single digits, while sales of Special Applications are planned down in the low single digits.
Within Special Applications, we expect lower sales of disk drive filters to be partially offset by growth in Venting Solutions.
In terms of operating margin, we expect a full year rate between 14.1% and 14.7%.
This range implies an increase of 10 basis points to 70 basis points from the fiscal '21 adjusted operating margin and we expect the improvement to come from expense leverage.
Gross margin is expected to be flat to slightly down from the prior year with raw materials being the single biggest headwind.
At today's prices, we expect to pay 8% to 10% more for our raw materials this year and that translates to a gross margin impact of nearly three full points in fiscal '22 margin.
There is still a lot of variability and where prices have come down some, it is only a modest change relatively to the massive run-up over the past few months.
So we do not yet have signs of meaningful release.
And one final dynamic to keep in mind is that we had raw materials favorability during the first half of fiscal '21.
Consequently, we expect substantial pressure on our first-half gross margin and then moderating pressure as the timing of our price increases roll in and catch up to the current market pricing.
Importantly, we have already taken action to limit the impact.
We implemented several off cycle pricing actions over the past few months and we have more plan for this fiscal year, but those will take time to roll in.
As benefits from pricing compound and costs stabilize, we anticipate gross margin in the second half of fiscal '22 should be up versus '21.
Restructuring action we initiated in fiscal '21 will help reduce the impact a bit.
We continue to expect annualized savings of about $8 million, with about $5 million to $6 million landing in fiscal '22.
A large portion of these savings benefit operating expense and there are a handful of other puts and takes we considered in our operating expense budget.
For example, we anticipate savings from incentive compensation as we reset our annual bonus plans and we expect to increase travel and expense as the pandemic-related restrictions subside and we get back to visiting customers.
We are also making incremental investments in our Advance and Accelerate businesses, including another 10% increase in research and development spending.
Altogether, we expect total operating expenses will be up from the prior year, but to a lesser extent than sales, resulting in net leverage that drives year-over-year growth in operating margin.
In terms of other key financial metrics, fiscal '22 interest expense is planned to be about $14 million, other income is projected between $7 million and $11 million and the tax rate is expected between 24% and 26%.
Capital expenditures are planned up in fiscal '22 with a full-year estimate of $100 million to $120 million.
We are expanding PowerCore capacity, primarily in North America and [Indecipherable] with our new programs and cost reduction initiatives.
At the same time, we will further optimize and leverage the investments we made a few years ago with the goal of growing ROI again this year.
Additionally, we expect to repurchase about 2% of our shares in fiscal '22, keeping with our multi-decade trend and reaffirming our commitment to shareholders.
Finally, we will maintain a strong balance sheet to allow us to act on any acquisition opportunities in the life sciences space.
Based on these forecasts, we plan for a new earnings per share record between $2.50 and $2.66 and implying an increase from last year's adjusted earnings per share of 8% to 15%.
To help with modeling, I want to also offer a few comments about the anticipated cadence of results in fiscal '22.
It's actually pretty straightforward.
The first half has an easier sales comparison, meaning we plan for more of our full year increase to come from the first half than the second.
The reverse is true for operating margin.
As I said a moment ago, gross margin will be under substantial pressure in the first half.
While we pursue expense leverage all year, it won't be enough in the first half.
Then as things normalize and pricing takes hold, operating margin should be up year-over-year in the second half.
Overall, our Company has a long history of solid expense management and we have responsible leaders across the world that will invest where appropriate.
What we need to do is achieve pricing and that takes a global coordinated response.
We talked about it a lot during our planning process and I know every level of the organization is committed to protecting gross margin and delivering another year of strong profit improvement.
I think we are in an excellent position to deliver on our strategic and financial goals in fiscal '22 due to the dedicated employees around the world.
While there is a lot to consider in our fiscal '22 plan, our priorities are straightforward, gain share and outperform our markets, protect gross margin, deliver best-in-class levels of service and continue to invest in our team and Company culture.
Let me share a few of the ways we are attacking these priorities.
The best tactic for growing our share is continued investment in our Advance and Accelerate portfolio.
We are adding staff and developing tools to help these teams deliver strong growth again in fiscal '22.
Areas like Process Filtration, dust collection replacement parts and Engine Aftermarket are all positioned to have another very successful year.
We will also drive above-market growth by capitalizing on the market recovery related to new equipment.
We seek opportunities to plan first-fit seeds in both segments from Engine products to new industrial equipment and we must take advantage of this moment to capture future aftermarket growth.
We have a strong value proposition for every customer and this year we have aggressive plans to get back into the field and drive selling.
Additionally, we remain committed to growth through acquisitions.
We continue to work a robust pipeline of potential targets with the primary focus on expanding into life sciences and supporting our Industrial segment growth.
While there is no update to share today, I'm confident that our strong balance sheet, laser focus and disciplined adherence to our long-term strategy gives us an excellent opportunity for success.
Another priority of fiscal '22 is protecting our gross margin.
At our Investor Day two years ago, we talked about our plans to improve gross margin.
Since then we have executed.
Compared with fiscal '19, fiscal '21 sales are about flat and gross margin is up 90 basis points.
We acted with speed and fiscal '22 will be no different.
We proactively took price increases when we saw early signs of inflation and we planned for additional increases to catch up with the massive acceleration we saw in raw material costs.
Given the magnitude of the incremental headwind, especially in the first half of fiscal '22, we will stay vigilant and continue to pursue margin-accretive price and cost reduction opportunities.
We are also closely monitoring our supply chain to improve the situation.
With labor shortages now superseding raw materials availability as a top concern, our global operations team is having to adapt quickly.
With our global footprint and strong relationships with customers and suppliers, I'm confident we will navigate the situation and deliver the best-in-class service Donaldson is known for.
Finally, we will continue to invest in our team as part of our multi-year journey to further strengthen our human resources processes.
This year our focus is on global alignment around career, planning and development.
We are also expanding our diversity, equity and inclusion efforts, which will be part of how we continue to build out and strengthen our ESG program.
We turned 106 years old this year.
So we clearly value long-term thinking.
Our investments in supporting our team and embracing the positive changes in society are critical parts of how we will succeed in advancing filtration for a cleaner world.
I've been with the Company for 25 years and this team continues to find new ways to impress me.

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q4 gaap earnings per share $0.66.
fiscal 2022 sales forecasted to increase between 5% and 10%; earnings per share projected at $2.50 to $2.66.

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