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(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________.

Commission File Number 1-7891

(Exact name of registrant as specified in its charter)

Delaware						41-0222640
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification No.)

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (952) 887-3131

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $5.00 par value			DCI			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of November 28, 2023, 120,135,723 shares of the registrant’s common stock, par value $5.00 per share, were outstanding.

 

The accompanying unaudited Condensed Consolidated Financial Statements of Donaldson Company, Inc. and its subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of earnings, comprehensive income, financial position, cash flows and changes in stockholders’ equity have been included and are of a normal recurring nature. Operating results for the three months ended October 31, 2023 are not necessarily indicative of the results that may be expected for future periods. The year-end Condensed Consolidated Balance Sheet information was derived from the Company’s Audited Consolidated Financial Statements but does not include all disclosures required by GAAP. For further information, refer to the Audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023.

The Condensed 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.

The preparation of the Company’s financial statements in conformity with GAAP 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.

In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Company adopted ASU 2021-08 in the first quarter of fiscal 2024 and will apply this guidance to all future business combinations. The adoption did not have an impact on its Condensed Consolidated Financial Statements.

The Company considers the applicability and impact of the FASB’s ASUs issued but not yet adopted.

In October 2023, FASB issued ASU No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative," which modifies the disclosure or presentation requirements of various FASB topics in the Codification. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-K becomes effective, with early adoption prohibited. The Company does not expect adoption of this standard will have a material impact on its financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair values; it also requires additional disclosures, including the nature and remaining duration of such restrictions. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. This ASU is applicable to the Company’s fiscal year beginning in the first quarter of fiscal 2025. The Company does not expect adoption of this standard will have a material impact on its financial statements.

In the fourth quarter of fiscal 2023, the Company acquired UTEC, headquartered in Nivelles, Belgium, for cash consideration of €134.6 million, or $147.2 million, net of cash acquired. UTEC is a global producer of innovative biomanufacturing solutions for cell and gene therapy research, development and commercial manufacturing. UTEC is reported within the Company’s Life Sciences segment. The Company assigned the fair values to the net assets acquired resulting in $95.8 million for goodwill and $52.5 million for intangible assets, the amortization of which is not deductible for tax purposes, resulting in a deferred tax liability of $13.1 million and a deferred tax asset of $7.0 million. Net working capital was a net liability of $0.9 million; there were $6.6 million of other non-current assets and $0.7 million of other non-current liabilities. The purchase price allocation for this acquisition is preliminary pending the outcome of the final valuation of the net assets acquired. Net sales of UTEC were immaterial to the Consolidated Statements of Earnings for the three months ended October 31, 2023. Management expects to finalize the purchase accounting by the fourth quarter of fiscal 2024.

In the third quarter of fiscal 2023, the Company acquired Isolere, headquartered in Durham, North Carolina, for cash consideration of $62.4 million, net of cash acquired. Isolere develops reagents and accompanying filtration processes used for the purification and streamlined manufacturing of biopharmaceuticals. Isolere is reported within the Company’s Life Sciences segment. The Company assigned the fair values to the net assets acquired resulting in $28.2 million for goodwill and $44.5 million for intangible assets, the amortization of which is not deductible for tax purposes, resulting in a deferred tax liability of $10.9 million. Net working capital was a net liability of $0.4 million; there were $1.2 million of other non-current assets and $0.2 million other non-current liabilities. Purchase accounting was finalized in the first quarter of fiscal 2024. Net sales of Isolere were immaterial to the Condensed Consolidated Statements of Earnings for the three months ended October 31, 2023.

The components of the above acquisitions, net of cash acquired in fiscal 2023, as of each acquisition date were as follows (in millions):

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.

Net sales, generally disaggregated by location where the customer’s order was placed, were as follows (in millions):

See Note 18 for net sales disaggregated by segment and business unit.

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 Condensed Consolidated Balance Sheets. Contract assets were $11.9 million and $13.3 million as of October 31, 2023 and July 31, 2023, 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 deferred revenue on the Condensed Consolidated Balance Sheets. Contract liabilities were $26.0 million and $25.3 million as of October 31, 2023 and July 31, 2023, 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.

The components of inventories, net were as follows (in millions):

The components of property, plant and equipment, net were as follows (in millions):

The Company allocates goodwill to reporting units within its Mobile Solutions, Industrial Solutions and Life Sciences segments. There were no dispositions or impairment charges recorded during the three months ended October 31, 2023 and 2022. Goodwill is assessed for impairment annually during the third quarter of the fiscal year, or more frequently if events or changes in circumstances indicate the asset may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal 2023 and did not record any impairment as a result of this assessment.

Goodwill by reportable segment was as follows (in millions):

Intangible assets preliminarily recognized from the UTEC acquisition were $52.5 million, of which $43.2 million was technology with an 18 year useful life, $6.7 million was trademarks with a 10 year useful life, $1.4 million was non-competition agreements with a 2 year useful life and $1.2 million was customer relationships with a 20 year useful life.

There was a foreign currency translation loss of $3.2 million and $2.1 million for the three months ended October 31, 2023 and 2022, respectively.

Intangible asset classes were as follows (in millions):

Intangible asset amortization expense was $4.0 million and $2.5 million for the three months ended October 31, 2023 and 2022, respectively. Amortization expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings.

As of October 31, 2023, there was $437.5 million available and $55.0 million outstanding on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of October 31, 2023, the Company was in compliance with all such covenants.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed examinations of the Company’s U.S. federal income tax returns through fiscal 2019. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before fiscal 2018.

As of October 31, 2023, gross unrecognized tax benefits were $15.1 million and accrued interest and penalties on these unrecognized tax benefits were $1.9 million. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes in the Condensed Consolidated Statements of Earnings. The Company estimates within the next 12 months it is reasonably possible its uncertain tax positions could decrease by as much as $4.0 million due to lapses in statutes of limitation. The statutes of limitation periods for the Company’s various tax jurisdictions range from two years to 10 years.

The Company believes it is remote that any adjustment necessary to the reserve for income taxes over the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.

Basic net earnings per share (EPS) is computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net EPS is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options and other stock incentive plans.

Basic and diluted net EPS calculations were as follows (in millions, except per share amounts):

In May 2019, the Company’s Board of Directors authorized the repurchase of up to 13.0 million shares of common stock under the Company’s stock repurchase plan. This repurchase authorization is effective until terminated by the Board of Directors. During the three months ended October 31, 2023, the Company repurchased 0.9 million shares for $53.7 million. During the three months ended October 31, 2022, the Company repurchased 0.9 million shares for $45.7 million. As of October 31, 2023, the Company had remaining authorization to repurchase 2.0 million shares under this plan.

Dividends paid were 25.0 cents and 23.0 cents per common share for the three months ended October 31, 2023 and 2022, respectively.

On November 17, 2023, the Company’s Board of Directors declared a cash dividend in the amount of 25.0 cents per common share, payable December 20, 2023, to shareholders of record as of December 5, 2023.

Changes in accumulated other comprehensive loss for the three months ended October 31, 2023 and 2022 were as follows (in millions):

(1)Amounts include foreign currency translation losses of $0.9 million and $1.0 million and net amortization of prior service costs and actuarial losses of $0.3 million and $0.6 million in fiscal 2024 and 2023, respectively, included in other income, net in the Condensed Consolidated Statements of Earnings, see Note 13.

(2)Relates to designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets to net sales, cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings, see Note 14.

The Company recognizes compensation expense for all stock-based awards based on the grant date fair value of the award. Stock-based awards consist primarily of non-qualified stock options, performance-based awards, restricted stock awards and restricted stock units. Grants related to restricted stock awards and restricted stock units are immaterial. The Company issues treasury shares for stock options and performance-based awards.

The exercise price of options granted is equal to the market price of the Company’s common stock at the date of the grant. Options are generally exercisable for up to 10 years from the date of grant and vest in equal increments over three years.

Pretax stock-based compensation expense associated with options was $8.5 million and $7.5 million for the three months ended October 31, 2023 and 2022, respectively.

Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted was $18.91 and $15.50 per share during the three months ended October 31, 2023 and 2022, respectively.

Option activity was as follows:

Performance-based awards are payable in common stock and are based on a formula that measures Company performance over a three-year period. These awards are settled after three years with payouts ranging from 0% to 200% of the target award depending on achievement.

Pretax performance-based awards expense was $1.6 million and $1.8 million for the three months ended October 31, 2023 and 2022, respectively.

Performance-based awards for non-vested activity were as follows:

The Company has defined benefit pension plans for certain hourly and salaried employees. They consist of plans in the U.S., Belgium, Germany, Mexico and the United Kingdom. These plans generally provide pension benefits based on years of service and compensation level. Components of net periodic pension costs other than the service cost component are included in other income, net in the Condensed Consolidated Statements of Earnings.

Net periodic pension costs for the Company’s pension plans were as follows (in millions):

The Company’s general funding policy is to make at least the minimum required contributions under applicable regulations, plus any additional amounts it determines to be appropriate. Future required pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements.

The Company enters into derivative instrument agreements, including foreign currency forward contracts and net investment hedges, to manage risk in connection with changes in foreign currency. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit. There is risk the counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors.

Contract provisions may require the posting of collateral or settlement of the contracts for various reasons, including if the Company’s credit ratings are downgraded below its investment grade credit rating by any of the major credit agencies or for cross default contractual provisions if there is a failure under other financing arrangements related to payment terms or covenants. As of October 31, 2023 and July 31, 2023, no collateral was posted.

The Company does not enter into derivative instrument agreements for trading or speculative purposes. For discussion on the fair value of the Company’s derivatives, see Note 15.

Changes in the fair value of the Company’s designated hedges are reported in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets until the related transaction occurs, see Note 11. Designated hedges are recognized as a component of either net sales, cost of sales, selling, general and administrative expenses or other income, net in the Condensed Consolidated Statements of Earnings upon occurrence of the related hedged transaction.

Hedges which are not designated are recognized in other income, net in the Condensed Consolidated Statements of Earnings along with the related hedged transactions. Changes in the fair value of hedges which are not designated, are recognized in other income, net in the Condensed Consolidated Statements of Earnings.

Amounts related to foreign currency forward contracts designated as hedges are expected to be reclassified into earnings during the next 12 months based upon the timing of inventory purchases and sales.

Gains and losses resulting from a change in fair value of the net investment hedge are offset by gains and losses on the underlying foreign currency exposure and are included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets. Amounts related to excluded components associated with the net investment hedge are expected to be reclassified into earnings in interest expense in the Condensed Consolidated Statements of Earnings through their maturity.

Cash flows from derivative transactions are recorded in operating activities in the Condensed Consolidated Statements of Cash Flows.

Fair value measurements of financial instruments are reported in one of three levels based on the lowest level of significant input used. For Level 1, inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. For Level 2, inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. For Level 3, inputs to the fair value measurement are unobservable inputs or are based on valuation techniques.

As of October 31, 2023 and July 31, 2023, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments. Short-term financial instruments are classified as Level 1 in the fair value hierarchy.

As of October 31, 2023, the estimated fair values of fixed interest rate long-term debt were $370.8 million compared to the carrying values of $425.0 million, inclusive of a current portion with a fair value of $123.7 million and carrying value of $125.0 million. As of July 31, 2023, the estimated fair values of fixed interest rate long-term debt were $378.9 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. The carrying values of total variable interest rate long-term debt were $153.5 million and $198.4 million as of October 31, 2023 and July 31, 2023, respectively and approximate their fair values. Long-term debt is classified as Level 2 in the fair value hierarchy.

The Company holds equity method investments in its joint ventures, which are included in other long-term assets on the Condensed Consolidated Balance Sheets. The aggregate carrying amount of these investments was $23.5 million and $24.4 million as of October 31, 2023 and July 31, 2023, respectively. These equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s equity method investments has not been adjusted as there have been no triggering events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event these investments are required to be measured, they would fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities.

The fair values of the Company’s foreign currency forward contracts and net investment hedges reflect the amounts that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date (exit price). The fair values are based on inputs other than quoted prices that are observable for the asset or liability and are determined by standard calculations and models that use readily observable market parameters. These inputs include foreign currency exchange rates. Industry standard data providers are the primary source for forward and spot rate information for foreign currency exchange rates. The fair values of the Company’s foreign currency forward contracts and net investment hedges are classified as Level 2 in the fair value hierarchy. For discussion of the Company’s derivatives and hedging, see Note 14.

The fair value of the Company’s derivative contracts, recorded on the Condensed Consolidated Balance Sheets, was as follows (in millions):

Amounts related to excluded components, such as forward points, are excluded from the assessment of hedge effectiveness of net investment hedges and are expected to be reclassified into earnings throughout their maturity dates. See Note 11 for additional information on accumulated other comprehensive loss.

The fair value of the contingent consideration liability is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market and thus, represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future financial and operational milestones, probabilities of achieving such milestones and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving such milestones generally represents the only significant unobservable input. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

The fair value of the Company’s contingent consideration liability that uses unobservable inputs was $25.2 million as of October 31, 2023 and $25.0 million as of July 31, 2023. The maximum potential payout of the contingent consideration as of October 31, 2023 and July 31, 2023 was $30.7 million, see Note 17.

The Company has letters of credit which guarantee payment to third parties in the event the Company is in breach of contract terms as detailed in each letter of credit. The outstanding contingent liability for standby letters of credit was as follows (in millions):

The Company has an unconsolidated joint venture, AFSI, established by the Company and Caterpillar Inc. (Caterpillar) in 1986. AFSI designs and manufactures high-efficiency fluid filters used in Caterpillar’s machinery worldwide. The Company and Caterpillar equally own the shares of AFSI and both companies guarantee certain debt and banking services, including credit and debit cards, merchant processing and treasury management services, of the joint venture. The Company accounts for AFSI as an equity method investment.

The outstanding debt relating to AFSI, which the Company guarantees half, was $56.6 million and $59.6 million as of October 31, 2023 and July 31, 2023, respectively. AFSI has a $63.0 million revolving credit facility, which expires July 31, 2024 and an additional $17.0 million multi-currency revolving credit facility, which terminates upon notification by either AFSI or the financial institution.

Earnings from AFSI, which are recorded in other income, net in the Condensed Consolidated Statements of Earnings, were $1.7 million and $1.3 million for the three months ended October 31, 2023 and 2022, respectively.

The Company's agreement with Purilogics includes deferred payment provisions representing potential milestone payments for Purilogics’ 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 was recorded as purchase consideration in both other current and other long-term liabilities on the Condensed Consolidated Balance Sheets 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 $1.3 million and $1.1 million as of October 31, 2023 and July 31, 2023, respectively, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.0 million as of October 31, 2023 and July 31, 2023, inclusive of the $1.3 million and $1.1 million accrued, respectively.

The Company primarily determines the contingent consideration liability based on the forecasted probability of achieving the respective 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 $23.5 million and $23.2 million as of October 31, 2023 and July 31, 2023, respectively and was included in other current and other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent consideration was $29.0 million, inclusive of the $23.5 million and $23.2 million accrued as of October 31, 2023 and July 31, 2023, respectively.

For other acquisitions, there was no contingent compensation arrangement liability as of October 31, 2023, as the contingent compensation agreement was terminated. The total contingent compensation arrangement liability was $0.9 million as of July 31, 2023, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets.

The total contingent consideration liability was $1.7 million, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets, as of October 31, 2023 and July 31, 2023. The maximum payout of the contingent consideration was $1.7 million, which concludes three years from the acquisition date of November 22, 2021 and was fully accrued as of October 31, 2023 and July 31, 2023.

For additional discussion regarding the fair value of the Company’s contingent consideration liability, see Note 15.

The Company’s reportable segments are: Mobile Solutions, Industrial Solutions and Life Sciences. The organizational structure also includes Corporate and Unallocated which includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and business development expenses. The Company determines its operating segments consistent with the manner in which it manages its operations and evaluates performance for internal review and decision-making. For the three months ended October 31, 2022, Corporate and Unallocated also included non-recurring charges of $7.6 million, see Note 19.

The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.

The Industrial Solutions segment is organized based on product type and consists of the Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense business units. Within our Industrial Solutions portfolio, Donaldson provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gasses and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gasses purification systems, hydraulic and lubricated rotating filtration applications as well as gas and liquid filtration for industrial processes. Power Generation products consist of air inlet systems and filtration sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for fixed-wing and rotorcraft aerospace applications and ground defense vehicle and naval platforms. Industrial Solutions businesses sell through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.

The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report earnings before income taxes and other financial information as stated below.

Segment details were as follows (in millions):

Assets by segment were as follows (in millions):

Net sales by business unit were as follows (in millions):

There were no customers that accounted for over 10% of net sales for the three months ended October 31, 2023 or 2022. There were no customers that accounted for over 10% of gross accounts receivable as of October 31, 2023 or July 31, 2023.

During the first quarter of fiscal 2023, the Company announced a company-wide organizational redesign to further support the Company’s growth strategies and better serve its customers. In conjunction with the organizational redesign, the Company recorded $7.6 million of charges consisting of $4.2 million of severance charges and $3.4 million of other organizational redesign costs during the three months ended October 31, 2022. These amounts were included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.

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 150 locations, 75 of which are manufacturing and/or distribution centers, on six continents partner with customers - from small business owners to the world’s largest original equipment manufacturer (OEM) brands - to solve complex filtration challenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements and need for reliability.

The Company’s operating segments are Mobile Solutions, Industrial Solutions and Life Sciences. The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to OEMs in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.

The Industrial Solutions segment is organized based on product type and consists of the Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense business units. Within our Industrial Solutions portfolio, Donaldson provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gasses and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gasses purification systems, hydraulic and lubricated rotating filtration applications as well as gas and liquid filtration for industrial processes. Power Generation products consist of air inlet systems and filtration sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for fixed-wing and rotorcraft aerospace applications and ground defense vehicle and naval platforms.

Industrial Solutions businesses sell through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.

The Company’s results of operations are affected by conditions in the global economic and geopolitical environment. Under most economic conditions, the Company’s 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 results were as follows (in millions, except per share amounts):

Net sales, generally disaggregated by location where the customer’s order was received, were as follows (in millions):

Net sales for the three months ended October 31, 2023 decreased $1.0 million, or 0.1%, from the three months ended October 31, 2022, reflecting lower sales in the Mobile Solutions segment of $15.0 million, or a 2.7% decline, and the Life Sciences segment of $2.6 million, or a 4.1% decline, partially offset by higher sales in the Industrial Solutions segment of $16.6 million, or 7.2% growth. Foreign currency translation increased net sales by $12.3 million compared to the three months ended October 31, 2022, reflecting increases in the Mobile Solutions, Industrial Solutions and Life Sciences segments of $6.9 million, $3.7 million and $1.7 million, respectively. During the three months ended October 31, 2023, the Company’s net sales were relatively flat as volume declines were largely offset by pricing benefits.

Gross margin as a percentage of net sales for the three months ended October 31, 2023 was 35.6% compared with 33.9% for the three months ended October 31, 2022. The increase in gross margin as a percentage of net sales was primarily driven by pricing benefits and lower freight and select material costs, as well as favorable mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended October 31, 2023 were $155.0 million, or 18.3% of net sales, compared with $149.2 million, or 17.6% of net sales, for the three months ended October 31, 2022, an increase of $5.8 million, or 3.8%. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to incremental expenses associated with investments in the Life Sciences acquisitions as well as increased headcount.

Research and development expenses for the three months ended October 31, 2023 were $21.3 million, or 2.5% of net sales, compared with $18.7 million, or 2.2% of net sales, for the three months ended October 31, 2022, primarily due to increased headcount.

Interest expense for the three months ended October 31, 2023 was $5.5 million, compared with $4.5 million for the three months ended October 31, 2022, an increase of $1.0 million, or 20.7%. The increase reflected rising variable interest rates.

Other income, net for the three months ended October 31, 2023 was $3.8 million, compared with other income, net of $1.8 million for the three months ended October 31, 2022, an increase of $2.0 million, which was driven primarily by lower foreign currency losses compared to the prior year.

The effective tax rate was 25.1% and 25.2% for the three months ended October 31, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to a favorable shift in the mix of earnings between tax jurisdictions, partially offset by an overall decrease in discrete tax benefits.

Net earnings for the three months ended October 31, 2023 were $92.1 million, compared with $87.2 million for the three months ended October 31, 2022, an increase of $4.9 million, or 5.7%. Diluted EPS were $0.75 for the three months ended October 31, 2023, compared with $0.70 for the three months ended October 31, 2022, an increase of $0.05, or 6.8%.

Net sales and earnings (loss) before income taxes were as follows (in millions):

(1)Corporate and unallocated includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and incentive compensation.

Net sales for the Mobile Solutions segment for the three months ended October 31, 2023 were $540.0 million, compared with $555.0 million for the three months ended October 31, 2022, a decrease of $15.0 million, or 2.7%. Excluding a $6.9 million increase from foreign currency translation, net sales for the Mobile Solutions segment declined 3.9%.

Net sales of Off-Road decreased $9.0 million, primarily due to weaker global end market conditions, particularly in China, partially offset by pricing benefits. Net sales of Aftermarket decreased $7.8 million, as large OEM customers continued to normalize inventories, partially offset by pricing benefits.

Earnings before income taxes for the Mobile Solutions segment for the three months ended October 31, 2023 were $92.2 million, or 17.1% of net sales, an increase from 14.5% of net sales for the three months ended October 31, 2022. The increase was driven by pricing actions and deflation of select input costs.

Net sales for the Industrial Solutions segment for the three months ended October 31, 2023 were $246.2 million, compared with $229.6 million for the three months ended October 31, 2022, an increase of $16.6 million, or 7.2%. Excluding a $3.7 million increase from foreign currency translation, net sales for the Industrial Solutions segment increased 5.6%.

Net sales of IFS increased $14.6 million, reflecting higher sales volume in power generation and industrial dust collection from strong demand in most geographies. Net sales of Aerospace and Defense increased by $2.0 million due to ongoing strength in the defense end market.

Earnings before income taxes for the Industrial Solutions segment for the three months ended October 31, 2023 were $43.3 million, or 17.6% of net sales, an increase from 16.4% of net sales for the three months ended October 31, 2022. The increase was primarily due to the impact from leveraging operating expenses, operational efficiencies and lower freight costs.

Net sales and (losses) earnings before income taxes were as follows (in millions):

Net sales for the Life Sciences segment for the three months ended October 31, 2023 were $60.1 million, compared with $62.7 million for the three months ended October 31, 2022, a decrease of $2.6 million, or 4.1%. Excluding a $1.7 million increase from foreign currency translation, net sales for the Life Sciences segment declined 6.8%. The decrease was primarily driven by weakness in market demand for products in the disk drive business.

Losses before income taxes for the Life Sciences segment for the three months ended October 31, 2023 were $4.2 million, or 7.0% of net sales, a decrease from earnings of 17.2% of net sales for the three months ended October 31, 2022. The decrease was driven by the expected impact from investments made to scale up the Company’s recent acquisitions.

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 flows were as follows (in millions):

Cash provided by operating activities for the three months ended October 31, 2023 was $138.0 million, compared with $118.2 million for the three months ended October 31, 2022, an increase of $19.8 million. The increase in cash provided by operating activities was primarily driven by an increase in accounts payable in the current quarter compared to a decrease in accounts payable in the first quarter of the prior year, as well as higher earnings.

Cash used in investing activities for the three months ended October 31, 2023 was $23.2 million, compared with $28.1 million for the three months ended October 31, 2022, a decrease of $4.9 million. The decrease in cash used was due to slightly lower investment of capital in various projects in the current year.

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 three months ended October 31, 2023 was $78.9 million, compared with $112.8 million for the three months ended October 31, 2022, a decrease of $33.9 million. The decrease was primarily driven by proceeds from long-term debt of $35.0 million in the current year as well as a net debt repayment of $32.3 million in the current year, compared to a net debt repayment of $43.3 million in the first quarter of the prior year. This was partially offset by an increase in the use of cash associated with share repurchase and the exercise of stock options in the first quarter of the current year of $51.4 million, compared to $41.3 million in the prior year.

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 three months ended October 31, 2023 and 2022 were $30.2 million and $28.2 million, respectively. Share repurchases for the three months ended October 31, 2023 and 2022 were $53.3 million and $45.7 million, respectively.

Additional sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of October 31, 2023 was $217.8 million, compared with $187.1 million as of July 31, 2023. The Company has capacity of $613.6 million available for further borrowing under existing credit facilities as of October 31, 2023, which includes $437.5 million available on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

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 dividends, share repurchase activity and potential acquisitions.

As of October 31, 2023, total debt, including short-term borrowings and long-term debt, represented 32.8% of total capitalization, defined as total debt plus total stockholders’ equity, compared with 33.2% as of July 31, 2023. As of October 31, 2023, the Company was in compliance with its financial covenants.

Long-term debt outstanding was $576.8 million as of October 31, 2023, compared with $621.6 million as of July 31, 2023, a decrease of $44.8 million, primarily due to a repayment on the unsecured revolving credit facility during the first quarter of fiscal 2024. As of October 31, 2023, there was $437.5 million available and $55.0 million outstanding on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

In order to help measure and analyze the impact of working capital management, the Company reviews its cash conversion cycle. 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 October 31, 2023, was $582.5 million, compared with $599.7 million as of July 31, 2023, a decrease of $17.2 million. Days sales outstanding were 64 days as of October 31, 2023, consistent with 64 days as of July 31, 2023.

Inventories, net as of October 31, 2023, was $429.6 million, compared with $418.1 million as of July 31, 2023, an increase of $11.5 million. Days inventory outstanding were 71 days as of October 31, 2023, an increase from 69 days as of July 31, 2023. Inventory turns were 5.1 times and 5.3 times per year as of October 31, 2023 and July 31, 2023, respectively.

Accounts payable as of October 31, 2023, was $324.9 million, compared with $304.9 million as of July 31, 2023, an increase of $20.0 million. Days payable outstanding were 53 days as of October 31, 2023, an increase from 49 days as of July 31, 2023.

The Company guarantees 50% of certain debts of its joint venture, AFSI, as discussed in Note 16 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.

There have been no material changes to the Company’s critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023.

For new accounting standards not yet adopted, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.

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 the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023, 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 Quarterly Report on Form 10-Q. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.

These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, challenges in global operations; impacts of global economic, industrial and political conditions on product demand, impacts from unexpected events, effects of unavailable raw materials, significant demand fluctuations 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; inability to achieve commitments related to ESG; 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 the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023. 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.

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 strategies 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 the three months ended October 31, 2023, the U.S. dollar was generally weaker than in the three months ended October 31, 2022 compared with many of the currencies of the foreign countries in which the Company operates. The overall weaker U.S. dollar had a positive impact on the Company’s international net sales and net earnings because the foreign denominated revenues translated into more U.S. dollars in many regions around the world. The estimated impact of foreign currency translation for the three months ended October 31, 2023 resulted in an overall increase in reported net sales of $12.3 million and an increase in reported net earnings of $1.6 million.

The Company enters into derivative instrument agreements, including foreign currency forward contracts and net investment hedges, to manage risk in connection with changes in foreign currency. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit. See Notes 11, 14 and 15 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.

Based on the net investment hedges outstanding as of October 31, 2023, a 10% appreciation of the U.S. dollar compared to the Euro would result in a net gain of $7.4 million in the fair value of these contracts.

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 October 31, 2023, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $55.0 million outstanding on the Company’s unsecured revolving credit facility, €80.0 million, or $85.2 million, of a variable rate term loan and ¥2.0 billion, or $13.3 million, of variable rate senior notes. 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 $0.9 million in the three months ended October 31, 2023. The Company has no interest rate hedging agreements. Interest rate changes would also affect the fair market value of fixed-rate debt. As of October 31, 2023, the estimated fair values of fixed interest rate long-term debt were $370.8 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.

The interest on cash and cash equivalents will vary as short-term yields change. Assuming a hypothetical 0.5 percentage point increase in yields, with all other variables remaining constant, interest income would have increased approximately $0.9 million in the three months ended October 31, 2023.

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 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.

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 October 31, 2023 and July 31, 2023, the Company owned $12.4 million and $13.2 million, respectively, of these bankers’ acceptance notes and includes them in accounts receivable on the Condensed Consolidated Balance Sheets.

Management of the Company, with the participation of its Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period. Based on their evaluation, as of the end of the period covered, the Company’s Chief Executive Officer and Chief Financial Officer concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective. The Company’s disclosure controls and procedures are designed so information required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms and such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

No change in the Company’s internal control over financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

There are inherent risks and uncertainties associated with the Company’s global operations that involve the manufacturing and sale of products for highly demanding customer applications throughout the world. These risks and uncertainties could adversely affect the Company’s business, reputation, financial condition or results of operations. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023 outlines the risks and uncertainties the Company believes are the most material to its business.

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 October 31, 2023 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 2.0 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 October 31, 2023. The “Total Number of Shares Purchased” column of the table above includes 3,689 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the fiscal first quarter. 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.

During the three months ended October 31, 2023, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: December 6, 2023			By:			/s/ Tod E. Carpenter
						Tod E. Carpenter Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: December 6, 2023			By:			/s/ Scott J. Robinson
						Scott J. Robinson Chief Financial Officer (Principal Financial Officer)
Date: December 6, 2023			By:			/s/ Andrew J. Cebulla
						Andrew J. Cebulla Vice President and Corporate Controller (Principal Accounting Officer)