UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, ~~2022~~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

DONALDSON COMPANY, INC.

(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.)

1400 West 94th Street

Minneapolis, Minnesota 55431

(Address of principal executive offices, including zip code)

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

Not Applicable

(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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 ~~29, 2022, 121,686,920~~28, 2023, 120,135,723 shares of the registrant’s common stock, par value $5.00 per share, were outstanding.

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share amounts)

(Unaudited)


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Net sales	Net sales	$	847.3	$	760.9		Net sales	$	846.3	$	847.3
Cost of sales	Cost of sales	560.1		503.9			Cost of sales	545.4		560.1
Gross profit	Gross profit	287.2		257.0			Gross profit	300.9		287.2
Selling, general and administrative	Selling, general and administrative	149.2		133.0			Selling, general and administrative	155.0		149.2
Research and development	Research and development	18.7		16.5			Research and development	21.3		18.7
Operating expenses	Operating expenses	167.9		149.5			Operating expenses	176.3		167.9
Operating income	Operating income	119.3		107.5			Operating income	124.6		119.3
Interest expense	Interest expense	4.5		3.4			Interest expense	5.5		4.5
Other income, net	Other income, net	(1.8)		—			Other income, net	(3.8)		(1.8)
Earnings before income taxes	Earnings before income taxes	116.6		104.1			Earnings before income taxes	122.9		116.6
Income taxes	Income taxes	29.4		27.0			Income taxes	30.8		29.4
Net earnings	Net earnings	$	87.2	$	77.1		Net earnings	$	92.1	$	87.2

Weighted average shares – basic	Weighted average shares – basic	122.6		124.4			Weighted average shares – basic	120.9		122.6
Weighted average shares – diluted	Weighted average shares – diluted	123.9		126.3			Weighted average shares – diluted	122.6		123.9

Net earnings per share – basic	Net earnings per share – basic	$	0.71	$	0.62		Net earnings per share – basic	$	0.76	$	0.71
Net earnings per share – diluted	Net earnings per share – diluted	$	0.70	$	0.61		Net earnings per share – diluted	$	0.75	$	0.70

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Net earnings	Net earnings	$	87.2	$	77.1		Net earnings	$	92.1	$	87.2
Other comprehensive loss:	Other comprehensive loss:						Other comprehensive loss:
Foreign currency translation loss	Foreign currency translation loss	(40.1)		(10.5)			Foreign currency translation loss	(37.6)		(40.1)
Pension liability adjustment, net of deferred taxes of $(0.4) and $(0.5), respectively		1.2		2.0
Pension liability adjustment, net of deferred taxes of $(0.2) and $(0.4), respectively							Pension liability adjustment, net of deferred taxes of $(0.2) and $(0.4), respectively	1.0		1.2
Derivatives:	Derivatives:						Derivatives:
Gains on hedging derivatives, net of deferred taxes of $(1.1) and $(0.2), respectively		3.4		1.0
Reclassifications of losses on hedging derivatives to net earnings, net of taxes of $(0.6) and $(0.3), respectively		1.2		0.3
Gain on hedging derivatives, net of deferred taxes of $(0.1) and $(1.1), respectively							Gain on hedging derivatives, net of deferred taxes of $(0.1) and $(1.1), respectively	0.1		3.4
Reclassifications of gain on hedging derivatives to net earnings, net of taxes of $(0.2) and $(0.6), respectively							Reclassifications of gain on hedging derivatives to net earnings, net of taxes of $(0.2) and $(0.6), respectively	0.7		1.2
Total derivatives	Total derivatives	4.6		1.3			Total derivatives	0.8		4.6

Net other comprehensive loss	Net other comprehensive loss	(34.3)		(7.2)			Net other comprehensive loss	(35.8)		(34.3)
Comprehensive income	Comprehensive income	$	52.9	$	69.9		Comprehensive income	$	56.3	$	52.9

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)


		October 31, 2022		July 31, 2022			October 31, 2023		July 31, 2023
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	161.0	$	193.3	Cash and cash equivalents	$	217.8	$	187.1

Accounts receivable, less allowances of $7.0 and $7.6, respectively		584.2		616.6
Accounts receivable, less allowances of $5.8 and $8.3, respectively						Accounts receivable, less allowances of $5.8 and $8.3, respectively	582.5		599.7
Inventories, net	Inventories, net	490.1		502.4		Inventories, net	429.6		418.1
Prepaid expenses and other current assets	Prepaid expenses and other current assets	100.1		94.2		Prepaid expenses and other current assets	83.2		81.1
Total current assets	Total current assets	1,335.4		1,406.5		Total current assets	1,313.1		1,286.0
Property, plant and equipment, net	Property, plant and equipment, net	590.8		594.4		Property, plant and equipment, net	642.3		652.9

Goodwill	Goodwill	340.1		345.8		Goodwill	469.3		481.1
Intangible assets, net	Intangible assets, net	95.2		99.8		Intangible assets, net	181.7		188.1

Other long-term assets	Other long-term assets	150.5		153.8		Other long-term assets	162.2		162.4
Total assets	Total assets	$	2,512.0	$	2,600.3	Total assets	$	2,768.6	$	2,770.5

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Short-term borrowings	Short-term borrowings	$	0.2	$	3.7	Short-term borrowings	$	74.6	$	34.1

Current maturities of long-term debt						Current maturities of long-term debt	210.2		125.0
Accounts payable	Accounts payable	320.7		338.5		Accounts payable	324.9		304.9
Accrued employee compensation and related taxes	Accrued employee compensation and related taxes	98.5		113.8		Accrued employee compensation and related taxes	110.2		119.4

Deferred revenue						Deferred revenue	26.0		25.3
Income taxes payable	Income taxes payable	43.6		31.8		Income taxes payable	45.5		32.3
Dividend payable	Dividend payable	—		28.3		Dividend payable	—		30.4
Other current liabilities	Other current liabilities	106.3		113.5		Other current liabilities	91.2		85.0
Total current liabilities	Total current liabilities	569.3		629.6		Total current liabilities	882.6		756.4
Long-term debt	Long-term debt	600.7		644.3		Long-term debt	366.6		496.6
Non-current income taxes payable	Non-current income taxes payable	69.6		69.4		Non-current income taxes payable	56.8		56.5
Deferred income taxes	Deferred income taxes	29.0		32.7		Deferred income taxes	27.4		32.3

Other long-term liabilities	Other long-term liabilities	88.6		91.1		Other long-term liabilities	99.1		108.0
Total liabilities	Total liabilities	1,357.2		1,467.1		Total liabilities	1,432.5		1,449.8

Commitments and contingencies (Note 17)

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued	Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued	—		—		Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued	—		—
Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued	Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued	758.2		758.2		Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued	758.2		758.2
Additional paid-in capital	Additional paid-in capital	22.2		17.0		Additional paid-in capital	25.6		24.8
Retained earnings	Retained earnings	1,932.8		1,845.7		Retained earnings	2,180.2		2,087.8

Accumulated other comprehensive loss	Accumulated other comprehensive loss	(239.9)		(205.6)		Accumulated other comprehensive loss	(208.3)		(172.5)
Treasury stock, 29,764,794 and 29,089,612 shares, respectively, at cost		(1,318.5)		(1,282.1)
Treasury stock, 31,140,923 and 30,528,696 shares, respectively, at cost						Treasury stock, 31,140,923 and 30,528,696 shares, respectively, at cost	(1,419.6)		(1,377.6)
Total stockholders’ equity	Total stockholders’ equity	1,154.8		1,133.2		Total stockholders’ equity	1,336.1		1,320.7
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	2,512.0	$	2,600.3	Total liabilities and stockholders’ equity	$	2,768.6	$	2,770.5

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


		Three Months Ended October 31,					Three Months Ended October 31,
		2022		2021			2023		2022
Operating Activities	Operating Activities					Operating Activities
Net earnings	Net earnings	$	87.2	$	77.1	Net earnings	$	92.1	$	87.2
Adjustments to reconcile net earnings to net cash provided by operating activities:	Adjustments to reconcile net earnings to net cash provided by operating activities:					Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	22.4		23.8		Depreciation and amortization	24.3		22.4

Deferred income taxes	Deferred income taxes	(3.4)		0.8		Deferred income taxes	(4.6)		(3.4)
Stock-based compensation expense	Stock-based compensation expense	9.7		9.0		Stock-based compensation expense	10.5		9.7
Other, net	Other, net	4.5		2.7		Other, net	(0.2)		4.5
Changes in operating assets and liabilities	Changes in operating assets and liabilities	(2.2)		(70.5)		Changes in operating assets and liabilities	15.9		(2.2)

Net cash provided by operating activities	Net cash provided by operating activities	118.2		42.9		Net cash provided by operating activities	138.0		118.2

Investing Activities	Investing Activities					Investing Activities
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(28.1)		(18.3)		Purchases of property, plant and equipment	(23.2)		(28.1)

Net cash used in investing activities	Net cash used in investing activities	(28.1)		(18.3)		Net cash used in investing activities	(23.2)		(28.1)

Financing Activities	Financing Activities					Financing Activities

Proceeds from long-term debt	Proceeds from long-term debt	—		124.5		Proceeds from long-term debt	35.0		—
Repayments of long-term debt	Repayments of long-term debt	(40.0)		(35.0)		Repayments of long-term debt	(73.8)		(40.0)
Change in short-term borrowings	Change in short-term borrowings	(3.3)		(7.3)		Change in short-term borrowings	41.5		(3.3)

Purchase of treasury stock	Purchase of treasury stock	(45.7)		(102.9)		Purchase of treasury stock	(53.3)		(45.7)
Dividends paid	Dividends paid	(28.2)		(27.4)		Dividends paid	(30.2)		(28.2)
Exercise of stock options and other	Exercise of stock options and other	4.4		2.6		Exercise of stock options and other	1.9		4.4

Net cash used in financing activities	Net cash used in financing activities	(112.8)		(45.5)		Net cash used in financing activities	(78.9)		(112.8)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(9.6)		(1.1)		Effect of exchange rate changes on cash	(5.2)		(9.6)
Decrease in cash and cash equivalents		(32.3)		(22.0)
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	30.7		(32.3)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	193.3		222.8		Cash and cash equivalents, beginning of period	187.1		193.3
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	161.0	$	200.8	Cash and cash equivalents, end of period	$	217.8	$	161.0

Supplemental Cash Flow Information	Supplemental Cash Flow Information					Supplemental Cash Flow Information

Income taxes paid	Income taxes paid	$	19.8	$	23.2	Income taxes paid	$	21.9	$	19.8
Interest paid	Interest paid	$	5.4	$	3.1	Interest paid	$	6.6	$	5.4
Supplemental Disclosure of Non-Cash Operating and Investing Transactions	Supplemental Disclosure of Non-Cash Operating and Investing Transactions					Supplemental Disclosure of Non-Cash Operating and Investing Transactions
Accrued property, plant and equipment additions	Accrued property, plant and equipment additions	$	14.7	$	7.8	Accrued property, plant and equipment additions	$	15.9	$	14.7

Leased assets obtained in exchange for new operating lease liabilities	Leased assets obtained in exchange for new operating lease liabilities	$	2.4	$	4.3	Leased assets obtained in exchange for new operating lease liabilities	$	4.4	$	2.4

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions)

(Unaudited)


															Three Months Ended October 31, 2023 and 2022
															Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balance as of July 31, 2023														Balance as of July 31, 2023	$	758.2	$	24.8	$	2,087.8	$	(172.5)	$	(1,377.6)	$	1,320.7
Net earnings														Net earnings					92.1						92.1
Other comprehensive loss														Other comprehensive loss							(35.8)				(35.8)
Treasury stock acquired														Treasury stock acquired									(53.7)		(53.7)
Dividends declared														Dividends declared					0.1						0.1
Stock compensation and other activity														Stock compensation and other activity			0.8		0.2				11.7		12.7
Balance as of October 31, 2023														Balance as of October 31, 2023	$	758.2	$	25.6	$	2,180.2	$	(208.3)	$	(1,419.6)	$	1,336.1

		Three Months Ended October 31, 2022 and 2021
		Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balance as of July 31, 2022	Balance as of July 31, 2022	$	758.2	$	17.0	$	1,845.7	$	(205.6)	$	(1,282.1)	$	1,133.2	Balance as of July 31, 2022	$	758.2	$	17.0	$	1,845.7	$	(205.6)	$	(1,282.1)	$	1,133.2
Net earnings	Net earnings					87.2						87.2		Net earnings					87.2						87.2
Other comprehensive loss	Other comprehensive loss							(34.3)				(34.3)		Other comprehensive loss							(34.3)				(34.3)
Treasury stock acquired	Treasury stock acquired									(45.7)		(45.7)		Treasury stock acquired									(45.7)		(45.7)
Dividends declared	Dividends declared					0.1						0.1		Dividends declared					0.1						0.1
Stock compensation and other activity	Stock compensation and other activity			5.2		(0.2)				9.3		14.3		Stock compensation and other activity			5.2		(0.2)				9.3		14.3
Balance as of October 31, 2022	Balance as of October 31, 2022	$	758.2	$	22.2	$	1,932.8	$	(239.9)	$	(1,318.5)	$	1,154.8	Balance as of October 31, 2022	$	758.2	$	22.2	$	1,932.8	$	(239.9)	$	(1,318.5)	$	1,154.8

Balance as of July 31, 2021		$	758.2	$	3.2	$	1,623.8	$	(118.2)	$	(1,129.9)	$	1,137.1
Net earnings						77.1						77.1
Other comprehensive loss								(7.2)				(7.2)
Treasury stock acquired										(102.9)		(102.9)
Dividends declared						0.2						0.2
Stock compensation and other activity				8.5		(0.1)				3.2		11.6
Balance as of October 31, 2021		$	758.2	$	11.7	$	1,701.0	$	(125.4)	$	(1,229.6)	$	1,115.9

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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, ~~2022~~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, ~~2022.~~2023.

Principles of Consolidation

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. Certain reclassifications to previously reported financial information on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Stockholders’ Equity have been made to conform to the current period presentation.

Use of Estimates

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.

~~Operating Environment~~

~~Inflation~~

While inflation was not as significant in the first quarter of fiscal 2023, the Company continues to experience the effects of inflation from the prior year related to raw materials and other expenses, including labor and energy. These inflationary pressures have had an adverse impact on the Company’s profit margins throughout the first quarter of fiscal 2023, however they have been generally mitigated by pricing actions implemented in the prior year.

New Significant Accounting ~~Standards Not Yet~~Standard Recently Adopted

~~The Company considers the applicability and impact of the Financial Accounting Standards Board’s (FASB) Accounting Standards Updates (ASUs) issued but not yet adopted.~~

In October 2021, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~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 ~~guidance is effective for fiscal years beginning after December 15, 2022, with early application permitted. This~~Company adopted ASU ~~is applicable to the Company’s fiscal year beginning~~2021-08 in the first quarter of fiscal ~~2024.~~ 2024 and will apply this guidance to all future business combinations. The adoption did not have an impact on its Condensed Consolidated Financial Statements.

New Significant Accounting Standards Not Yet Adopted

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.

Note 2. Acquisitions

Univercells Technologies (UTEC)

In the ~~second~~fourth quarter of fiscal ~~2022,~~2023, the Company acquired ~~Pearson Arnold Industrial Services (PAIS),~~UTEC, headquartered in ~~New Hope, Minnesota,~~Nivelles, Belgium, for cash consideration of $3.3 million, net of cash acquired, and contingent consideration with a maximum payout of $1.7 million, and Solaris Biotechnology S.r.l (Solaris), headquartered in Mantovano, Italy, with U.S. operations based in Berkeley, California, for cash consideration of ~~€41~~€134.6 million, or ~~$45.7~~$147.2 million, net of cash acquired. ~~PAIS provides equipment, parts~~UTEC is a global producer of innovative biomanufacturing solutions for cell and ~~services for dust, mist~~gene therapy research, development and ~~fume collection systems, industrial fans and compressed air systems. PAIS~~commercial manufacturing. UTEC is reported within the Company’s ~~Industrial Filtration Solutions (IFS) business~~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 ~~Industrial Products segment. Solaris designs~~amortization of which is not deductible for tax purposes, resulting in a deferred tax liability of $13.1 million and ~~manufactures bioprocessing equipment, including bioreactors, fermenters~~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 ~~tangential flow filtration systems~~$0.7 million of other non-current liabilities. The purchase price allocation for ~~use in food and beverage, biotechnology and other life sciences markets. Solaris~~this acquisition is ~~reported within~~preliminary pending the ~~Company’s IFS business in~~outcome of the ~~Industrial Products segment.~~final valuation of the net assets acquired. Net sales of ~~these acquisitions~~UTEC were immaterial to the ~~Condensed~~ Consolidated ~~Statement~~Statements of Earnings for the three months ended October 31, ~~2022.~~

In the fourth quarter of fiscal 2022, the Company acquired Purilogics LLC (Purilogics) headquartered in Greenville, South Carolina, for cash consideration of $19.9 million, net of cash acquired, and contingent consideration with a maximum payout of ~~$29.0 million.~~ 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 was reported within the Company’s IFS business in the Industrial Products segment.2023. Management expects to finalize the purchase accounting ~~for this acquisition~~ by the fourth quarter of fiscal ~~2023.~~2024.

Isolere Bio, Inc. (Isolere)

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 ~~Purilogics~~Isolere were immaterial to the Condensed Consolidated ~~Statement~~Statements of Earnings for the three months ended October 31, ~~2022.~~

~~See Notes 15 and 17 for related contingent compensation and consideration.~~2023.

Purchase Price Summary

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


	2023
Intangible assets:
Technology	$	~~45.9~~84.9
Trademarks and tradenames	~~4.0~~8.2

Customer relationships	~~3.0~~1.2
Non-competition agreements	~~0.6~~2.7
~~Backlog~~	~~0.2~~
Intangible assets acquired	~~53.7~~97.0
Tangible ~~liabilities,~~assets, net	~~(2.7)~~10.4
Assets acquired, net	~~51.0~~107.4
Goodwill	~~42.8~~124.0
Aggregate purchase price	~~93.8~~231.4
Add deferred tax asset	7.0
Less ~~contingent consideration~~deferred tax liability	~~(24.6)~~(24.0)

Less cash acquired	~~(0.3)~~(4.8)
Acquisitions, net of cash acquired	$	~~68.9~~209.6

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):


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
U.S. and Canada	U.S. and Canada	$	375.2	$	300.8		U.S. and Canada	$	381.5	$	375.2
Europe, Middle East and Africa (EMEA)	Europe, Middle East and Africa (EMEA)	226.7		224.6			Europe, Middle East and Africa (EMEA)	234.4		226.7
Asia Pacific (APAC)	Asia Pacific (APAC)	150.7		163.7			Asia Pacific (APAC)	140.0		150.7
Latin America (LATAM)	Latin America (LATAM)	94.7		71.8			Latin America (LATAM)	90.4		94.7
Total net sales	Total net sales	$	847.3	$	760.9		Total net sales	$	846.3	$	847.3

See Note 18 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 Condensed Consolidated Balance Sheets. Contract assets were ~~$16.9~~$11.9 million and ~~$17.7~~$13.3 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~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 ~~other current liabilities~~deferred revenue on the Condensed Consolidated Balance Sheets. Contract liabilities were ~~$23.4~~$26.0 million and ~~$22.3~~$25.3 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~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.

Note 4. Inventories, Net

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


		October 31, 2022		July 31, 2022			October 31, 2023		July 31, 2023
Raw materials	Raw materials	$	186.3	$	197.6	Raw materials	$	154.9	$	155.1
Work in process	Work in process	59.2		56.1		Work in process	57.2		50.9
Finished products	Finished products	244.6		248.7		Finished products	217.5		212.1
Total inventories, net	Total inventories, net	$	490.1	$	502.4	Total inventories, net	$	429.6	$	418.1

Note 5. Property, Plant and Equipment, Net

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

October 31,
2022 July 31,
2022
Land $ 25.0 $ 25.6
Buildings 389.6 396.2
Machinery and equipment 930.9 940.1
Computer software 140.8 141.0
Construction in progress 87.3 72.1
Less accumulated depreciation (982.8) (980.6)
Total property, plant and equipment, net $ 590.8 $ 594.4


	October 31, 2023		July 31, 2023
Land	$	28.8	$	29.3
Buildings	438.0		430.8
Machinery and equipment	997.6		989.0
Computer software	141.8		142.0
Construction in progress	83.3		107.7
Less accumulated depreciation	(1,047.2)		(1,045.9)
Total property, plant and equipment, net	$	642.3	$	652.9

Note 6. Goodwill and Intangible Assets

Goodwill

The Company allocates goodwill to reporting units within its ~~Engine Products~~Mobile Solutions, Industrial Solutions and ~~Industrial Products~~Life Sciences segments. There were no dispositions or impairment charges recorded during the three months ended October 31, ~~2022~~2023 and ~~2021.~~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 ~~2022~~2023 and did not record any impairment as a result of this assessment.

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

Engine
Products Segment Industrial
Products Segment Total
Balance as of July 31, 2022 $ 83.7 $ 262.1 $ 345.8
Foreign currency translation (0.3) (5.4) (5.7)
Balance as of October 31, 2022 $ 83.4 $ 256.7 $ 340.1



	Mobile Solutions Segment		Industrial Solutions Segment		Life Sciences Segment		Total
Balance as of July 31, 2023	$	25.5	$	289.1	$	166.5	$	481.1
Purchase price adjustments	—		—		(1.1)		(1.1)

Foreign currency translation	(0.1)		(5.6)		(5.0)		(10.7)
Balance as of October 31, 2023	$	25.4	$	283.5	$	160.4	$	469.3

Intangible Assets

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):

Customer Relationships Patents, Trademarks and Technology
Gross Carrying Amount Accumulated Amortization Total Net Value Gross Carrying Amount Accumulated Amortization Total Net Value Total
Balance as of July 31, 2022 $ 104.6 $ (60.3) $ 44.3 $ 71.9 $ (16.4) $ 55.5 $ 99.8
Amortization expense — (1.2) (1.2) — (1.3) (1.3) (2.5)
Foreign currency translation (2.2) 0.8 (1.4) (0.9) 0.2 (0.7) (2.1)
Balance as of October 31, 2022 $ 102.4 $ (60.7) $ 41.7 $ 71.0 $ (17.5) $ 53.5 $ 95.2


	Three Months Ended October 31, 2023
	Weighted Amortizable Life (in Years)	Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	10.6	$	105.5	$	(65.9)	$	39.6
Patents	18.7	33.4		(6.7)		26.7
Trademarks	8.8	15.6		(4.2)		11.4
Technology	17.1	115.4		(14.4)		101.0
Non-compete agreements	3.0	3.9		(0.9)		3.0
Total intangible assets		$	273.8	$	(92.1)	$	181.7

~~Amortization~~


	Twelve Months Ended July 31, 2023
	Weighted Amortizable Life (in Years)	Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	10.8	$	107.8	$	(65.6)	$	42.2
Patents	18.9	33.4		(6.3)		27.1
Trademarks	9.0	15.9		(3.9)		12.0
Technology	17.2	116.3		(12.9)		103.4
Non-compete agreements	3.1	4.0		(0.6)		3.4
Total intangible assets		$	277.4	$	(89.3)	$	188.1

Intangible asset amortization expense was ~~$2.5~~$4.0 million and ~~$2.2~~$2.5 million for the three months ended October 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Amortization expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings.

Note 7. Long-Term Debt

As of October 31, ~~2022,~~2023, there was ~~$407.5~~$437.5 million available and ~~$85.0~~$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, ~~2022,~~2023, the Company was in compliance with all such covenants.

Note 8. Income Taxes

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 ~~2018.~~2019. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before fiscal ~~2017.~~2018.

As of October 31, ~~2022,~~2023, gross unrecognized tax benefits were ~~$15.3~~$15.1 million and accrued interest and penalties on these unrecognized tax benefits were ~~$1.3~~$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 ~~$3.2~~$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.

In August 2022, the Inflation Reduction Act of 2022 was signed into U.S. law. Under this law, there is a new 15% corporate minimum tax, which is not expected to have an impact on the Company. In addition, beginning after December 31, 2022, there will be a 1% excise tax on certain share repurchases, which is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements. The Company evaluated the other aspects within this new law and does not expect a material impact to the Company’s Condensed Consolidated Financial Statements.

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.

Note 9. Earnings Per Share

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):


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Net earnings	Net earnings	$	87.2	$	77.1		Net earnings	$	92.1	$	87.2

Weighted average common shares outstanding	Weighted average common shares outstanding						Weighted average common shares outstanding
Weighted average common shares – basic	Weighted average common shares – basic	122.6		124.4			Weighted average common shares – basic	120.9		122.6
Dilutive impact of stock-based awards	Dilutive impact of stock-based awards	1.3		1.9			Dilutive impact of stock-based awards	1.7		1.3
Weighted average common shares – diluted	Weighted average common shares – diluted	123.9		126.3			Weighted average common shares – diluted	122.6		123.9

Net EPS – basic	Net EPS – basic	$	0.71	$	0.62		Net EPS – basic	$	0.76	$	0.71
Net EPS – diluted	Net EPS – diluted	$	0.70	$	0.61		Net EPS – diluted	$	0.75	$	0.70
Stock options excluded from net EPS calculation		1.7		—
Impact of potentially anti-dilutive stock options excluded from net EPS calculation							Impact of potentially anti-dilutive stock options excluded from net EPS calculation	—		1.7

Note 10. Stockholders’ Equity

Share Repurchases

~~The~~In May 2019, the Company’s Board of Directors ~~has~~ 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, ~~2022,~~2023, the Company had remaining authorization to repurchase ~~4.5~~2.0 million shares under this plan.

~~Dividends Paid~~On November 17, 2023, the Board of Directors authorized the repurchase of up to 12.0 million shares of common stock under the Company’s stock repurchase plan. This repurchase authorization was effective immediately and ~~Declared~~will expire or terminate only upon action by the Board of Directors. The remaining shares under the May 2019 authorization were terminated.

Dividends

Dividends paid were ~~23.0~~25.0 cents and ~~22.0~~23.0 cents per common share for the three months ended October 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

On November ~~18, 2022,~~17, 2023, the Company’s Board of Directors declared a cash dividend in the amount of ~~23.0~~25.0 cents per common share, payable December 20, ~~2022,~~2023, to ~~stockholders~~shareholders of record as of December 5, ~~2022.~~2023.

Note 11. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the three months ended October 31, ~~2022~~2023 and ~~2021~~2022 were as follows (in millions):


													Foreign Currency Translation Adjustment		Pension Benefits			Derivative Financial Instruments			Total
Balance as of July 31, 2023, net of tax												Balance as of July 31, 2023, net of tax	$	(109.6)	$	(67.2)		$	4.3		$	(172.5)
Other comprehensive (loss) income before reclassifications and tax												Other comprehensive (loss) income before reclassifications and tax	(37.6)		—			0.2			(37.4)
Tax expense												Tax expense	—		—			(0.1)			(0.1)
Other comprehensive (loss) income before reclassifications, net of tax												Other comprehensive (loss) income before reclassifications, net of tax	(37.6)		—			0.1			(37.5)

Reclassifications, before tax												Reclassifications, before tax	—		1.2		(1)	0.9			2.1
Tax expense												Tax expense	—		(0.2)			(0.2)			(0.4)
Reclassifications, net of tax												Reclassifications, net of tax	—		1.0			0.7		(2)	1.7
Other comprehensive (loss) income, net of tax												Other comprehensive (loss) income, net of tax	(37.6)		1.0			0.8			(35.8)
Balance as of October 31, 2023, net of tax												Balance as of October 31, 2023, net of tax	$	(147.2)	$	(66.2)		$	5.1		$	(208.3)
		Foreign Currency Translation Adjustment		Pension Benefits			Derivative Financial Instruments			Total
Balance as of July 31, 2022, net of tax	Balance as of July 31, 2022, net of tax	$	(143.6)	$	(67.5)		$	5.5		$	(205.6)	Balance as of July 31, 2022, net of tax	$	(143.6)	$	(67.5)		$	5.5		$	(205.6)
Other comprehensive (loss) income before reclassifications and tax	Other comprehensive (loss) income before reclassifications and tax	(40.1)		—			4.5			(35.6)		Other comprehensive (loss) income before reclassifications and tax	(40.1)		—			4.5			(35.6)
Tax expense	Tax expense	—		—			(1.1)			(1.1)		Tax expense	—		—			(1.1)			(1.1)
Other comprehensive (loss) income before reclassifications, net of tax	Other comprehensive (loss) income before reclassifications, net of tax	(40.1)		—			3.4			(36.7)		Other comprehensive (loss) income before reclassifications, net of tax	(40.1)		—			3.4			(36.7)

Reclassifications, before tax	Reclassifications, before tax	—		1.6		(1)	1.8			3.4		Reclassifications, before tax	—		1.6		(1)	1.8			3.4
Tax expense	Tax expense	—		(0.4)			(0.6)			(1.0)		Tax expense	—		(0.4)			(0.6)			(1.0)
Reclassifications, net of tax	Reclassifications, net of tax	—		1.2			1.2		(2)	2.4		Reclassifications, net of tax	—		1.2			1.2		(2)	2.4
Other comprehensive (loss) income, net of tax	Other comprehensive (loss) income, net of tax	(40.1)		1.2			4.6			(34.3)		Other comprehensive (loss) income, net of tax	(40.1)		1.2			4.6			(34.3)
Balance as of October 31, 2022, net of tax	Balance as of October 31, 2022, net of tax	$	(183.7)	$	(66.3)		$	10.1		$	(239.9)	Balance as of October 31, 2022, net of tax	$	(183.7)	$	(66.3)		$	10.1		$	(239.9)

Balance as of July 31, 2021, net of tax		$	(44.0)	$	(74.7)		$	0.5		$	(118.2)
Other comprehensive (loss) income before reclassifications and tax		(10.5)		—			1.2			(9.3)
Tax expense		—		—			(0.2)			(0.2)
Other comprehensive (loss) income before reclassifications, net of tax		(10.5)		—			1.0			(9.5)

Reclassifications, before tax		—		2.5		(1)	0.6			3.1
Tax expense		—		(0.5)			(0.3)			(0.8)
Reclassifications, net of tax		—		2.0			0.3		(2)	2.3
Other comprehensive (loss) income, net of tax		(10.5)		2.0			1.3			(7.2)
Balance as of October 31, 2021, net of tax		$	(54.5)	$	(72.7)		$	1.8		$	(125.4)

(1)Amounts include foreign currency translation losses of ~~$1.0~~$0.9 million and ~~$0.5~~$1.0 million and net amortization of prior service costs and actuarial losses of ~~$0.6~~$0.3 million and ~~$2.0~~$0.6 million in fiscal ~~2023~~2024 and ~~2022,~~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.

Note 12. Stock-Based Compensation

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.

Stock Options

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 ~~$7.5~~$8.5 million and ~~$6.9~~$7.5 million for the three months ended October 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted was ~~$15.50~~$18.91 and ~~$14.24~~$15.50 per share during the three months ended October 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Option activity was as follows:


		Options	Weighted Average Exercise Price			Options	Weighted Average Exercise Price
Balance outstanding as of July 31, 2022		6,927,161	$	46.32
Balance outstanding as of July 31, 2023					Balance outstanding as of July 31, 2023	6,777,407	$	47.80
Granted	Granted	875,900	50.89		Granted	770,038	59.66
Exercised	Exercised	(175,631)	36.60		Exercised	(165,279)	42.93
Expired/forfeited	Expired/forfeited	(27,660)	53.69		Expired/forfeited	(20,478)	55.01
Balance outstanding as of October 31, 2022		7,599,770	$	47.04
Balance outstanding as of October 31, 2023					Balance outstanding as of October 31, 2023	7,361,688	$	49.13

Performance-Based Awards

Performance-based awards are payable in common stock and are based on a formula that measures Company performance over a ~~three year~~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 ~~$1.8~~$1.6 million and ~~$1.7~~$1.8 million for the three months ended October 31, ~~2022~~2023 and ~~and 2021,~~2022, respectively.

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


		Performance Shares	Weighted Average Grant Date Fair Value			Performance Shares	Weighted Average Grant Date Fair Value
Balance outstanding as of July 31, 2022		188,206	$	52.20
Balance outstanding as of July 31, 2023					Balance outstanding as of July 31, 2023	194,761	$	54.46
Granted	Granted	113,100	50.89		Granted	114,800	59.66
Vested	Vested	—	—		Vested	—	—
Forfeited	Forfeited	—	—		Forfeited	—	—
Balance outstanding as of October 31, 2022		301,306	$	51.71
Balance outstanding as of October 31, 2023					Balance outstanding as of October 31, 2023	309,561	$	56.39

Note 13. Employee Benefit Plans

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):


		Three Months Ended October 31,
		2022		2021			Three Months Ended October 31,
							2023		2022
Service cost	Service cost	$	1.6	$	1.8	Service cost	$	1.2	$	1.6
Interest cost	Interest cost	4.1		2.5		Interest cost	5.1		4.1
Expected return on assets	Expected return on assets	(6.3)		(6.3)		Expected return on assets	(6.4)		(6.3)
Prior service cost amortization	Prior service cost amortization	0.1		0.1		Prior service cost amortization	—		0.1
Actuarial loss amortization	Actuarial loss amortization	0.5		1.8		Actuarial loss amortization	0.3		0.5

Net periodic pension costs	Net periodic pension costs	$	—	$	(0.1)	Net periodic pension costs	$	0.2	$	—

The Company’s general funding policy is to make at least the minimum required contributions ~~as required by~~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.

Note 14. Derivative Instruments and Hedging

Derivative Fair Value Measurements

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, ~~2022~~2023 and July 31, ~~2022,~~ 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.

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~~amount of the foreign currency forward contracts designated as hedges ~~were $118.1~~was $76.7 million and ~~$158.0~~$84.9 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively. The total notional ~~amounts~~amount of the foreign currency forward contracts not designated as hedges ~~were $211.4~~was $147.2 million and ~~$151.6~~$147.5 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively.

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.

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 was €80 million, or ~~$88.8~~$88.8 million, as of October 31, ~~2022~~2023 and July 31, ~~2022.~~2023. The maturity dates range from 2027 to 2029.

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

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

Note 15. Fair Value Measurements

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.

Short-Term Financial Instruments

As of October 31, ~~2022~~2023 and July 31, ~~2022,~~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 ~~and~~ are classified as Level 1 in the fair value hierarchy.

Long-Term Debt

As of October 31, ~~2022,~~2023, the estimated fair values of fixed interest rate long-term debt were ~~$368.4~~$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, ~~2022,~~2023, the estimated fair values of fixed interest rate long-term debt were ~~$396.9~~$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 ~~$178.0~~$153.5 million and ~~$221.7~~$198.4 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively and approximate their fair values. Long-term debt is classified as Level 2 in the fair value hierarchy.

Equity Method Investments

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 ~~$20.4~~$23.5 million and ~~$22.4~~$24.4 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~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.

Derivative Fair Value Measurements

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.

Fair Value of Derivatives Contracts

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


			Assets				Liabilities						Assets				Liabilities
		Balance Sheet Location	October 31, 2022		July 31, 2022		October 31, 2022		July 31, 2022			Balance Sheet Location	October 31, 2023		July 31, 2023		October 31, 2023		July 31, 2023
Designated as hedging instruments	Designated as hedging instruments										Designated as hedging instruments
Foreign currency forward contracts	Foreign currency forward contracts	Other current assets, other long-term assets	$	4.1	$	0.3	$	2.3	$	2.7	Foreign currency forward contracts	Other current assets and other current liabilities	$	1.7	$	0.6	$	1.0	$	0.1
Net investment hedges	Net investment hedges	Other current assets, other long-term assets and other long-term liabilities	10.3		8.2		—		—		Net investment hedges	Other current assets and other long-term assets	4.7		3.6		—		—

Total designated	Total designated		14.4		8.5		2.3		2.7		Total designated		6.4		4.2		1.0		0.1

Not designated as hedging instruments	Not designated as hedging instruments										Not designated as hedging instruments
Foreign currency forward contracts	Foreign currency forward contracts	Other current liabilities	1.6		1.7		2.0		2.5		Foreign currency forward contracts	Other current assets and other current liabilities	0.6		0.7		1.6		1.4
Total not designated	Total not designated		1.6		1.7		2.0		2.5		Total not designated		0.6		0.7		1.6		1.4
Total	Total		$	16.0	$	10.2	$	4.3	$	5.2	Total		$	7.0	$	4.9	$	2.6	$	1.5

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.

Fair Value of Contingent Consideration

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 ~~cash flows,~~financial and operational milestones, probabilities of achieving such ~~future cash flows~~milestones and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving ~~future cash flows or earnings~~such milestones generally ~~represent~~represents the only significant unobservable ~~inputs.~~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 ~~$24.7~~$25.2 million as of October 31, ~~2022~~2023 and $25.0 million as of July 31, ~~2022.~~2023. The maximum potential payout of the contingent consideration as of October 31, ~~2022~~2023 and July 31, ~~2022~~2023 was $30.7 ~~million. There was no contingent consideration as of October 31, 2021,~~million, see Note 17.

Note 16. Guarantees

Letters of Credit

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):


		October 31, 2022		July 31, 2022			October 31, 2023		July 31, 2023
Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	$	7.5	$	7.5	Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	$	7.5	$	7.5
Amounts drawn for letters of credit under the Company’s revolving credit facility	Amounts drawn for letters of credit under the Company’s revolving credit facility	$	—	$	—	Amounts drawn for letters of credit under the Company’s revolving credit facility	$	—	$	—

Advanced Filtration Systems Inc. (AFSI)

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 ~~$67.7~~$56.6 million and ~~$68.8~~$59.6 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively. AFSI has a $63.0 million ~~in a~~ revolving credit facility, which expires inJuly 31, 2024 and an additional $17.0 million ~~in an additional~~ multi-currency revolving credit facility, which terminates upon notification by either ~~party.~~AFSI or the financial institution.

Earnings from AFSI, which are recorded in other income, net in the Condensed Consolidated Statements of Earnings, were ~~$1.3~~$1.7 million and ~~$1.2~~$1.3 million for the three months ended October 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Note 17. Commitments and Contingencies

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 Condensed 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.

Contingent Compensation and Consideration

Acquisition Agreement - Purilogics

The ~~Company has an acquisition purchase~~Company's agreement with Purilogics ~~which~~ 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 ~~$0.3~~$1.3 million and ~~$0.1~~$1.1 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~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, ~~2022~~2023 and July 31, ~~2022,~~2023, inclusive of the ~~$0.3~~$1.3 million and ~~$0.1~~$1.1 million accrued, respectively.

The total contingent consideration liability was $23.0 million as of both October 31, 2022 and July 31, 2022, and was included in other current and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company primarily determines the contingent consideration liability based on the forecasted probability of achieving ~~certain~~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 ~~maximum payout of the~~total contingent consideration ~~was $29.0 million, inclusive of the $23.0 million accrued as of both October 31, 2022 and July 31, 2022.~~

~~Other Acquisition Agreements~~

~~For other acquisitions, the total contingent compensation arrangement~~ liability was ~~$0.4~~$23.5 million and ~~$0.3~~$23.2 million as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively ~~which~~and was included in other current and 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~~consideration was ~~$3.1~~$29.0 million, ~~which terminates in five years,~~ inclusive of the ~~$0.4~~$23.5 million and ~~$0.3~~$23.2 million accrued as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively.

Other Acquisition Agreements

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, ~~2022~~2023 and July 31, ~~2022, respectively.~~2023. The maximum payout of the contingent consideration was $1.7 million, which ~~terminates in~~concludes three years from the acquisition date of November 22, 2021 and was fully accrued as of October 31, ~~2022~~2023 and July 31, ~~2022, respectively.~~2023.

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

Note 18. Segment Reporting

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 ~~are Engine Products~~consistent with the manner in which it manages its operations and ~~Industrial Products.~~ 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 ~~Engine Products~~Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road ~~Aftermarket~~ and ~~Aerospace and Defense~~Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications ~~as well as~~and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and ~~lube~~hydraulic systems, ~~hydraulic applications and exhaust and~~ emissions systems and sensors, indicators and monitoring systems. ~~Engine Products~~Mobile Solutions sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture ~~transportation, aerospace~~ and ~~defense~~transportation end markets and to independent distributors and OEM dealer ~~networks, private label accounts and large fleets.~~networks.

The Industrial ~~Products~~Solutions segment is organized based on product type and consists of the Industrial Air Filtration, ~~Solutions (IFS), Gas Turbines Systems (GTS)~~Industrial Gasses, Industrial Hydraulics, Power Generation and ~~Special Applications~~Aerospace and Defense business units. Within our Industrial Solutions portfolio, Donaldson provides a wide product offering in the ~~IFS business unit,~~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 ~~food, beverage and~~ industrial processes. ~~The GTS business unit~~Power Generation products consist of air inlet systems and filtration ~~systems~~sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for ~~gas turbines. Special Applications~~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 Life Sciences segment is organized by end market, including the Bioprocessing, Food and Beverage, Medical Device, Vehicle Electrification, Microelectronics and Disk Drive business units. Our products include ~~polytetrafluoroethylene membrane-based products as well as~~gas and liquid filtration bioprocessing equipment (including bioreactors, fermenters and filtration skids), bioprocessing consumables (including membrane chromatography devices, reagents and filters) and specialized air and gas filtration systems for ~~applications including~~ hard disk ~~drives~~drive, semiconductor and ~~semiconductor manufacturing and sensors, indicators and monitoring systems. Industrial Products~~electric vehicle applications. Life Sciences primarily sells to ~~various dealers, distributors,~~large OEMs and directly to various end ~~users.~~users requiring cell growth, separation, purification, high purity filtration and device protection.

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):


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Net sales	Net sales						Net sales
Engine Products segment		$	604.5	$	527.2
Industrial Products segment		242.8		233.7
Mobile Solutions							Mobile Solutions	$	540.0	$	555.0
Industrial Solutions							Industrial Solutions	246.2		229.6
Life Sciences							Life Sciences	60.1		62.7
Total Company	Total Company	$	847.3	$	760.9		Total Company	$	846.3	$	847.3

Earnings (loss) before income taxes	Earnings (loss) before income taxes						Earnings (loss) before income taxes
Engine Products segment		$	90.9	$	72.3
Industrial Products segment		37.8		38.3
Mobile Solutions							Mobile Solutions	$	92.2	$	80.3
Industrial Solutions							Industrial Solutions	43.3		37.6
Life Sciences							Life Sciences	(4.2)		10.8
Corporate and unallocated	Corporate and unallocated	(12.1)		(6.5)			Corporate and unallocated	(8.4)		(12.1)
Total Company	Total Company	$	116.6	$	104.1		Total Company	$	122.9	$	116.6

Assets by segment were as follows (in millions):


	October 31, 2023		July 31, 2023
Mobile Solutions	$	1,266.4	$	1,243.8
Industrial Solutions	770.8		788.1
Life Sciences	509.6		513.8
Corporate and unallocated	221.8		224.8
Total assets	$	2,768.6	$	2,770.5

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


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Engine Products segment
Mobile Solutions segment							Mobile Solutions segment
Off-Road	Off-Road	$	108.0	$	93.9		Off-Road	$	94.7	$	103.7
On-Road	On-Road	36.0		31.5			On-Road	37.8		36.0
Aftermarket	Aftermarket	426.9		374.3			Aftermarket	407.5		415.3
Total Mobile Solutions segment							Total Mobile Solutions segment	540.0		555.0

Industrial Solutions segment							Industrial Solutions segment
Industrial Filtration Solutions							Industrial Filtration Solutions	210.6		196.0
Aerospace and Defense	Aerospace and Defense	33.6		27.5			Aerospace and Defense	35.6		33.6
Total Engine Products segment		604.5		527.2
Total Industrial Solutions segment							Total Industrial Solutions segment	246.2		229.6

Industrial Products segment
Industrial Filtration Solutions		180.9		165.5
Gas Turbine Systems		25.5		16.6
Special Applications		36.4		51.6
Total Industrial Products segment		242.8		233.7
Life Sciences segment							Life Sciences segment
Total Life Sciences segment							Total Life Sciences segment	60.1		62.7

Total Company	Total Company	$	847.3	$	760.9		Total Company	$	846.3	$	847.3

Concentrations

There were no customers that accounted for over 10% of net sales for the three months ended October 31, ~~2022~~2023 or ~~2021.~~2022. There were no customers that accounted for over 10% of gross accounts receivable as of October 31, ~~2022~~2023 or ~~as of~~ July 31, ~~2022.~~2023.

~~Organizational Redesign~~Note 19. Restructuring and Other Charges

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. Effective November 1, 2022, as a result of the organizational redesign, the Company established a new segment reporting structure which resulted in three reportable segments: Mobile Solutions, Industrial Solutions and Life Sciences. The organizational structure also includes Corporate and unallocated which encompasses corporate expenses determined to be non-allocable to the segments, such as interest expense, restructuring charges and certain incentive compensation. 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.

~~Note 19. Restructuring~~

In ~~October 2022, 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.~~costs during the three months ended October 31, 2022. These amounts ~~have been~~were included in selling, general and administrative expenses in the accompanying Condensed Consolidated ~~Statement~~Statements of Earnings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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~~150 locations, 7475 of which are manufacturing ~~and~~and/or distribution centers, on six continents partner with customers —- from small business owners to the world’s ~~biggest~~largest original equipment manufacturer (~~OEM)~~ (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~~Mobile Solutions, Industrial Solutions and ~~Industrial Products.~~Life Sciences. The ~~Engine~~ ~~Products~~ Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road ~~Aftermarket~~ and ~~Aerospace and Defense~~Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications ~~as well as~~and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and ~~lube~~hydraulic systems, ~~hydraulic applications and exhaust and~~ emissions systems and sensors, indicators and monitoring systems. ~~Engine~~ ~~Products~~ Mobile Solutions sells to OEMs in the construction, mining, agriculture ~~transportation, aerospace~~ and ~~defense~~transportation end markets and to independent distributors and OEM dealer ~~networks, private label accounts and large fleets.~~networks.

The Industrial ~~Products~~ Solutions segment is organized based on product type and consists of the Industrial Air Filtration, ~~Solutions (IFS), Gas Turbines Systems (GTS)~~Industrial Gasses, Industrial Hydraulics, Power Generation and ~~Special Applications~~Aerospace and Defense business units. Within our Industrial Solutions portfolio, Donaldson provides a wide product offering in the ~~IFS business unit,~~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 ~~food, beverage and~~ industrial processes. ~~The GTS business unit~~Power Generation products consist of air inlet systems and filtration ~~systems~~sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for ~~gas turbines. Special Applications~~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 Life Sciences segment is organized by end market, including the Bioprocessing, Food and Beverage, Medical Device, Vehicle Electrification, Microelectronics and Disk Drive business units. Our products include ~~polytetrafluoroethylene membrane-based products as well as~~gas and liquid filtration bioprocessing equipment (including bioreactors, fermenters and filtration skids), bioprocessing consumables (including membrane chromatography devices, reagents and filters) and specialized air and gas filtration systems for ~~applications including~~ hard disk ~~drives~~drive, semiconductor and ~~semiconductor manufacturing and sensors, indicators and monitoring systems. Industrial~~ ~~Products~~ electric vehicle applications. Life Sciences primarily sells to ~~various dealers, distributors,~~large OEMs and directly to various end ~~users.~~users requiring cell growth, separation, purification, high purity filtration and device protection.

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~~

~~Inflation~~

Consolidated Results of Operations

Three months ended October 31, 2023 compared with three months ended October 31, 2022

Operating Results

Operating results were as follows (in millions, except per share amounts):


		Three Months Ended October 31,									Three Months Ended October 31,
		2022		% of net sales		2021		% of net sales			2023		% of net sales		2022		% of net sales
Net sales	Net sales	$	847.3			$	760.9			Net sales	$	846.3			$	847.3
Cost of sales	Cost of sales	560.1		66.1	%	503.9		66.2	%	Cost of sales	545.4		64.4	%	560.1		66.1	%
Gross profit	Gross profit	287.2		33.9		257.0		33.8		Gross profit	300.9		35.6		287.2		33.9
Selling, general and administrative	Selling, general and administrative	149.2		17.6		133.0		17.5		Selling, general and administrative	155.0		18.3		149.2		17.6
Research and development	Research and development	18.7		2.2		16.5		2.2		Research and development	21.3		2.5		18.7		2.2
Operating expenses	Operating expenses	167.9		19.8		149.5		19.7		Operating expenses	176.3		20.8		167.9		19.8
Operating income	Operating income	119.3		14.1		107.5		14.1		Operating income	124.6		14.7		119.3		14.1
Interest expense	Interest expense	4.5		0.5		3.4		0.5		Interest expense	5.5		0.6		4.5		0.5
Other income, net	Other income, net	(1.8)		(0.2)		—		—		Other income, net	(3.8)		(0.4)		(1.8)		(0.2)
Earnings before income taxes	Earnings before income taxes	116.6		13.8		104.1		13.7		Earnings before income taxes	122.9		14.5		116.6		13.8
Income taxes	Income taxes	29.4		3.5		27.0		3.5		Income taxes	30.8		3.6		29.4		3.5
Net earnings	Net earnings	$	87.2	10.3	%	$	77.1	10.1	%	Net earnings	$	92.1	10.9	%	$	87.2	10.3	%

Net earnings per share (EPS) - diluted	Net earnings per share (EPS) - diluted	$	0.70			$	0.61			Net earnings per share (EPS) - diluted	$	0.75			$	0.70

Geographic Net Sales by Origination

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


		Three Months Ended October 31,									Three Months Ended October 31,
		2022		% of net sales		2021		% of net sales			2023		% of net sales		2022		% of net sales
U.S. and Canada	U.S. and Canada	$	375.2	44.3	%	$	300.8	39.5	%	U.S. and Canada	$	381.5	45.1	%	$	375.2	44.3	%
Europe, Middle East and Africa (EMEA)	Europe, Middle East and Africa (EMEA)	226.7		26.8		224.6		29.5		Europe, Middle East and Africa (EMEA)	234.4		27.7		226.7		26.8
Asia Pacific (APAC)	Asia Pacific (APAC)	150.7		17.8		163.7		21.5		Asia Pacific (APAC)	140.0		16.5		150.7		17.8
Latin America (LATAM)	Latin America (LATAM)	94.7		11.1		71.8		9.5		Latin America (LATAM)	90.4		10.7		94.7		11.1
Total Company	Total Company	$	847.3	100.0	%	$	760.9	100.0	%	Total Company	$	846.3	100.0	%	$	847.3	100.0	%

Net Sales

Net ~~sales~~sales for the three months ended October 31, ~~2022~~ ~~increased $86.4~~2023 decreased $1.0 million, or ~~11.4% fr~~om0.1%, from the three months ended October 31, ~~2021~~,2022, reflecting ~~higher~~ sa~~les~~lower sales in th~~e Engine Products~~the Mobile Solutions segment of ~~$77.3~~$15.0 million, or ~~14.7%~~a 2.7% decline, and the ~~Industrial Products~~Life Sciences segment of ~~$9.1~~$2.6 million, or ~~3.9%.~~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 ~~decreased~~increased net sales by ~~$58.8~~$12.3 million compared to the three months ended October 31, ~~2021,~~2022, reflecting ~~decreases~~increases in the ~~Engine Products~~Mobile Solutions, Industrial Solutions and ~~Industrial Products~~Life Sciences segments of ~~$39.1~~$6.9 million, $3.7 million and ~~$19.7~~$1.7 million, respectively. During the three months ended October 31, ~~2022,~~2023, the Company’s net sales ~~increased primarily from higher pricing and~~were relatively flat as volume ~~growth, partially~~declines were largely offset by ~~a negative impact from foreign currency translation.~~pricing benefits.

~~Cost of Sales and~~ Gross Margin

~~Cost of sales for the three months ended October 31, 2022 was $560.1 million, compared with $503.9 million for the three months ended October 31, 2021, an increase of $56.2 million, or 11.2%.~~ Gross margin as a percentage of net sales for the three months ended October 31, ~~2022~~2023 was ~~33.9%~~35.6% compared with ~~33.8%~~33.9% for the three months ended October 31, ~~2021.~~2022. The increase in gross margin as a percentage of net sales ~~increase~~ was primarily driven by ~~continued~~ pricing ~~efforts, which was mostly offset by higher costs.~~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, ~~2022~~2023 were ~~$149.2~~$155.0 million, or ~~17.6%~~18.3% of net sales, compared with ~~$133.0~~$149.2 million, or ~~17.5%~~17.6% of net sales, for the three months ended October 31, ~~2021,~~2022, an increase of ~~$16.2~~$5.8 million, or ~~12.2%~~3.8%. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to ~~a $7.6 million charge related to~~incremental expenses associated with investments in the ~~company-wide organizational redesign. This was partially offset by expense leverage on higher sales.~~Life Sciences acquisitions as well as increased headcount.

Research and Development Expenses

Research and development expenses for the three months ended October 31, ~~2022 were~~ ~~$18.7~~2023 were $21.3 million,, or ~~2.2%~~2.5% of net sales, ~~compared~~compared with ~~$16.5~~$18.7 million, or 2.2% of net sales, for the three months ended October 31, ~~2021.~~2022, primarily due to increased headcount.

Non-Operating Items

Interest expense for the three months ended October 31, ~~2022~~2023 was ~~$4.5~~$5.5 million, compared with ~~$3.4~~$4.5 million for the three months ended October 31, ~~2021,~~2022, an increase of ~~$1.1~~$1.0 million, or ~~32.1%~~20.7%. The increase ~~reflected a higher debt level and~~reflected rising variable interest rates.

Other income, net for the three months ended October 31, ~~2022~~2023 was ~~$1.8~~$3.8 million, co~~mpared~~compared with ~~less than $0.1 million~~ ~~for~~ ~~the three months ended October 31, 2021, an increase~~other income, net of $1.8 million ~~which was driven primarily by the timing of charitable contributions.~~

~~Income Taxes~~

~~The effective tax rates were 25.2% and 25.9%~~ 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.

Income Taxes

The effective tax rate was 25.1% and 25.2% for the three months ended October 31, 2023 and ~~2021, respectively.~~2022, respectively. The decrease in the effective tax rate was primarily due to ~~increased~~a favorable shift in the mix of earnings between tax ~~benefits on export income and~~jurisdictions, partially offset by an overall ~~increase~~decrease in discrete tax benefits.

Net Earnings

Net earnings for the three months ended October 31, ~~2022~~2023 were ~~$87.2~~$92.1 million, compared with ~~$77.1~~$87.2 million for the three months ended October 31, ~~2021,~~2022, an increase of ~~$10.1~~$4.9 million, or ~~13.1%~~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, ~~compared with $0.61 for the three months ended October 31, 2021,~~ an increase of ~~$0.09,~~$0.05, or ~~15.3%~~6.8%.

Segment Results of Operations

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


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023		2022
Net sales	Net sales						Net sales

Engine Products segment		$	604.5	$	527.2

Industrial Products segment		242.8		233.7

Mobile Solutions							Mobile Solutions	$	540.0	$	555.0
Industrial Solutions							Industrial Solutions	246.2		229.6
Life Sciences							Life Sciences	60.1		62.7
Total Company	Total Company	$	847.3	$	760.9		Total Company	$	846.3	$	847.3

Earnings (loss) before income taxes	Earnings (loss) before income taxes						Earnings (loss) before income taxes
Engine Products segment		$	90.9	$	72.3
Industrial Products segment		37.8		38.3
Mobile Solutions							Mobile Solutions	$	92.2	$	80.3
Industrial Solutions							Industrial Solutions	43.3		37.6
Life Sciences							Life Sciences	(4.2)		10.8
Corporate and unallocated(1)	Corporate and unallocated(1)	(12.1)		(6.5)			Corporate and unallocated(1)	(8.4)		(12.1)
Total Company	Total Company	$	116.6	$	104.1		Total Company	$	122.9	$	116.6

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

~~Engine Products~~

Mobile Solutions Segment

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


		Three Months Ended October 31,				Three Months Ended October 31,
		2022		2021				2023			2022
Off-Road	Off-Road	$	108.0	$	93.9		Off-Road	$	94.7		$	103.7
On-Road	On-Road	36.0		31.5			On-Road	37.8			36.0
Aftermarket	Aftermarket	426.9		374.3			Aftermarket	407.5			415.3
Aerospace and Defense		33.6		27.5
Total Engine Products segment		$	604.5	$	527.2
Total Mobile Solutions segment							Total Mobile Solutions segment	$	540.0		$	555.0

Engine Products segment earnings before income taxes		$	90.9	$	72.3
Mobile Solutions segment earnings before income taxes							Mobile Solutions segment earnings before income taxes	$	92.2		$	80.3
Mobile Solutions segment earnings before income taxes % of net sales							Mobile Solutions segment earnings before income taxes % of net sales	17.1		%	14.5		%

Three months ended October 31, 2023 compared with three months ended October 31, 2022

Net sales for the ~~Engine Products~~Mobile Solutions segment for the three months ended October 31, ~~2022~~2023 were ~~$604.5~~$540.0 million, compared with ~~$527.2~~$555.0 million for the three months ended October 31, ~~2021, an increase~~2022, a decrease of ~~$77.3~~$15.0 million, or ~~14.7%~~2.7%. Excluding a ~~$39.1~~$6.9 million ~~decrease~~increase from foreign currency translation, net sales for the ~~Engine Products~~Mobile Solutions segment ~~increased 22.1%~~declined 3.9%.

Net sales of ~~Aftermarket increased $52.6 million, primarily driven by pricing and continued high end-market demand. Net sales of~~ Off-Road ~~increased $14.1~~decreased $9.0 million, primarily due to ~~increased pricing and high levels of~~weaker global ~~equipment production. The increased sales for all business units were~~end market conditions, particularly in China, partially offset by ~~negative impacts from foreign currency translation.~~pricing benefits. Net sales of Aftermarket decreased $7.8 million, as large OEM customers continued to normalize inventories, partially offset by pricing benefits.

Earnings ~~befor~~ebefore income taxes for the ~~Engine Products~~Mobile Solutions segment for the three months ended October 31, ~~2022~~2023 were ~~$90.9~~$92.2 million, or ~~15.0%~~17.1% of ~~Engine Products’~~ net sales, an increase from ~~13.7%~~14.5% of net sales for the three months ended October 31, ~~2021.~~2022. The increase was ~~drive~~ndriven by ~~higher~~ pricing actions and ~~expense leverage on higher sales, which were partially offset by higher~~deflation of select input costs.

Industrial ~~Products~~Solutions Segment

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

Three Months Ended
October 31,
2022 2021
Industrial Filtration Solutions (IFS) $ 180.9 $ 165.5
Gas Turbine Systems 25.5 16.6
Special Applications 36.4 51.6
Total Industrial Products segment $ 242.8 $ 233.7
Industrial Products segment earnings before income taxes $ 37.8 $ 38.3


	Three Months Ended October 31,
	2023			2022
Industrial Filtration Solutions (IFS)	$	210.6		$	196.0
Aerospace and Defense	35.6			33.6
Total Industrial Solutions segment	$	246.2		$	229.6

Industrial Solutions segment earnings before income taxes	$	43.3		$	37.6
Industrial Solutions segment earnings before income taxes % of net sales	17.6		%	16.4		%

Three months ended October 31, 2023 compared with three months ended October 31, 2022

Net sales for the Industrial ~~Products~~Solutions segment for the three months ended October 31, ~~2022~~2023 were ~~$242.8~~$246.2 million, compared with ~~$233.7~~$229.6 million for the three months ended October 31, ~~2021,~~2022, an increase of ~~$9.1~~$16.6 million, or ~~3.9%~~7.2%. Excluding a ~~$19.7~~$3.7 million ~~decrease~~increase from foreign currency translation, net sales for the Industrial ~~Products~~Solutions segment increased ~~12.3%~~5.6%.

Net sales of IFS increased ~~$15.4~~$14.6 million, reflecting ~~pricing benefits and~~ higher sales volume in power generation and industrial dust collection from strong demand in most geographies. Net sales of Aerospace and ~~process filtration, along with net sales related to recent acquisitions. GTS~~Defense increased by ~~$8.9 million as the prior year period was unseasonably soft due to the timing of orders. Special Applications decreased $15.2~~$2.0 million due to ~~Disk Drive sales pressure from customer inventory management and a reduction~~ongoing strength in ~~overall market demand. All business units were negatively impacted by foreign currency translation.~~the defense end market.

~~Earnings~~Earnings before ~~incom~~eincome taxes for the Industrial ~~Products~~Solutions segment for the three months ended October 31, ~~2022~~2023 were ~~$37.8~~$43.3 million, or ~~15.6%~~17.6% of ~~Industrial Products’~~ net sales, ~~a decrease~~an increase from 16.4% of net sales for the three months ended October 31, ~~2021.~~2022. The increase was primarily due to the impact from leveraging operating expenses, operational efficiencies and lower freight costs.

Life Sciences Segment

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


	Three Months Ended October 31,
	2023			2022


Life Sciences segment net sales	$	60.1		$	62.7
Life Sciences segment (losses) earnings before income taxes	$	(4.2)		$	10.8
Life Sciences segment (losses) earnings before income taxes % of net sales	(7.0)		%	17.2		%

Three months ended October 31, 2023 compared with three months ended October 31, 2022

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 ~~due to unfavorable~~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, ~~mix within~~a decrease from earnings of 17.2% of net sales for the ~~Special Applications business unit~~ ~~and~~three months ended October 31, 2022. The decrease was driven by the expected ~~initial negative margin~~ impact from investments made to scale up the Company’s recent acquisitions.

Liquidity, Capital Resources 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.

2223

Cash Flow Summary

Cash flows were as follows (in millions):


		Three Months Ended October 31,							Three Months Ended October 31,
		2022		2021		$ Change			2023		2022		$ Change
Net cash provided by (used in):	Net cash provided by (used in):							Net cash provided by (used in):
Operating activities	Operating activities	$	118.2	$	42.9	$	75.3	Operating activities	$	138.0	$	118.2	$	19.8
Investing activities	Investing activities	(28.1)		(18.3)		(9.8)		Investing activities	(23.2)		(28.1)		4.9
Financing activities	Financing activities	(112.8)		(45.5)		(67.3)		Financing activities	(78.9)		(112.8)		33.9
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(9.6)		(1.1)		(8.5)		Effect of exchange rate changes on cash	(5.2)		(9.6)		4.4
Decrease in cash and cash equivalents		$	(32.3)	$	(22.0)	$	(10.3)
Increase (decrease) in cash and cash equivalents								Increase (decrease) in cash and cash equivalents	$	30.7	$	(32.3)	$	63.0

Operating Activities

Cash provided by operating activities for the three months ended October 31, ~~2022~~2023 was ~~$118.2~~$138.0 million, compared with ~~$42.9~~$118.2 million for the three months ended October 31, ~~2021,~~2022, an increase of ~~$75.3~~$19.8 million. The increase in cash provided by operating activities was ~~primari~~lyprimarily driven by ~~relatively flat inventory~~an increase in accounts payable in the current quarter compared to a ~~significant increase~~decrease in ~~inventory~~accounts payable in the first quarter of the prior year, as well as higher earnings.

Investing Activities

Cash used in investing activities for the three months ended October 31, ~~2022~~2023 was ~~$28.1~~$23.2 million, compared with ~~$18.3~~$28.1 million for the three months ended October 31, ~~2021, an increase~~2022, a decrease of ~~$9.8~~$4.9 million. The ~~increase~~decrease in cash used was due to ~~the higher~~slightly lower investment of capital in various projects ~~including capacity expansion and tooling for new programs~~ in the current year.

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 three months ended October 31, ~~2022~~2023 was ~~$112.8~~$78.9 million, compared with ~~$45.5~~$112.8 million for the three months ended October 31, ~~2021, an increase~~2022, a decrease of ~~$67.3~~$33.9 million. The ~~increase~~decrease was primarily driven by proceeds from ~~the issuance~~long-term debt of ~~debt in the prior year, the repayment of long-term debt~~$35.0 million in the current year ~~and lower share repurchases~~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 ~~and 2021~~ were ~~$28.2~~$30.2 million and ~~$27.4~~$28.2 million, respectively. Share repurchases for the three months ended October 31, 2023 and 2022 ~~and 2021~~ were ~~$45.7~~$53.3 million and ~~$102.9~~$45.7 million, respectively.

Capital Resources

Additional so~~urces~~sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of October 31, ~~2022~~2023 was ~~$161.0~~$217.8 million,, compared with ~~$193.3~~$187.1 million as of July 31, ~~2022.~~2023. The Company has capacity of ~~$653.0~~$613.6 million available for further borrowing under existing credit facilities as of October 31, ~~2022,~~2023, which includes ~~$407.5~~$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 ~~anticipated~~ dividends, share repurchase activity and potential acquisitions.

Financial Condition

Short-Term Borrowings and Long-Term Debt

As of October 31, ~~2022,~~2023, total debt, including short-term borrowings and long-term debt, represented ~~34.2%~~32.8% of total capitalization, defined as total debt plus total stockholders’ equity, compared with ~~36.4%~~33.2% as of July 31, ~~2022.~~2023. As of October 31, ~~2022,~~2023, the Company was in compliance with its financial covenants.

Long-term debt outstanding was ~~$600.7~~$576.8 million as of October 31, ~~2022,~~2023, compared with ~~$644.3~~$621.6 million as of July 31, ~~2022,~~2023, a decrease of ~~$43.6~~$44.8 million, primarily due to a repayment on the unsecured revolving credit facility during the first quarter of fiscal ~~2023.~~2024. As of October 31, ~~2022,~~2023, there was ~~$407.5~~$437.5 million available and ~~$85.0~~$55.0 million outstanding on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

Working Capital

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, ~~2022,~~2023, was ~~$584.2~~$582.5 million, compared with ~~$616.6~~$599.7 million as of July 31, ~~2022,~~2023, a decrease of ~~$32.4~~$17.2 million. Days sales outstanding were 6564 days as of October 31, ~~2022, an increase from 62~~2023, consistent with 64 days as of July 31, ~~2022.~~2023.

Inventories, net as of October 31, ~~2022,~~2023, was ~~$490.1~~$429.6 million, compared with ~~$502.4~~$418.1 million as of July 31, ~~2022, a decrease~~2023, an increase of ~~$12.3~~$11.5 million. Days inventory outstanding were 8271 days as of October 31, ~~2022,~~2023, an increase from 7869 days as of July 31, ~~2022.~~2023. Inventory turns were ~~4.5~~5.1 times and ~~4.7~~5.3 times per year as of October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, respectively.

Accounts payable as of October 31, ~~2022,~~2023, was ~~$320.7~~$324.9 million, compared with ~~$338.5~~$304.9 million as of July 31, ~~2022, a decrease~~2023, an increase of ~~$17.8~~$20.0 million. Days payable outstanding were 5453 days as of October 31, ~~2022,~~2023, an increase from 5249 days as of July 31, ~~2022.~~2023.

Off-Balance Sheet Arrangements

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

Critical Accounting Estimates

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, ~~2022.~~2023.

New Accounting Standards Not Yet Adopted

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.

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 the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2022,~~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.

2425

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, 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, ~~2022.~~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.

Item 3. 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 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, ~~2022,~~2023, the U.S. dollar was generally ~~stronger~~weaker than in the three months ended October 31, ~~2021~~2022 compared with many of the currencies of the foreign countries in which the Company operates. The overall ~~stronger~~weaker U.S. dollar had a ~~negative~~positive impact on the Company’s international net sales and net earnings because the foreign denominated revenues translated into ~~less~~more U.S. dollars in many regions around the world. The estimated impact of foreign currency translation for the three months ended October 31, ~~2022~~2023 resulted in an overall ~~decrease~~increase in reported net sales of ~~$58.8~~$12.3 million and ~~a decrease~~an increase in reported net earnings of ~~$7.2~~$1.6 million.

Derivative Fair Value Measurements

Foreign Currency Forward Contracts - Cash Flow Hedges and Derivatives Not Designated as Hedging Instruments

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~~its operations in Europe. The Company has elected the spot method for designating these contracts as net investment ~~hedges~~.hedges.

The total notional amount of net investment hedges was €80 million, or $88.8 million, as of October 31, ~~2022~~2023 and July 31, ~~2022.~~2023. The maturity dates range from 2027 to 2029.

Based on the net investment hedges outstanding as of October 31, ~~2022,~~2023, a 10% appreciation of the U.S. dollar compared to the Euro would result in a net gain of ~~$6.9~~$7.4 million in the fair value of these contracts.

2526

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 October 31, ~~2022,~~2023, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of ~~$85.0~~$55.0 million outstanding on the Company’s unsecured revolving credit facility, €80.0 million, or ~~$79.5~~$85.2 million, of a variable rate term loan and ¥2.0 billion, or ~~$13.5~~$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 ~~$0.2~~$0.9 million ~~and interest income would have increased by an immaterial amount~~ in the three months ended October 31, ~~2022.~~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, ~~2022,~~2023, the estimated fair values of fixed interest rate long-term debt were ~~$368.4~~$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.

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 October 31, ~~2022~~2023 and July 31, ~~2022,~~2023, the Company owned ~~$9.5~~$12.4 million and ~~$12.6~~$13.2 million, respectively, of these bankers’ acceptance notes and includes them in accounts receivable on the Condensed Consolidated Balance Sheets.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 covered by this report.~~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.

Changes in Internal Control over Financial Reporting

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, ~~2022,~~2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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 ~~operating performances~~business, reputation, financial condition or ~~financial condition.~~results of operations. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2022~~2023 outlines the risks and uncertainties the Company believes are the most material to its business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Equity Securities

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, ~~2022~~2023 was as follows:

Period Total Number
of Shares
Purchased Average Price
Paid per Share Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs Maximum
Number
of Shares
that May Yet
Be Purchased
Under the Plans
or Programs
August 1 - August 31, 2022 55,353 $ 53.77 55,353 5,347,361
September 1 - September 30, 2022 332,245 50.98 330,000 5,017,361
October 1 - October 31, 2022 500,000 51.79 500,000 4,517,361
Total 887,598 $ 51.61 885,353 4,517,361


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
August 1 - August 31, 2023	644,618	$	61.96	644,618	2,273,096
September 1 - September 30, 2023	1,945	64.85		—	2,273,096
October 1 - October 31, 2023	227,801	59.07		226,057	2,047,039
Total	874,364	$	61.22	870,675	2,047,039

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 ~~4.5~~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, ~~2022.~~2023. The “Total Number of Shares Purchased” column of the table above includes ~~2,245~~3,689 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the fiscal first ~~quarter of fiscal~~ ~~2023~~.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.

On November 17, 2023, the Board of Directors authorized the repurchase of up to 12.0 million shares of common stock under the Company’s stock repurchase plan. This repurchase authorization was effective immediately and will expire or terminate only upon action by the Board of Directors. The remaining shares under the May 2019 authorization were terminated.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Not applicable.~~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.

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Item 6. Exhibits


3-A*3-A			Restated Certificate of Incorporation of Registrant as currently in effect ~~(Filed as Exhibit 3-A to Form 10-Q Report for the second quarter ended January 31, 2012)~~
3-B*			Amended and Restated Bylaws of Registrant, dated as of July ~~29, 2016~~2 8 , 20 23 (Filed as Exhibit ~~3-C~~3-B to Form 8-K Report filed on July ~~29, 2016)~~2
~~10-A~~8			~~Form of Separation and General Release Agreement, dated as of October 7, 2022, by and between Jeffrey E. Spethmann and Donaldson Company, Inc.~~, 20 23 )
31-A			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31-B			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101			The following financial information from the Donaldson Company, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, ~~2022,~~2023, formatted in inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Changes in Stockholders’ Equity and (vi) the Notes to Condensed Consolidated Financial Statements
104			The cover page from the Donaldson Company Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, ~~2022,~~2023, formatted in iXBRL (included as Exhibit 101)


*			Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit.
**			Denotes compensatory plan or management contract.

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SIGNATURES

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.



			DONALDSON COMPANY, INC.
			(Registrant)


Date: December ~~7, 2022~~6, 2023	By:	/s/ Tod E. Carpenter
		Tod E. Carpenter Chairman, President and Chief Executive Officer (~~duly authorized officer)~~Principal Executive Officer)


Date: December ~~7, 2022~~6, 2023	By:	/s/ Scott J. Robinson
		Scott J. Robinson Chief Financial Officer (~~principal financial officer)~~Principal Financial Officer)


Date: December ~~7, 2022~~6, 2023	By:	/s/ Andrew J. Cebulla
		Andrew J. Cebulla Vice President and Corporate Controller (~~principal accounting officer)~~Principal Accounting Officer)

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	Engine Products Segment		Industrial Products Segment		Total
Balance as of July 31, 2022	$	83.7	$	262.1	$	345.8

Foreign currency translation	(0.3)		(5.4)		(5.7)
Balance as of October 31, 2022	$	83.4	$	256.7	$	340.1


	Customer Relationships						Patents, Trademarks and Technology
	Gross Carrying Amount		Accumulated Amortization		Total Net Value		Gross Carrying Amount		Accumulated Amortization		Total Net Value		Total
Balance as of July 31, 2022	$	104.6	$	(60.3)	$	44.3	$	71.9	$	(16.4)	$	55.5	$	99.8

Amortization expense	—		(1.2)		(1.2)		—		(1.3)		(1.3)		(2.5)
Foreign currency translation	(2.2)		0.8		(1.4)		(0.9)		0.2		(0.7)		(2.1)
Balance as of October 31, 2022	$	102.4	$	(60.7)	$	41.7	$	71.0	$	(17.5)	$	53.5	$	95.2