DCI 10-Q
DONALDSON Co INC (DCI)
10-Q
2024-03-04
For: 2024-01-31
View Original
Added on
April 06, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
(Mark One)
OR
Commission File Number 1-7891
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (952 ) 887-3131
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 | ||||||
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.
| ☒ | 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 February 27, 2024, 120,369,127 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 January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Earnings before income taxes | |||||||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares – basic | |||||||||||||||||||||||
| Weighted average shares – diluted | |||||||||||||||||||||||
| Net earnings per share – basic | $ | $ | $ | $ | |||||||||||||||||||
| Net earnings per share – diluted | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
2
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||
Foreign currency translation gain (loss) | ( | ||||||||||||||||||||||
Pension liability adjustment, net of deferred taxes of $ | ( | ( | |||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||
(Loss) gain on hedging derivatives, net of deferred taxes of $ | ( | ( | ( | ||||||||||||||||||||
Reclassification of loss on hedging derivatives to net earnings, net of taxes of $ | ( | ( | ( | ( | |||||||||||||||||||
| Total derivatives | ( | ( | ( | ( | |||||||||||||||||||
Net other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
3
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
(Unaudited)
| January 31, 2024 | July 31, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowances of $ | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings | $ | $ | |||||||||
| Current maturities of long-term debt | |||||||||||
| Accounts payable | |||||||||||
| Accrued employee compensation and related taxes | |||||||||||
| Deferred revenue | |||||||||||
| Income taxes payable | |||||||||||
Dividends payable | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Non-current income taxes payable | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
4
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Six Months Ended January 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Stock-based compensation expense | |||||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Change in short-term borrowings | |||||||||||
| Purchase of treasury stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Exercise of stock options and other | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information | |||||||||||
| Income taxes paid | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
| Supplemental Disclosure of Non-Cash Operating and Investing Transactions | |||||||||||
| Accrued property, plant and equipment additions | $ | $ | |||||||||
| Leased assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
5
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
(Unaudited)
Three Months Ended January 31, 2024 and 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance as of October 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Stock compensation and other activity | ( | ||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balance as of October 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Stock compensation and other activity | ( | — | |||||||||||||||||||||||||||||||||
| Balance as of January 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
Six Months Ended January 31, 2024 and 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Stock compensation and other activity | ( | ||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balance as of July 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net earnings | |||||||||||||||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Treasury stock acquired | ( | ( | |||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Stock compensation and other activity | ( | ||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
6
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
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.
New Significant Accounting Standard Recently Adopted
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The Company adopted ASU 2021-08 in the first quarter of fiscal 2024 and will apply this guidance to all future business combinations. The adoption did not have an impact on its Condensed Consolidated Financial Statements.
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 December 2023, FASB issued ASU No. 2023-09, Income Taxes (Topic 820), “Improvements to Income Tax Disclosures,” which enhances the transparency and decision usefulness of income tax disclosures. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not expect adoption of this standard will have a material impact on the related disclosures within its financial statements.
In November 2023, FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), “Improvements to Reportable Segment Disclosures,” which improves the segment disclosures to include reportable segment’s expenses. The guidance is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company does not expect adoption of this standard will have a material impact on the related disclosures within its financial statements.
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.
7
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 fourth quarter of fiscal 2023, the Company acquired UTEC, headquartered in Nivelles, Belgium, for cash consideration of €134.6 million, or $147.2 million, net of cash acquired. UTEC is a global producer of innovative biomanufacturing solutions for cell and gene therapy research, development and commercial manufacturing. UTEC is reported within the Company’s Life Sciences segment. The Company assigned the fair values to the net assets acquired resulting in $95.8 million for goodwill and $52.5 million for intangible assets, the amortization of which is not deductible for tax purposes. The valuation resulted in a deferred tax liability of $13.1 million and a deferred tax asset of $7.0 million. Net working capital was a net liability of $0.9 million, there were $6.6 million of other non-current assets and $0.7 million of other non-current liabilities. The purchase price allocation for this acquisition is preliminary pending the outcome of the final valuation of the net assets acquired. Net sales of UTEC were immaterial to the Consolidated Statements of Earnings for the three and six months ended January 31, 2024. Management expects to finalize the purchase accounting by the fourth quarter of fiscal 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, and there were $1.2 million of other non-current assets and $0.2 million other non-current liabilities. Purchase accounting was finalized in the first quarter of fiscal 2024. Net sales of Isolere were immaterial to the Condensed Consolidated Statements of Earnings for the three and six months ended January 31, 2024.
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 | $ | ||||
| Trademarks and tradenames | |||||
Customer relationships | |||||
| Non-competition agreements | |||||
| Intangible assets acquired | |||||
| Tangible assets, net | |||||
| Assets acquired, net | |||||
| Goodwill | |||||
| Aggregate purchase price | |||||
Add deferred tax asset | |||||
| Less deferred tax liability | ( | ||||
| Less cash acquired | ( | ||||
| Acquisitions, net of cash acquired | $ | ||||
There have been no acquisitions in fiscal 2024.
8
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 January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| U.S. and Canada | $ | $ | $ | $ | |||||||||||||||||||
| Europe, Middle East and Africa (EMEA) | |||||||||||||||||||||||
| Asia Pacific (APAC) | |||||||||||||||||||||||
| Latin America (LATAM) | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
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 $11.2 million and $13.3 million as of January 31, 2024 and July 31, 2023, respectively. In other limited circumstances, the customer may make a payment at a time earlier than when revenue is recognized and prior to the satisfaction of performance obligations, resulting in contract liabilities, which are reported in deferred revenue on the Condensed Consolidated Balance Sheets. Contract liabilities were $29.7 million and $25.3 million as of January 31, 2024 and July 31, 2023, respectively.
The Company will recognize revenue in future periods related to remaining performance obligations for certain open contracts. Generally, these contracts have terms of one year or less. The amount of revenue related to unsatisfied performance obligations in which the original duration of the contract is greater than one year is not significant. None of the Company’s contracts contained a significant financing component.
Note 4. Inventories, Net
The components of inventories, net were as follows (in millions):
| January 31, 2024 | July 31, 2023 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished products | |||||||||||
| Total inventories, net | $ | $ | |||||||||
Note 5. Property, Plant and Equipment, Net
The components of property, plant and equipment, net were as follows (in millions):
| January 31, 2024 | July 31, 2023 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Computer software | |||||||||||
| Construction in progress | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Total property, plant and equipment, net | $ | $ | |||||||||
9
Note 6. Goodwill and Intangible Assets
Goodwill
The Company allocates goodwill to reporting units within its Mobile Solutions, Industrial Solutions and Life Sciences segments. There were no dispositions or impairment charges recorded during the three and six months ended January 31, 2024 and 2023. Goodwill is assessed for impairment annually during the third quarter of the fiscal year, or more frequently if events or changes in circumstances indicate the asset may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal 2023 and did not record any impairment as a result of this assessment.
Goodwill by reportable segment was as follows (in millions):
Mobile Solutions Segment | Industrial Solutions Segment | Life Sciences Segment | Total | ||||||||||||||||||||
Balance as of July 31, 2023 | $ | $ | $ | $ | |||||||||||||||||||
Purchase price adjustments | ( | ( | |||||||||||||||||||||
| Foreign currency translation | ( | ( | ( | ( | |||||||||||||||||||
| Balance as of January 31, 2024 | $ | $ | $ | $ | |||||||||||||||||||
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 10 year useful life.
There was a foreign currency translation gain of $1.5 million and loss of $1.7 million for the three and six months ended January 31, 2024, respectively, and gain of $3.8 million and a gain of $1.7 million for the three and six months ended January 31, 2023, respectively.
10
Intangible asset classes were as follows (in millions):
| January 31, 2024 | |||||||||||||||||||||||
| Weighted Amortizable Life (in Years) | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||
| Patents | ( | ||||||||||||||||||||||
| Trademarks | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||
| July 31, 2023 | |||||||||||||||||||||||
| Weighted Amortizable Life (in Years) | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||
| Patents | ( | ||||||||||||||||||||||
| Trademarks | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||
Intangible asset amortization expense was $3.8 million and $7.8 million for the three and six months ended January 31, 2024, respectively, and was $2.5 million and $5.1 million for the three and six months ended January 31, 2023, 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 January 31, 2024, there was $452.5 million available and $40.0 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 January 31, 2024, 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 2019. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before fiscal 2018.
As of January 31, 2024, gross unrecognized tax benefits were $15.8 million and accrued interest and penalties on these unrecognized tax benefits were $2.2 million. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes in the Condensed Consolidated Statements of Earnings. The Company estimates within the next 12 months it is reasonably possible its uncertain tax positions could decrease by as much as $4.0 million due to lapses in statutes of limitation. The statutes of limitation periods for the Company’s various tax jurisdictions range from two years to 10 years.
The Company believes it is remote that any adjustment necessary to the reserve for income taxes over the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.
11
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 January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Weighted average common shares – basic | |||||||||||||||||||||||
| Dilutive impact of stock-based awards | |||||||||||||||||||||||
| Weighted average common shares – diluted | |||||||||||||||||||||||
| Net EPS – basic | $ | $ | $ | $ | |||||||||||||||||||
| Net EPS – diluted | $ | $ | $ | $ | |||||||||||||||||||
Impact of potentially anti-dilutive stock options excluded from net EPS calculation | |||||||||||||||||||||||
Note 10. Stockholders’ Equity
Share Repurchases
In November 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, replacing the Company’s previous stock repurchase plan dated May 31, 2019. This repurchase authorization is effective until terminated by the Board of Directors. During the six months ended January 31, 2024, the Company repurchased 1.4 million shares for $87.1 million. During the six months ended January 31, 2023, the Company repurchased 2.1 million shares for $115.2 million. As of January 31, 2024, the Company had remaining authorization to repurchase 11.8 million shares under the November 2023 stock repurchase plan.
Dividends
Dividends paid were 25.0 cents and 50.0 cents per common share for the three and six months ended January 31, 2024 and were 23.0 cents and 46.0 cents per common share for the three and six months ended January 31, 2023, respectively.
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Note 11. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the three months ended January 31, 2024 and 2023 were as follows (in millions):
| Foreign Currency Translation Adjustment | Pension Benefits | Derivative Financial Instruments | Total | ||||||||||||||||||||
| Balance as of October 31, 2023, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive income (loss) before reclassifications and tax | ( | ||||||||||||||||||||||
Tax benefit | |||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, net of tax | ( | ||||||||||||||||||||||
| Reclassifications, before tax | ( | (1) | ( | ( | |||||||||||||||||||
Tax benefit | |||||||||||||||||||||||
| Reclassifications, net of tax | ( | ( | (2) | ( | |||||||||||||||||||
Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Balance as of January 31, 2024, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Balance as of October 31, 2022, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive income (loss) before reclassifications and tax | ( | ||||||||||||||||||||||
Tax benefit | |||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, net of tax | ( | ||||||||||||||||||||||
| Reclassifications, before tax | ( | (1) | ( | ( | |||||||||||||||||||
Tax benefit | |||||||||||||||||||||||
| Reclassifications, net of tax | ( | ( | (2) | ( | |||||||||||||||||||
Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Balance as of January 31, 2023, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
(1)Amounts include foreign currency translation gain of $0.6 million and $1.5 million and net amortization of prior service costs and actuarial losses of $0.4 million and $0.5 million in fiscal 2024 and 2023, respectively, included in other income, net in the Condensed Consolidated Statements of Earnings, see Note 13.
(2)Relates to designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets to net sales, cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings, see Note 14.
13
Changes in accumulated other comprehensive loss for the six months ended January 31, 2024 and 2023 were as follows (in millions):
| Foreign Currency Translation Adjustment | Pension Benefits | Derivative Financial Instruments | Total | ||||||||||||||||||||
| Balance as of July 31, 2023, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive loss before reclassifications and tax | ( | ( | ( | ||||||||||||||||||||
| Tax expense | |||||||||||||||||||||||
Other comprehensive loss before reclassifications, net of tax | ( | ( | ( | ||||||||||||||||||||
| Reclassifications, before tax | (1) | ( | |||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||
| Reclassifications, net of tax | ( | (2) | |||||||||||||||||||||
Other comprehensive (loss) income, net of tax | ( | ( | ( | ||||||||||||||||||||
| Balance at January 31, 2024, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Balance as of July 31, 2022, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Other comprehensive income before reclassifications and tax | |||||||||||||||||||||||
Tax expense | ( | ( | |||||||||||||||||||||
Other comprehensive income before reclassifications, net of tax | |||||||||||||||||||||||
| Reclassifications, before tax | (1) | ( | ( | ||||||||||||||||||||
Tax (expense) benefit | ( | ||||||||||||||||||||||
| Reclassifications, net of tax | ( | (2) | ( | ||||||||||||||||||||
Other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||
| Balance at January 31, 2023, net of tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
(1)Amounts include foreign currency translation loss of $0.2 million and gain of $0.5 million and net amortization of prior service costs and actuarial losses of $0.8 million and $1.1 million in fiscal 2024 and 2023, respectively, included in other income, net in the Condensed Consolidated Statements of Earnings, see Note 13.
(2)Relates to designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets to net sales, cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings, see Note 14.
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 $2.0 million and $10.5 million for the three and six months ended January 31, 2024, respectively, and was $1.8 million and $9.3 million for the three and six months ended January 31, 2023, respectively.
Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted was $18.98 and $15.62 per share during the six months ended January 31, 2024 and 2023, respectively.
14
Option activity was as follows:
| Options | Weighted Average Exercise Price | ||||||||||
| Balance outstanding as of July 31, 2023 | $ | ||||||||||
| Granted | |||||||||||
| Exercised | ( | ||||||||||
| Expired/forfeited | ( | ||||||||||
| Balance outstanding as of January 31, 2024 | $ | ||||||||||
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 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 $1.5 million and $3.1 million for the three and six months ended January 31, 2024, respectively, and was $1.7 million and $3.5 million for the three and six months ended January 31, 2023, respectively.
Performance-based awards for non-vested activity were as follows:
| Performance Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Balance outstanding as of July 31, 2023 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ||||||||||||||
| Forfeited | ||||||||||||||
| Balance outstanding as of January 31, 2024 | $ | |||||||||||||
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 January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
| Prior service cost amortization | |||||||||||||||||||||||
| Net periodic pension costs | $ | $ | $ | $ | |||||||||||||||||||
The Company’s general funding policy is to make at least the minimum required contributions under applicable regulations, plus any additional amounts it determines to be appropriate. Future required pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements.
15
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 January 31, 2024 and July 31, 2023, no collateral was posted.
The Company does not enter into derivative instrument agreements for trading or speculative purposes. For discussion on the fair value of the Company’s derivatives, see Note 15.
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 amount of the foreign currency forward contracts designated as hedges was $53.0 million and $84.9 million as of January 31, 2024 and July 31, 2023, respectively. The total notional amount of the foreign currency forward contracts not designated as hedges was $148.0 million and $147.5 million as of January 31, 2024 and July 31, 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 and subsequent changes in the fair value of hedges that are not designated are recognized in other income, net in the Condensed Consolidated Statements of Earnings along with the related hedged transactions.
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 88.8
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.
16
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 January 31, 2024 and July 31, 2023, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments. Short-term financial instruments are classified as Level 1 in the fair value hierarchy.
Long-Term Debt
As of January 31, 2024, the estimated fair values of fixed interest rate long-term debt were $388.0 million compared to the carrying values of $425.0 million, inclusive of a current portion with a fair value of $124.5 million and carrying value of $125.0 million. As of July 31, 2023, the estimated fair values of fixed interest rate long-term debt were $378.9 million compared to the carrying values of $425.0 million. The fair values are estimated by discounting the projected cash flows using the interest rates at which similar amounts of debt could currently be borrowed. The carrying values of total variable interest rate long-term debt were $140.2 198.4
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 $24.3 million and $24.4 million as of January 31, 2024 and July 31, 2023, respectively. These equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s equity method investments has not been adjusted for the three or six months ended January 31, 2024 or 2023 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.
17
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 | |||||||||||||||||||||||||||||||
| Balance Sheet Location | January 31, 2024 | July 31, 2023 | January 31, 2024 | July 31, 2023 | ||||||||||||||||||||||||||||
| Designated as hedging instruments | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other current assets and other current liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Net investment hedges | Other current assets and other long-term assets | |||||||||||||||||||||||||||||||
| Total designated | ||||||||||||||||||||||||||||||||
| Not designated as hedging instruments | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other current assets and other current liabilities | |||||||||||||||||||||||||||||||
| Total not designated | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
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 financial and operational milestones, probabilities of achieving such milestones and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving such milestones generally represents the only significant unobservable input. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The fair value of the Company’s contingent consideration liability that uses unobservable inputs was $26.0 million as of January 31, 2024 and $25.0 million as of July 31, 2023. The maximum potential payout of the contingent consideration as of January 31, 2024 and July 31, 2023 was $30.7
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):
| January 31, 2024 | July 31, 2023 | |||||||||||||
Contingent liability for standby letters of credit issued 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.
18
The outstanding debt relating to AFSI, which the Company guarantees half, was $55.4 million and $59.6 million as of January 31, 2024 and July 31, 2023, respectively. AFSI has a $63.0 million revolving credit facility, which expires July 31, 2024, and an additional $17.0 million multi-currency revolving credit facility, which terminates upon notification by either AFSI or the financial institution.
Earnings from AFSI, which are recorded in other income, net in the Condensed Consolidated Statements of Earnings, were $2.5 million and $4.2 million for the three and six months ended January 31, 2024, respectively, and were $0.5 million and $1.8 million for the three and six months ended January 31, 2023, 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's agreement with Purilogics includes deferred payment provisions representing potential milestone payments for Purilogics’ former owners. The provisions are made up of two general types of arrangements, contingent compensation and contingent consideration. The contingent compensation arrangement is contingent on the former owner’s future employment with the Company and the related amounts are recognized over the required employment period. The contingent consideration is not contingent on employment and was recorded as purchase consideration in both other current and other long-term liabilities on the Condensed Consolidated Balance Sheets at the time of the initial acquisition based on the fair value of the estimated liability. The amounts are paid over a - to five-year period, contingent on the achievement of certain revenue and manufacturing milestones.
The total contingent compensation arrangement liability was $1.7 million and $1.1 million as of January 31, 2024 and July 31, 2023, respectively, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.0 1.7 million and $1.1 million accrued, respectively.
The Company primarily determines the contingent consideration liability based on the forecasted probability of achieving the respective milestones. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. The total contingent consideration liability was $24.3 million and $23.2 million as of January 31, 2024 and July 31, 2023, respectively, and was included in other current and other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent consideration was $29.0 24.3 million and $23.2 million accrued as of January 31, 2024 and July 31, 2023, respectively.
Other Acquisition Agreements
For other acquisitions, there was no contingent compensation arrangement liability as of January 31, 2024, 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 1.7 three years from the acquisition date of November 22, 2021 and was fully accrued as of January 31, 2024 and July 31, 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 consistent with the manner in which it manages its operations and evaluates performance for internal review and decision-making. For the three and six months ended January 31, 2023, Corporate and Unallocated also included non-recurring charges of $9.3 million and $16.9 million, see Note 19.
19
The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.
The Industrial Solutions segment is organized based on product type and consists of the Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense business units. Within our Industrial Solutions portfolio, the Company provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gasses and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gasses purification systems, hydraulic and lubricated rotating filtration applications as well as gas and liquid filtration for industrial processes. Power Generation products consist of air inlet systems and filtration sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for fixed-wing and rotorcraft aerospace applications and ground defense vehicle and naval platforms. Industrial Solutions businesses sell through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.
The 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 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 hard disk drive, semiconductor and electric vehicle applications. Life Sciences primarily sells to large OEMs and directly to various end 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 January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Mobile Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Industrial Solutions | |||||||||||||||||||||||
| Life Sciences | |||||||||||||||||||||||
| Total Company | $ | $ | $ | $ | |||||||||||||||||||
| Earnings (loss) before income taxes | |||||||||||||||||||||||
| Mobile Solutions | $ | $ | $ | $ | |||||||||||||||||||
| Industrial Solutions | |||||||||||||||||||||||
| Life Sciences | ( | ( | |||||||||||||||||||||
| Corporate and unallocated | ( | ( | ( | ( | |||||||||||||||||||
| Total Company | $ | $ | $ | $ | |||||||||||||||||||
Assets by segment were as follows (in millions):
| January 31, 2024 | July 31, 2023 | ||||||||||
| Mobile Solutions | $ | $ | |||||||||
| Industrial Solutions | |||||||||||
| Life Sciences | |||||||||||
| Corporate and unallocated | |||||||||||
| Total assets | $ | $ | |||||||||
20
Net sales by business unit were as follows (in millions):
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Mobile Solutions segment | |||||||||||||||||||||||
| Off-Road | $ | $ | $ | $ | |||||||||||||||||||
| On-Road | |||||||||||||||||||||||
| Aftermarket | |||||||||||||||||||||||
| Total Mobile Solutions segment | |||||||||||||||||||||||
| Industrial Solutions segment | |||||||||||||||||||||||
| Industrial Filtration Solutions | |||||||||||||||||||||||
| Aerospace and Defense | |||||||||||||||||||||||
| Total Industrial Solutions segment | |||||||||||||||||||||||
| Life Sciences segment | |||||||||||||||||||||||
| Total Life Sciences segment | |||||||||||||||||||||||
| Total Company | $ | $ | $ | $ | |||||||||||||||||||
Concentrations
There were no customers that accounted for over 10% of net sales for the three and six months ended January 31, 2024 or 2023. There were no customers that accounted for over 10% of gross accounts receivable as of January 31, 2024 or July 31, 2023.
Note 19. Restructuring and Other Charges
There were no
During the first quarter of fiscal 2023, the Company announced a company-wide organizational redesign to further support the Company’s growth strategies and better serve its customers. In conjunction with the organizational redesign, the Company recorded $7.6 million of charges consisting of $4.2 million of severance charges and $3.4 million of other organizational redesign costs. These amounts were included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.
During the second quarter of fiscal 2023, the Company recorded additional charges of $9.3 million, consisting of $3.1 million of severance charges, $1.4 million of other organizational redesign costs and $4.8 million of costs mainly associated with the exiting of a lower-margin customer program. Of these amounts, $1.5 million were included in cost of sales and $7.8 million were included in selling, general and administrative expenses in the accompanying Condensed Consolidated 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 150 locations, 75 of which are manufacturing and/or distribution centers, on six continents, partner with customers - from small business owners to the world’s largest original equipment manufacturer (OEM) brands - to solve complex filtration challenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements and need for reliability.
The Company’s operating segments are Mobile Solutions, Industrial Solutions and Life Sciences. The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to OEMs in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.
21
The Industrial Solutions segment is organized based on product type and consists of the Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense business units. Within our Industrial Solutions portfolio, the Company provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gasses and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gasses purification systems, hydraulic and lubricated rotating filtration applications as well as gas and liquid filtration for industrial processes. Power Generation products consist of air inlet systems and filtration sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for fixed-wing and rotorcraft aerospace applications and ground defense vehicle and naval platforms. Industrial Solutions businesses sell through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.
The 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 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 hard disk drive, semiconductor and electric vehicle applications. Life Sciences primarily sells to large OEMs and directly to various end 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 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.
Consolidated Results of Operations
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Operating Results
Operating results were as follows (in millions, except per share amounts):
| Three Months Ended January 31, | |||||||||||||||||||||||
| 2024 | % of net sales | 2023 | % of net sales | ||||||||||||||||||||
| Net sales | $ | 876.7 | $ | 828.3 | |||||||||||||||||||
| Cost of sales | 568.1 | 64.8 | % | 543.9 | 65.7 | % | |||||||||||||||||
| Gross profit | 308.6 | 35.2 | 284.4 | 34.3 | |||||||||||||||||||
| Selling, general and administrative | 156.8 | 17.9 | 149.6 | 18.1 | |||||||||||||||||||
| Research and development | 22.1 | 2.5 | 18.5 | 2.2 | |||||||||||||||||||
| Operating expenses | 178.9 | 20.4 | 168.1 | 20.3 | |||||||||||||||||||
| Operating income | 129.7 | 14.8 | 116.3 | 14.0 | |||||||||||||||||||
| Interest expense | 5.6 | 0.6 | 4.6 | 0.6 | |||||||||||||||||||
| Other income, net | (4.9) | (0.5) | (1.6) | (0.2) | |||||||||||||||||||
| Earnings before income taxes | 129.0 | 14.7 | 113.3 | 13.7 | |||||||||||||||||||
| Income taxes | 30.3 | 3.5 | 27.3 | 3.3 | |||||||||||||||||||
| Net earnings | $ | 98.7 | 11.3 | % | $ | 86.0 | 10.4 | % | |||||||||||||||
| Net earnings per share (EPS) - diluted | $ | 0.81 | $ | 0.70 | |||||||||||||||||||
22
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 January 31, | ||||||||||||||||||||||||||
| 2024 | % of net sales | 2023 | % of net sales | |||||||||||||||||||||||
| U.S. and Canada | $ | 376.9 | 43.0 | % | $ | 346.4 | 41.8 | % | ||||||||||||||||||
Europe, Middle East and Africa (EMEA) | 251.6 | 28.7 | 252.1 | 30.4 | ||||||||||||||||||||||
| Asia Pacific (APAC) | 151.0 | 17.2 | 142.4 | 17.2 | ||||||||||||||||||||||
Latin America (LATAM) | 97.2 | 11.1 | 87.4 | 10.6 | ||||||||||||||||||||||
| Total Company | $ | 876.7 | 100.0 | % | $ | 828.3 | 100.0 | % | ||||||||||||||||||
Net Sales
Net sales for the three months ended January 31, 2024 increased $48.4 million, or 5.8%, from the three months ended January 31, 2023, reflecting higher sales in the Mobile Solutions segment of $27.8 million, or 5.3% growth, the Industrial Solutions segment of $17.0 million, or 6.9%, growth and the Life Sciences segment of $3.6 million, or 6.0% growth. Foreign currency translation increased net sales by $4.8 million compared to the three months ended January 31, 2023, reflecting increases in the Mobile Solutions, Industrial Solutions and Life Sciences segments of $2.7 million, $1.6 million and $0.5 million, respectively. During the three months ended January 31, 2024, the Company’s net sales increase was driven primarily by volume increases and higher pricing.
Gross Margin
Gross margin as a percentage of net sales for the three months ended January 31, 2024 was 35.2% compared with 34.3% for the three months ended January 31, 2023. The increase in gross margin as a percentage of net sales was primarily driven by higher pricing and lower freight and select material costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended January 31, 2024 were $156.8 million, or 17.9% of net sales, compared with $149.6 million, or 18.1% of net sales, for the three months ended January 31, 2023, an increase of $7.2 million, or 4.9%. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to a decrease in severance and other non-recurring costs, partially offset by increased headcount and incremental expenses associated with investments in acquired Life Sciences businesses.
Research and Development Expenses
Research and development expenses for the three months ended January 31, 2024 were $22.1 million, or 2.5% of net sales, compared with $18.5 million, or 2.2% of net sales, for the three months ended January 31, 2023, primarily due to increased headcount.
Non-Operating Items
Interest expense for the three months ended January 31, 2024 was $5.6 million, compared with $4.6 million for the three months ended January 31, 2023, an increase of $1.0 million, or 20.3%. The increase reflected rising variable interest rates.
Other income, net for the three months ended January 31, 2024 was $4.9 million, compared with other income, net of $1.6 million for the three months ended January 31, 2023, an increase of $3.3 million, which was driven primarily by increases in earnings from joint ventures and lower foreign currency losses.
Income Taxes
The effective tax rate was 23.5% and 24.1% for the three months ended January 31, 2024 and 2023, respectively. The decrease in the effective tax rate was primarily due to a favorable shift in the mix of global earnings and increased foreign tax credit benefits.
Net Earnings
Net earnings for the three months ended January 31, 2024 were $98.7 million, compared with $86.0 million for the three months ended January 31, 2023, an increase of $12.7 million, or 14.8%. Diluted EPS were $0.81 for the three months ended January 31, 2024, compared with $0.70 for the three months ended January 31, 2023, an increase of $0.11, or 15.9%.
23
Six months ended January 31, 2024 compared with six months ended January 31, 2023
Operating Results
Operating results were as follows (in millions, except per share amounts):
| Six Months Ended January 31, | |||||||||||||||||||||||
| 2024 | % of net sales | 2023 | % of net sales | ||||||||||||||||||||
| Net sales | $ | 1,723.0 | $ | 1,675.6 | |||||||||||||||||||
| Cost of sales | 1,113.5 | 64.6 | % | 1,104.0 | 65.9 | % | |||||||||||||||||
| Gross profit | 609.5 | 35.4 | 571.6 | 34.1 | |||||||||||||||||||
| Selling, general and administrative | 311.8 | 18.1 | 298.8 | 17.8 | |||||||||||||||||||
| Research and development | 43.4 | 2.5 | 37.2 | 2.2 | |||||||||||||||||||
| Operating expenses | 355.2 | 20.6 | 336.0 | 20.1 | |||||||||||||||||||
| Operating income | 254.3 | 14.8 | 235.6 | 14.1 | |||||||||||||||||||
| Interest expense | 11.1 | 0.6 | 9.2 | 0.5 | |||||||||||||||||||
| Other income, net | (8.7) | (0.5) | (3.4) | (0.2) | |||||||||||||||||||
| Earnings before income taxes | 251.9 | 14.6 | 229.8 | 13.7 | |||||||||||||||||||
| Income taxes | 61.1 | 3.5 | 56.6 | 3.4 | |||||||||||||||||||
| Net earnings | $ | 190.8 | 11.1 | % | $ | 173.2 | 10.3 | % | |||||||||||||||
| Net EPS - diluted | $ | 1.56 | $ | 1.40 | |||||||||||||||||||
Geographic Net Sales by Origination
Net sales, generally disaggregated by location where the customer’s order was received, were as follows (in millions):
| Six Months Ended January 31, | ||||||||||||||||||||||||||
| 2024 | % of net sales | 2023 | % of net sales | |||||||||||||||||||||||
| U.S. and Canada | $ | 758.4 | 44.0 | % | $ | 721.7 | 43.1 | % | ||||||||||||||||||
EMEA | 485.9 | 28.2 | 478.8 | 28.6 | ||||||||||||||||||||||
| APAC | 291.1 | 16.9 | 293.0 | 17.5 | ||||||||||||||||||||||
LATAM | 187.6 | 10.9 | 182.1 | 10.8 | ||||||||||||||||||||||
| Total Company | $ | 1,723.0 | 100.0 | % | $ | 1,675.6 | 100.0 | % | ||||||||||||||||||
Net Sales
Net sales for the six months ended January 31, 2024 increased $47.4 million, or 2.8%, from the six months ended January 31, 2023, reflecting higher sales in the Industrial Solutions segment of $33.6 million, or 7.0% growth, the Mobile Solutions segment of $12.9 million, or 1.2% growth, and the Life Sciences segment of $0.9 million, or a 0.8% growth. Foreign currency translation increased net sales by $17.2 million compared to the six months ended January 31, 2023, reflecting increases in the Mobile Solutions, Industrial Solutions and Life Sciences segments of $9.7 million, $5.3 million and $2.2 million, respectively. During the six months ended January 31, 2024, the Company’s net sales increased primarily from higher pricing, volume growth and a positive impact from foreign currency translation.
Gross Margin
Gross margin as a percentage of net sales for the six months ended January 31, 2024 was 35.4% compared with 34.1% for the six months ended January 31, 2023. The increase in gross margin as a percentage of net sales was primarily driven by pricing benefits and lower freight and certain material costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended January 31, 2024 were $311.8 million, or 18.1% of net sales, compared with $298.8 million, or 17.8% of net sales, for the six months ended January 31, 2023, an increase of $13.0 million, or 4.4%. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to increased headcount and incremental expenses associated with investments in acquired Life Sciences businesses.
24
Research and Development Expenses
Research and development expenses for the six months ended January 31, 2024 were $43.4 million, or 2.5% of net sales, compared with $37.2 million, or 2.2% of net sales, for the six months ended January 31, 2023. The increase in research and development expenses as a percent of revenue was due to higher headcount.
Non-Operating Items
Interest expense for the six months ended January 31, 2024 was $11.1 million, compared with $9.2 million for the six months ended January 31, 2023, an increase of $1.9 million, or 20.5%. The increase reflected rising variable interest rates.
Other income, net for the six months ended January 31, 2024 was $8.7 million, compared with other income, net of $3.4 million for the six months ended January 31, 2023, an increase of $5.3 million, which was driven primarily by increases in earnings from joint ventures and lower foreign currency losses.
Income Taxes
The effective tax rate was 24.2% and 24.7% for the six months ended January 31, 2024 and 2023, respectively. The decrease in the effective tax rate was primarily due to a favorable shift in the mix of global earnings and increased foreign tax credit benefits.
Net Earnings
Net earnings for the six months ended January 31, 2024 were $190.8 million, compared with $173.2 million for the six months ended January 31, 2023, an increase of $17.6 million, or 10.2%. Diluted EPS were $1.56 for the six months ended January 31, 2024, compared with $1.40 for the six months ended January 31, 2023, an increase of $0.16, or 11.4%.
Segment Results of Operations
Net sales and earnings (loss) before income taxes were as follows (in millions):
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Mobile Solutions | $ | 550.3 | $ | 522.5 | $ | 1,090.3 | $ | 1,077.4 | |||||||||||||||
| Industrial Solutions | 263.4 | 246.4 | 509.6 | 476.0 | |||||||||||||||||||
| Life Sciences | 63.0 | 59.4 | 123.1 | 122.2 | |||||||||||||||||||
| Total Company | $ | 876.7 | $ | 828.3 | $ | 1,723.0 | $ | 1,675.6 | |||||||||||||||
| Earnings (loss) before income taxes | |||||||||||||||||||||||
| Mobile Solutions | $ | 99.2 | $ | 78.6 | $ | 191.4 | $ | 158.9 | |||||||||||||||
| Industrial Solutions | 47.4 | 46.3 | 90.7 | 83.9 | |||||||||||||||||||
| Life Sciences | (5.8) | 6.3 | (10.0) | 17.1 | |||||||||||||||||||
Corporate and unallocated(1) | (11.8) | (17.9) | (20.2) | (30.1) | |||||||||||||||||||
| Total Company | $ | 129.0 | $ | 113.3 | $ | 251.9 | $ | 229.8 | |||||||||||||||
(1)Corporate and unallocated includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and incentive compensation.
25
Mobile Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Off-Road | $ | 91.9 | $ | 106.2 | $ | 186.6 | $ | 209.8 | |||||||||||||||
| On-Road | 33.5 | 34.5 | 71.3 | 70.5 | |||||||||||||||||||
| Aftermarket | 424.9 | 381.8 | 832.4 | 797.1 | |||||||||||||||||||
| Total Mobile Solutions segment | $ | 550.3 | $ | 522.5 | $ | 1,090.3 | $ | 1,077.4 | |||||||||||||||
| Mobile Solutions segment earnings before income taxes | $ | 99.2 | $ | 78.6 | $ | 191.4 | $ | 158.9 | |||||||||||||||
Mobile Solutions segment earnings before income taxes % of net sales | 18.0 | % | 15.0 | % | 17.6 | % | 14.7 | % | |||||||||||||||
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Net sales for the Mobile Solutions segment for the three months ended January 31, 2024 were $550.3 million, compared with $522.5 million for the three months ended January 31, 2023, an increase of $27.8 million, or 5.3%. Excluding a $2.7 million increase from foreign currency translation, net sales for the Mobile Solutions segment increased 4.8%.
Net sales of Aftermarket increased $43.1 million, driven by market share gains, strong end market demand and pricing benefits. Net sales of Off-Road decreased $14.3 million, primarily due to weak agriculture end market conditions.
Earnings before income taxes for the Mobile Solutions segment for the three months ended January 31, 2024 were $99.2 million, or 18.0% of net sales, an increase from 15.0% of net sales for the three months ended January 31, 2023. The increase was driven by favorable product mix, pricing actions and lower freight costs, partially offset by higher labor and overhead costs.
Six months ended January 31, 2024 compared with six months ended January 31, 2023
Net sales for the Mobile Solutions segment for the six months ended January 31, 2024 were $1,090.3 million, compared with $1,077.4 million for the six months ended January 31, 2023, an increase of $12.9 million, or 1.2%. Excluding a $9.7 million increase from foreign currency translation, net sales for the Mobile Solutions segment increased 0.3%. All business units were positively impacted by foreign currency translation.
Net sales of Aftermarket increased $35.3 million driven by market share gains, strong end market demand and pricing benefits. Net sales of Off-Road decreased $23.2 million, primarily due to weaker agriculture end market conditions.
Earnings before income taxes for the Mobile Solutions segment for the six months ended January 31, 2024 were $191.4 million, or 17.6% of net sales, an increase from 14.7% of net sales for the six months ended January 31, 2023. The increase was driven by favorable product mix, pricing actions and lower input costs, partially offset by higher labor and overhead costs.
Industrial Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Industrial Filtration Solutions (IFS) | $ | 224.5 | $ | 211.8 | $ | 435.1 | $ | 407.8 | |||||||||||||||
| Aerospace and Defense | 38.9 | 34.6 | 74.5 | 68.2 | |||||||||||||||||||
| Total Industrial Solutions segment | $ | 263.4 | $ | 246.4 | $ | 509.6 | $ | 476.0 | |||||||||||||||
| Industrial Solutions segment earnings before income taxes | $ | 47.4 | $ | 46.3 | $ | 90.7 | $ | 83.9 | |||||||||||||||
Industrial Solutions segment earnings before income taxes % of net sales | 18.0 | % | 18.8 | % | 17.8 | % | 17.6 | % | |||||||||||||||
26
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Net sales for the Industrial Solutions segment for the three months ended January 31, 2024 were $263.4 million, compared with $246.4 million for the three months ended January 31, 2023, an increase of $17.0 million, or 6.9%. Excluding a $1.6 million increase from foreign currency translation, net sales for the Industrial Solutions segment increased 6.2%. Both business units were positively impacted by foreign currency translation.
Net sales of IFS increased $12.7 million, reflecting higher sales volume in power generation and industrial dust collection. Net sales of Aerospace and Defense increased by $4.3 million due to ongoing strength in the defense end market.
Earnings before income taxes for the Industrial Solutions segment for the three months ended January 31, 2024 were $47.4 million, or 18.0% of net sales, a decrease from 18.8% of net sales for the three months ended January 31, 2023. The decrease was primarily due to unfavorable product mix, partially offset by the impact from leveraging operating expenses.
Six months ended January 31, 2024 compared with six months ended January 31, 2023
Net sales for the Industrial Solutions segment for the six months ended January 31, 2024 were $509.6 million, compared with $476.0 million for the six months ended January 31, 2023, an increase of $33.6 million, or 7.0%. Excluding a $5.3 million increase from foreign currency translation, net sales for the Industrial Solutions segment increased 5.9%. Both business units were positively impacted by foreign currency translation.
Net sales of IFS increased $27.3 million, reflecting higher sales volume in power generation and industrial dust collection from strong demand in most geographies. Net sales of Aerospace and Defense increased by $6.3 million due to ongoing strength in the defense end market.
Earnings before income taxes for the Industrial Solutions segment for the six months ended January 31, 2024 were $90.7 million, or 17.8% of net sales, an increase from 17.6% of net sales for the six months ended January 31, 2023. The increase was primarily due to the impact from leveraging operating expenses, operational efficiencies and lower freight costs, partially offset by unfavorable product mix.
Life Sciences Segment
Net sales and (losses) earnings before income taxes were as follows (in millions):
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Life Sciences segment net sales | $ | 63.0 | $ | 59.4 | $ | 123.1 | $ | 122.2 | |||||||||||||||
Life Sciences segment (losses) earnings before income taxes | $ | (5.8) | $ | 6.3 | $ | (10.0) | $ | 17.1 | |||||||||||||||
Life Sciences segment (losses) earnings before income taxes % of net sales | (9.2) | % | 10.6 | % | (8.1) | % | 14.0 | % | |||||||||||||||
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Net sales for the Life Sciences segment for the three months ended January 31, 2024 were $63.0 million, compared with $59.4 million for the three months ended January 31, 2023, an increase of $3.6 million, or 6.0%. Excluding a $0.5 million increase from foreign currency translation, net sales for the Life Sciences segment increased 5.1%. The increase was primarily driven by a recovery in market demand for products in the disk drive business.
Losses before income taxes for the Life Sciences segment for the three months ended January 31, 2024 were $5.8 million, or 9.2% of net sales, a decrease from earnings before income taxes of 10.6% of net sales for the three months ended January 31, 2023. The decrease was driven by the expected impact from investments made to scale up the Company’s recently-acquired businesses.
Six months ended January 31, 2024 compared with six months ended January 31, 2023
Net sales for the Life Sciences segment for the six months ended January 31, 2024 were $123.1 million, compared with $122.2 million for the six months ended January 31, 2023, an increase of $0.9 million, or 0.8%. Excluding a $2.2 million increase from foreign currency translation, net sales for the Life Sciences segment declined 1.0%.
Losses before income taxes for the Life Sciences segment for the six months ended January 31, 2024 were $10.0 million, or 8.1% of net sales, a decrease from earnings before income taxes of 14.0% of net sales for the six months ended January 31, 2023. The decrease was driven by the expected impact from investments made to scale up the Company’s recently-acquired businesses.
27
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.
Cash Flow Summary
Cash flows were as follows (in millions):
| Six Months Ended January 31, | ||||||||||||||||||||
| 2024 | 2023 | $ Change | ||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 225.0 | $ | 220.5 | $ | 4.5 | ||||||||||||||
| Investing activities | (44.5) | (57.6) | 13.1 | |||||||||||||||||
| Financing activities | (171.7) | (176.8) | 5.1 | |||||||||||||||||
| Effect of exchange rate changes on cash | (2.1) | — | (2.1) | |||||||||||||||||
| Increase (decrease) in cash and cash equivalents | $ | 6.7 | $ | (13.9) | $ | 20.6 | ||||||||||||||
Operating Activities
Cash provided by operating activities for the six months ended January 31, 2024 was $225.0 million, compared with $220.5 million for the six months ended January 31, 2023, an increase of $4.5 million. The increase in cash provided by operating activities was primarily driven by higher earnings.
Investing Activities
Cash used in investing activities for the six months ended January 31, 2024 was $44.5 million, compared with $57.6 million for the six months ended January 31, 2023, a decrease of $13.1 million. The decrease in cash used was due to the timing of investments of capital in various projects 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 six months ended January 31, 2024 was $171.7 million, compared with $176.8 million for the six months ended January 31, 2023, a decrease of $5.1 million. The decrease was primarily driven by costs associated with the purchase of treasury stock of $86.6 million in the current year compared to $115.2 million in the prior year, partially offset by a net debt repayment of $37.4 million in the current year compared to $24.7 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 six months ended January 31, 2024 and 2023 were $60.3 million and $56.2 million, respectively. Share repurchases for the six months ended January 31, 2024 and 2023 were $86.6 million and $115.2 million, respectively.
Capital Resources
Additional sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of January 31, 2024 was $193.8 million, compared with $187.1 million as of July 31, 2023. The Company has capacity of $642.2 million available for further borrowing under existing credit facilities as of January 31, 2024, which includes $452.5 million available on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.
The Company believes the liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities will be sufficient to meet its cash requirements for the next 12 months and beyond, including working capital needs, debt service obligations, capital expenditures, payment of dividends, share repurchase activity and potential acquisitions.
28
Financial Condition
Short-Term Borrowings and Long-Term Debt
As of January 31, 2024, total debt, including short-term borrowings and long-term debt, represented 30.9% of total capitalization, defined as total debt plus total stockholders’ equity, compared with 33.2% as of July 31, 2023. As of January 31, 2024, the Company was in compliance with its financial covenants.
Long-term debt outstanding was $563.7 million as of January 31, 2024, compared with $621.6 million as of July 31, 2023, a decrease of $57.9 million, primarily due to a repayment on the unsecured revolving credit facility during the six months ended January 31, 2024. As of January 31, 2024, there was $452.5 million available and $40.0 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 January 31, 2024, was $599.3 million, compared with $599.7 million as of July 31, 2023, a decrease of $0.4 million. Days sales outstanding were 62 days as of January 31, 2024, a decrease from 64 days as of July 31, 2023.
Inventories, net as of January 31, 2024, was $433.4 million, compared with $418.1 million as of July 31, 2023, an increase of $15.3 million. Days inventory on hand were 70 days as of January 31, 2024, an increase from 69 days as of July 31, 2023. Inventory turns were 5.2 times and 5.3 times per year as of January 31, 2024 and July 31, 2023, respectively.
Accounts payable as of January 31, 2024, was $325.8 million, compared with $304.9 million as of July 31, 2023, an increase of $20.9 million. Days payable outstanding were 53 days as of January 31, 2024, an increase from 49 days as of July 31, 2023.
Off-Balance Sheet Arrangements
The Company guarantees 50% of certain debts of its joint venture, AFSI, as discussed in Note 16 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.
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, 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, 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.
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These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, challenges in global operations; impacts of global economic, industrial and political conditions on product demand, impacts from unexpected events, effects of unavailable raw materials, significant demand fluctuations or material cost inflation; inability to attract and retain qualified personnel; inability to meet customer demand; inability to maintain competitive advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressure; exposure to customer concentration in certain cyclical industries; inability to manage productivity improvements; inability to achieve commitments related to ESG; results of execution of any acquisition, divestiture and other strategic transactions; vulnerabilities associated with information technology systems and security; inability to protect and enforce intellectual property rights; costs associated with governmental laws and regulations; impacts of foreign currency fluctuations; and effects of changes in capital and credit markets. These and other factors are described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
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 six months ended January 31, 2024, the U.S. dollar was generally weaker than in the six months ended January 31, 2023 compared with many of the currencies of the foreign countries in which the Company operates. The overall weaker U.S. dollar had a positive impact on the Company’s international net sales and net earnings because the foreign denominated revenues translated into more U.S. dollars in many regions around the world. The estimated impact of foreign currency translation for the six months ended January 31, 2024 resulted in an overall increase in reported net sales of $17.2 million and an increase in reported net earnings of $1.9 million.
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. See Notes 11, 14 and 15 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.
Foreign Currency Forward Contracts - Cash Flow Hedges and Derivatives Not Designated as Hedging Instruments
The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amount of the foreign currency forward contracts designated as hedges was $53.0 million and $84.9 million as of January 31, 2024 and July 31, 2023, respectively. The total notional amount of the foreign currency forward contracts not designated as hedges was $148.0 million and $147.5 million as of January 31, 2024 and July 31, 2023, respectively.
Net Investment Hedges
The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method for designating these contracts as net investment hedges.
The total notional amount of net investment hedges was €80 million, or $88.8 million, as of January 31, 2024 and July 31, 2023. The maturity dates range from 2027 to 2029.
Based on the net investment hedges outstanding as of January 31, 2024, a 10% appreciation of the U.S. dollar compared to the Euro would result in a net gain of $7.9 million in the fair value of these contracts.
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Interest Rates
The Company’s exposure to market risk for changes in interest rates primarily relates to debt obligations that are at variable rates, as well as the potential increase in the fair value of long-term debt resulting from a potential decrease in interest rates. As of January 31, 2024, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $40.0 million outstanding on the Company’s unsecured revolving credit facility, €80.0 million, or $86.7 million, of a variable rate term loan and ¥2.0 billion, or $13.5 million, of variable rate senior notes. As of January 31, 2024, short-term borrowings outstanding consisted of $49.8 million. Assuming a hypothetical 0.5 percentage point increase in short-term interest rates, with all other variables remaining constant, interest expense would have increased approximately $0.5 million in the six months ended January 31, 2024. The Company has no interest rate hedging agreements. Interest rate changes would also affect the fair market value of fixed-rate debt. As of January 31, 2024, the estimated fair values of fixed interest rate long-term debt were $388.0 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 $0.5 million in the six months ended January 31, 2024.
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 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 January 31, 2024 and July 31, 2023, the Company owned $14.8 million and $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. 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 January 31, 2024, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company records provisions when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and litigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the estimated liability in its 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.
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 business, reputation, financial condition or results of operations. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2023 outlines the risks and uncertainties the Company believes are the most material to its business.
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 January 31, 2024 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 | ||||||||||||||||||||||
| November 1 - November 30, 2023 | 400,000 | $ | 59.21 | 400,000 | 11,940,000 | |||||||||||||||||||||
| December 1 - December 31, 2023 | 8,004 | 61.86 | — | 11,940,000 | ||||||||||||||||||||||
| January 1 - January 31, 2024 | 195,497 | 64.23 | 150,000 | 11,790,000 | ||||||||||||||||||||||
| Total | 603,501 | $ | 60.87 | 550,000 | 11,790,000 | |||||||||||||||||||||
On November 17, 2023, the Board of Directors authorized the repurchase of up to 12.0 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 11.8 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 January 31, 2024. The “Total Number of Shares Purchased” column of the table above includes 53,501 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the three months ended January 31, 2024. 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended January 31, 2024, no director or officer of the Company adopted, terminated
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Item 6. Exhibits
3-A* | Restated Certificate of Incorporation of Registrant, dated as of September 22, 2023 (Filed as Exhibit 3-A to Form 10-Q Report filed on December 6, 2023) | ||||
| 101 | The following financial information from the Donaldson Company, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2024, 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 January 31, 2024, 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: March 4, 2024 | By: | /s/ Tod E. Carpenter | ||||||
Tod E. Carpenter Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: March 4, 2024 | By: | /s/ Scott J. Robinson | ||||||
Scott J. Robinson Chief Financial Officer (Principal Financial Officer) | ||||||||
| Date: March 4, 2024 | By: | /s/ Andrew J. Cebulla | ||||||
Andrew J. Cebulla Vice President and Corporate Controller (Principal Accounting Officer) | ||||||||
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