dci-20240731
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Commission File Number: 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
1400 West 94th Street, Minneapolis, Minnesota55431
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (952) 887-3131
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $5.00 par value DCI New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of January 31, 2024, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $7,729,445,706 (based on the closing price of $64.59 as reported on the New York Stock Exchange as of that date).
As of September 13, 2024, 119,732,101 shares of the registrant’s common stock, par value $5.00 per share, were outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for its 2024 annual meeting of stockholders (the “2024 Proxy Statement”) are incorporated by reference in Part III, as specifically set forth in Part III.
DONALDSON COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 14
Item 1C. Cybersecurity 14
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Mine Safety Disclosures 15
PART II
Item 6. [Reserved] 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 33
Report of Independent Registered Public Accounting Firm 33
Consolidated Statements of Earnings 35
Consolidated Statements of Comprehensive Income 36
Consolidated Balance Sheets 37
Consolidated Statements of Cash Flows 38
Consolidated Statements of Changes in Stockholders’ Equity 39
Notes to Consolidated Financial Statements 40
Item 9A. Controls and Procedures 70
Item 9B. Other Information 71
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 71
PART III
Item 10. Directors, Executive Officers and Corporate Governance 71
Item 11. Executive Compensation 71
Item 14. Principal Accountant Fees and Services 71
PART IV
Item 15. Exhibits and Financial Statement Schedules 72
Signatures 74
PART I
Item 1. Business
The Company
Founded in 1915, Donaldson Company, Inc. (the Company or Donaldson) is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Donaldson’s diverse and skilled employees at approximately 150 locations on six continents, 77 of which are manufacturing and/or distribution centers, 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.
Donaldson’s four regions and their contributing share of fiscal year 2024 revenue are as follows: the U.S. and Canada 44.1%; Europe, Middle East and Africa (EMEA) 28.2%; Asia Pacific (APAC) 16.8%; and Latin America (LATAM) 10.9%. Below are the Company’s manufacturing plants and distribution centers by region.
Strategic Priorities
The company has three primary strategic priorities to drive profitable growth. Below are each of the priorities and areas of focus related to each priority.
Extend Market Access - Grow Addressable Market by Extending Presence Across Adjacencies
•Significantly grow presence in bioprocessing markets organically and inorganically within Life Sciences segment
•Strengthen position across alternative power solutions through innovated and differentiated products
Expand Technologies and Solutions - Leverage Foundational Filtration Capabilities to Expand Best-in-class Technology and Service Offerings
•Expand Industrial Solutions connected service offerings to gain additional aftermarket share
•Enhance digital experience through stronger data integration and navigation capabilities
Pursue Strategic Acquisitions - Accelerate Long-term Growth Through Strategic Acquisitions in High-margin Areas
•Strengthen presence in bioprocessing capabilities with disruptive technologies
•Penetrate underserved markets and expand service offerings
Reportable Segments
The Company’s reportable segments are Mobile Solutions, Industrial Solutions and Life Sciences.
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The Mobile Solutions segment, which represents 62.8% of net sales in fiscal 2024, 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, which represents 29.7% of net sales in fiscal 2024, is organized based on product type and consists of Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense products. These products are further organized by the Industrial Filtration Solutions and Aerospace and Defense business units. Within our industrial portfolio, Donaldson provides the widest 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, which represents 7.5% of net sales in fiscal 2024, is organized by end market and consists of the Bioprocessing Equipment and Consumables, Food and Beverage, Vehicle Electrification and Medical Device, Microelectronics and Disk Drive markets. Within these markets, products consist of micro-environment gas and liquid filtration for food and beverage and industrial processes, bioprocessing equipment, including bioreactors and fermenters, bioprocessing consumables including chromatography devices, reagents and filters, polytetrafluoroethylene membrane-based products, as well as specialized air and gas filtration systems for applications including hard disk drives, semiconductor manufacturing, sensors, battery systems and powertrain components. Life Sciences primarily sells to large OEMs and directly to various end users requiring cell growth, separation, purification, high purity filtration and device protection.
Diverse Product Groups
The Company sells a diverse group of products within each segment and the business units within the segments. Below are the product groups across the Company’s three segments represented as a percentage of total fiscal 2024 net sales.
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Mobile Solutions
Air Filtration
Air filtration systems are vital for safeguarding engine components against abrasive wear caused by dust particles. These systems play a pivotal role in supporting agricultural, construction and mining machinery, as well as commercial vehicles. Donaldson's air filtration solutions are globally renowned, featuring the standard in pleated cellulose filters. The company also offers advanced air filtration technologies, including PowerCore® and Ultra-Web®. PowerCore® filtration technology surpasses standard pleated cellulose filters in efficiency and compactness, making it a preferred choice for OEMs’ engines and equipment. Ultra-Web® media technology delivers robust filtration in the harshest environments, such as high-temperature and humid conditions frequently encountered by diesel, turbine, hybrid and other powered engines. Our Ultra-Web® HD media technology further enhances our fine fiber performance by ensuring consistent inter-fiber spacing at a microscopic level. This makes it ideal for extreme fine dust environments, commonly found in mining and high soot industries.
Fuel and Lube
Fuel and lube systems achieve optimal operations when contaminants are removed. The various components of the engine impacted include fuel injectors, valves, pumps, bearings and actuators. Fuel filters include primary and secondary particulate filters, coalescing fuel water separators, barrier fuel water separators and all-in-one filtration systems. The Company’s technology includes Synteq® XP filtration technology, which offers significantly higher fuel system protection and longer life under dynamic application conditions compared to commercially available alternatives. In addition, Donaldson’s Synteq® DRY and Synteq® XP coalescing technologies remove significantly more water in real-world conditions than current barrier or coalescing filters on the market. Fuel and lube filtration supports agricultural, construction and mining machinery and commercial vehicles.
Hydraulic
Hydraulic products provide filtration solutions typically for the same equipment that is filtered by fuel and lube systems. Applications include a suction strainer to protect the pump, high pressure filters, a charge pump or transmission filter, a return-line filter prior to the reservoir and a breather filter located on the reservoir.
The Duramax® filter, the Company’s primary mobile hydraulics filter, is renowned for its achievement of higher pressure in a spin-on configuration, allowing it to be designed on systems where other more costly, harder-to-service options were previously used. The Duramax® filter is combined with Synteq®TM XP media, a synthetic option for high performance.
Alpha-WebTM, the Company’s hydraulic filtration media, features a first-of-its-kind fine-fiber layer to trap and lock particles during frequent flow-rate changes, delivering transformational improvement in hydraulic equipment protection. Advanced contaminant retention results in cleaner oil and helps ensure that equipment will continue to perform better, and longer, with a lower risk of wear, damage and unplanned downtime. Hydraulics Systems support agricultural, construction and mining machinery and transportation markets.
Emissions
Emissions products include sound-reducing mufflers used on machinery and vehicles, diesel-powered machinery and commercial vehicles. Emission control systems include diesel particulate filters, exhaust fluid mixers and catalytic reduction substrates to reduce emissions of particulate matter, nitrogen oxides and other greenhouse gases. Emissions products support agricultural, construction and mining machinery industries, as well as transportation markets.
Industrial Solutions
Industrial Air Filtration
Industrial air filtration systems collect dust, fume and mist within manufacturing facilities. Donaldson offers an innovative portfolio of cartridge-style or bag house collectors that support customers throughout the entire equipment lifecycle from original consultation, design and installation to post-sale maintenance and services. Customers are supported through a global network of channel partners and service centers, which provide a quality customer experience. Technology and features are continually added, such as the iCueTM Connected Filtration Technology, which proactively monitors a facility’s dust collection equipment to reduce unplanned downtime, supporting efficient operation and maintenance costs, and better connect Donaldson with its end market customers, enabling additional service opportunities. With continued acquisition activities, Donaldson has expanded its service capabilities and geographic presence, enhancing its ability to meet customer service needs.
Industrial dust, fume and mist collectors and filters are utilized globally across major industries including metals, mining, transportation, chemicals, food and beverage, pharmaceuticals, construction materials and emerging markets, such as electric vehicle manufacturing, recycling and alternative power. For example, materials transformed in manufacturing, such as metal grinding, recycling, plasma cutting, mixing and welding, can create air contamination that may inhibit the production environment, which can be collected and filtered by Donaldson’s products.
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Industrial Gasses
Industrial gasses provides solutions for challenging industrial gas purification objectives with premium filtration, drying and purification products. This includes delivering dust and particle collectors for air compressors at the inlet and output of air compressors and lube, fuel and air/oil separators used in a manufacturing environment.
Major product categories include dryers, compressed air, gasses and steam. Filtration involved in liquids, sterile and condensation management are part of the portfolio as well. Industrial gasses products are used within major industries including metals, mining, transportation, chemicals and construction materials.
Industrial Hydraulics
Industrial hydraulics helps to solve customers’ toughest contamination challenges with premium filtration products for hydraulics and lubrication. Hydraulic oil is adversely affected by contaminants such as wear metals, particulate, water and oxidation by-products. Contaminated fluid reduces performance and shortens lives of various system components including valves, pumps, bearings and actuators. Industrial hydraulic applications include steel mills, paper mills, refineries, oil and gas exploration, plastic molding, general manufacturing and power generation. Industrial hydraulics also supports the OEM fluid power and lubrication systems that support those industries.
Power Generation
Power generation provides leading OEMs air inlet equipment systems that deliver filtration and air handling performance. Power Generation filtration components are custom-engineered air intake systems for gas turbines and industrial compressors, for both new and retrofit applications. Aftermarket filters and parts are used in a variety of applications including cartridge filters, panel and compact filters, pulse systems, inlet hood components, filter retention hardware and accessories. Power Generation filtration components are in power plants, oil and gas delivery systems, other industrial applications and refining and processing machinery.
Aerospace and Defense
Aerospace and defense products are specifically designed to protect critical systems from contamination to ensure proper and efficient operation. The filtration portfolio includes engine intake, cabin air, avionics air, fuel, lubrication and hydraulics. Applications are found on fixed wing aircraft, helicopters, ground defense vehicles and naval vessels.
Life Sciences
Food and Beverage
Donaldson’s food and beverage business provides filtration solutions that enable process and product integrity for food and beverage manufacturing and support development of sustainable foods. Key products and applications include sterile liquid, air and steam filtration, compressed air dryers, bioreactors and fermenters and tangential and direct flow filtration.
Other Life Sciences
Bioprocessing Equipment and Consumables
Donaldson’s bioprocessing business provides equipment and consumables to support the development and production of biologic drugs and genetic medicines, including mAbs, mRNA and cell and gene therapies, along with many other applications that use a bioprocessing workflow.
In fiscal year 2023, Donaldson acquired Isolere Bio, Inc. (Isolere), headquartered in Durham, North Carolina and Univercells Technologies (UTEC), headquartered in Nivelles, Belgium.
•Isolere is an early-stage biotechnology company that has developed novel and proprietary IsoTagTM reagents used for the purification and streamlined manufacturing of biopharmaceuticals. Aimed initially at the purification of viral vectors used for cell and gene therapies, IsoTagTM reagents are designed to substantially improve product quality and purity with faster timelines compared to competing solutions.
•UTEC is a global producer of innovative biomanufacturing solutions for cell and gene therapy research, development and commercial manufacturing. UTEC’s product offering includes the unique scale-XTM single-use structured fixed-bed bioreactor for the intensified production of viruses used in cell and gene therapy, viral vaccines and other therapeutics. In addition, UTEC’s automated NevoLineTM Upstream platform incorporates industry-standard filtration to provide integrated up-and mid-stream processing capabilities in a single unit, driving productivity improvements, a reduction in operational footprints and greater consistency of results.
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During fiscal year 2022, the Company acquired Solaris Biotechnology S.r.l. (Solaris), headquartered in Porto Mantovano, Italy and Purilogics LLC (Purilogics) headquartered in Greenville, South Carolina.
•Solaris designs and manufactures bioprocessing equipment, including bioreactors, fermenters and tangential flow filtration systems for use in pharma, food and beverage and many other applications that require bioprocess technology.
•Purilogics is an early-stage biotechnology company that has developed novel and proprietary Purexa membrane chromatography products used for the purification and streamlined manufacturing of biopharmaceuticals. Aimed initially at the purification of pDNA, mRNA and mAbs, Purilogics’ platform is able to address a wide range of biologics. Purilogics’ Purexa membranes have significant competitive advantages over traditional resin and monolith technologies, enabling improved productivity, speed and production costs.
Vehicle Electrification and Medical Device
Vehicle electrification and medical device equipment provide a broad range of filters that protect devices and enclosures from pressure fluctuation, liquids and harmful contaminants. Key products include battery, powertrain and headlight vents for the automotive industry, including for electric vehicles, as well as venting solutions for hearing aids, ostomy bags and implantable devices.
Microelectronics
Microelectronics delivers product filtration solutions for gas phase molecular contamination at fabrication, tool and point-of-use locations. It offers protection and filtering for a broad spectrum of contaminants that can degrade tools, affect critical processes and impact production yield, which enables increased processing speeds and miniaturization of semiconductors. Key products/applications include lithography process air filtration, point-of-use chemical filtration, compressed air dryers and liquid filtration.
Disk Drive
Disk drive delivers products that have advanced materials and absorbent technologies to control moisture and contaminants in microenvironments. Disk drive filters work in the background to help protect critical components in cloud computing: streaming, storage, sharing and business-to-business interaction. Key products/applications include particle filters, chemical filters and relative humidity control.
Key Growth Drivers
The key growth drivers within each segment are as follows:
•Mobile Solutions
◦Providing solutions to customers to address their higher performance requirements
◦Utilization of technology to improve efficiencies and fuel economies in all end markets
◦Increased activity in construction, transportation, agriculture and mining markets driven by expansion in living standards
•Industrial Solutions
◦Complementing automation trends through expanded connected applications and service offerings
◦Industrial equipment designed for optimized energy consumption and carbon footprint reduction
◦Growing operational efficiency needs to reduce costs associated with maintenance and downtime
•Life Sciences
◦Increasing need for cell and gene therapy as well as membrane applications for disease treatment and cures
◦Changing customer preferences and regulatory standards driving demand for sustainable products, including food, materials, and use of alternative energies
◦Continually increasing demand for cloud computing capacity and need for highly technical solutions
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Competition
Principal methods of competition in the Mobile Solutions, Industrial Solutions and Life Sciences segments are technology, innovation, price, geographic coverage, service and product performance. The Company participates in a number of highly competitive filtration markets in all segments. Donaldson believes it is a market leader within many of its product lines, specifically within its Off-Road and On-Road product lines for OEMs and in the Aftermarket business for replacement filters. The Mobile Solutions segment’s principal competitors include several large global competitors and many regional competitors, especially in the Aftermarket business. The Industrial Solutions segment’s principal competitors vary from country to country and range from large global competitors to a significant number of smaller competitors who compete in a specific geographical region or in a limited number of product applications. The Life Sciences segment’s principal competitors include several large global competitors as well as niche players in the individual markets served by the segment.
Raw Materials
The principal raw materials the Company uses are steel, filter media and petrochemical-based products including plastic, rubber and adhesive products. Purchased raw materials represent approximately 69% of the Company’s cost of sales. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its customers and the Company’s cost reduction initiatives, which include material substitution, process improvement and product redesigns.
Manufacturing and Backlog
Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including the timing of the receipt of orders, as well as product mix. Backlog orders expected to be delivered within 90 days as of July 31, 2024 and 2023 were $574.7 million and $576.4 million, respectively.
Seasonality
Many of the Company’s end markets are generally stronger in the second half of the Company’s fiscal year. In addition, the first half of the fiscal year contains more holiday periods, which typically include more customer plant closures.
Diversification
The Company’s results of operations are affected by conditions in the global economic and geopolitical environment. Under most economic conditions, the Company’s market diversification between the regions and various end markets it serves and diversification through 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.
Intellectual Capital
Research and Development
Investment in research and development strengthens the Company’s material science capabilities and supports development of new and improved products and solutions. Research and development expenses include scientific research costs such as salaries, facility costs, testing, technical information technology and administrative expenditures. Research and development expenses are for the application of scientific advances to the development of new and improved products and their uses. Substantially all research and development is performed in-house. During the years ended July 31, 2024, 2023 and 2022, the Company spent $93.6 million, $78.1 million and $69.1 million, respectively, on research and development activities, which was 2.6%, 2.3% and 2.1% of net sales, respectively.
Intellectual Property
The Company owns a broad range of intellectual property rights relating to its products and services, which it considers in the aggregate to constitute a valuable asset. These include patents, trade secrets, trademarks, copyrights and other forms of intellectual property rights in the U.S. and a number of foreign countries. The Company protects its innovations arising from research and development through patent filings and owns a portfolio of over 3,000 issued patents, including utility and design patents. The Company also owns various trademarks related to its products and services including Donaldson® and the turbo D logo, Ultra-Web®, PowerCore®, Downflo®, Torit®, Synteq® XP, LifeTec®, iCue®, Tetratex®, IsoTag®, scale-x® and NevoLine®, among others. No single intellectual property right is responsible for protecting the Company’s products.
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Government Regulations
Donaldson is subject to a wide variety of local, state and federal governmental laws and regulations in the U.S., as well as the laws and regulations of other countries in which Donaldson conducts business, including securities laws, tax laws, data privacy, employment and pension-related laws, competition laws, U.S. and foreign export and trade laws, the Foreign Corrupt Practices Act ("FCPA") and similar worldwide anti-bribery laws, government procurement regulations and laws governing improper business practices. Donaldson strives to comply with applicable laws and regulations. We have robust internal controls, quality management systems, and management systems related to compliance that govern our internal actions and mitigate our risk of non-compliance. We also have safeguards established to identify non-compliance concerns through internal and external audits and risk assessments, as well as an ethics helpline reporting system. Failure to comply with these regulations, however, could lead to fines and other penalties.
We are subject to local, state, federal and international environmental, safety and health laws and regulations concerning, among other things, emissions to air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the use of raw materials and goods such as iron, steel aluminum, electricity, natural gas and hydrogen. The operation of manufacturing plants unavoidably entails environmental, safety and health risks, and we could incur material unanticipated costs or liabilities in the future if any of these risks were realized in ways or to an extent that we did not anticipate.
We believe that we operate in compliance, in all material respects, with applicable environmental laws and regulations. Compliance with environmental laws and regulations requires continuing management effort and expenditures. We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations and to obtain and maintain the necessary permits and licenses. We believe that the cost of complying with environmental laws and regulations will not have a material effect on our results of operations, financial condition or cash flows but cannot assure that material compliance-related costs and expenses may not arise in the future. For example, future adoption of new or amended environmental laws, regulations or requirements or other circumstances could require us to incur costs and expenses that may have a material effect, but cannot be presently anticipated.
We believe that policies, practices and procedures have been properly designed to prevent unreasonable risk of material environmental damage arising from our operations. In fiscal 2024, the Company did not experience any material effect on its capital expenditures, results of operations or financial condition due to compliance with government rules regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, nor does it expect such impact during fiscal 2025.
We are also required to comply with increasingly complex and changing laws and regulations enacted to protect business and personal data in the U.S. and other jurisdictions regarding privacy, data protection and data security, including those related to the collection, storage, use, transmission and protection of personal information and other consumer, customer, vendor or employee data. Such privacy and data protection laws and regulations, including with respect to the European Union’s General Data Protection Regulation ("GDPR"), the Brazilian General Data Protection Law, and the California Consumer Privacy Act of 2018 ("CCPA"), and the interpretation and enforcement of such laws and regulations, are continuously developing and evolving and there is significant uncertainty with respect to how compliance with these laws and regulations may evolve and the costs and complexity of future compliance.
For a discussion of the risks associated with these laws and regulations, see Part I, Item 1A, "Risk Factors."
Human Capital Resources
As of July 31, 2024, the Company had approximately 14,000 full time employees, of which 58% were in production related roles. When necessary, the Company’s production facilities augment their resources utilizing contingent labor. For over 100 years, the Company has been making a difference with customers, employees, investors, suppliers and communities through a collaborative and diverse workplace where every employee matters. The Company prides itself on providing innovative technologies and solutions backed by talented and dedicated employees guided by its core values.
Core Values
The Company’s purpose is to advance filtration for a cleaner world. The principles that guide this purpose are as follows:
•act with integrity - deliver on commitments and be accountable for actions;
•engage and empower people - have a richly diverse and inclusive culture and provide opportunities for people to grow, build successful careers and make meaningful contributions;
•deliver for customers - understand, anticipate and prioritize customers’ needs, delivering differentiated products and solutions that enable their success;
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•cultivate innovation - pursue innovation in everything from continuous improvement in processes to breakthrough solutions that create value and competitive advantage;
•operate safely and sustainably - committed to safety in the workplace, being good stewards of natural resources and reducing environmental impacts; and
•enrich communities - share time, resources and talent to make a positive impact.
Culture
The Company is comprised of a diverse global team. With a broad base of capabilities, cultures and perspectives, employees reflect the communities they serve. The Company promotes a collaborative workplace. By working together, the Company’s employees can better understand and meet the customers’ needs. Every role is recognized and individuals’ contributions have a direct impact. The Company fosters learning and growth. To help employees continue to learn and succeed in their careers, while keeping pace with a rapidly changing global marketplace, the Company provides multiple learning opportunities and programs, including online courses and customized development plans.
Diversity, Equity and Inclusion
The Company values and welcomes employees’ unique views and contributions, knowing that together the global team can better understand and meet the needs of its customers and communities. The Company participates in outreach efforts for organizations focused on diversity and supporting educational opportunities to underserved students and communities.
Benefits
The Company is committed to the health, wealth and work-life balance of employees and offers competitive financial compensation packages that may include both base pay and bonus elements in addition to competitive benefits packages to help support individuals and their families. To support the health and well-being of employees in the U.S. and their dependents, the Company offers subsidized health insurance and also provides an employee assistance program. In other parts of the world, the Company offers social programs specific to the countries in which it operates. To help employees provide and prepare for the future, the Company provides several other financial and non-financial benefits.
Employment
The Company attracts a qualified workforce through an inclusive and accessible recruiting process that utilizes online recruiting platforms, campus outreach, internships, recruitment vendor partners, job fairs and other recruitment tools. The Company seeks to retain employees by offering competitive wages, benefits and training opportunities, as well as promoting a safe and healthy workplace. The Company is committed to treating all applicants and employees with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, veteran status, gender identity, disability or other protected status. It is the Company’s policy to comply with all applicable state, local and international laws governing non-discrimination in employment in every location where it operates. This compliance includes terms and conditions of employment, which cover recruiting, hiring, placement, promotion, termination, layoff, recall, transfer, leaves of absence, compensation and training.
Health and Safety
The Company empowers its employees and provides the knowledge and tools needed to make safe decisions and mitigate risks. Every employee is responsible for identifying and managing exposure to health and safety hazards and harmful environmental impacts. A variety of training methods are available to fulfill these requirements, including online learning, training, coaching or mentoring and group discussions and activities.
Community Service
Generations of the Company’s employees and their families give their time, energy and aid to various philanthropic efforts, addressing the needs of our local communities and helping transform lives. Organizations are supported in partnership with the Donaldson Foundation and through numerous volunteer events.
Available Information
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information, including amendments to those reports, available free of charge through its website at ir.donaldson.com, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (SEC). These filings are available on the SEC’s website at www.sec.gov. Also available on the Company’s website are corporate governance documents, including the Company’s Code of Business Conduct and Business Conduct Help Line, Corporate Governance Guidelines, Audit Committee Charter, Human Resources Committee Charter and Corporate Governance Committee Charter. The information contained on the Company’s website is not incorporated by reference into this Annual Report and should not be considered as part of this report.
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Executive Officers
Our executive officers of the Company as of August 31, 2024 were as follows:
Amy C. Becker 59 Chief Legal Officer and Corporate Secretary 2014
Guillermo Briseño 57 President, Industrial Solutions 2022
Tod E. Carpenter 65 Chairman, President and Chief Executive Officer 2008
Andrew Dahlgren 53 President, Mobile Solutions 2022
Sheila G. Kramer 65 Chief Human Resources Officer 2015
Richard B. Lewis 52 President, Life Sciences 2017
Scott J. Robinson 57 Chief Financial Officer 2015
Thomas R. Scalf 58 President, Enterprise Operations and Supply Chain 2014
Ms. Becker was appointed to Chief Legal Officer and Corporate Secretary in November 2022. Ms. Becker joined the Company in 1998 and held positions as Senior Counsel and Assistant Corporate Secretary; Assistant General Counsel; and Vice President, General Counsel and Secretary. Prior to joining the Company, Ms. Becker was an attorney for Dorsey and Whitney, LLP from 1991 to 1995 and was a Project Manager and Corporate Counsel for Harmon, Ltd. from 1995 to 1998.
Mr. Briseño was appointed President, Industrial Solutions in November 2022. Mr. Briseño joined the Company in 2003 and has held various positions, including IAF District Manager; IFS Latin America Business Manager; Industrial Sales Director Latin America; Managing Director Latin America; and Vice President, Latin America.
Mr. Carpenter was appointed Chairman, President and Chief Executive Officer in November 2017. Mr. Carpenter joined the Company in 1996 and has held various positions, including Director of Operations, Gas Turbine Systems; General Manager, Gas Turbine Systems; General Manager, Industrial Filtration Systems; Vice President, Global Industrial Filtration Systems; Vice President, Europe and Middle East; and Senior Vice President, Engine Products. Mr. Carpenter was appointed Chief Operating Officer in April 2014 and President and Chief Executive Officer in April 2015.
Mr. Dahlgren was appointed President, Mobile Solutions effective August 1, 2024. Mr. Dahlgren joined the Company in 1994 and has held various positions, including President, Life Sciences; Manager Business Development, Disk Drive; Director of Business Development, IVS, Semiconductor, Fuel Cell; General Manager, Engine Air; General Manager, GTS; Vice President, GTS and Special Applications; and Vice President, Asia Pacific.
Ms. Kramer was appointed Chief Human Resources Officer in November 2022. Ms. Kramer joined the Company in 2015 as Vice President, Human Resources. Prior to joining the Company, Ms. Kramer was Vice President, Human Resources for Taylor Corporation, a print and graphics media company, from 2013 until September 2015. Prior to that, Ms. Kramer spent 22 years at Lifetouch, Inc. in various human resources roles, including Corporate Vice President, Human Resources from 2009 to 2013.
Mr. Lewis was appointed President, Life Sciences effective August 1, 2024. Mr. Lewis joined the Company in 2002 and has held various positions, including President, Mobile Solutions; Plant Manager; Director of Operations; General Manager, Liquid Filtration; General Manager, Operations; Vice President, Global Operations; and Senior Vice President, Global Operations.
Mr. Robinson was appointed Chief Financial Officer and joined the Company in 2015. Prior to joining the Company, Mr. Robinson was the Chief Financial Officer for Imation Corp., a global data storage and information security company, from 2014 to 2015. During his 11 years with Imation Corp., he also served as the Investor Relations Officer, Corporate Controller and Chief Accounting Officer.
Mr. Scalf was appointed President, Enterprise Operations and Supply Chain in November 2022. Mr. Scalf joined the Company in 1989 and has held various positions, including Plant Manager; Manager, Site Integration; Director of Operations; General Manager, Exhaust and Emissions; General Manager, Industrial Filtration Solutions Americas; Vice President, Global Industrial Air Filtration; and Senior Vice President, Engine Products.
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Item 1A. Risk Factors
The Company’s (we, our or us) business is subject to various risks and uncertainties. The following discussion outlines what we believe to be the risk factors that could materially and adversely affect our business, reputation, financial condition and results of operations. These risk factors should be considered with the Company’s cautionary comments related to forward-looking statements when evaluating information provided in this Annual Report. Risks not currently known to the Company, or which the Company currently believes are immaterial, may also impair the Company’s business, reputation, financial condition and results of operations. The Company periodically reviews its strategies, processes and controls with respect to risk identification, assessment and mitigation with the audit committee of the Company’s board of directors.
Macroeconomic and Geopolitical Risks
Global Operations - we have a broad footprint and global operations may present challenges.
We have operations throughout the world. Our stability, growth and profitability are subject to a number of risks of doing business globally including the following:
•political and military events, including the rise of nationalism and support for protectionist policies;
•tariffs, trade barriers and other trade restrictions;
•legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws and foreign exchange controls;
•potential difficulties in staffing and managing local operations;
•credit risk of local customers and distributors;
•deterioration in economic conditions, including the effect of inflation on our customers and suppliers;
•difficulties in protecting our intellectual property; and
•local economic, political and social conditions.
Due to the global reach of our operations, our business is subject to a complex system of commercial and trade laws, regulations and policies, including those related to data privacy, trade compliance, anti-corruption and anti-bribery. We experience exposure to and costs of complying with, these laws and regulations. Our global subsidiaries, joint venture partners and affiliates are governed by laws, rules and business practices that differ from those of the U.S. Our compliance programs may not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating laws, regulations or standards. We may incur defense costs, fines, penalties, damage to our reputation and business disruptions, which could result in an adverse effect on our results of operations, financial condition and cash flows.
Business Disruption - unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.
There could be an occurrence of one or more unexpected events, including a terrorist attack, war or civil unrest, a weather event, a natural disaster, a climate-related event, a pandemic or other catastrophes in countries in which we operate or in which our suppliers are located. Such an event could result in physical damage to and complete or partial closure of our headquarters, manufacturing facilities or distribution centers, temporary or long-term disruption in the supply of component products from some local and international suppliers, disruption in the transport of our products to customers and disruption of information systems. Existing insurance coverage may not provide protection for all costs that may arise from any such event. Any disruption in our operations could have an adverse impact on our ability to meet our customer needs or may require us to incur additional expense in order to produce sufficient inventory. Certain unexpected events could adversely impact our business, results of operations, financial condition and cash flows.
Operational Risks
Supply Chain - unavailable raw materials, significant demand fluctuations and material cost changes could have an impact on our sales and cost of sales.
We obtain raw materials, including steel, filter media, petroleum-based products and other components from third-party suppliers. We often concentrate our sourcing of some materials from one supplier or a few suppliers. We rely, in part, on our suppliers to ensure they meet required quality and delivery standards. An unanticipated delay in delivery by our suppliers could result in the inability to deliver our products on time and to meet the expectations of our customers. We could experience an increase in the costs of doing business, including increasing raw material prices and transportation costs, which could have an adverse impact on our business, results of operations, financial condition and cash flows.
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Personnel - our success has been and could in the future be affected, if we are not able to attract, engage, train and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, engage, train and retain highly skilled, qualified and diverse personnel globally and successfully execute management transitions at leadership levels of the Company. There is competition for talent with market-leading skills and capabilities in new technologies. Additionally, in some locations we have experienced labor shortages causing significant wage inflation and workplace availability. We may not be able to attract and retain qualified personnel and it may be difficult for us to compete effectively, which could adversely impact our business, results of operations, financial condition and cash flows.
Operations - complexity of manufacturing could cause inability to meet demand and result in the loss of customers.
Our ability to fulfill customer orders is dependent on our manufacturing and distribution operations. Although we forecast demand, additional plant capacity takes significant time to bring online and thus, unexpected or extreme changes in demand could result in longer lead times. We cannot guarantee we will be able to adjust manufacturing capacity, in the short-term, to meet higher customer demand. Efficient operations require streamlining processes to maintain or reduce lead times, which we may not be capable of achieving. Unacceptable levels of service for key customers may result if we are not able to fulfill orders on a timely basis or if product quality, warranty or safety issues result from compromised production. We may not be able to adjust our production schedules to reflect changes in customer demand on a timely basis. Due to the complexity of our manufacturing operations, we may be unable to timely respond to fluctuations in demand, which could adversely impact our business, results of operations, financial condition and cash flows.
Products - maintaining a competitive advantage requires consistent investment with uncertain returns.
We operate in highly competitive markets and have numerous competitors that are already well-established in those markets. We expect our competitors to continue to improve the design and performance of their products and to introduce new products that could be competitive in both price and performance. We believe we have certain technological advantages over our competitors, but maintaining these advantages requires us to consistently invest in research and development, sales and marketing and customer service and support. There is no guarantee we will be successful in maintaining these advantages and we could encounter the commoditization of our key products. We make investments in new technologies that address increased performance and regulatory requirements around the globe. There is no guarantee we will be successful in completing development or achieving sales of these products or that the margins on such products will be acceptable. A competitor’s successful product innovation could reach the market before ours or gain broader market acceptance, which could adversely impact our business, results of operations, financial condition and cash flows.
Evolving Customer Needs - disruptive technologies may threaten our growth in certain industries.
Certain industry market trends guide decisions we make in operating the Company and our growth could be threatened by disruptive technologies. We may be adversely impacted by changes in technology that could reduce or eliminate the demand for our products. These risks include wider adoption of technologies providing alternatives to diesel engines such as electrification of equipment or other alternative power solutions. Such disruptive innovation could create new markets and displace existing companies and products, resulting in significantly negative consequences for the Company. If we do not properly address future customer needs, we may be slower to adapt to such disruption, which could adversely impact our business, results of operations, financial condition and cash flows.
Competition - we participate in highly competitive markets with pricing pressure.
The businesses and product lines in which we participate are very competitive and we risk losing business based on a wide range of factors, including price, technology, performance, reliability and availability, geographic coverage and customer service. Our customers continue to seek technological innovation, productivity gains, competitive prices, reliability and availability from us and their other suppliers. Additionally, we sell through a variety of channels (e.g., OEM, dealer, distributor and eCommerce) in a diverse set of highly competitive filtration markets. The variability complicates the supply chain, affects working capital needs, requires balance between relationships and drives a more targeted sales force. As a result of these and other factors, we may not be able to compete effectively, which could adversely impact our business, results of operations, financial condition and cash flows.
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Customer Concentration and Retention - a number of our customers operate in similar cyclical industries. Changes in economic conditions in these industries could impact our sales.
No customer accounted for 10% or more of our net sales in fiscal 2024, 2023 or 2022. However, a number of our customers are concentrated in similar cyclical industries (e.g., construction, agriculture, mining, oil and gas, transportation, power generation and disk drive), resulting in additional risk based on their respective economic conditions. Our success is also dependent on retaining key customers, which requires us to successfully manage relationships and anticipate the needs of our customers in the channels in which we sell our products. Changes in economic conditions could materially and adversely impact our business, results of operations, financial condition and cash flows.
Productivity Improvements - if we do not successfully manage productivity improvements, we may not realize the expected benefits.
Our financial projections assume certain ongoing productivity improvements as a key component of our business strategy to, among other things, contain operating expenses, maintain competitiveness, increase operating efficiencies and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost savings if we do not successfully execute these plans while continuing to invest in business growth. Such cost savings may not otherwise be realized or other difficulties could be encountered, which could adversely impact our business, results of operations, financial condition and cash flows.
Environmental, Social and Governance (ESG) - achieving commitments could result in additional costs and our inability to achieve them could have an adverse impact on our reputation and performance.
We periodically communicate our strategies, commitments and targets related to ESG matters, including greenhouse gas (GHG) emissions and diversity, equity and inclusion through the issuance of our ESG report. Although we intend to meet these strategies, commitments and targets, we may be unable to achieve them due to impacts on resources, operational costs and technological advancements. In addition, standards and processes for measuring and reporting GHG emissions and other sustainability metrics may change over time, result in inconsistent data or result in significant revisions to our strategies, commitments and targets, or our ability to achieve them. Any scrutiny of our carbon emissions or other sustainability disclosures, our failure to achieve related strategies, commitments and targets or failure to meet sustainability requirements could negatively impact our reputation as well as the demand for our products and adversely affect our business, results of operations, financial condition and cash flow.
Acquisitions, Divestitures and Other Strategic Transactions - the execution of our acquisitions, divestitures and other strategic transactions may not provide the desired return on investment.
We have made and continue to pursue acquisitions and divestitures and may pursue joint ventures, strategic investments and other similar strategic transactions. Acquisitions, joint ventures and strategic investments could negatively impact our profitability and financial condition due to operating and integration inefficiencies, the incurrence of debt, contingent liabilities and amortization of expenses related to intangible assets. There are also a number of other risks involved in acquisitions including the potential loss of key customers or employees, difficulties in assimilating the acquired operations and the diversion of management’s time and attention away from other business matters. Further, during the pendency of a proposed transaction, we may be subject to risks related to a decline in the business and the risk the transaction may not close. Divestitures may involve significant challenges and risks, such as difficulty separating out portions of our business or the potential loss of revenue or negative impacts on margins. The divestitures may also result in ongoing financial or legal proceedings, such as retained liabilities, which could have an adverse impact on our business, results of operations, financial condition and cash flows.
Cybersecurity Risks
Cybersecurity Risks - vulnerability of our information technology systems and security.
We have many information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information and to manage or support a variety of business processes and activities, which are critical to our operations. We could encounter difficulties in developing new systems, maintaining and upgrading our existing systems, managing access to these systems and preventing information security breaches. Additionally, we collect and store sensitive data, including intellectual property and proprietary business information, in data centers and on information technology networks.
Our data is subject to a variety of U.S. and international laws and regulations that pertain to the collection and handling of personal information. The laws require us to notify governmental authorities and affected individuals of data breaches involving certain personal information. These laws include the European GDPR and the CCPA. Regulatory litigation or actions that could impose significant penalties may be brought against us in the event of a breach of data or alleged non-compliance with such laws and regulations.
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Information technology security threats are increasing in frequency and sophistication; to date, none of the threats faced by the Company have been material. We have invested in protection to prevent these threats; however, there can be no assurance our efforts will prevent all potential failures, cybersecurity attacks or breaches of our systems. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operation disruptions. The occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, potential liability, increased costs and operational consequences of implementing further data protection matters. The Company maintains insurance coverage for various cybersecurity and business continuity risks, however, there can be no guarantee all costs or losses incurred will be fully insured. Vulnerabilities could lead to significant additional expenses and an adverse effect on our reputation, business, results of operations, financial condition and cash flows.
Legal and Regulatory Risks
Intellectual Property - demand for our products may be affected by new entrants that copy our products and/or infringe on our intellectual property.
The ability to protect and enforce intellectual property rights varies across jurisdictions. Where possible, we seek to preserve our intellectual property rights through patents. These patents have a limited life and, in some cases, have expired or will expire in the near future. Competitors and others may also initiate litigation to challenge the validity of our intellectual property rights or allege that we infringe their intellectual property rights. We may be required to pay substantial damages if it is determined our products infringe on their intellectual property rights. We may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license on terms that are unfavorable to us.
Protecting or defending against such claims could significantly increase our costs and divert management’s time and attention away from other business matters, which could adversely impact our business, results of operations, financial condition and cash flows.
Legal and Regulatory - costs associated with lawsuits, investigations or complying with laws and regulations.
We are subject to many laws and regulations in the jurisdictions in which we operate. We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing laws and regulations that affect both our operations and our ability to develop and sell products that meet our customers’ requirements. We are involved in various product liability, product warranty, intellectual property, environmental claims and other legal proceedings that arise in and outside of the ordinary course of our business. We are subject to increasingly stringent laws and regulations in the countries in which we operate, including those governing the environment (e.g., emissions to air; discharges to water; and the generation, handling, storage, transportation, treatment and disposal of waste materials; and the use of raw materials and goods such as iron, steel aluminum, electricity, natural gas and hydrogen) and data protection and privacy. It is not possible to predict the outcome of investigations and lawsuits and we could incur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have an adverse effect on our reputation, business, results of operations, financial condition and cash flows in any particular period. In addition, we may not be able to maintain our insurance at a reasonable cost or in sufficient amounts to protect us against any losses.
Financial Risks
Currency - an unfavorable fluctuation in foreign currency exchange rates could impact our results of operations.
We have operations in many countries, with a substantial portion of our annual revenue earned in currencies other than the U.S. dollar. We face transactional and translational risks associated with the fluctuations in foreign currency exchange rates. Transactional risk arises from changes in the value of cash flows denominated in different currencies. This can be caused by supply chains that cross borders resulting in revenues and costs being in different currencies. Translational risk arises from the remeasurement of our financial statements. In addition, decreased value of local currency may make it difficult for some of our customers, distributors and end users to purchase our products. Each of our subsidiaries reports its results of operations and financial position in its relevant functional currency, which is then translated into U.S. dollars. This translated financial information is included in our Consolidated Financial Statements. Significant fluctuations of the U.S. dollar in comparison to the foreign currencies of our subsidiaries during discrete periods may have a negative impact on our business, results of operations, financial condition and cash flows.
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Liquidity - changes in the capital and credit markets may negatively affect our ability to access financing to support strategic initiatives.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. There can be no assurance the cost or availability of future borrowings will not be impacted by future capital market disruptions. Some of our existing borrowings contain covenants to maintain certain financial ratios that, under certain circumstances, could restrict our ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity Strategy and Risk Management
Donaldson recognizes the critical importance of cybersecurity. Protecting the confidentiality, integrity and availability of our data, we focus on building resilience into the very fabric of our enterprise digital ecosystem. Our cybersecurity program is comprehensively integrated within our enterprise risk management and encompasses the enterprise information technology (IT) and operational technology (OT) environments. Our cyber risk management program controls are based on industry-recognized best practices and standards, including the National Institute of Standards and Technology (NIST) Cyber Security Framework and the International Organization for Standardization (ISO) 27001 information security management system requirements.
Our cybersecurity processes include the following:
Technical safeguards – We seek to maintain an information technology infrastructure that implements risk-based physical, administrative and technical controls to safeguard our information systems and information stored on our networks, including customer information, personal information, intellectual property and proprietary information.
Cybersecurity incident response plan and testing – We perform 24x7 security monitoring and execute a cybersecurity incident response plan with a dedicated team to respond to cybersecurity incidents. When a potential material cybersecurity incident is identified, we deploy cross-functional teams responsible for leading the initial assessment of priority and severity, and external experts may also be engaged as appropriate. Our cybersecurity teams prioritize responses to incidents depending on severity levels. We continuously improve our cybersecurity incident management plan through periodic tabletop exercises or simulations at the enterprise and business levels.
Education and Awareness – We require annual training for personnel for information security, including information about the latest cybersecurity threats. To equip employees with the knowledge to identify potential risks with tools to report any suspicious activities, we implemented monthly phishing exercises that encompass various real-life simulations. We also practice scenario-based simulation drills, such as tabletop exercises for employees and contractors, to enhance awareness and vigilance of potential threats. For fast-developing threat situations, we utilize enterprise-wide corporate communication channels to broadcast security alerts for the timely delivery of important information to our employees.
Technology managed by third parties – We have IT systems essential to business operations managed by third parties. These systems process, transmit, store electronic information and manage or support a variety of business processes and activities. Before any engagement, we conduct holistic risk assessments of third-party providers. We scrutinize multiple dimensions of risk factors including information security, regulatory compliance and architectural design. We established monitoring procedures to mitigate risks related to data breaches or other security incidents originating from third parties.
Third-party assessments of the Company – We regularly engage third-party consultants, legal advisors and audit firms in evaluating and testing our risk management processes, compliance with international standards and regulations, and assessing potential cybersecurity threats, as appropriate. Any recommendations are tracked with senior IT ownership and timelines for remediation.
We consider cyber risks among the top risks for us within our enterprise risk management framework. This framework includes internal reporting at the business and enterprise levels, with consideration of key risk indicators, trends and countermeasures for cybersecurity and other types of significant risks. As of the date of this Form 10-K, we are not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition, and that are required to be reported in this Form 10-K. We do not believe we have experienced any risks from cybersecurity threats or previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect us, our business strategy or our results of operations or financial condition, including for any of the three years ended July 31, 2024, 2023 or 2022. For further discussion of the risks associated with cybersecurity incidents, refer to the cybersecurity risk factors in Item 1A, “Risk Factors” in this Form 10-K.
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Cybersecurity Governance
Our board of directors has oversight of overall risk management, prioritizing the most significant risks including strategic, operational, financial and legal compliance risks. The board’s risk oversight process builds upon management’s risk management processes, which include processes for identifying, assessing and managing material risks from cybersecurity threats. The board implements its risk oversight function primarily through its audit committee, which receives reports about our practices, programs, notable threats or incidents, and other developments related to cybersecurity throughout the year. To this extent, the audit committee receives information about cybersecurity risks as part of our enterprise risk management framework and reporting. The audit committee then assesses implemented cybersecurity controls to monitor and evaluate the mitigation of cybersecurity risks.
Our Chief Information Officer (CIO) provides annual reports, with additional updates as necessary to the board of directors. Our CIO also attends annual audit committee meetings and provides cybersecurity updates which include specific cybersecurity topics, covering material risks and threats. Our CIO oversees the cybersecurity program. With an extensive background in the IT industry, our CIO has previously been in multiple CIO positions and other top global leadership roles that drove digital transformation and owned technology from end to end. Our CIO leads a cross-functional information security team, comprised of experienced professionals from the global infrastructure and cybersecurity, legal and compliance organizations. Beyond information technology, this leadership team also partners with our Enterprise Operations team managing the operational technology security of our manufacturing facilities.
Item 2. Properties
The Company’s corporate headquarters and corporate research facilities are located in Minneapolis, Minnesota. The Company also has administrative and engineering offices, as well as research facilities in the regions of EMEA, APAC and LATAM. The Company’s manufacturing and distribution activities are located throughout the world and the Company considers its properties to be suitable for their present purposes, well-maintained and in good operating condition.
Item 3. Legal Proceedings
The Company records provisions when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and litigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the estimated liability in its Consolidated Financial Statements for claims or litigation is adequate and appropriate for the probable and estimable outcomes. Liabilities recorded were not material to the Company’s financial position, results of operations or liquidity. The Company believes it is remote that the settlement of any of the currently identified claims or litigation will be materially in excess of what is accrued.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock, par value $5.00 per share, is traded on the New York Stock Exchange under the symbol “DCI.” As of September 13, 2024, there were 1,116 registered stockholders of common stock.
To determine the appropriate level of dividend payouts, the Company considers recent and projected performance across key financial metrics, including earnings, cash flow from operations and total debt.
Information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the three months ended July 31, 2024 was as follows:
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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 10.7 million shares under this plan. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the three months ended July 31, 2024. The “Total Number of Shares Purchased” column of the table above includes 1,576 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the three months ended July 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.
The table set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report is also incorporated herein by reference.
The graph below compares the cumulative total stockholder return on the Company’s common stock for the last five fiscal years with the cumulative total return of the Standard & Poor’s (S&P) 500 Stock Index and the S&P Industrial Machinery Index. The graph and table assume the investment of $100 in each of the Company’s common stock and the specified indexes at the beginning of the applicable period and assume the reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Donaldson Company Inc., the S&P 500 Index
and the S&P Industrial Machinery Index
As of July 31,
Item 6. [Reserved]
Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In fiscal 2023, the Company established a new segment reporting structure which resulted in three reportable segments: Mobile Solutions, Industrial Solutions and Life Sciences. See Note 19. Segment Reporting in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report for further detail of this change.
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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company’s results of operations, liquidity and capital resources for the years ended July 31, 2024 and 2023. A discussion of the changes in the Company’s results of operations and liquidity and capital resources for the year ended July 31, 2023 from July 31, 2022 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended July 31, 2023 (the “2023 Annual Report”), which was filed with the SEC on September 22, 2023.
The MD&A should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly Item 1A, “Risk Factors” and in the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.
Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including a number of financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S. Excluding foreign currency translation from net sales and net earnings (i.e. constant currency) are not measures of financial performance under GAAP; however, the Company believes they are useful in understanding its financial results and provide comparable measures for understanding the operating results of the Company between different fiscal periods. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
Overview
Founded in 1915, Donaldson Company, Inc. is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Donaldson’s diverse and skilled employees at approximately 150 locations on six continents, 77 of which are manufacturing and/or distribution centers, partner with customers — from small business owners to the world’s largest original equipment manufacturer (OEM) brands — to solve complex filtration challenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements and need for reliability.
The Company’s operating segments are Mobile Solutions, Industrial Solutions and Life Sciences. The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to OEMs in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.
The Industrial Solutions segment is organized based on product type and consists of Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense products. These products are further organized by the Industrial Filtration Solutions and Aerospace and Defense business units. Within our Industrial Solutions portfolio, Donaldson provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhance 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 equipment applications, gas and liquid filtration for industrial processes and connected services which provide on-demand maintenance services and replacements to support Industrial Air Filtration products. 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 sells through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.
The Life Sciences segment is organized by end market and consists of the Bioprocessing Equipment and Consumables, Food and Beverage, Vehicle Electrification and Medical Device, Microelectronics and Disk Drive markets. Within these markets, products consist of micro-environment gas and liquid filtration for food and beverage and industrial processes, bioprocessing equipment, including bioreactors and fermenters, bioprocessing consumables including chromatography devices, reagents and filters, polytetrafluoroethylene membrane-based products, as well as specialized air and gas filtration systems for applications including hard disk drives, semiconductor manufacturing, sensors, battery systems and powertrain components. 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 market diversification between its diesel engine end markets, its global end markets, its diversification through technology and its OEM and replacement parts customers has helped to limit the impact of weakness in any one product line, market or geography on the consolidated operating results of the Company.
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Consolidated Results of Operations
Operating Results
Operating results were as follows (in millions, except per share amounts):
Year Ended July 31,
Net earnings per share (EPS) – diluted $ 3.38 $ 2.90
Geographic Net Sales by Origination
Net sales, generally disaggregated by location where the customer’s order was received, were as follows (in millions):
Year Ended July 31,
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Net Sales
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales by segment (in millions):
Net sales for the year ended July 31, 2024 increased $155.5 million, or 4.5% from fiscal 2023, reflecting higher sales in the Mobile Solutions segment of $76.0 million, or 3.5%, the Industrial Solutions segment of $51.8 million, or 5.1%, and the Life Sciences segment of $27.7 million, or 11.5%. Foreign currency translation decreased net sales by $0.5 million, reflecting decreases in the Mobile Solutions and Life Sciences segments of $2.1 million and $0.6 million, respectively, and an increase in the Industrial Solutions segment of $2.2 million. In fiscal 2024, the Company’s net sales increased primarily from higher volume and pricing actions.
Cost of Sales and Gross Margin
Cost of sales for the year ended July 31, 2024 was $2,311.9 million, compared with $2,270.2 million for the year ended July 31, 2023, an increase of $41.7 million, or 1.8%. Gross margin as a percentage of net sales for the year ended July 31, 2024 was 35.5% compared with 33.8% for the year ended July 31, 2023, an increase of 1.7 percentage points. The increase in gross margin as a percentage of net sales was primarily driven by lower input costs, pricing actions and favorable product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended July 31, 2024 were $636.7 million, or 17.8% of net sales, compared with $602.3 million, or 17.6% of net sales, for the year ended July 31, 2023, an increase of $34.4 million, or 5.7%. 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, partially offset by lower restructuring charges in fiscal year 2024 compared to the prior year.
Research and Development Expenses
Research and development expenses for the year ended July 31, 2024 were $93.6 million, or 2.6% of net sales, compared with $78.1 million, or 2.3% of net sales, for the year ended July 31, 2023, an increase of $15.5 million, or 19.8%. The increase in research and development expenses as a percentage of net sales was primarily due to increased headcount and incremental expenses associated with investments in acquired Life Sciences businesses.
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Non-Operating Items
Interest expense for the year ended July 31, 2024 was $21.4 million, compared with $19.2 million for the year ended July 31, 2023, an increase of $2.2 million, or 11.3%. The increase reflected higher interest rates.
Other income, net for the year ended July 31, 2024 was $12.6 million, compared with $7.7 million for the year ended July 31, 2023, an increase of $4.9 million, or 62.6%, driven by lower foreign exchange losses in the current year and higher income from joint ventures, partially offset by higher donations.
Income Taxes
The effective tax rates were 22.7% and 23.4% for the years ended July 31, 2024 and 2023, respectively. The lower effective tax rate was primarily due to an increase in excess tax benefits on stock-based compensation.
The Organization for Economic Co-operation and Development (“OECD”) released the Model GloBE Rules for Pillar Two on December 20, 2021, which defined a 15% global minimum tax. Since the model rules have been released, many countries have enacted or continue to consider changes in their tax laws and regulations based on the Pillar Two proposals, some of which became effective for tax years beginning after January 1, 2024. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. The Company does not expect Pillar Two to have a material impact on its financial statements as most jurisdictions in which the Company operates have an effective tax above the 15% threshold.
Net Earnings
Net earnings for the year ended July 31, 2024 were $414.0 million, compared with $358.8 million for the year ended July 31, 2023, an increase of $55.2 million, or 15.4%. Diluted EPS were $3.38 for the year ended July 31, 2024, compared with $2.90 for the year ended July 31, 2023.
Net earnings were impacted by fluctuations in foreign currency exchange rates. The impact of these fluctuations on net earnings was as follows (in millions):
Year Ended July 31,
Change in net earnings excluding translation 56.0 40.4
Impact of foreign currency translation(1) (0.8) (14.4)
Current year net earnings $ 414.0 $ 358.8
(1)The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net earnings into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year.
Restructuring
During the fourth quarter of fiscal 2024, the Company initiated global footprint optimization and cost reduction actions to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $6.4 million. Charges of $3.8 million were included in cost of sales and $2.6 million were included in operating expenses in the Consolidated Statement of Earnings for the year ended July 31, 2024. As of July 31, 2024, $6.4 million of accrued expenses were included in accrued employee compensation and related taxes in the Consolidated Balance Sheet. Estimated future costs associated with actions related to this restructuring initiative are not included due to the Company’s inability to reasonably quantify the anticipated restructuring charges.
During 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 $21.8 million of charges consisting of $15.3 million of severance charges and other organizational redesign costs and $6.5 million of costs mainly associated with the exiting of a lower-margin customer program and a lower-margin product. Charges of $2.9 million were included in cost of sales and $18.9 million were included in selling, general and administrative expenses in the accompanying Consolidated Statements of Earnings.
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Segment Results of Operations
Net sales and earnings before income taxes were as follows (in millions):
Net sales
Earnings (loss) before income taxes
(1)Corporate and unallocated includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and business development expenses.
NM = Not meaningful
Mobile Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
Net sales
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(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Mobile Solutions segment for the year ended July 31, 2024 were $2,250.8 million, compared with $2,174.8 million for the year ended July 31, 2023, an increase of $76.0 million, or 3.5%, driven by a $24.3 million volume increase and a $53.8 million increase from pricing benefits. Excluding a $2.1 million decrease from foreign currency translation, net sales increased 3.6%.
Net sales of Off-Road decreased $47.9 million, due to weak agriculture end market conditions. Net sales of Aftermarket increased $129.9 million, primarily due to volume increases of $107.5 million, driven by market share gains, favorable market conditions and destocking of inventory which negatively impacted the prior year and pricing benefits of $23.6 million.
Earnings before income taxes for the Mobile Solutions segment for the year ended July 31, 2024 were $404.5 million, or 18.0% of net sales, an increase from 15.2% of net sales for the year ended July 31, 2023. The increase was driven by higher volume, favorable product mix related to sales of replacement parts and pricing actions.
Industrial Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
Net sales
Industrial Filtration Solutions (IFS) $ 901.1 $ 872.2 $ 28.9 3.3 %
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(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Industrial Solutions segment for the year ended July 31, 2024 were $1,066.5 million, compared with $1,014.7 million for the year ended July 31, 2023, an increase of $51.8 million, or 5.1%, driven by a $33.4 million volume increase and a $16.2 million increase from pricing benefits. Excluding a $2.2 million increase from foreign currency translation, net sales increased 4.9%.
Net sales of IFS increased $28.9 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 $22.9 million due to ongoing strength in the aerospace and defense end markets.
Earnings before income taxes for the Industrial Solutions segment for the year ended July 31, 2024 were $198.8 million, or 18.6% of net sales, an increase from 18.4% of net sales for the year ended July 31, 2023.
Life Sciences Segment
Net sales and earnings before income taxes were as follows (in millions):
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(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Life Sciences segment for the year ended July 31, 2024 were $269.0 million, compared with $241.3 million for the year ended July 31, 2023, an increase of $27.7 million, or 11.5%, driven by a $17.6 million volume increase, a $1.0 million increase from pricing benefits and a $9.7 million increase from acquisitions. Excluding a $0.6 million decrease from foreign currency translation, net sales increased 11.7%, primarily driven by strong market demand and market share gains in disk drive, sales of bioprocessing equipment and strong food and beverage markets in EMEA.
Losses before income taxes for the Life Sciences segment for the year ended July 31, 2024 were $10.4 million, or a loss of 3.9% of net sales, a decrease from earnings of 4.1% of net sales for the year ended July 31, 2023. The decrease was driven by the expected impact from investments made to scale up the Company’s recently-acquired businesses.
Liquidity, Capital Resources, Capital Requirements and Financial Condition
Liquidity
Liquidity is assessed in terms of the Company’s ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, adequacy of available credit facilities and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses as its primary source of liquidity, with sufficient liquidity available to fund growth through reinvestment in existing businesses and strategic acquisitions.
Cash Flow Summary
Cash flows were as follows (in millions):
Net cash provided by (used in):
Effect of exchange rate changes on cash (4.1) (1.2) (2.9)
Increase (decrease) in cash and cash equivalents $ 45.6 $ (6.2) $ 51.8
Operating Activities
Cash provided by operating activities for the year ended July 31, 2024 was $492.5 million, compared with $544.5 million for the year ended July 31, 2023, a decrease of $52.0 million. The decrease in cash provided by operating activities was primarily driven by an increase in working capital requirements during the current year based on additional inventory needs to increase on-time deliveries, partially offset by higher earnings in the current year.
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Investing Activities
Cash used in investing activities for the year ended July 31, 2024 was $86.9 million, compared with $327.3 million for the year ended July 31, 2023, a decrease of $240.4 million. The decrease in cash used in investing activities was primarily driven by lower cash used related to acquisitions. In fiscal 2023, the Company acquired Isolere and UTEC for cash consideration of $209.2 million, net of cash acquired, and invested a higher level of capital in various projects, including capacity expansion and tooling for new programs.
Financing Activities
Cash used in financing activities generally relates to the use of cash for payment of dividends and repurchases of the Company’s common stock, net of borrowing activity and proceeds from the exercise of stock options. Cash used in financing activities for the year ended July 31, 2024 was $355.9 million, compared with $222.2 million for the year ended July 31, 2023, an increase of $133.7 million. The increase was primarily driven by net debt repayments of $114.8 million due to strong operating cash flows in the current year, compared to relatively flat net debt 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 years ended July 31, 2024 and 2023 were $122.8 million and $114.4 million, respectively. Share repurchases for the years ended July 31, 2024 and 2023 were $162.7 million and $141.8 million, respectively.
Capital Resources
Additional sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of July 31, 2024 was $232.7 million, compared with $187.1 million as of July 31, 2023. A significant portion of the Company’s cash and cash equivalents is held by subsidiaries throughout the world as over half of the Company’s earnings occur outside the U.S. Additionally, the Company has capacity of $593.0 million available for further borrowing under existing credit facilities as of July 31, 2024.
Short-term borrowing capacity as of July 31, 2024 was as follows (in millions):
Reductions to borrowing capacity:
Other non-borrowing reductions — — 38.9 25.7 64.6
Other non-borrowing reductions include financial instruments such as bank guarantees and foreign exchange instruments.
Long-term borrowing capacity is maintained through a $500.0 million unsecured revolving credit facility. Borrowings against the credit facility are reported on the Consolidated Balance Sheets. Borrowing capacity as of July 31, 2024 was as follows (in millions):
Revolving credit facility $ 500.0
Reductions to borrowing capacity:
Outstanding borrowings 110.0
Contingent liability for standby letters of credit 7.5
Total reductions 117.5
Remaining borrowing capacity $ 382.5
Weighted average interest rate as of July 31, 2024 6.44 %
Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2024, the Company was in compliance with all such covenants.
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Capital Requirements
The Company’s cash requirements within the next 12 months include short-term borrowings, accounts payable, accrued expenses, income taxes payable, dividends payable, purchase commitments and other current liabilities. Additionally, in fiscal 2025, the Company expects its cash paid for capital expenditures to be between $85 million and $105 million, primarily associated with capacity expansion and new products and technologies.
The Company’s cash requirements greater than 12 months from various contractual obligations and commitments primarily include:
•debt obligations and interest payments - see Note 7. Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report for further detail of the Company’s debt and the timing of expected future principal and interest payments; and
•operating leases - see Note 9. Leases in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report for further detail of our lease obligations and the timing of expected future payments.
The Company believes the liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities will be sufficient to meet its cash requirements for the next 12 months and beyond, including working capital needs, debt service obligations, capital expenditures, payment of dividends, share repurchase activity and potential acquisitions.
Financial Condition
The Company’s total capitalization components and debt-to-capitalization ratio were as follows (in millions):
2024 % of total capitalization 2023 % of total capitalization
As of July 31, 2024, total debt, including short-term borrowings and long-term debt, represented 26.5% of total capitalization, defined as total debt plus total stockholders’ equity, compared with 33.2% as of July 31, 2023.
Long-term debt outstanding as of July 31, 2024 was $508.4 million compared with $621.6 million as of July 31, 2023, a decrease of $113.2 million. In fiscal 2024, the Company used strong operating cash flows to reduce the long-term debt outstanding.
Working Capital
In order to help measure and analyze the impact of working capital management, the Company calculates days sales outstanding as the average accounts receivable, net for the quarter, divided by net sales for the quarter multiplied by the number of days in the quarter. The Company calculates days inventory outstanding as the average inventories, net for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter. 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. The Company calculates net cash cycle as the sum of days sales outstanding and days inventory outstanding, less days payables outstanding.
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Working capital measurements and analysis were as follows (in millions, except days):
Days sales outstanding 62 64 (2)
Days inventory outstanding 71 69 2
Days payable outstanding 57 49 8
Off-Balance Sheet Arrangements
Joint Venture Guarantee
The Company has an unconsolidated joint venture, Advanced Filtration Systems Inc. (AFSI), established by the Company and Caterpillar Inc. (Caterpillar) in 1986. AFSI designs and manufactures high-efficiency fluid filters used in Caterpillar’s machinery worldwide. The Company and Caterpillar equally own the shares of AFSI and both companies guarantee certain debt and banking services, including credit and debit cards, merchant processing and treasury management services, of the joint venture. The Company accounts for AFSI as an equity method investment.
The outstanding debt relating to AFSI, which the Company guarantees half, was $51.0 million and $59.6 million as of July 31, 2024 and 2023, respectively. AFSI has $63.0 million in revolving credit facilities which expire in 2027 and $17.0 million in an additional multi-currency revolving credit facility which terminates upon notification of either party. The Company does not believe this guarantee will have a current or future effect on its financial condition, results of operations, liquidity or capital resources.
Critical Accounting Estimates
The Company’s Consolidated Financial Statements are prepared in conformity with GAAP. Our significant accounting policies are disclosed in Note 1 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report. The preparation of these Consolidated Financial Statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the periods presented. Management bases estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about recorded amounts. The Company believes its use of estimates and underlying accounting assumptions adheres to GAAP and are reasonable and consistently applied. The Company’s Critical Accounting Estimates are those which require more significant assumptions and judgments used in the preparation of its Consolidated Financial Statements and are the most important to aid in fully understanding its financial results. The Company’s Critical Accounting Estimates are as follows:
Revenue Recognition - Variable Consideration
Revenue is measured as the amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. The transaction price of a contract could be reduced by variable consideration including volume purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. The Company primarily relies on historical experience and anticipated future performance to estimate the variable consideration. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when the contingency is resolved.
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For volume, purchase rebates and discounts, management estimates are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume in quantity or mix of purchases of product during a specified time period and expectations for changes in relevant trends in the future. Actual results may differ from estimates if competitive factors create the need to enhance or reduce sales promotion and incentive accruals or if customer usage and field inventory levels vary from historical trends. Adjustments to sales promotions and incentive accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
For product refunds and returns, estimates are based primarily on the expected number of products sold, the trend in the historical ratio of returns to sales and the historical length of time between the sale and resulting return. Actual refunds and returns could be higher or lower than amounts estimated due to such factors as performance of new products or significant manufacturing or design defects not discovered until after the product is delivered to customers.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal 2024. The goodwill impairment assessment is conducted at a reporting unit level, which is one level below the operating segment level and utilizes either a qualitative or quantitative assessment. The Company determined the fair value for all its reporting units was substantially in excess of their respective carrying values and there were no indicators of impairment for any of the reporting units evaluated. An impairment loss would be recognized when the carrying amount of a reporting unit’s net assets exceeds the estimated fair value of the reporting unit.
The optional qualitative assessment evaluates general economic, industry and entity-specific factors that could impact the reporting units’ fair values. For reporting units evaluated using a qualitative assessment, if it is determined the fair value more likely than not exceeds the carrying value, no further assessment is necessary. For reporting units evaluated using a quantitative assessment, the fair values are determined using an income approach, a market approach or a weighting of the two. The income approach determines fair value based on discounted cash flow models derived from the reporting units’ long-term forecasts. The market approach determines fair value based on earnings multiples derived from prices investors paid for the stocks of comparable publicly traded companies. Estimates and assumptions are utilized in the valuations, including discounted projected cash flows, earnings before interest, taxes, depreciation and amortization margins, terminal value growth rates, revenue growth rates, discount rates and the determination of comparable, publicly traded companies. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment.
Income Taxes
Management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating current tax exposure and assessing future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. These deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are anticipated to reverse based on future taxable income projections and the impact of tax planning strategies. The Company intends to indefinitely reinvest undistributed earnings for certain of its non-U.S. subsidiaries and thus has not provided for income taxes on these earnings.
Additionally, benefits of tax return positions are recognized in the Consolidated Financial Statements when the position is more likely than not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50% likely to be realized. The Company maintains a reserve for uncertain tax benefits that are currently unresolved and routinely monitors the potential impact of such situations. The liability for unrecognized tax benefits, accrued interest and penalties was $23.0 million and $16.7 million as of July 31, 2024 and 2023, respectively.
The Company believes it is remote that any adjustment necessary to the reserve for income taxes for the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the Company’s reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.
Defined Benefit Pension Plans
The Company incurs expenses for employee benefits provided through defined benefit pension plans. In accounting for these defined benefit pension plans, management must make a variety of estimates and assumptions including discount rates and expected return on plan assets. The Company considers current and historical data and uses a third-party specialist to assist management in determining these estimates.
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Discount Rates
The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income investments currently available and expected to be available, during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans. The Company utilized a 5.44% and 5.58% weighted average discount rate for its U.S. plans for the years ended July 31, 2024 and 2023, respectively. The Company used a 4.33% and 4.80% weighted average discount rate for its non-U.S. plans for the years ended July 31, 2024 and 2023, respectively.
Expected Long-Term Rate of Return on Plan Assets
The Company considers historical returns and future expected returns for each asset class, as well as the target asset allocation to develop the assumption for each of its U.S. pension plans. The assumption for non-U.S. pension plans reflects the investment allocation and expected total portfolio returns specific to each plan and country.
The Company utilized a 6.16% and 5.66% asset-based weighted average expected return on plan assets for its U.S. plans for the years ended July 31, 2024 and 2023, respectively. The Company utilized a 5.01% and 4.39% asset-based weighted average expected return on plan assets for its non-U.S. plans for the years ended July 31, 2024 and 2023, respectively. The expected returns on plan assets are used to develop the following fiscal years’ expense for the plans.
Alternative Assumptions
If the Company were to use alternative assumptions for its pension plans as of July 31, 2024, a one percentage point change in the assumptions would impact fiscal 2024 net periodic benefit cost as follows (in millions):
Rate of return $ (4.3) $ 4.3
Discount rate $ (0.3) $ 0.4
The Company’s net periodic benefit cost recognized in the Consolidated Statements of Earnings was $6.6 million, $6.2 million and $2.8 million for the years ended July 31, 2024, 2023 and 2022, respectively. While changes to the Company’s pension plan assumptions would not be expected to impact its net periodic benefit cost by a material amount, such changes could significantly impact the Company’s projected benefit obligation.
Business Combinations
The Company allocates the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, where applicable, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, technology obsolescence, customer retention rates, discount rates, royalty rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.
The Company estimates the fair value of acquired customer relationships using the multi-period excess earnings method. This approach is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group which includes the particular asset. Fair value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the economic returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated economic returns from contributory assets. Assumptions used in these calculations include same-customer revenue growth rates, estimated earnings and customer attrition rates.
The Company estimates the fair value of trade names and/or trademarks using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including reputation and recognition within the industry.
The Company estimates the fair value of technology utilizing the multi-period excess earnings method or the relief from royalty method, depending on the technology asset acquired. The multi-period excess earnings method is consistent with the approach used to value acquired customer relationships and the relief from royalty method is consistent with the approach used to value trade names and/or trademarks.
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While the Company uses its best estimates and assumptions, especially at the acquisition date, including its estimates for intangible assets, pre-acquisition contingencies and any contingent consideration, where applicable, the fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Earnings. The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income.
New Accounting Standard Not Yet Adopted
For the new accounting standards not yet adopted, refer to Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and expectations, such as forecasts, plans, trends and projections relating to the Company’s business and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Part I, Item 1A, “Risk Factors” of this Annual Report, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases such as “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.
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 changes; 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 this Annual Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. To manage these risks, the Company employs certain strategies to mitigate the effect of these fluctuations. The Company does not enter into any of these 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 fiscal 2024, the U.S. dollar was generally stronger than in fiscal 2023 compared with many of the currencies of the foreign countries in which the Company operates. The overall stronger dollar had a negative impact on the Company’s international net sales and net earnings because the foreign denominated revenues translated into less U.S. dollars in many regions around the world. The estimated impact of foreign currency translation for the year ended July 31, 2024 resulted in an overall decrease in reported net sales of $0.5 million and a decrease in reported net earnings of $0.8 million.
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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 12, 15 and 16 in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report.
Foreign Currency Forward Contracts - Cash Flow Hedges and Derivatives Not Designated as Hedging Instruments
The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges as of July 31, 2024 and 2023 were $32.3 million and $84.9 million, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges as of July 31, 2024 and 2023 were $249.7 million and $147.5 million, respectively.
Net Investment Hedges
The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method for designating these contracts as net investment hedges.
The total notional amount of net investment hedges as of July 31, 2024 and 2023 was €80 million, or $88.8 million. The maturity dates range from 2027 to 2029.
Based on the net investment hedges outstanding as of July 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.
Interest Rates
The Company’s exposure to market risk for changes in interest rates primarily relates to debt obligations that are at variable rates, as well as the potential increase in the fair value of long-term debt resulting from a potential decrease in interest rates. As of July 31, 2024, the Company’s financial liabilities with exposure to changes in interest rates consisted of $110.0 million, outstanding on the Company’s unsecured revolving credit facility, €80.0 million, or $86.6 million, of a variable rate term loan and ¥2.0 billion, or $13.4 million, of variable rate senior notes. As of July 31, 2024, short-term borrowings outstanding consisted of $28.3 million. Assuming a hypothetical 0.5 percentage point increase in short-term interest rates, with all other variables remaining constant, interest expense would have increased approximately $1.2 million in the 12 months ended July 31, 2024. The Company had no interest rate hedging agreements in fiscal year 2024 or 2023. Interest rate changes would also affect the fair market value of fixed-rate debt. As of July 31, 2024, the estimated fair values of fixed interest rate long-term debt were $267.7 million compared to the carrying values of $300.0 million. The fair values are estimated by discounting the projected cash flows using the interest rates at which similar amounts of debt could currently be borrowed.
In addition, the Company is exposed to market risk for changes in interest rates for the impact to its qualified defined benefit pension plans. The plans’ projected benefit obligation is inversely related to changes in interest rates. Consistent with published bond indices, in fiscal 2024, the Company decreased its weighted average discount rate from 5.58% to 5.44% on its U.S. plans and decreased its weighted average discount rate from 4.80% to 4.33% on its non-U.S. plans. To protect against declines in interest rates, the pension plans hold high-quality, long-duration bonds. The rates impact both the projected benefit obligation and the fair value of the plan assets and hence, the funded status of the plans. The plans were overfunded by $9.6 million as of July 31, 2024, since the fair value of the plan assets exceeded the projected benefit obligation.
Commodity Prices
The Company is exposed to market risk from fluctuating prices of purchased commodity raw materials, including steel, filter media and petrochemical-based products including plastics, rubber and adhesives. On an ongoing basis, the Company enters into selective supply arrangements that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through 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.
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Bankers’ Acceptance Notes
Consistent with common business practice in APAC, the Company has subsidiaries which accept bankers’ acceptance notes from their customers in settlement of certain customer billed accounts receivable. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity dates of bankers’ acceptance notes vary, but it is the Company’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of the Company’s receipt of such draft. As of July 31, 2024 and 2023, the Company owned $8.4 million and $13.2 million, respectively, of these bankers’ acceptance notes and includes them in accounts receivable on the Consolidated Balance Sheets.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Donaldson Company, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Donaldson Company, Inc. and its subsidiaries (the "Company") as of July 31, 2024 and 2023, and the related consolidated statements of earnings, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended July 31, 2024, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of July 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Product Sales
As described in Notes 1 and 3 to the consolidated financial statements, net sales were $3,586.3 million for the year ended July 31, 2024, of which a majority pertains to product sales. Revenue is measured as the amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. For most customer contracts, the Company recognizes revenue at a point in time when control of the goods is transferred to the customer. For product sales, control is typically deemed to have transferred in accordance with the shipping terms, either at the time of shipment from the plants or distribution centers or the time of delivery to the customers. The transaction price of a contract could be reduced by variable consideration including volume, purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when the contingency is resolved.
The principal consideration for our determination that performing procedures relating to revenue recognition for product sales is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process. These procedures also included, among others (i) evaluating certain revenue transactions by either (a) testing the issuance and settlement of invoices and credit memos, tracing transactions not settled to a detailed listing of accounts receivable, and testing the completeness and accuracy of data provided by management or (b) testing, on a sample basis, the revenue recognized by obtaining and inspecting source documents, including executed contracts, invoices, shipment or delivery documents, and cash receipts, as applicable; (ii) testing, on a sample basis, the recognition of variable consideration for rebates issued during the year by obtaining and inspecting source documents, including support for the nature of the rebate, amount, and agreement with the customer; and (iii) confirming, on a sample basis, outstanding customer invoice balances as of year-end and, and for confirmations not returned, obtaining and inspecting source documents, including executed contracts, invoices, shipment or delivery documents, and subsequent cash receipts, as applicable.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 27, 2024
We have served as the Company’s auditor since 2002.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share amounts)
Year Ended July 31,
Other income, net (12.6) (7.7) (9.8)
Net earnings per share – basic $ 3.43 $ 2.95 $ 2.69
Net earnings per share – diluted $ 3.38 $ 2.90 $ 2.66
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year Ended July 31,
Other comprehensive income:
Foreign currency translation (loss) income (24.2) 34.0 (99.6)
Derivatives:
Total derivatives (0.3) (1.2) 5.0
Net other comprehensive (loss) income (26.4) 33.1 (87.4)
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
As of July 31,
Assets
Current assets:
Cash and cash equivalents $ 232.7 $ 187.1
Accounts receivable, less allowances of $6.3 and $8.3, respectively 629.7 599.7
Prepaid expenses and other current assets 99.0 81.1
Property, plant and equipment, net 645.5 652.9
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings $ 28.3 $ 34.1
Current maturities of long-term debt 25.0 125.0
Accrued employee compensation and related taxes 140.9 119.4
Other current liabilities 114.1 85.0
Non-current income taxes payable 39.8 56.5
Deferred income taxes 16.1 32.3
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued — —
Additional paid-in capital 26.8 24.8
Accumulated other comprehensive loss (198.9) (172.5)
Total liabilities and stockholders’ equity $ 2,914.3 $ 2,770.5
See Notes to Consolidated Financial Statements.
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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended July 31,
Operating Activities
Equity in earnings of affiliates, net of distributions (4.7) (1.0) 0.3
Deferred income taxes (24.3) (15.3) (1.4)
Stock-based compensation expense 22.0 20.4 20.4
Prepaid expenses and other current assets (28.3) 16.8 (10.5)
Investing Activities
Purchases of property, plant and equipment (85.6) (118.5) (85.5)
Proceeds from sale of property, plant and equipment 0.7 0.4 0.4
Acquisitions, net of cash acquired (2.0) (209.2) (68.9)
Net cash used in investing activities (86.9) (327.3) (154.0)
Financing Activities
Change in short-term borrowings (5.7) 30.4 (43.9)
Payment of contingent consideration (1.7) — —
Tax withholding for stock compensation transactions (8.0) (4.3) (1.8)
Net cash used in financing activities (355.9) (222.2) (114.2)
Effect of exchange rate changes on cash (4.1) (1.2) (14.1)
Increase (decrease) in cash and cash equivalents 45.6 (6.2) (29.5)
Cash and cash equivalents, beginning of year 187.1 193.3 222.8
Cash and cash equivalents, end of year $ 232.7 $ 187.1 $ 193.3