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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.

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.

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,

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.

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.

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

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 %

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):

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

Supplemental Cash Flow Information

Supplemental Disclosure of Non-Cash Operating and Investing Transactions

Accrued property, plant and equipment additions $ 14.2 $ 18.5 $ 16.3

See Notes to Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except per share amounts)

Comprehensive income

Foreign currency translation (99.6) (99.6)

Pension liability adjustment, net of deferred taxes 7.2 7.2

Gains on hedging derivatives, net of deferred taxes 7.2 7.2

Reclassification of gains on hedging derivatives to net earnings (2.2) (2.2)

Comprehensive income 245.4

Stock compensation expense 20.5 (0.1) 20.4

Deferred stock and other activity (4.2) (0.2) 2.7 (1.7)

Comprehensive income

Foreign currency translation 34.0 34.0

Pension liability adjustment, net of deferred taxes 0.3 0.3

Losses on hedging derivatives, net of deferred taxes (1.4) (1.4)

Reclassification of losses on hedging derivatives to net earnings 0.2 0.2

Comprehensive income 391.9

Deferred stock and other activity (7.2) (0.3) 4.0 (3.5)

Comprehensive income

Foreign currency translation (24.2) (24.2)

Pension liability adjustment, net of deferred taxes (1.9) (1.9)

Losses on hedging derivatives, net of deferred taxes (0.6) (0.6)

Reclassification of losses on hedging derivatives to net earnings 0.3 0.3

Comprehensive income 387.6

Deferred stock and other activity (13.4) 0.6 6.8 (6.0)

See Notes to Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Description of Business

Donaldson Company, Inc. (the Company) is a global leader in technology-led filtration products and solutions. The Company’s core strengths include leading filtration technology, diverse business and a global presence. Products are manufactured and sold around the world to original equipment manufacturers (OEMs), distributors, dealers and directly to end users.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and all its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s joint ventures are not majority-owned and are accounted for under the equity method. The Company is party to joint ventures with Advanced Filtration Systems Inc. (AFSI) and PT Panata Jaya Mandiri (PTPJM), both of which are considered related parties. The investment and earnings from joint ventures are not material.

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

Use of Estimates

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles (GAAP) in the United States (U.S.) requires management to make estimates and assumptions that affect the amount of assets and liabilities and the disclosures regarding contingent assets and liabilities at period end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Operating Environment

Foreign Currency Translation

For most foreign operations, local currencies are considered the functional currency. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at fiscal year end exchange rates and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss on the Consolidated Balance Sheets. Elements of the Consolidated Statements of Earnings are translated at average exchange rates in effect during the fiscal year. Foreign currency transaction losses are included in other income, net in the Consolidated Statements of Earnings and were $1.7 million, $6.4 million and $6.3 million in the years ended July 31, 2024, 2023 and 2022, respectively.

Cash Equivalents

The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.

Revenue Recognition

For most customer contracts, the Company recognizes revenue at a point in time when control of the goods or services 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. Revenue is recognized for services upon completion of those services. Payment terms vary by customer and the geographic location of the customer. The Company’s contracts with customers do not include significant financing components or non-cash consideration.

The Company has some contracts with customers where the performance obligations are satisfied over time. Certain customer contracts provide the Company with an enforceable right to payment of the transaction price for performance completed to date and the Company uses either an input or an output method of production to measure the progress towards the completion of the performance obligation in these arrangements, depending on the nature of the contract. The timing of revenue recognized from these products is slightly accelerated compared to revenue recognized at the time of shipment or delivery.

The Company generally does not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. The Company may incur certain fulfillment costs such as initial design or mobilization costs which are capitalized if they relate directly to the contract, if they are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and if they are expected to be recovered through revenues generated under the contract. Such costs, which are amortized over the life of the respective project, were not material for any period presented.

The Company does not pay upfront sales commissions on contracts when the related contract period is greater than one year and thus has not capitalized any amounts as of July 31, 2024 and 2023, see Note 3.

Shipping and Handling

Shipping and handling costs on products sold of $91.5 million, $91.2 million and $96.4 million are classified as a component of operating expenses in the Consolidated Statements of Earnings for the years ended July 31, 2024, 2023 and 2022, respectively.

Accounts Receivable, Net and Allowance for Doubtful Accounts

Accounts receivable, net are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in its existing accounts receivable. The Company determines the allowance based on utilization of a combination of aging schedules with reserve rates applied to both current and aged receivables using historical write-off experience, regional economic data and evaluation of specific customer accounts for risk of loss and changes in current or projected conditions to calculate the allowances related to accounts receivable, net. The Company reviews its allowance for doubtful accounts monthly. Account balances are reviewed on a pooled basis by reporting unit and geographic region and are reserved when the Company determines it is probable the receivable will not be recovered. The Company reduces the receivable and corresponding allowance when it confirms an account is uncollectible.

Factoring Arrangements

The Company has agreements with financial institutions to sell certain trade receivables from customers without recourse. The Company accounts for trade receivable transfers as sales and de-recognizes the sold receivables from the Consolidated Balance Sheets. During fiscal 2024, the Company sold $29.9 million receivables under factoring agreements. Costs incurred on these sales during the year ended July 31, 2024 were $1.7 million and are included in the cost of sales within the Consolidated Statements of Earnings. Cash received from selling receivables of $28.2 million is presented as a change in accounts receivable within the operating section of the Consolidated Statements of Cash Flow.

Inventories

Inventories are stated at the lower of cost and net realizable value. U.S. inventories are valued using the last-in, first-out (LIFO) method while the non-U.S. inventories are valued using the first-in, first-out (FIFO) method. Inventories valued at LIFO were approximately 35.3% and 29.7% of total inventories as of July 31, 2024 and 2023, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by $51.3 million and $56.1 million as of July 31, 2024 and 2023, respectively. Results of operations for all periods presented were not materially affected by the liquidation of LIFO inventory.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Additions, improvements or major renewals are capitalized while expenditures that do not enhance or extend the asset’s useful life are expensed as incurred. Depreciation is computed using the straight-line method. Depreciation expense was $82.8 million, $80.9 million and $85.1 million in the years ended July 31, 2024, 2023 and 2022, respectively. The estimated useful lives of property, plant and equipment are 10 to 40 years for buildings, including building improvements and three to 10 years for machinery and equipment, see Note 5.

Internal-Use Software and Cloud Computing Arrangements

The Company capitalizes direct costs of materials and services used in the development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of five to seven years and are reported as a component of property, plant and equipment.

The Company capitalizes certain costs incurred during the application development stage of implementation of internal-use software in cloud computing arrangements. Amounts capitalized are amortized on a straight-line basis over a period of five to 10 years and are reported as a component of other long-term assets.

Goodwill and Intangible Assets

Intangible assets, comprised of customer relationships, trademarks, technology and patents and non-compete agreements, are amortized on a straight-line basis over their estimated useful lives of 2 to 22 years.

Business Combinations

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.

Recoverability of Long-Lived Assets

The Company reviews its long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying value is reduced to the fair market value. There were no indicators of impairment or impairment charges recorded for the years ended July 31, 2024, 2023 and 2022.

Income Taxes

The provision for income taxes is computed based on the pretax income reported for financial statement purposes. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are anticipated to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not a tax benefit will not be realized.

The Company maintains a reserve for uncertain tax benefits. Benefits of tax return positions are recognized in the 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 is greater than 50% likely to be realized, in the Company’s judgment, see Note 8.

Leases

The Company determines whether an arrangement that provides control over the use of an asset to the Company is a lease. The Company recognizes a lease liability and corresponding right-of-use asset on the Consolidated Balance Sheets based on the present value of future lease payments and recognizes lease expense on a straight-line basis over the lease term. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term (or at fair values in the case of those leases assumed in an acquisition). Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term. Variable lease expense is immaterial and primarily includes leases with payments indexed to inflation when the index changes after lease commencement.

The Company has elected to separate payments for lease components from non-lease components for all asset classes. Lease agreements may include extension, termination or purchase options, all of which are considered in calculating the lease liability and right-of-use asset when it is reasonably certain the Company will exercise an option. The Company’s incremental borrowing rate on the commencement date is used to calculate the present value of future payments for most leases since the rate implicit in the lease is generally not readily determinable. These rates are assessed on a quarterly basis for measurement of new lease obligations, see Note 9.

Stock-Based Compensation

Stock-based compensation expense is recognized using the fair value method for all awards, see Note 13.

Treasury Stock

Repurchased common stock is stated at cost, determined on an average cost basis and is presented as a reduction of stockholders’ equity on the Consolidated Balance Sheets.

Research and Development Expenses

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. Expenses are charged against earnings in the year incurred.

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

Net Investment Hedges

Interest Rate Swaps - Cash Flow Hedges

The Company uses swap agreements to hedge exposure related to interest expense and to manage its exposure to interest rate movements. The Company enters into interest rate swap agreements designated as cash flow hedges to hedge future fixed-rate debt issuances, which effectively fix a portion of interest payments.

Product Warranties

The Company provides for estimated warranty expense at the time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company estimates warranty expense on certain products at the time of sale using quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues, see Note 18.

New Significant Accounting Standards Recently Adopted

There were no new significant accounting standards adopted in fiscal 2024 or 2023 that had a material impact on the Company’s financial statements.

New Significant Accounting Standards Not Yet Adopted

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

In December 2023, FASB issued ASU No. 2023-09, Income Taxes (Topic 820), “Improvements to Income Tax Disclosures,” which enhances the transparency and decision usefulness of income tax disclosures. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company does not expect adoption of this standard will have a material impact on the related disclosures within its financial statements.

In November 2023, FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), “Improvements to Reportable Segment Disclosures,” which improves the segment disclosures to include reportable segment’s expenses. The guidance is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. This ASU is applicable to annual reporting for the Company’s fiscal 2025 and interim reporting for the first quarter of the Company’s fiscal 2026. The Company does not expect adoption of this standard will have a material impact on the related disclosures within its financial statements.

In October 2023, FASB issued ASU No. 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative," which modifies the disclosure or presentation requirements of various FASB topics in the Codification. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-K becomes effective, with early adoption prohibited. The Company is in the process of evaluating the impact of the ASU on its related disclosures.

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

Note 2. Acquisitions and Equity Method Investments

Acquisitions

There have been no material acquisitions in fiscal 2024.

Univercells Technologies (UTEC)

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

Isolere Bio, Inc. (Isolere)

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

2023 Purchase Price Summary

The components of the UTEC and Isolere acquisitions, net of cash acquired, as of the acquisition date were as follows (in millions):

Intangible assets:

Technology $ 84.9

Trademarks and tradenames 8.2

Customer relationships 1.2

Non-competition agreements 2.7

Intangible assets acquired 97.0

Tangible assets, net 10.4

Assets acquired, net 107.4

Aggregate purchase price 231.4

Add deferred tax asset 7.0

Less deferred tax liability (24.0)

Less cash acquired (4.8)

Acquisitions, net of cash acquired $ 209.6

Purilogics, LLC (Purilogics)

In the fourth quarter of fiscal 2022, the Company acquired Purilogics, headquartered in Greenville, South Carolina, for cash consideration of approximately $19.9 million, net of cash acquired. The transaction included a maximum payout of $29.0 million in contingent consideration related to developing manufacturing capabilities, creating future technologies and attaining certain business performance results. Purilogics is a biotechnology company that leverages a novel technology platform for the development of membrane chromatography products. Purilogics offers a broad portfolio of purification tools for a wide range of biologics. Purilogics’ proprietary formulations and processes create membranes that have significant competitive advantages, enabling faster and more cost-effective production of increasingly complex biologic drugs. Purilogics is reported within the Company’s Life Sciences segment. Purchase accounting was finalized in the second quarter of fiscal 2023. Net sales of Purilogics were immaterial to the Consolidated Statements of Earnings for the year ended July 31, 2022.

Solaris Biotechnology S.r.l. (Solaris)

In the second quarter of fiscal 2022, the Company acquired Solaris, headquartered in Porto Mantovano, Italy, with U.S. operations based in Berkeley, California, for cash consideration of approximately €41 million, or $45.7 million, net of cash acquired. Solaris designs and manufactures bioprocessing equipment, including bioreactors, fermenters and tangential flow filtration systems for use in food and beverage, biotechnology and other life sciences markets. Solaris is reported within the Company’s Life Sciences segment. Purchase accounting was finalized in the fourth quarter of fiscal 2022. Net sales of Solaris were immaterial to the Consolidated Statements of Earnings for the year ended July 31, 2022.

Pearson Arnold Industrial Services (PAIS)

In the second quarter of fiscal 2022, the Company acquired PAIS, headquartered in the U.S., for cash consideration of approximately $3.3 million, net of cash acquired. PAIS provides equipment, parts and services for dust, mist and fume collection systems, industrial fans and compressed air systems. PAIS is reported within the Company’s Industrial Filtration Solutions (IFS) business in the Industrial Solutions segment. Goodwill and intangible assets acquired are deductible for tax purposes. Purchase accounting was finalized in the fourth quarter of fiscal 2022. Net sales of PAIS were immaterial to the Consolidated Statements of Earnings for the year ended July 31, 2022.

Equity Method Investments

Subsequent to year end, on August 9, 2024, the Company acquired a 49% non-controlling stake in Medica S.p.A. (Medica), headquartered in Medolla, Italy, for cash consideration of approximately €62 million, or $68 million. Medica is a leader in hollow fiber membrane filtration technology for medical applications and water purification. The Company has the option to acquire the remaining 51% stake in four years.

Pro forma Financial Information

Pro forma financial information for these acquisitions has not been presented because the acquisitions were not material to the Company’s Consolidated Statements of Earnings. See Note 6 for goodwill and intangible assets acquired.

Note 3. Revenue

The Company recognizes revenue on a wide range of filtration solutions sold to customers in many industries around the globe. Most of the Company’s performance obligations within customer sales contracts are for manufactured filtration systems and replacement parts. The Company also performs limited services and installation. Customer contracts may include multiple performance obligations and the transaction price is allocated to each distinct performance obligation based on its relative standalone selling price.

Revenue Disaggregation

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

Year Ended July 31,

See Note 19 for net sales disaggregated by segment and business unit.

Contract Assets and Liabilities

The satisfaction of performance obligations and the resulting recognition of revenue typically correspond with billing of the customer. In limited circumstances, the customer may be billed at a time later than when revenue is recognized, resulting in contract assets, which are reported in other current assets on the Consolidated Balance Sheets. Contract assets were $15.9 million and $13.3 million as of July 31, 2024 and 2023, respectively. In other limited circumstances, the customer may make a payment at a time earlier than when revenue is recognized and prior to the satisfaction of performance obligations, resulting in contract liabilities, which are reported in deferred revenue on the Consolidated Balance Sheets. Contract liabilities were $19.7 million and $25.3 million as of July 31, 2024 and 2023, respectively.

The Company will recognize revenue in future periods related to remaining performance obligations for certain open contracts. Generally, these contracts have terms of one year or less. The amount of revenue related to unsatisfied performance obligations in which the original duration of the contract is greater than one year is not significant. None of the Company’s contracts contained a significant financing component.

Note 4. Inventories, Net

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

Note 5. Property, Plant and Equipment, Net

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

Total property, plant and equipment, net $ 645.5 $ 652.9

Note 6. Goodwill and Intangible Assets

Goodwill

The Company allocates goodwill to reporting units within its Mobile Solutions, Industrial Solutions and Life Sciences segments. There were no dispositions or impairment charges recorded during the years ended July 31, 2024, 2023 and 2022. Goodwill is assessed for impairment annually during the third quarter of the fiscal year, or more frequently if events or changes in circumstances indicate the asset may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal 2024 and did not record any impairment as a result of this assessment.

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

Goodwill acquired — 1.9 — 1.9

Purchase price adjustments — — (1.1) (1.1)

Foreign exchange translation (0.1) (1.1) (2.3) (3.5)

Intangible Assets

Intangible assets recognized from the UTEC acquisition in fiscal 2023 were $52.5 million, of which $43.2 million was technology with an 18 year useful life, $6.7 million was trademarks with a 10 year useful life, $1.4 million was non-competition agreements with a two year useful life and $1.2 million was customer relationships with a 10 year useful life. Purchase accounting was finalized in the third quarter of fiscal 2024.

Intangible assets recognized from the Isolere acquisition in fiscal 2023 were $44.5 million, of which $41.7 million was technology with a 20 year useful life, trademarks and tradenames were $1.5 million with a 10 year useful life and non-competition agreements were $1.3 million with a three year useful life. Purchase accounting was finalized in the first quarter of fiscal 2024.

There was a foreign currency translation loss of $1.4 million in fiscal 2024 and translation gain of $3.2 million in fiscal 2023.

Intangible asset classes were as follows (in millions):

Intangible asset amortization expense was $15.7 million, $11.4 million and $9.2 million for the fiscal 2024, 2023 and 2022, respectively and is included in operating expenses in the Consolidated Statements of Earnings. Amortization expense relating to existing intangible assets as of July 31, 2024 was as follows (in millions):

Total amortization expense $ 171.9

Note 7. Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings

Short-term borrowings were as follows (in millions):

Year Ended July 31,

Reductions to borrowing capacity:

Other non-borrowing reductions include financial instruments such as bank guarantees and foreign currency exchange instruments. Commitment fees for the years ended July 31, 2024 and 2023 were not material.

Long-Term Debt

Long-term debt was as follows:

Interest Rate Outstanding Balance(in millions)

Debt issuance costs, net (1.6) (1.8)

Less current maturities (25.0) (125.0)

The Company’s $500.0 million revolving credit facility is with a group of lenders and allows for borrowings in multiple currencies. The interest rate is calculated using the appropriate benchmark rate plus the applicable rate. The borrowing availability can be reduced or the agreement terminated early at the option of the Company. The Company can request to increase the revolving credit facility by up to $250.0 million, subject to terms of the credit facility agreement, including written notification and lender acceptance, through an accordion feature. Borrowings are automatically rolled over until the credit facility maturity date, unless the agreement is terminated early or the Company is found to be in default. The total facility includes a commitment fee of 0.08% to 0.25%, depending on the Company’s leverage ratio.

The Company has long-term borrowing capacity of$382.5 million available for further borrowing under the existing credit facility as of July 31, 2024. The remaining borrowing capacity has been reduced for standby letters of credit as discussed in Note 17.

Future maturities of the Company’s long-term debt as of July 31, 2024 were as follows (in millions):

Total future maturities payments 510.0

Less debt issuance costs, net (1.6)

Total future maturities payments, net of debt issuance costs $ 508.4

Note 8. Income Taxes

The components of earnings before income taxes were as follows (in millions):

Year Ended July 31,

The components of the provision for income taxes were as follows (in millions):

Year Ended July 31,

Current

Deferred

The reconciliation of the U.S. statutory federal income tax rate with the effective income tax rate was as follows:

Year Ended July 31,

U.S. statutory federal income tax rate 21.0 % 21.0 % 21.0 %

Global Intangible Low Tax Income 0.2 0.2 0.3

Foreign Derived Intangible Income (1.3) (1.6) (0.6)

Research and development credit (0.9) (0.7) (0.6)

Change in unrecognized tax benefits 1.2 — (0.8)

Tax benefits on stock-based compensation (1.2) (0.7) (0.5)

Effective income tax rate 22.7 % 23.4 % 24.1 %

The tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows (in millions):

Deferred tax assets

Compensation and retirement plans 26.6 24.7

Capitalization of R&D costs 32.9 17.6

Net operating loss (NOL) and tax credit carryforwards 17.6 15.1

Operating lease assets 15.6 15.0

Gross deferred tax assets 113.2 90.8

Valuation allowance (9.1) (6.4)

Deferred tax assets, net of valuation allowance 104.1 84.4

Deferred tax liabilities

Depreciation and amortization (74.5) (79.5)

Operating lease liabilities (14.9) (15.1)

Deferred tax liabilities (93.2) (98.8)

Net deferred tax asset (liability) $ 10.9 $ (14.4)

The activity in the NOL and tax credit valuation allowances was as follows (in millions):

Year Ended July 31,

Balance as of beginning of year $ (6.4) $ (3.4) $ (4.6)

Additions charged to costs and expenses (3.6) (3.0) (0.9)

Deductions from reserves 0.9 — 2.1

Balance as of end of year $ (9.1) $ (6.4) $ (3.4)

As of July 31, 2024, the Company had deferred tax assets related to U.S. federal foreign tax credits of $6.3 million, related to state research and development credits of $3.4 million and related to foreign operating loss carryovers of $6.4 million. The U.S. federal tax credits will expire after 10 years, the state portion after one to 20 years and the foreign portion has an indefinite carryover period. As of July 31, 2024, the Company had provided $9.1 million for a valuation allowance against certain of these deferred tax assets based on management’s determination it is more likely than not the tax benefits related to these assets will not be realized.

As of July 31, 2024, the total undistributed earnings of the Company’s non-U.S. subsidiaries were $1.4 billion, of which $1.0 billion were not considered indefinitely reinvested. The Company is subject to foreign withholding taxes on a small portion of these earnings distributable in the future in the form of dividends. Thus, the Company provides for foreign withholding taxes payable upon future dividend distributions of the earnings not considered indefinitely reinvested annually. For the year ended July 31, 2024, the Company recognized a tax charge of $6.6 million related to these foreign withholding taxes. The remaining $380.8 million of earnings are considered indefinitely reinvested and it is not practicable to estimate, within any reasonable range, the additional taxes that may be payable on the potential distribution of the portion of the undistributed earnings considered indefinitely reinvested.

The transition tax related to the U.S. Tax Cuts and Jobs Act of 2017 on undistributed earnings was accrued in fiscal 2018 and it is payable over an eight year period. The portion not due within 12 months classified in non-current income taxes payable on the Consolidated Balance Sheets as of July 31, 2024 was$22.1 million.

The reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows (in millions):

Year Ended July 31,

Balance as of beginning of year $ 15.0 $ 15.2 $ 18.7

Additions for tax positions of the current year 2.8 2.5 2.7

Additions for tax positions of prior years 6.2 — —

Reductions for tax positions of prior years (0.1) 0.1 (1.1)

Reductions due to lapse of applicable statute of limitations (3.1) (2.8) (5.1)

Balance as of end of year $ 20.8 $ 15.0 $ 15.2

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes in the Consolidated Statements of Earnings. As of July 31, 2024 and 2023, accrued interest and penalties on a gross basis were $2.2 million and $1.7 million, respectively. During the year ended July 31, 2024, the Company recognized interest expense, net of tax benefit, of $0.8 million. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of five years, up to $3.1 million of the unrecognized tax benefits could potentially expire in the next 12 months, unless extended by an audit.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed examinations of the Company’s U.S. federal income tax returns through fiscal 2020. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before fiscal 2019.

Note 9. Leases

The Company enters into operating leases primarily for office, production and warehouse facilities, production and non-production equipment, automobiles and computer equipment. As of July 31, 2024 and 2023, the Company had no material financing lease obligations.

The Company’s operating lease costs were as follows (in millions):

Year Ended July 31,

Operating lease cost $ 29.5 $ 24.5

Short-term lease cost 3.0 3.2

Total lease costs $ 32.5 $ 27.7

Supplemental balance sheet information for the Company was as follows (in millions):

Right-of-use lease assets Other long-term assets $ 59.7 $ 59.4

Current lease liabilities Other current liabilities $ 20.2 $ 17.8

Long-term lease liabilities Other long-term liabilities $ 41.3 $ 42.4

Additional information related to operating leases was as follows:

Weighted average remaining lease term (years) 3.5 4.2

Weighted average discount rate 4.61 % 3.89 %

Remaining payments for operating leases having initial terms of more than one year as of July 31, 2024 were as follows (in millions):

Thereafter 2.4

Total future lease payments 67.6

Less imputed interest 6.1

Present value of future lease payments $ 61.5

Note 10. Earnings Per Share

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

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

Year Ended July 31,

Weighted average common shares outstanding

Dilutive impact of stock-based awards 1.9 1.8 1.5

Stock options excluded from net EPS calculation 0.0 0.0 1.6

Note 11. Stockholders’ Equity

Share Repurchases

In November 2023, the Board of Directors authorized the repurchase of up to 12.0 million shares of common stock under the Company’s stock repurchase plan, replacing the Company’s previous stock repurchase plan dated May 31, 2019. This repurchase authorization is effective until terminated by the Board of Directors. During the year ended July 31, 2024, the Company repurchased 2.5 million shares for $163.3 million. During the year ended July 31, 2023, the Company repurchased 2.5 million shares for $141.8 million. As of July 31, 2024, the Company had remaining authorization to repurchase 10.7 million shares under the November 2023 stock repurchase plan.

Treasury stock share activity was as follows:

Year Ended July 31,

Dividends Paid and Declared

Dividends paid were $1.02 and 94.0 cents per common share for the years ended July 31, 2024 and 2023, respectively. On July 26, 2024, the Company’s Board of Directors declared a cash dividend in the amount of 27.0 cents per common share, payable August 28, 2024, to stockholders of record as of August 13, 2024.

Note 12. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the years ended July 31, 2024 and 2023 were as follows (in millions):

Reclassifications, before tax — 6.3 (2) 0.3 6.6

Tax expense — (1.5) — (1.5)

Reclassifications, net of tax — 4.8 0.3 (3) 5.1

Other comprehensive loss, net of tax (24.2) (1.9) (0.3) (26.4)

Reclassifications, before tax — 7.5 (2) 0.3 7.8

Tax expense — (2.5) (0.1) (2.6)

Reclassifications, net of tax — 5.0 0.2 (3) 5.2

Other comprehensive income (loss), net of tax 34.0 0.3 (1.2) 33.1

(1)In fiscal 2024 and 2023, pension settlement accounting was triggered. In addition, pension curtailment accounting was triggered in fiscal 2024 and 2023. Remeasurements of the Company’s pension obligations resulted in an increase of $9.0 million and $6.9 million in fiscal 2024 and 2023, respectively, to accumulated other comprehensive loss on the Consolidated Balance Sheets, see Note 14.

(2)Amounts include reclassifications of $4.8 million and $6.6 million, a foreign currency translation loss of $0.1 million and gain of $1.4 million and net amortization of prior service costs and actuarial losses of $1.4 million and $2.3 million in fiscal 2024 and 2023, respectively. Amounts are included in other income, net in the Consolidated Statements of Earnings, see Note 14.

(3)Relates to designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Consolidated Balance Sheets to net sales, cost of sales and operating expenses in the Consolidated Statements of Earnings, see Note 15.

Note 13. Stock-Based Compensation

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

Stock Options

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

Pretax stock-based compensation expense associated with options was $14.2 million, $12.4 million and $11.6 million for the years ended July 31, 2024, 2023 and 2022, respectively.

Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted during the years ended July 31, 2024, 2023 and 2022 was $19.00, $15.67 and $14.24 per share, respectively.

The fair value of these awards was determined using the following inputs:

Year Ended July 31,

Expected dividend yield 1.6 % 1.6 % 1.6 %

Expected life:

Director grants 8 years 8 years 8 years

Officer grants 7 years 7 years 7 years

Non-officer grants 7 years 7 years 7 years

Option activity was as follows:

Options WeightedAverage ExercisePrice

The total intrinsic value of options exercised during the years ended July 31, 2024, 2023 and 2022 was $35.9 million, $20.2 million and $7.8 million, respectively.

The number of shares authorized as of July 31, 2024 for outstanding options and future grants was 11,954,309. Forfeited options are recorded as an offset to operating expenses in the Consolidated Statements of Earnings in the period in which they occur.

Outstanding and exercisable stock options as of July 31, 2024 were as follows:

As of July 31, 2024, the aggregate intrinsic value of stock options outstanding and exercisable was $149.5 million and $119.6 million, respectively.

DCI US Equity

DCI · 10-K · period ended 2024-07-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

DCI US Equity☆

DCI · 10-K · period ended 2024-07-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

DCI US Equity