UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~WASHINGTON,~~Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, ~~2021~~2022

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

Commission File Number 1-7891

DONALDSON COMPANY, INC.

(Exact name of registrant as specified in its charter)


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

1400 West 94th Street

Minneapolis, Minnesota 55431

(Address of principal executive offices, including zip code)

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

Not Applicable

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

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


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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of November ~~30, 2021, 123,532,038~~29, 2022, 121,686,920 shares of the registrant’s common stock, par value $5.00 per share, were outstanding.

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share amounts)

(Unaudited)

Three Months Ended
October 31,
2021 2020
Net sales $ 760.9 $ 636.6
Cost of sales 503.9 413.9
Gross profit 257.0 222.7
Operating expenses 149.5 135.5
Operating income 107.5 87.2
Interest expense 3.4 3.5
Other expense, net — 1.5
Earnings before income taxes 104.1 82.2
Income taxes 27.0 20.3
Net earnings $ 77.1 $ 61.9
Weighted average shares – basic 124.4 126.8
Weighted average shares – diluted 126.3 128.0
Net earnings per share – basic $ 0.62 $ 0.49
Net earnings per share – diluted $ 0.61 $ 0.48


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

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

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

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)
Three Months Ended
October 31,
2021 2020
Net earnings $ 77.1 $ 61.9
Other comprehensive (loss) income:
Foreign currency translation loss (10.5) (5.0)
Pension liability adjustment, net of deferred taxes of $(0.5) and $(1.5), respectively 2.0 6.1
Derivatives:
Gains on hedging derivatives, net of deferred taxes of $(0.2) and $0.0, respectively 1.0 0.3
Reclassifications of losses (gains) on hedging derivatives to net earnings, net of taxes of $(0.3) and $(0.2), respectively 0.3 (0.2)
Total derivatives 1.3 0.1
Net other comprehensive (loss) income (7.2) 1.2
Comprehensive income $ 69.9 $ 63.1


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

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

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)
October 31,
2021 July 31,
2021
Assets
Current assets:
Cash and cash equivalents $ 200.8 $ 222.8
Accounts receivable, less allowances of $6.6 and $7.0, respectively 545.1 552.7
Inventories, net 444.7 384.5
Prepaid expenses and other current assets 105.2 84.0
Total current assets 1,295.8 1,244.0
Property, plant and equipment, net 609.7 617.8
Goodwill 320.6 322.5
Intangible assets, net 59.2 61.6
Other long-term assets 153.2 154.3
Total assets $ 2,438.5 $ 2,400.2
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings $ 41.2 $ 48.5
Accounts payable 310.0 293.9
Accrued employee compensation and related taxes 108.6 126.8
Dividend payable — 27.6
Other current liabilities 122.1 109.8
Total current liabilities 581.9 606.6
Long-term debt 548.1 461.0
Non-current income taxes payable 81.1 80.7
Deferred income taxes 26.5 26.6
Other long-term liabilities 85.0 88.2
Total liabilities 1,322.6 1,263.1
Stockholders’ equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued — —
Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued 758.2 758.2
Additional paid-in capital 12.3 5.8
Retained earnings 1,685.9 1,608.4
Stock-based compensation plans 14.5 12.8
Accumulated other comprehensive loss (125.4) (118.2)
Treasury stock, 28,133,757 and 26,620,560 shares, respectively, at cost (1,229.6) (1,129.9)
Total stockholders’ equity 1,115.9 1,137.1
Total liabilities and stockholders’ equity $ 2,438.5 $ 2,400.2


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

Accounts receivable, less allowances of $7.0 and $7.6, respectively	584.2		616.6
Inventories, net	490.1		502.4
Prepaid expenses and other current assets	100.1		94.2
Total current assets	1,335.4		1,406.5
Property, plant and equipment, net	590.8		594.4

Goodwill	340.1		345.8
Intangible assets, net	95.2		99.8

Other long-term assets	150.5		153.8
Total assets	$	2,512.0	$	2,600.3

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

Accounts payable	320.7		338.5
Accrued employee compensation and related taxes	98.5		113.8


Income taxes payable	43.6		31.8
Dividend payable	—		28.3
Other current liabilities	106.3		113.5
Total current liabilities	569.3		629.6
Long-term debt	600.7		644.3
Non-current income taxes payable	69.6		69.4
Deferred income taxes	29.0		32.7

Other long-term liabilities	88.6		91.1
Total liabilities	1,357.2		1,467.1

Commitments and contingencies (Note 17)


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

Accumulated other comprehensive loss	(239.9)		(205.6)
Treasury stock, 29,764,794 and 29,089,612 shares, respectively, at cost	(1,318.5)		(1,282.1)
Total stockholders’ equity	1,154.8		1,133.2
Total liabilities and stockholders’ equity	$	2,512.0	$	2,600.3

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


		Three Months Ended October 31,					Three Months Ended October 31,
		2021		2020			2022		2021
Operating Activities	Operating Activities					Operating Activities
Net earnings	Net earnings	$	77.1	$	61.9	Net earnings	$	87.2	$	77.1
Adjustments to reconcile net earnings to net cash provided by operating activities:	Adjustments to reconcile net earnings to net cash provided by operating activities:					Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	23.8		23.3		Depreciation and amortization	22.4		23.8

Deferred income taxes	Deferred income taxes	0.8		(2.9)		Deferred income taxes	(3.4)		0.8
Stock-based compensation expense	Stock-based compensation expense	9.0		6.3		Stock-based compensation expense	9.7		9.0
Other, net	Other, net	2.7		7.3		Other, net	4.5		2.7
Changes in operating assets and liabilities	Changes in operating assets and liabilities	(70.5)		33.0		Changes in operating assets and liabilities	(2.2)		(70.5)

Net cash provided by operating activities	Net cash provided by operating activities	42.9		128.9		Net cash provided by operating activities	118.2		42.9

Investing Activities	Investing Activities					Investing Activities
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(18.3)		(18.8)		Purchases of property, plant and equipment	(28.1)		(18.3)

Net cash used in investing activities	Net cash used in investing activities	(18.3)		(18.8)		Net cash used in investing activities	(28.1)		(18.3)

Financing Activities	Financing Activities					Financing Activities

Proceeds from long-term debt	Proceeds from long-term debt	124.5		—		Proceeds from long-term debt	—		124.5
Repayments of long-term debt	Repayments of long-term debt	(35.0)		(40.0)		Repayments of long-term debt	(40.0)		(35.0)
Change in short-term borrowings	Change in short-term borrowings	(7.3)		(2.8)		Change in short-term borrowings	(3.3)		(7.3)

Purchase of treasury stock	Purchase of treasury stock	(102.9)		(15.6)		Purchase of treasury stock	(45.7)		(102.9)
Dividends paid	Dividends paid	(27.4)		(26.6)		Dividends paid	(28.2)		(27.4)
Tax withholding payments for stock compensation transactions		(0.2)		(2.2)
Exercise of stock options		2.8		8.3
Exercise of stock options and other						Exercise of stock options and other	4.4		2.6

Net cash used in financing activities	Net cash used in financing activities	(45.5)		(78.9)		Net cash used in financing activities	(112.8)		(45.5)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(1.1)		2.2		Effect of exchange rate changes on cash	(9.6)		(1.1)
(Decrease) increase in cash and cash equivalents		(22.0)		33.4
Decrease in cash and cash equivalents						Decrease in cash and cash equivalents	(32.3)		(22.0)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	222.8		236.6		Cash and cash equivalents, beginning of period	193.3		222.8
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	200.8	$	270.0	Cash and cash equivalents, end of period	$	161.0	$	200.8

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

Income taxes paid	Income taxes paid	$	23.2	$	13.2	Income taxes paid	$	19.8	$	23.2
Interest paid	Interest paid	$	3.1	$	3.6	Interest paid	$	5.4	$	3.1
Supplemental Disclosure of Non-Cash Operating and Investing Transactions	Supplemental Disclosure of Non-Cash Operating and Investing Transactions					Supplemental Disclosure of Non-Cash Operating and Investing Transactions
Accrued property, plant and equipment additions	Accrued property, plant and equipment additions	$	7.8	$	5.0	Accrued property, plant and equipment additions	$	14.7	$	7.8

Leased assets obtained in exchange for new operating lease liabilities	Leased assets obtained in exchange for new operating lease liabilities	$	4.3	$	1.2	Leased assets obtained in exchange for new operating lease liabilities	$	2.4	$	4.3

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions)

(Unaudited)


		Three Months Ended October 31, 2021 and 2020																	Three Months Ended October 31, 2022 and 2021
		Common Stock		Additional Paid-in Capital		Retained Earnings		Non- Controlling Interest		Stock-Based Compensation Plans		Accumulated Other Comprehensive Loss		Treasury Stock		Total			Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balance July 31, 2021		$	758.2	$	5.8	$	1,608.4	$	—	$	12.8	$	(118.2)	$	(1,129.9)	$	1,137.1
Balance as of July 31, 2022																		Balance as of July 31, 2022	$	758.2	$	17.0	$	1,845.7	$	(205.6)	$	(1,282.1)	$	1,133.2
Net earnings	Net earnings					77.1										77.1		Net earnings					87.2						87.2
Other comprehensive loss	Other comprehensive loss											(7.2)				(7.2)		Other comprehensive loss							(34.3)				(34.3)
Treasury stock acquired	Treasury stock acquired													(102.9)		(102.9)		Treasury stock acquired									(45.7)		(45.7)
Dividends declared	Dividends declared					0.2										0.2		Dividends declared					0.1						0.1
Stock compensation and other activity	Stock compensation and other activity			6.5		0.2				1.7				3.2		11.6		Stock compensation and other activity			5.2		(0.2)				9.3		14.3
Balance October 31, 2021		$	758.2	$	12.3	$	1,685.9	$	—	$	14.5	$	(125.4)	$	(1,229.6)	$	1,115.9
Balance as of October 31, 2022																		Balance as of October 31, 2022	$	758.2	$	22.2	$	1,932.8	$	(239.9)	$	(1,318.5)	$	1,154.8

Balance July 31, 2020		$	758.2	$	—	$	1,430.0	$	5.8	$	15.9	$	(184.0)	$	(1,033.0)	$	992.9
Balance as of July 31, 2021																		Balance as of July 31, 2021	$	758.2	$	3.2	$	1,623.8	$	(118.2)	$	(1,129.9)	$	1,137.1
Net earnings	Net earnings					61.9										61.9		Net earnings					77.1						77.1
Other comprehensive income												1.2				1.2
Other comprehensive loss																		Other comprehensive loss							(7.2)				(7.2)
Treasury stock acquired	Treasury stock acquired													(15.6)		(15.6)		Treasury stock acquired									(102.9)		(102.9)
Dividends declared	Dividends declared					0.1										0.1		Dividends declared					0.2						0.2
Stock compensation and other activity	Stock compensation and other activity			2.7		(0.1)		0		(2.9)				12.4		12.1		Stock compensation and other activity			8.5		(0.1)				3.2		11.6
Balance October 31, 2020		$	758.2	$	2.7	$	1,491.9	$	5.8	$	13.0	$	(182.8)	$	(1,036.2)	$	1,052.6
Balance as of October 31, 2021																		Balance as of October 31, 2021	$	758.2	$	11.7	$	1,701.0	$	(125.4)	$	(1,229.6)	$	1,115.9

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Donaldson Company, Inc. and its subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of earnings, comprehensive income, financial position, cash flows and changes in stockholders’ equity have been included and ~~are~~are of a normal recurring nature. Operating results for the three ~~month period~~months ended October 31, ~~2021~~2022 are not necessarily indicative of the results that may be expected for future periods. The ~~year end~~year-end Condensed Consolidated Balance Sheet information was derived from the Company’s Audited Consolidated Financial Statements but does not include all disclosures required by GAAP. For further information, refer to the Audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2021.~~2022.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s joint ventures are not majority-owned and are accounted for under the equity method. Certain reclassifications to previously reported financial information on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Stockholders’ Equity have been made to conform to the current period presentation.

Use of Estimates

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

The effects of the ongoing Coronavirus (COVID-19) pandemic continue to impact global economic conditions. The Company continues to experience supply chain disruptions, including global logistic challenges, labor constraints and low supplies of steel, petrochemical products and filter media. These disruptions have slowed the Company’s production speed and increased lead times. The Company has undertaken steps to mitigate these negative impacts, suchOperating Environment

Inflation

While inflation was not as ~~qualifying additional suppliers. These disruptions impeded the Company’s ability to meet strengthening demand. This dynamic impacted results~~significant in the first quarter of fiscal ~~2022~~2023, the Company continues to experience the effects of inflation from the prior year related to raw materials and ~~is expected to continue~~other expenses, including labor and energy. These inflationary pressures have had an adverse impact on the Company’s profit margins throughout the first quarter of fiscal ~~2022.~~2023, however they have been generally mitigated by pricing actions implemented in the prior year.

New Accounting Standards Not Yet Adopted

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

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022, with early application permitted. This ASU is applicable to the Company’s fiscal year beginning in the first quarter of fiscal 2024. The Company ~~assessed ASUs recently issued and determined that they were either~~does not ~~applicable or were not expected to~~expect adoption of this standard will have a material impact on its financial statements.

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

Note 2. Acquisitions

~~On November 22, 2021,~~In the second quarter of fiscal 2022, the Company acquired Pearson Arnold Industrial Services (PAIS), headquartered in New Hope, Minnesota, for cash consideration of $3.3 million, net of cash acquired, and contingent consideration with a maximum payout of $1.7 million, and Solaris Biotechnology S.r.l (Solaris), headquartered in ~~Porto~~ Mantovano, Italy, with U.S. operations based in Berkeley, California, for ~~approximately~~cash consideration of €41 million, or ~~$46.2 million. Solaris~~$45.7 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 Products segment. Solaris designs and manufactures bioprocessing equipment, including bioreactors, fermenters and tangential flow filtration systems for use in food and beverage, ~~biotechnology~~biotechnology and other life sciences markets. Solaris ~~expects to generate calendar year 2021 sales of approximately €5 million, or $5.6 million, and will be~~is reported within the Company’s IFS business in the Industrial ~~Filtration Solutions~~Products segment. Net sales of these acquisitions were immaterial to the Condensed Consolidated Statement of Earnings for the three months ended October 31, 2022.

In the fourth quarter of fiscal 2022, the Company acquired Purilogics LLC (Purilogics) headquartered in Greenville, South Carolina, for cash consideration of $19.9 million, net of cash acquired, and contingent consideration with a maximum payout of $29.0 million. Purilogics is a biotechnology company that leverages a novel technology platform for the development of membrane chromatography products. Purilogics offers a broad portfolio of purification tools for a wide range of biologics. Purilogics’ proprietary formulations and processes create membranes that have significant competitive advantages, enabling faster and more cost-effective production of increasingly complex biologic drugs. Purilogics was reported within the Company’s IFS business in the Industrial Products segment. Management expects to finalize the purchase accounting for this acquisition by the ~~first~~fourth quarter of fiscal 2023. Net sales of Purilogics were immaterial to the Condensed Consolidated Statement of Earnings for the three months ended October 31, 2022.

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

Purchase Price Summary

The components of acquisitions, net of cash acquired, as of each acquisition date (in millions):


Intangible assets:
Technology	$	45.9
Trademarks and tradenames	4.0
Customer relationships	3.0
Non-competition agreements	0.6
Backlog	0.2
Intangible assets acquired	53.7
Tangible liabilities, net	(2.7)
Assets acquired, net	51.0
Goodwill	42.8
Aggregate purchase price	93.8
Less contingent consideration	(24.6)
Less cash acquired	(0.3)
Acquisitions, net of cash acquired	$	68.9

Note 3. Revenue

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

Revenue Disaggregation

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


		Three Months Ended October 31,				Three Months Ended October 31,
		2021		2020				2022		2021
U.S. and Canada	U.S. and Canada	$	300.8	$	251.0		U.S. and Canada	$	375.2	$	300.8
Europe, Middle East and Africa (EMEA)	Europe, Middle East and Africa (EMEA)	224.6		187.8			Europe, Middle East and Africa (EMEA)	226.7		224.6
Asia Pacific		163.7		144.1
Latin America		71.8		53.7
Asia Pacific (APAC)							Asia Pacific (APAC)	150.7		163.7
Latin America (LATAM)							Latin America (LATAM)	94.7		71.8
Total net sales	Total net sales	$	760.9	$	636.6		Total net sales	$	847.3	$	760.9

See Note 1718 for net sales disaggregated by ~~segment.~~segment and business unit.

Contract Assets and Liabilities

The satisfaction of performance obligations and the resulting recognition of revenue typically correspond with billing of the customer. In limited circumstances, the customer may be billed at a time later than when revenue is recognized, resulting in contract assets, which are reported in other current assets on the Condensed Consolidated Balance Sheets. Contract assets were ~~$18.3~~$16.9 million and ~~$14.9~~$17.7 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively. In other limited circumstances, the customer may make a payment at a time earlier than when revenue is recognized and prior to the satisfaction of performance obligations, resulting in contract liabilities, which are reported in other current liabilities ~~and other long-term liabilities~~ on the Condensed Consolidated Balance Sheets. Contract liabilities were ~~$12.7~~$23.4 million and ~~$12.2~~$22.3 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively.

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

Note 4. Inventories, Net

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


		October 31, 2021		July 31, 2021			October 31, 2022		July 31, 2022
Raw materials	Raw materials	$	164.0	$	148.1	Raw materials	$	186.3	$	197.6
Work in process	Work in process	53.6		43.2		Work in process	59.2		56.1
Finished products	Finished products	227.1		193.2		Finished products	244.6		248.7
Total inventories, net	Total inventories, net	$	444.7	$	384.5	Total inventories, net	$	490.1	$	502.4

Note 5. Property, Plant and Equipment, Net

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


		October 31, 2021		July 31, 2021			October 31, 2022		July 31, 2022
Land	Land	$	27.2	$	27.1	Land	$	25.0	$	25.6
Buildings	Buildings	409.6		410.8		Buildings	389.6		396.2
Machinery and equipment	Machinery and equipment	971.2		972.0		Machinery and equipment	930.9		940.1
Computer software	Computer software	144.2		144.3		Computer software	140.8		141.0
Construction in progress	Construction in progress	45.0		40.6		Construction in progress	87.3		72.1
Less accumulated depreciation	Less accumulated depreciation	(987.5)		(977.0)		Less accumulated depreciation	(982.8)		(980.6)
Total property, plant and equipment, net	Total property, plant and equipment, net	$	609.7	$	617.8	Total property, plant and equipment, net	$	590.8	$	594.4

Note 6. Goodwill and Intangible Assets

Goodwill

The Company ~~has allocated~~allocates goodwill to reporting units within its Engine Products and Industrial Products segments. There were no dispositions or impairment charges recorded during the three months ended October 31, ~~2021~~2022 and ~~2020.~~2021. Goodwill is assessed for impairment annually during the third quarter of the fiscal year, or more frequently if events or changes in circumstances indicate ~~that~~ the asset may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal ~~2021~~2022 and did not record any impairment as a result of this assessment.

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

Engine
Products Segment Industrial
Products Segment Total
Balance as of July 31, 2021 $ 84.7 $ 237.8 $ 322.5
Goodwill acquired — — —
Currency translation (0.1) (1.8) (1.9)
Balance as of October 31, 2021 $ 84.6 $ 236.0 $ 320.6



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

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

Intangible Assets

Intangible asset classes were as follows (in millions):

October 31, 2021 July 31, 2021
Gross Carrying Amount Accumulated Amortization Total Gross Carrying Amount Accumulated Amortization Total
Customer relationships $ 107.0 $ (57.8) $ 49.2 $ 107.5 $ (56.4) $ 51.1
Patents, trademarks and technology 24.3 (14.3) 10.0 24.3 (13.8) 10.5
Total intangible assets $ 131.3 $ (72.1) $ 59.2 $ 131.8 $ (70.2) $ 61.6


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

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

Amortization expense was ~~$2.2~~$2.5 million and ~~$2.1~~$2.2 million for the three months ended October 31, 2022 and 2021, respectively. Amortization expense is included in selling, general and ~~2020, respectively.~~administrative expenses in the Condensed Consolidated Statements of Earnings.

Note 7. Long-Term Debt

As of October 31, ~~2021,~~2022, there was ~~$427.5~~$407.5 million available and $85.0 million outstanding on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

In fiscal 2021, the Company entered into an agreement in which the Company would issue and sell two tranches of unsecured senior notes, totaling $150.0 million. The first tranche, received in August 2021, was a $100.0 million 10 year note due 2031 at a fixed interest rate of 2.50%. The second tranche, received in November 2021, was a $50.0 million seven year note due 2028 at a fixed interest rate of 2.12%.

Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of October 31, ~~2021,~~2022, the Company was in compliance with all such covenants.

Note 8. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. In~~ternal~~Internal Revenue Service has completed examinations of the Company’s U.S. federal income tax returns through ~~2017.~~fiscal 2018. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before ~~2016.~~fiscal 2017.

As of October 31, ~~2021,~~2022, gross unrecognized tax benefits were ~~$19.0~~$15.3 million and accrued interest and penalties on these unrecognized tax benefits were ~~$1.7~~$1.3 million. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes in the Condensed Consolidated Statements of Earnings. The Company estimates ~~that~~ within the next 12 months it is reasonably possible ~~that~~ its uncertain tax positions could decrease by as much as ~~$5.3~~$3.2 million due to lapses in statutes of limitation. The statutes of limitation periods for the Company’s various tax jurisdictions range from two years to 10 years.

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

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

Note 9. Earnings Per Share

Basic net earnings per share (EPS) is computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net ~~earnings per share~~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 ~~earnings per share~~EPS calculations were as follows (in millions, except per share amounts):


		Three Months Ended October 31,				Three Months Ended October 31,
		2021		2020				2022		2021
Net earnings	Net earnings	$	77.1	$	61.9		Net earnings	$	87.2	$	77.1

Weighted average common shares outstanding	Weighted average common shares outstanding						Weighted average common shares outstanding
Weighted average common shares – basic	Weighted average common shares – basic	124.4		126.8			Weighted average common shares – basic	122.6		124.4
Dilutive impact of stock-based awards	Dilutive impact of stock-based awards	1.9		1.2			Dilutive impact of stock-based awards	1.3		1.9
Weighted average common shares – diluted	Weighted average common shares – diluted	126.3		128.0			Weighted average common shares – diluted	123.9		126.3

Net earnings per share – basic		$	0.62	$	0.49
Net earnings per share – diluted		$	0.61	$	0.48
Stock options excluded from net earnings per share calculation		—		1.7
Net EPS – basic							Net EPS – basic	$	0.71	$	0.62
Net EPS – diluted							Net EPS – diluted	$	0.70	$	0.61
Stock options excluded from net EPS calculation							Stock options excluded from net EPS calculation	1.7		—

Note 10. Stockholders’ Equity

Share Repurchases

The Company’s Board of Directors has authorized the repurchase of up to 13.0 million shares of common stock under the Company’s stock repurchase plan. This repurchase authorization is effective until terminated by the Board of Directors. During the three months ended October 31, ~~2021,~~2022, the Company repurchased ~~1.6~~0.9 million shares for ~~$102.9~~$45.7 million. As of October 31, ~~2021,~~2022, the Company had remaining authorization to repurchase ~~6.7~~4.5 million shares under this plan.

Dividends Paid and Declared

Dividends paid were 23.0 cents and 22.0 cents ~~and 21.0 cents~~ per common share for the three months ended October 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

On November ~~19, 2021,~~18, 2022, the Company’s Board of Directors declared a cash dividend in the amount of ~~22.0~~23.0 cents per common share, payable December ~~22, 2021,~~20, 2022, to stockholders of record as of December ~~7, 2021.~~5, 2022.

1011

Note 11. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the three months ended October 31, ~~2021~~2022 and ~~2020~~2021 were as follows (in millions):


													Foreign Currency Translation Adjustment		Pension Benefits			Derivative Financial Instruments			Total
Balance as of July 31, 2022, net of tax												Balance as of July 31, 2022, net of tax	$	(143.6)	$	(67.5)		$	5.5		$	(205.6)
Other comprehensive (loss) income before reclassifications and tax												Other comprehensive (loss) income before reclassifications and tax	(40.1)		—			4.5			(35.6)
Tax expense												Tax expense	—		—			(1.1)			(1.1)
Other comprehensive (loss) income before reclassifications, net of tax												Other comprehensive (loss) income before reclassifications, net of tax	(40.1)		—			3.4			(36.7)

Reclassifications, before tax												Reclassifications, before tax	—		1.6		(1)	1.8			3.4
Tax expense												Tax expense	—		(0.4)			(0.6)			(1.0)
Reclassifications, net of tax												Reclassifications, net of tax	—		1.2			1.2		(2)	2.4
Other comprehensive (loss) income, net of tax												Other comprehensive (loss) income, net of tax	(40.1)		1.2			4.6			(34.3)
Balance as of October 31, 2022, net of tax												Balance as of October 31, 2022, net of tax	$	(183.7)	$	(66.3)		$	10.1		$	(239.9)
		Foreign Currency Translation Adjustment		Pension Benefits			Derivative Financial Instruments			Total
Balance as of July 31, 2021, net of tax	Balance as of July 31, 2021, net of tax	$	(44.0)	$	(74.7)		$	0.5		$	(118.2)	Balance as of July 31, 2021, net of tax	$	(44.0)	$	(74.7)		$	0.5		$	(118.2)
Other comprehensive (loss) income before reclassifications and tax	Other comprehensive (loss) income before reclassifications and tax	(10.5)		—			1.2			(9.3)		Other comprehensive (loss) income before reclassifications and tax	(10.5)		—			1.2			(9.3)
Tax expense	Tax expense	—		—			(0.2)			(0.2)		Tax expense	—		—			(0.2)			(0.2)
Other comprehensive (loss) income before reclassifications, net of tax	Other comprehensive (loss) income before reclassifications, net of tax	(10.5)		—			1.0			(9.5)		Other comprehensive (loss) income before reclassifications, net of tax	(10.5)		—			1.0			(9.5)

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

Balance as of July 31, 2020, net of tax		$	(74.0)	$	(110.0)		$	—		$	(184.0)
Other comprehensive (loss) income before reclassifications and tax		(5.0)		4.0		(2)	0.3			(0.7)
Tax expense		—		(1.0)			—			(1.0)
Other comprehensive (loss) income before reclassifications, net of tax		(5.0)		3.0			0.3			(1.7)
Reclassifications, before tax		—		3.6		(3)	—			3.6
Tax expense		—		(0.5)			(0.2)			(0.7)
Reclassifications, net of tax		—		3.1			(0.2)		(1)	2.9
Other comprehensive (loss) income, net of tax		(5.0)		6.1			0.1			1.2
Balance as of October 31, 2020, net of tax		$	(79.0)	$	(103.9)		$	0.1		$	(182.8)

(1)~~Relates to designated forward~~Amounts include foreign currency ~~exchange contracts that were reclassified from accumulated~~translation losses of $1.0 million and $0.5 million and net amortization of prior service costs and actuarial losses of $0.6 million and $2.0 million in fiscal 2023 and 2022, respectively, included in other ~~comprehensive loss to other expense,~~income, net in the Condensed Consolidated Statements of Earnings, see Note ~~14.~~13.

(2)~~In fiscal 2021, pension curtailment accounting was triggered and the Company recorded a charge of $0.8 million. Remeasurements of the Company’s pension obligations resulted in a decrease~~Relates to ~~accumulated other comprehensive loss of $4.0 million, see Note 13.~~

~~(3)Includes net amortization of prior service costs and actuarial losses included in net periodic benefit costs~~designated foreign currency forward contracts that were reclassified from accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets to net sales, cost of sales and ~~operating~~selling, general, and administrative expenses in the Condensed Consolidated Statements of Earnings, see Note ~~13.~~14.

Note 12. Stock-Based Compensation

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

Stock Options

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

~~For the~~ ~~three months ended October 31, 2021 and 2020, the Company recorded pretax~~Pretax stock-based compensation expense associated with options ofwas $7.5 million and $6.9 million for the three months ended October 31, 2022 and ~~$5.1 million,~~2021, respectively.

Fair value is calculated using the Black-Scholes option pricing model. The weighted average fair value for options granted was $15.50 and $14.24 per share during the three months ended October 31, 2022 and 2021, ~~and 2020 was $14.24 and $10.08 per share,~~ respectively.

1112

Option activity was as follows:

Options Weighted
Average
Exercise Price
Balance outstanding as of July 31, 2021 6,444,743 $ 44.05
Granted 834,105 59.40
Exercised (70,555) 38.41
Canceled/forfeited (9,131) 50.21
Balance outstanding as of October 31, 2021 7,199,162 $ 45.88


	Options	Weighted Average Exercise Price
Balance outstanding as of July 31, 2022	6,927,161	$	46.32
Granted	875,900	50.89
Exercised	(175,631)	36.60
Expired/forfeited	(27,660)	53.69
Balance outstanding as of October 31, 2022	7,599,770	$	47.04

Performance-Based Awards

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

~~For~~Pretax performance-based awards expense was $1.8 million and $1.7 million for the three ~~months~~months ended October 31, 2022 and 2021, ~~and 2020, the Company recorded pretax performance-based award expense of $1.7 million and $0.9 million,~~ respectively.

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

Performance Shares Weighted
Average Grant
Date Fair
Value
Balance outstanding as of July 31, 2021 200,567 $ 48.76
Granted 88,400 59.40
Vested — —
Canceled — —
Balance outstanding as of October 31, 2021 288,967 $ 52.02


	Performance Shares	Weighted Average Grant Date Fair Value
Balance outstanding as of July 31, 2022	188,206	$	52.20
Granted	113,100	50.89
Vested	—	—
Forfeited	—	—
Balance outstanding as of October 31, 2022	301,306	$	51.71

Note 13. Employee Benefit Plans

~~Defined Benefit Pension Plans~~

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

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

Three Months Ended
October 31,
2021 2020
Service cost $ 1.8 $ 2.2
Interest cost 2.5 2.4
Expected return on assets (6.3) (5.8)
Prior service cost amortization 0.1 0.1
Actuarial loss amortization 1.8 2.2
Curtailment charge — 0.8
Net periodic pension (benefits) costs $ (0.1) $ 1.9

In fiscal 2021, the Company recorded a pension curtailment charge of $0.8 million as a result of freezing the pension benefits to certain employees. The corresponding remeasurement resulted in a decrease in the Company’s pension obligation and an adjustment to ~~other comprehensive income~~ ~~in the Condensed Consolidated Statement of Comprehensive Income of $4.0 million. See Note 11.~~


	Three Months Ended October 31,
	2022		2021

Service cost	$	1.6	$	1.8
Interest cost	4.1		2.5
Expected return on assets	(6.3)		(6.3)
Prior service cost amortization	0.1		0.1
Actuarial loss amortization	0.5		1.8


Net periodic pension costs	$	—	$	(0.1)

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

1213

Note 14. Derivative Instruments and Hedging

Derivative Fair Value Measurements

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

Contract provisions may require the posting of collateral or settlement of the contracts for various reasons, including if the Company’s credit ratings are downgraded below its investment grade credit rating by any of the major credit agencies or for cross default contractual provisions if there is a failure under other financing arrangements related to payment terms or covenants. As of October 31, 2022 and July 31, 2022, no collateral was posted.

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

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

The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges were $118.1 million and $158.0 million as of October 31, 2022 and July 31, 2022, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges were $211.4 million and $151.6 million as of October 31, 2022 and July 31, 2022, respectively.

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

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

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

Net Investment Hedges

The Company uses fixed-to-fixed cross-currency swap agreements to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe. The Company has elected the spot method for designating these contracts as net investment hedges.

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

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

Cash Flows

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

Note ~~14.~~15. Fair Value Measurements

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

Short-Term Financial Instruments

As of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments, and are classified as Level 1 in the fair value hierarchy.

Long-Term Debt

As of October 31, ~~2021,~~2022, the estimated fair values of fixed interest rate long-term debt were ~~$392.3~~$368.4 million compared to the carrying values of ~~$375.0~~$425.0 million. As of July 31, ~~2021,~~2022, the estimated fair values of fixed interest rate long-term debt were ~~$297.4~~$396.9 million compared to the carrying values of ~~$275.0~~$425.0 million. The fair values are estimated by discounting the projected cash flows using the interest rates at which similar amounts of debt could currently be borrowed. The carrying values of total variable interest rate long-term debt were ~~$175.7~~$178.0 million and ~~$188.3~~and $221.7 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively, and approximate their fair values. Long-term ~~debt~~debt is classified as Level 2 in the fair value hierarchy.

Equity Method Investments

The Company holds equity method investments in its joint ventures, which are included in other long-term assets on the Condensed Consolidated Balance Sheets. The aggregate carrying amount of these investments was ~~$23.9~~$20.4 million and ~~$24.2~~$22.4 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively. These equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s equity method investments has not been adjusted as there have been no triggering events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event ~~that~~ these investments are required to be measured, they would fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities.

Derivative Fair Value Measurements

The Company enters into derivative instrument agreements, including forward foreign currency exchange 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. The Company does not enter into derivative instrument agreements for trading or speculative purposes.

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

~~Forward Foreign Currency Exchange Contracts~~

~~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.~~hedging, see Note 14.

1315

Fair Value of Derivatives Contracts

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

Total Notional Amounts Assets Liabilities
October 31, July 31, October 31, July 31, October 31, July 31,
2021 2021 2021 2021 2021 2021
Designated as hedging instruments
Forward foreign currency exchange contracts $ 86.1 $ 117.2 $ 1.8 $ 1.0 $ 1.2 $ 1.2
Net investment hedge 55.8 55.8 1.1 1.1 0.7 2.0
Total designated 141.9 173.0 2.9 2.1 1.9 3.2
Not designated as hedging instruments
Forward foreign currency exchange contracts 222.0 154.2 1.6 0.5 0.6 0.4
Total not designated 222.0 154.2 1.6 0.5 0.6 0.4
Total $ 363.9 $ 327.2 $ 4.5 $ 2.6 $ 2.5 $ 3.6

Forward foreign currency exchange contract assets were recorded in other current assets and in other long-term assets on the Condensed Consolidated Balance Sheets. Forward foreign currency exchange contract liabilities were recorded in other current liabilities on the Condensed Consolidated Balance Sheets. The net investment hedge was recorded in other current assets and in other long-term liabilities on the Condensed Consolidated Balance Sheets.

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

~~Hedges which are not designated are recognized in~~ other expense, net in the Condensed Consolidated Statements of Earnings timed to coincide with the related hedged transactions. Changes in the fair value of these hedges are, likewise, recognized in other expense, net in the Condensed Consolidated Statements of Earnings.

The Company classifies cash flows from derivatives designated in a qualifying cash flow hedging relationship in the same category as the cash flows from the hedged items. Cash flows from these derivative transactions are recorded in operating activities in the Condensed Consolidated Statements of Cash Flows.



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

Total designated		14.4		8.5		2.3		2.7

Not designated as hedging instruments
Foreign currency forward contracts	Other current liabilities	1.6		1.7		2.0		2.5
Total not designated		1.6		1.7		2.0		2.5
Total		$	16.0	$	10.2	$	4.3	$	5.2

Amounts related to excluded components, such as forward ~~foreign currency exchange contracts~~points, are excluded from the assessment of hedge effectiveness of net investment hedges, and are expected to be reclassified into earnings during the next 12 months based on the timing of inventory purchases and sales. Amounts related to excluded components associated with the net investment hedge are expected to be reclassified into earnings through its termination in July 2029.throughout their maturity dates. See Note 11 for additional information on accumulated other comprehensive loss.

~~Credit Risk Related~~Fair Value of Contingent ~~Features~~Consideration

~~Contract provisions may require the posting of collateral or settlement~~The fair value of the ~~contracts for various reasons, including if~~contingent consideration liability is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market, and thus, represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows or earnings generally represent the only significant unobservable inputs. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

The fair value of the Company’s ~~credit ratings are downgraded below its investment grade credit rating by any~~contingent consideration liability that uses unobservable inputs, was $24.7 million as of October 31, 2022 and July 31, 2022. The maximum potential payout of the ~~major credit agencies or for cross default contractual provisions if there is a failure under other financing arrangements related to payment terms or covenants. As~~contingent consideration as of October 31, 2022 and July 31, 2022 was $30.7 million. There was no contingent consideration as of October 31, 2021, ~~and July 31, 2021, no collateral was posted.~~see Note 17.

~~Counterparty Credit Risk~~

There is risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based on their credit ratings and certain other financial factors.

Note ~~15.~~16. Guarantees

Letters of Credit

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


		October 31, 2021		July 31, 2021			October 31, 2022		July 31, 2022
Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	$	7.5	$	7.7	Contingent liability for standby letters of credit issued under the Company’s revolving credit facility	$	7.5	$	7.5
Amounts drawn for letters of credit under the Company’s revolving credit facility	Amounts drawn for letters of credit under the Company’s revolving credit facility	$	—	$	—	Amounts drawn for letters of credit under the Company’s revolving credit facility	$	—	$	—

Advanced Filtration Systems Inc. (AFSI)

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

The outstanding debt relating to AFSI, which the Company guarantees half, was ~~$38.6~~$67.7 million and ~~$37.8~~$68.8 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively. AFSI has $63.0 million in a revolving credit facility, which expires in 2024, and $17.0 million in an additional multi-currency revolving credit facility, which terminates upon notification by either party.

Earnings from AFSI, which are recorded in other ~~expense,~~income, net in the Condensed Consolidated Statements of Earnings, were ~~$1.2~~$1.3 million and ~~$2.0~~$1.2 million for the three months ended October 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

Note ~~16.~~17. Commitments and Contingencies

The Company records provisions when it is probable ~~that~~ a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and litigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the estimated liability in its Condensed Consolidated Financial Statements for claims or litigation is adequate and appropriate for the probable and estimable outcomes. Liabilities recorded were not material to the Company’s financial position, results of operations or liquidity. The Company believes it is remote that the settlement of any of the currently identified claims or litigation will be materially in excess of what is accrued.

~~Warranty Reserves~~Contingent Compensation and Consideration

Acquisition Agreement - Purilogics

The Company ~~estimates warranty expense~~has an acquisition purchase agreement with Purilogics, which includes deferred payment provisions representing potential milestone payments for Purilogics’ former owners. The provisions are made up of two general types of arrangements, contingent compensation and contingent consideration. The contingent compensation arrangement is contingent on ~~certain products~~the former owner’s future employment with the Company, and the related amounts are recognized over the required employment period. The contingent consideration is not contingent on employment and was recorded as purchase consideration in both other current and other long-term liabilities on the Condensed Consolidated Balance Sheets at the time of ~~sale using quantitative measures~~the initial acquisition based on ~~historical warranty claim experience~~the fair value of the estimated liability. The amounts are paid over a three- to five-year period, contingent on the achievement of certain revenue and evaluation of specific customer warranty issues. There were no individually or collectively material specific warranty matters accrued for, or significant settlements made, during the three months ended October 31, 2021 and 2020. manufacturing milestones.

The ~~Company’s accrued warranty reserves were $5.9~~total contingent compensation arrangement liability was $0.3 million and ~~$6.1~~$0.1 million as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.0 million as of October 31, 2022 and July 31, 2022, inclusive of the $0.3 million and $0.1 million accrued, respectively.

The total contingent consideration liability was $23.0 million as of both October 31, 2022 and July 31, 2022, and was included in other current and other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company primarily determines the contingent consideration liability based on the forecasted probability of achieving certain milestones. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. The maximum payout of the contingent consideration was $29.0 million, inclusive of the $23.0 million accrued as of both October 31, 2022 and July 31, 2022.

Other Acquisition Agreements

For other acquisitions, the total contingent compensation arrangement liability was $0.4 million and $0.3 million as of October 31, 2022 and July 31, 2022, respectively, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.1 million, which terminates in five years, inclusive of the $0.4 million and $0.3 million accrued as of October 31, 2022 and July 31, 2022, respectively.

The total contingent consideration liability was $1.7 million, which was included in other long-term liabilities on the Condensed Consolidated Balance Sheets, as of October 31, 2022 and July 31, 2022, respectively. The maximum payout of the contingent consideration was $1.7 million, which terminates in three years and was fully accrued as of October 31, 2022 and July 31, 2022, respectively.

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

Note ~~17.~~18. Segment Reporting

The Company’s ~~reportable~~ operating segments are Engine Products and Industrial Products. The Engine Products segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road, Aftermarket and Aerospace and Defense business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications as well as exhaust and emissions. Applications include air filtration systems, fuel and lube systems, hydraulic applications and exhaust and emissions systems and sensors, indicators and monitoring systems. Engine Products sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture, transportation, aerospace and defense end markets and to independent distributors, OEM dealer networks, private label accounts and large fleets.

The Industrial Products segment is organized based on product type and consists of the Industrial Filtration Solutions (IFS), Gas Turbines Systems (GTS) and Special Applications business units. Within the IFS business unit, products consist of dust, fume and mist collectors, compressed air purification systems, gas and liquid filtration for food, beverage and industrial processes. The GTS business unit products consist of air filtration systems for gas turbines. Special Applications products include polytetrafluoroethylene membrane-based products as well as specialized air and gas filtration systems for applications including hard disk drives and semiconductor manufacturing and sensors, indicators and monitoring systems. Industrial Products sells to various dealers, distributors, OEMs and end users.

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

Segment details were as follows (in millions):


	Three Months Ended October 31,
	2022		2021
Net sales
Engine Products segment	$	604.5	$	527.2
Industrial Products segment	242.8		233.7
Total Company	$	847.3	$	760.9

Earnings (loss) before income taxes
Engine Products segment	$	90.9	$	72.3
Industrial Products segment	37.8		38.3
Corporate and unallocated	(12.1)		(6.5)
Total Company	$	116.6	$	104.1

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



	Three Months Ended October 31,
	2022		2021
Engine Products segment
Off-Road	$	108.0	$	93.9
On-Road	36.0		31.5
Aftermarket	426.9		374.3
Aerospace and Defense	33.6		27.5
Total Engine Products segment	604.5		527.2

Industrial Products segment
Industrial Filtration Solutions	180.9		165.5
Gas Turbine Systems	25.5		16.6
Special Applications	36.4		51.6
Total Industrial Products segment	242.8		233.7
Total Company	$	847.3	$	760.9

Concentrations

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

Organizational Redesign

During the first quarter of fiscal 2023, the Company announced a company-wide organizational redesign to further support the Company’s growth strategies and better serve its customers. Effective November 1, 2022, as a result of the organizational redesign, the Company established a new segment reporting structure which resulted in three reportable segments: Mobile Solutions, Industrial Solutions and Life Sciences. The organizational structure also includes Corporate and unallocated which encompasses corporate expenses determined to be non-allocable to the segments, such as interest expense, restructuring charges and certain incentive compensation. The Company determines its operating segments consistent with the manner in which it manages its operations and evaluates performance for internal review and decision-making. ~~Corporate and unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest expense and certain incentive compensation~~.

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

~~Segment details were as follows (in millions):~~

Three Months Ended
October 31,
2021 2020
Net sales
Engine Products segment $ 527.2 $ 436.2
Industrial Products segment 233.7 200.4
Total Company $ 760.9 $ 636.6

Earnings before income taxes
Engine Products segment $ 72.3 $ 60.4
Industrial Products segment 38.3 27.5
Corporate and unallocated (6.5) (5.7)
Total Company $ 104.1 $ 82.2

~~Net sales by product group were as follows (in millions):~~

Three Months Ended
October 31,
2021 2020
Engine Products segment
Off-Road $ 93.9 $ 64.8
On-Road 31.5 32.0
Aftermarket 374.3 317.0
Aerospace and Defense 27.5 22.4
Total Engine Products segment 527.2 436.2
Industrial Products segment
Industrial Filtration Solutions 165.5 135.6
Gas Turbine Systems 16.6 23.0
Special Applications 51.6 41.8
Total Industrial Products segment 233.7 200.4
Total Company $ 760.9 $ 636.6

~~Concentrations~~

There were no customers that accounted for over 10% of net sales for the three months ended October 31, 2021 or 2020. There were no customers that accounted for over 10% of gross accounts receivable as of October 31, 2021 or as of July 31, 2021.

Note ~~18.~~19. Restructuring

In October 2022, in conjunction with the ~~second quarter of fiscal 2021,~~organizational redesign, the Company ~~initiated activities to further improve its operating~~recorded $7.6 million of charges consisting of $4.2 million of severance charges and ~~manufacturing cost structure, primarily in EMEA.~~$3.4 million of other organizational redesign costs. These ~~activities resulted in restructuring expenses, primarily related to severance, of $14.8 million. Charges of $5.8 million were~~amounts have been included in ~~cost of sales~~selling, general and ~~$9.0 million were included in operating~~administrative expenses in the accompanying Condensed Consolidated ~~Statements~~Statement of Earnings for the year ended July 31, 2021. Charges of $2.5 million relate to the Engine Products segment, $6.5 million relate to the Industrial Products segment and $5.8 million relate to corporate and unallocated expenses. For the three months ended October 31, 2021, $2.5 million of the restructuring expenses were paid. As of October 31, 2021, $7.8 million was accrued.Earnings.

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

Overview

~~The Company~~Founded in 1915, Donaldson Company, Inc. is a global ~~manufacturer~~leader in technology-led filtration products and solutions, serving a broad range of ~~filtration systems~~industries and ~~replacement parts. The Company’s core strengths include leading filtration technology, strong customer relationships~~advanced markets. Donaldson’s diverse, skilled employees at over 140 locations, 74 of which are manufacturing and ~~its global presence. Products are manufactured and sold around~~distribution centers, on six continents, partner with customers — from small business owners to the ~~world. Products are sold to~~world’s biggest original equipment ~~manufacturers (OEMs), distributors, dealers~~manufacturer (OEM) brands — to solve complex filtration challenges. Customers choose Donaldson’s filtration solutions due to their stringent performance requirements, natural replacement change cycles and ~~directly to end users.~~need for reliability.

The Company’s operating segments are Engine Products and Industrial Products. The Engine Products segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road, Aftermarket and Aerospace and Defense business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications as well as exhaust and emissions. Applications include air filtration systems, ~~liquid filtration~~fuel and lube systems, ~~for fuel, lube and~~ hydraulic applications and exhaust and emissions systems and sensors, indicators and monitoring systems. ~~The~~ Engine Products ~~segment~~ sells to OEMs in the construction, mining, agriculture, transportation, aerospace ~~defense~~ and ~~transportation~~defense end markets and to independent distributors, OEM dealer networks, private label accounts and large fleets.

The Industrial Products segment is organized based on product type and consists of the Industrial Filtration Solutions (IFS), Gas Turbines Systems (GTS) and Special Applications business units. Within the IFS business unit, products consist of dust, fume and mist collectors, compressed air purification systems, gas and liquid filtration for food, beverage and industrial ~~processes,~~processes. The GTS business unit products consist of air filtration systems for gas ~~turbines,~~turbines. Special Applications products include polytetrafluoroethylene membrane-based products ~~and~~as well as specialized air and gas filtration systems for applications including hard disk drives and ~~semi-conductor~~semiconductor manufacturing and sensors, indicators and monitoring systems. ~~The~~ Industrial Products ~~segment~~ sells to various dealers, distributors, OEMs and end users.

~~Supply Chain Disruptions~~

The ~~effects~~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 ongoing Coronavirus (COVID-19) pandemic continue to impact global economic conditions. The Company continues to experience supply chain disruptions, including global logistic challenges, labor constraints and low supplies of steel, petrochemical products and filter media. These disruptions have slowed the Company’s production speed and increased lead times. The Company has undertaken steps to mitigate these negative impacts, suchCompany.

Operating Environment

Inflation

~~Inflation~~

~~In connection with the supply chain disruptions described above,~~2023, the Company ~~has experienced~~continues to experience the effects of inflation from the prior year related to raw materials and ~~operating expenses.~~other expenses, including labor and energy. These inflationary pressures have had an adverse impact on the Company’s profit margins ~~particularly in recent months. The Company continues to negotiate price increases with customers to mitigate these cost increases. Inflation impacted results in~~throughout the first quarter of fiscal ~~2022 and is expected to continue throughout fiscal 2022.~~2023, however they have been generally mitigated by pricing actions implemented in the prior year.

Consolidated Results of Operations

Operating Results

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


		Three Months Ended October 31,									Three Months Ended October 31,
		2021		% of net sales		2020		% of net sales			2022		% of net sales		2021		% of net sales
Net sales	Net sales	$	760.9			$	636.6			Net sales	$	847.3			$	760.9
Cost of sales	Cost of sales	503.9		66.2	%	413.9		65.0	%	Cost of sales	560.1		66.1	%	503.9		66.2	%
Gross profit	Gross profit	257.0		33.8		222.7		35.0		Gross profit	287.2		33.9		257.0		33.8
Selling, general and administrative										Selling, general and administrative	149.2		17.6		133.0		17.5
Research and development										Research and development	18.7		2.2		16.5		2.2
Operating expenses	Operating expenses	149.5		19.7		135.5		21.3		Operating expenses	167.9		19.8		149.5		19.7
Operating income	Operating income	107.5		14.1		87.2		13.7		Operating income	119.3		14.1		107.5		14.1
Interest expense	Interest expense	3.4		0.5		3.5		0.5		Interest expense	4.5		0.5		3.4		0.5
Other expense, net		—		—		1.5		0.2
Other income, net										Other income, net	(1.8)		(0.2)		—		—
Earnings before income taxes	Earnings before income taxes	104.1		13.7		82.2		12.9		Earnings before income taxes	116.6		13.8		104.1		13.7
Income taxes	Income taxes	27.0		3.5		20.3		3.2		Income taxes	29.4		3.5		27.0		3.5
Net earnings	Net earnings	$	77.1	10.1	%	$	61.9	9.7	%	Net earnings	$	87.2	10.3	%	$	77.1	10.1	%

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

Geographic Net Sales by Origination

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


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

Net Sales

Net sales for the three months ended October 31, ~~2021 we~~2022~~re $760.9 million, compared with $636.6 million for the three months ended October 31, 2020, an increase of $124.3~~ increased $86.4 million, or ~~19.5%.~~11.4% fr ~~Net s~~om~~ales increased $91.0 million, or 20.9%, in the Engine Products segment and increased $33.3 million, or 16.6%, in the Industrial Products segment. Foreign currency translation increased sales by $3.0 million compared to the~~ ~~three months ended October 31, 2020. Refer to the Segment Results of Operations section for further discussion on the Engine Products and Industrial Products segments. During the three months ended October 31, 2021, sales~~ ~~increased~~ ~~with varied demand by market and geography. For~~ the three months ended October 31, 2021, reflecting higher sales in the Engine Products segment of $77.3 million, or 14.7% and the Industrial Products segment of $9.1 million, or 3.9%. Foreign currency translation decreased net sales by $58.8 million compared to the three months ended October 31, 2021, reflecting decreases in ~~Latin America (LATAM)~~the Engine Products and Industrial Products segments of $39.1 million and $19.7 million, respectively. During the three months ended October 31, 2022, the Company’s net sales increased ~~33.5%, United States (U.S.) increased 19.8%, Europe, Middle East~~primarily from higher pricing and ~~Africa (EMEA) increased 19.6% and Asia Pacific (APAC) increased 13.6%.~~volume growth, partially offset by a negative impact from foreign currency translation.

Cost of Sales and Gross Margin

Cost of sales for the three months ended October 31, 2022 was $560.1 million, compared with $503.9 million for the three months ended October 31, 2021, an increase of $56.2 million, or 11.2%. Gross margin as a percentage of net sales for the three months ended October 31, 2022 was 33.9% compared with 33.8% for the three months ended October 31, 2021. The gross margin as a percentage of net sales increase was driven by continued pricing efforts, which was mostly offset by higher costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended October 31, 2022 were $149.2 million, or 17.6% of net sales, compared with $133.0 million, or 17.5% of net sales, for the three months ended October 31, 2021, ~~were~~an increase of $16.2 million, or 12.2%. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to a $7.6 million charge related to the company-wide organizational redesign. This was partially offset by expense leverage on higher sales.

Research and Development Expenses

Research and development expenses for the three months ended October 31, 2022 were $~~503.9~~18.7 million, or 2.2% of net sales, compared with $16.5 million, or 2.2% of net sales, for the three months ended October 31, 2021.

Non-Operating Items

Interest expense for the three months ended October 31, 2022 was $4.5 million, compared with ~~$413.9~~$3.4 million for the three months ended October 31, ~~2020,~~2021, an increase of ~~$90.0~~$1.1 million, or ~~21.7%~~32.1%. GThe increase refle~~ross margin was~~ cte~~33.8%, compared with 35.0% during the same period in the prior fiscal year. The gross margin decrease was primarily driven by increased raw material, labor~~d a higher debt level and ~~freight costs, partially offset by increased leverage from higher sales and increased pricing.~~rising variable interest rates.

~~Operating Expenses~~

~~Operating expenses~~Other income, net for the three months ended October 31, ~~2021 were~~ 2022 was $1.8 million, co~~$149.5~~mpared with less than $0.1 millionfor the three months ended October 31, 2021, ~~compared with $135.5~~an increase of $1.8 million, which was driven primarily by the timing of charitable contributions.

Income Taxes

The effective tax rates were 25.2% and 25.9% for the three months ended October 31, ~~2020,~~ ~~an increase of $14.0 million, or 10.4%. As a percentage of net sales, operating expenses were 19.7%, compared with 21.3% during the same period in the prior fiscal year.~~ 2022 and 2021, respectively. The decrease in ~~operating expenses as a percentage of net sales reflects increased leverage from higher sales.~~

~~Non-Operating Items~~

~~Interest expense was~~ ~~$3.4 million~~ ~~for the three months ended October 31, 2021, compared with $3.5 million for the three months ended October 31, 2020,~~ ~~a decrease of $0.1 million, or 1.7%~~. ~~The change reflects~~ ~~comparative debt levels.~~

~~Other expense, net~~ ~~for the three months ended October 31, 2021 was zero, compared with~~ ~~other expense, net of~~ ~~$1.5 million for the three months ended October 31, 2020,~~ ~~a decrease~~ of ~~$1.5 million~~. ~~The decrease was primarily driven by a pension curtailment charge in fiscal 2021.~~

~~Income Taxes~~

~~The effective tax rate for the three months ended October 31, 2021 was~~ ~~25.9%, compared with 24.7% for the three months ended October 31, 2020. The increase in the~~ effective tax rate was primarily due to ~~a reduction~~increased tax benefits on export income and an overall increase in ~~net~~ discrete tax benefits.

Net Earnings

Net earnings for the three months ended October 31, ~~2021 wer~~2022 w~~e $77.1~~ere $87.2 million, compared with ~~net earnings of $61.9~~$77.1 million for the three months ended October 31, ~~2020,~~2021, an increase of ~~$15.2~~$10.1 million, or ~~24.4%~~13.1%.

~~Restructuring~~

In the second quarter of fiscal 2021, the Company initiated activities to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $14.8 million. Charges of $5.8 million Diluted EPS were ~~included in cost of sales and $9.0 million were included in operating expenses in the Condensed Consolidated Statements of Earnings~~$0.70 for the ~~year~~three months ended ~~July~~October 31, ~~2021. Charges of $2.5 million relate to the Engine Products segment, $6.5 million relate to the Industrial Products segment and $5.8 million relate to corporate and unallocated expenses. For~~2022, compared with $0.61 for the three months ended October 31, 2021, ~~$2.5 million~~an increase of ~~the restructuring expenses were paid. As of October 31, 2021, $7.8 million was accrued.~~ ~~The Company expects approximately $8 million in annualized savings from these restructuring activities once completed by the beginning of the third quarter of fiscal 2022.~~$0.09, or 15.3%.

Segment Results of Operations

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


		Three Months Ended October 31,								Three Months Ended October 31,
		2021		2020		$ Change		% Change				2022		2021
Net sales	Net sales										Net sales

Engine Products segment	Engine Products segment	$	527.2	$	436.2	$	91.0	20.9	%		Engine Products segment	$	604.5	$	527.2

Industrial Products segment	Industrial Products segment	233.7		200.4		33.3		16.6			Industrial Products segment	242.8		233.7

Total Company	Total Company	$	760.9	$	636.6	$	124.3	19.5	%		Total Company	$	847.3	$	760.9

Earnings before income taxes
Earnings (loss) before income taxes											Earnings (loss) before income taxes
Engine Products segment	Engine Products segment	$	72.3	$	60.4	$	11.9	19.7	%		Engine Products segment	$	90.9	$	72.3
Industrial Products segment	Industrial Products segment	38.3		27.5		10.8		39.3			Industrial Products segment	37.8		38.3
Corporate and unallocated(1)	Corporate and unallocated(1)	(6.5)		(5.7)		(0.8)		14.0			Corporate and unallocated(1)	(12.1)		(6.5)
Total Company	Total Company	$	104.1	$	82.2	$	21.9	26.6	%		Total Company	$	116.6	$	104.1

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

Engine Products Segment

Net sales were as follows (in millions):


		Three Months Ended October 31,								Three Months Ended October 31,
		2021		2020		$ Change		% Change				2022		2021
Off-Road	Off-Road	$	93.9	$	64.8	$	29.1	44.9	%		Off-Road	$	108.0	$	93.9
On-Road	On-Road	31.5		32.0		(0.5)		(1.4)			On-Road	36.0		31.5
Aftermarket	Aftermarket	374.3		317.0		57.3		18.1			Aftermarket	426.9		374.3
Aerospace and Defense	Aerospace and Defense	27.5		22.4		5.1		22.9			Aerospace and Defense	33.6		27.5
Total Engine Products segment	Total Engine Products segment	$	527.2	$	436.2	$	91.0	20.9	%		Total Engine Products segment	$	604.5	$	527.2

Engine Products segment earnings before income taxes	Engine Products segment earnings before income taxes	$	72.3	$	60.4	$	11.9	19.7	%		Engine Products segment earnings before income taxes	$	90.9	$	72.3

Net sales for the Engine Products segment for the three months ended October 31, ~~2021~~2022 were ~~$527.2~~$604.5 million, compared with ~~$436.2~~$527.2 million for the three months ended October 31, ~~2020,~~2021, an increase of ~~$91.0~~$77.3 million, or ~~20.9%~~14.7%. Excluding a ~~$2.4~~$39.1 million ~~increase~~decrease from foreign currency translation, net sales for the Engine Products segment increased ~~20.3%~~22.1%.

Net sales of Aftermarket increased $52.6 million, primarily driven by pricing and continued high end-market demand. Net sales of Off-Road ~~were $93.9~~increased $14.1 million, ~~an increase of~~ ~~44.9% compared with the three months ended October 31, 2020. In constant currency, net sales increased $29.2 million, or 45.1%. Off-Road sales reflected strong growth in every major region~~primarily due to increased pricing and high levels of global equipment ~~demand as economic conditions improved compared to the prior year.~~

~~Net~~production. The increased sales ~~of On-Road~~for all business units were ~~$31.5 million, a decrease of 1.4% compared with the three months ended October 31, 2020. In constant~~partially offset by negative impacts from foreign currency ~~net sales decreased $0.4 million, or 1.2%. On-Road sales decreased in the U.S. primarily due to the Company’s decision to discontinue selling diesel exhaust fluid tanks as well as supply chain constraints.~~

~~Net sales of Aftermarket were $374.3 million, an increase of 18.1% compared with the three months ended October 31, 2020. In constant currency, net sales increased $54.6 million, or 17.2%. Aftermarket sales experienced broad growth across all regions as economic conditions improved.~~

~~Net sales of Aerospace and Defense were $27.5 million, an increase of 22.9% compared with the three months ended October 31, 2020. In constant currency, net sales increased $5.2 million, or 23.1%~~. Aerospace and Defense sales increased in the U.S. primarily due to improved economic conditions in the commercial aerospace market compared to the prior year, which had experienced a greater impact from the COVID-19 pandemic.translation.

Earnings ~~before~~before income taxes for the Engine Products segment for the three months ended October 31, ~~2021~~2022 were ~~$72.3~~$90.9 million, or ~~13.7%~~15.0% of Engine Products’ net sales, ~~a decrease fro~~m ~~13.9%~~an increase from 13.7% of net sales for the three months ended October 31, ~~2020.~~2021. The ~~decrease~~increase was ~~driven~~driven by higher ~~raw material, labor, freight costs~~pricing and ~~an unfavorable mix of~~expense leverage on higher sales, which were partially offset by ~~increased leverage from~~ higher ~~sales and improved pricing.~~costs.

Industrial Products Segment

Net sales were as follows (in millions):


		Three Months Ended October 31,								Three Months Ended October 31,
		2021		2020		$ Change		% Change				2022		2021
Industrial Filtration Solutions		$	165.5	$	135.6	$	29.9	22.0	%
Industrial Filtration Solutions (IFS)											Industrial Filtration Solutions (IFS)	$	180.9	$	165.5
Gas Turbine Systems	Gas Turbine Systems	16.6		23.0		(6.4)		(27.8)			Gas Turbine Systems	25.5		16.6
Special Applications	Special Applications	51.6		41.8		9.8		23.3			Special Applications	36.4		51.6
Total Industrial Products segment	Total Industrial Products segment	$	233.7	$	200.4	$	33.3	16.6	%		Total Industrial Products segment	$	242.8	$	233.7

Industrial Products segment earnings before income taxes	Industrial Products segment earnings before income taxes	$	38.3	$	27.5	$	10.8	39.3	%		Industrial Products segment earnings before income taxes	$	37.8	$	38.3

Net sales for the Industrial Products segment for the three months ended October 31, ~~2021~~2022 were ~~$233.7~~$242.8 million, compared with ~~$200.4~~$233.7 million for the three months ended October 31, ~~2020,~~2021, an increase of ~~$33.3~~$9.1 million, or ~~16.6%~~3.9%. Excluding a ~~$0.6~~$19.7 million ~~increase~~decrease from foreign currency translation, net sales for the Industrial Products segment increased ~~16.3%~~12.3%.

Net sales of ~~Industrial Filtration Solutions (IFS) were $165.5~~IFS increased $15.4 million, ~~an increase of 22.0% compared~~reflecting pricing benefits and higher volume in industrial dust collection and process filtration, along with ~~the three months ended October 31, 2020. In constant currency,~~ net sales related to recent acquisitions. GTS increased ~~$28.8~~by $8.9 million o~~r 21.2%. IFS~~as the prior year period was unseasonably soft due to the timing of orders. Special Applications decreased $15.2 million due to Disk Drive sales ~~increased across all~~pressure from customer inventory management and a reduction in overall market demand. All business units and regions, with growth strongest in the U.S. reflecting improved market conditions for both first-fit and replacement parts of dust collection products, as well as continued strength in Process Filtration within the food and beverage market.

~~Net sales of Gas Turbine Systems (GTS)~~ were ~~$16.6 million, a decrease of 27.8% compared with the three months ended October 31, 2020. In constant~~negatively impacted by foreign currency ~~net sales decreased $6.4 million, or 27.9%. The decrease in~~ ~~GTS sales was driven by lower sales of replacement parts in APAC, EMEA and the U.S., as well as lower sales of small turbines in the U.S.~~

~~Net sales of Special Applications were $51.6 million, an increase of 23.3% compared with the three months ended October 31, 2020. In constant currency, net sales increased $10.3 million, or 24.6%. Special Applications sales increased with growth across the product portfolio and regions, primarily led by APAC due to~~ ~~improved market conditions across several industries, including hard disk drive, minerals, automotive and semi-conductor manufacturers.~~translation.

Earnings before ~~income~~income taxes for the Industrial Products segment for the three months ended October 31, ~~2021~~2022 were ~~$38.3~~$37.8 million,, or ~~16.4%~~15.6% of Industrial Products’ net sales, ~~an increase~~a decrease from ~~13.7%~~16.4% of net sales for the three months ended October 31, ~~2020.~~2021. The decrease was due to unfavorable sales mix within the ~~The increase was driven by greater leverage~~Special Applications business unit and the expected initial negative margin impact from ~~higher sales, partially offset by increased raw material, freight and labor costs.~~the recent acquisitions.

Liquidity, Capital Resources and Financial Condition

Liquidity

Liquidity is assessed in terms of the Company’s ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, adequacy of available credit facilities and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses as its primary source of liquidity, with sufficient liquidity available to fund growth through reinvestment in existing businesses and strategic acquisitions.

Cash Flow Summary

Cash flows were as follows (in millions):


	Three Months Ended October 31,
	2022		2021		$ Change
Net cash provided by (used in):
Operating activities	$	118.2	$	42.9	$	75.3
Investing activities	(28.1)		(18.3)		(9.8)
Financing activities	(112.8)		(45.5)		(67.3)
Effect of exchange rate changes on cash	(9.6)		(1.1)		(8.5)
Decrease in cash and cash equivalents	$	(32.3)	$	(22.0)	$	(10.3)

Operating Activities

Cash provided by operating activities for the three months ended October 31, ~~2021~~2022 was ~~$42.9~~$118.2 million,, compared with ~~$128.9~~$42.9 million for the three months ended October 31, ~~2020, a~~ ~~decrease~~2021, an increase of ~~$86.0~~$75.3 million. The ~~decrease~~ increase in cash provided by operating activities was ~~primarily~~primarily driven by anrelatively flat inventory in the current quarter compared to a significant increase in ~~inventory as~~inventory in the ~~Company continues to experience strengthening demand while mitigating supply chain disruptions~~first quarter of the prior year, as well as ~~higher incentive compensation paid, partially offset by~~ higher earnings.

Investing Activities

Cash used in investing activities for the three months ended October 31, ~~2021~~2022 was ~~$18.3~~$28.1 million, compared with ~~$18.8~~$18.3 million for the three months ended October 31, ~~2020, a decrease~~2021, an increase of ~~$0.5~~$9.8 million. ~~In fiscal 2022,~~The increase in cash used was due to the ~~Company continued investing~~higher investment of capital in ~~its strategic priorities,~~various projects, including capacity ~~expansion.~~expansion and tooling for new programs in the current year.

Financing Activities

~~Cas~~hCash used in financing a~~ctivities~~activities generally relates to the use of cash for payment of dividends and repurchases of the Company’s common stock, net of borrowing activity and proceeds from the exercise of stock options. Cash used in financing activities for the three months ended October 31, 2022 was $112.8 million, compared with $45.5 million for the three months ended October 31, 2021, an increase of $67.3 million. The increase was primarily driven by proceeds from the issuance of debt in the prior year, the repayment of long-term debt in the current year and lower share repurchases in the current year.

To determine the level of dividend and share repurchases, the Company considers recent and projected performance across key financial metrics, including earnings, cash flow from operations and total debt. Dividends paid for the three months ended October 31, 2022 and 2021 ~~and 2020~~ were ~~$27.4~~$28.2 million and ~~$26.6~~$27.4 million, respectively. Share repurchases for the three months ended October 31, 2022 and 2021 ~~and 2020~~ were ~~$102.9~~$45.7 million and ~~$15.6~~$102.9 million, ~~respectively.~~

~~Cash used in financing acti~~respectivvities for the three months ended October 31, 2021 was $45.5 million, compared with $78.9 million for the three months ended October 31, 2020, a decrease of $33.4 million. In fiscal 2022, cash was received from issuing long-term debt. ely.~~In both fiscal~~ ~~2022 and~~ ~~2021, cash was used to repay borrowings and to fund the Company’s needs, driven by expenditures on property, plant and equipment, dividends and share repurchases.~~

Capital Resources

Additional sources of liquidity are existing cash and ~~Financial Condition~~

available credit facilities. Cash and cash equivalents as of October 31, ~~2021~~2022 was ~~$200.8~~$161.0 million, compared with ~~$222.8~~$193.3 million as of July 31, ~~2021.~~2022. The Company has capacity of ~~$669.5~~$653.0 million available for further borrowing under existing credit ~~faciliti~~esfacilities as of October 31, ~~2021,~~2022, which includes ~~$427.5~~$407.5 million available on the Company’s $500.0 million unsecured revolving credit facility that expires on May 21, 2026.

The Company believes ~~that~~ 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.~~months and beyond, including working capital needs, debt service obligations, capital expenditures, payment of anticipated dividends, share repurchase activity and potential acquisitions.

Financial Condition

Short-Term Borrowings and Long-Term Debt

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

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

~~To understand~~Working Capital

In order to help measure and analyze the ~~impacts~~impact of working capital management, the Company reviews its cash conversion cycle. The Company calculates days sales outstanding as the average accounts receivable, net for the quarter, divided by net sales for the quarter multiplied by the number of days in the quarter. The Company calculates days inventory outstanding as the average inventories, net for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter, and calculates inventory turns as the cost of sales for the quarter, annualized by the ratio of the number of ~~the~~ days in the year to the number of days in the quarter, divided by the average inventories, net for the quarter. The Company calculates days payable outstanding as the average accounts payable for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter.

Accounts receivable, net as of October 31, ~~2021,~~2022, was ~~$545.1~~$584.2 million, compared with ~~$552.7~~$616.6 million as of July 31, ~~2021,~~2022, a decrease of ~~$7.6~~$32.4 million. Days sales outstanding were 6665 days as of October 31, ~~2021, up~~2022, an increase from 6562 days atas of July 31, ~~2021.~~2022.

Inventories, net as of October 31, ~~2021,~~2022, was ~~$444.7~~$490.1 million, compared with ~~$384.5~~$502.4 million as of July 31, ~~2021,~~2022, a decrease of $12.3 million. Days inventory outstanding were 82 days as of October 31, 2022, an increase from 78 days as of ~~$60.2 million.~~July 31, 2022. Inventory turns were ~~4.8~~4.5 times and ~~5.4~~4.7 times per year as of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, respectively.

~~Long-term debt outstanding was $548.1 million~~Accounts payable as of October 31, ~~2021,~~2022, was $320.7 million, compared with ~~$461.0~~$338.5 million as of July 31, ~~2021, an increase~~2022, a decrease of ~~$87.1 million primarily due to an increase in proceeds from long-term debt. As~~$17.8 million. Days payable outstanding were 54 days as of October 31, ~~2021, total debt, including long-term debt and short-term borrowings, represented~~ ~~34.6% of~~ ~~total capitalization, defined as total debt plus total stockholders’ equity, compared with 30.9%~~2022, an increase from 52 days as of July 31, ~~2021. As of October 31, 2021, the Company was in compliance with its financial covenants.~~2022.

The Company guarantees 50% of certain debt of its joint venture, Advanced Filtration Systems Inc., as ~~further~~ discussed in Note 1516 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.

Critical Accounting Estimates

There have been no material changes to the Company’s critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2022.

New Accounting Standards Not Yet Adopted

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

~~Critical Accounting Policies~~

~~There have been no material changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021.~~

Safe Harbor Statement ~~under~~Under the Private Securities Litigation Reform Act of 1995

The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and expectations, such as forecasts, plans, trends and projections relating to the Company’s business and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2021,~~2022, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases such as “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.

2124

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;~~demand, including the Russia and Ukraine conflict; impacts from unexpected events, including the COVID-19 pandemic; effects of unavailable raw materials or material cost inflation; inability to attract and retain qualified personnel; inability to meet customer demand; inability to maintain competitive advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressure; exposure to customer concentration in certain cyclical industries; ~~impairment of intangible assets;~~ inability to manage productivity improvements; ~~inability to maintain an effective system~~results of ~~internal control over financial reporting;~~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; changes in tax laws and tax rates, regulations and results of examinations; and results of execution of any acquisition, divestiture and other strategic transactions strategy.~~markets. These and other factors are described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2021.~~2022. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk includes the potential loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. ~~In an attempt to~~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 ~~instruments~~strategies for trading or speculative ~~trading~~ purposes.

The Company maintains significant assets and operations outside the U.S., resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign currency exposure is naturally hedged by incurring liabilities, including bank debt, denominated in the local currency in which the Company’s foreign subsidiaries are located.

During the three months ended October 31, ~~2021,~~2022, the U.S. dollar was generally ~~weaker~~stronger than in the three months ended October 31, ~~2020~~2021 compared with many of the currencies of the foreign countries in which the Company operates. The overall ~~weaker~~stronger dollar had a ~~positive~~negative impact on the Company’s international net sales ~~results~~and net earnings because the foreign denominated revenues translated into ~~more~~less U.S. ~~dollars. Foreign currency translation had a positive impact to net sales and net earnings~~dollars in many regions around the world. The estimated impact of foreign currency translation for the three months ended October 31, ~~2021,~~2022 resulted in an overall ~~increase~~decrease in reported net sales of ~~$3.0~~$58.8 million and ~~an increase~~a decrease in reported net earnings of ~~$0.4~~$7.2 million.

Derivative Fair Value Measurements

The Company enters into derivative instrument agreements, including ~~forward~~ foreign currency ~~exchange~~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. ~~The Company does not enter into derivative instrument agreements for trading or speculative purposes.~~ See ~~Note~~Notes 11, 14 and ~~Note 14 to~~15 in the Notes to ~~the~~ Condensed Consolidated Financial ~~Statements.~~Statements included in Item 1 of this report.

~~Forward~~ Foreign Currency ~~Exchange~~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 ~~forward~~foreign currency ~~exchange~~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.~~designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges were $118.1 million and $158.0 million as of October 31, 2022 and July 31, 2022, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges were $211.4 million and $151.6 million as of October 31, 2022 and July 31, 2022, respectively.

Net Investment Hedges

The ~~Company has one contract, which terminates in~~total notional amount of net investment hedges was €80 million, or $88.8 million, as of October 31, 2022 and July 31, 2022. The maturity dates range from 2027 to 2029.

Based on the net investment ~~hedge~~hedges outstanding as of October 31, ~~2021,~~2022, a 10% appreciation of the U.S. dollar compared to the Euro would result in a net gain of ~~$5.8~~$6.9 million in the fair value of these contracts.

2225

Interest Rates

The Company’s exposure to market risk for changes in interest rates primarily relates to debt obligations that are at variable rates, as well as the potential increase in the fair value of long-term debt resulting from a potential decrease in interest rates. As of October 31, ~~2021,~~2022, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of ~~$65.0~~$85.0 million outstanding on the Company’s revolving credit facility, €80.0 million, or ~~$93.2~~$79.5 million, of a variable rate term loan and ¥2.0 billion, or ~~$17.6~~$13.5 million, of variable rate senior notes. ~~As of October 31, 2021, additional short-term borrowings outstanding consisted of $39.0 million and ¥250.0 million, or $2.2 million.~~ Assuming a hypothetical 0.5 percentage point increase in short-term interest rates, with all other variables remaining constant, interest expense would have increased approximately ~~$0.1~~$0.2 million and interest income would have increased ~~approximately $0.1 million~~by an immaterial amount in the three months ended October 31, ~~2021.~~2022. Interest rate changes would also affect the fair market value of fixed-rate debt. As of October 31, ~~2021,~~2022, the estimated fair ~~value~~values of fixed interest rate long-term debt ~~with fixed interest rates was $392.3~~were $368.4 million compared to ~~its~~the carrying ~~value~~values of ~~$375.0~~$425.0 million. The fair ~~value is~~values are estimated by discounting the projected cash flows using the interest ~~rate~~rates at which similar amounts of debt could currently be borrowed.

Commodity Prices

The Company is exposed to market risk from fluctuating prices of purchased commodity raw materials, including steel, filter media and petrochemical-based products including plastics, rubber and adhesives. On an ongoing basis, the Company enters into selective supply arrangements that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its customers and the Company’s cost reduction initiatives, which include material substitution, process improvement and product redesigns. However, an increase in commodity prices could result in lower gross profit.

~~Chinese~~Bankers’ Acceptance Notes

Consistent with common business practice in ~~China,~~APAC, the ~~Company’s Chinese~~Company has subsidiaries which accept bankers’ acceptance notes from ~~Chinese~~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 daysdays from the date of the Company’s receipt of such draft. As of October 31, ~~2021~~2022 and July 31, ~~2021,~~2022, the Company ~~owne~~downed $9.5 million and ~~$14.1~~$12.6 million, respectively, of these bankers’ acceptance notes and includes them in accounts receivable on the Condensed Consolidated Balance Sheets.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined by Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, ~~2021,~~2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

There are inherent risks and uncertainties associated with the Company’s global operations that involve the manufacturing and sale of products for highly demanding customer applications throughout the world. These risks and uncertainties could adversely affect the Company’s operating performances or financial condition. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, ~~2021~~2022 outlines the risks and uncertainties ~~that~~ the Company believes are the most material to its business.

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

Repurchases of Equity Securities

Information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the three months ended October 31, ~~2021~~2022 was as follows:

Period
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs Maximum
Number
of Shares
that May Still
Be Purchased
Under the Plans
or Programs
August 1 - August 31, 2021 799,537 $ 67.78 799,537 7,503,177
September 1 - September 30, 2021 790,000 61.63 790,000 6,713,177
October 1 - October 31, 2021 — — — 6,713,177
Total 1,589,537 $ 64.72 1,589,537 6,713,177


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

~~(1)~~On May 31, 2019, the Board of Directors authorized the repurchase of up to 13.0 million shares of the Company’s common stock. This repurchase authorization is effective until terminated by the Board of Directors. The Company has remaining authorization to repurchase ~~6.7~~4.5 million shares under this plan. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the three months ended October 31, ~~2021.~~2022. The “Total Number of Shares Purchased” column of the table above includes 2,245 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the first quarter of fiscal 2023. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under stock-based awards to cover the withholding of taxes due as a result of exercising stock options or payment of stock-based awards.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

2427

Item 6. Exhibits


3-A*			Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q Report for the second quarter ended January 31, 2012)
3-B*			Amended and Restated Bylaws of Registrant, dated as of July 29, 2016 ~~(Filed~~(Filed as Exhibit 3-C to Form 8-K Report filed on July 29, 2016)
10-A			Form of Separation and General Release Agreement, dated as of October 7, 2022, by and between Jeffrey E. Spethmann and Donaldson Company, Inc.
31-A			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31-B			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101			The following financial information from the Donaldson Company, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, ~~2021, as filed with the Securities and Exchange Commission,~~2022, formatted in inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Changes in Stockholders’ Equity and (vi) the Notes to Condensed Consolidated Financial Statements
104			The cover page from the Donaldson Company Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, ~~2021,~~2022, formatted in iXBRL (included as Exhibit 101)


*			Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit.

2528

SIGNATURES

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



			DONALDSON COMPANY, INC.
			(Registrant)


Date: December ~~8, 2021~~7, 2022	By:	/s/ Tod E. Carpenter
		Tod E. Carpenter Chairman, President and Chief Executive Officer (duly authorized officer)


Date: December ~~8, 2021~~7, 2022	By:	/s/ Scott J. Robinson
		Scott J. Robinson ~~Senior Vice President and~~ Chief Financial Officer (principal financial officer)


Date: December ~~8, 2021~~7, 2022	By:	~~/s/ Peter~~/s/ Andrew J. ~~Keller~~Cebulla
			~~Peter~~Andrew J. ~~Keller~~Cebulla Vice President and Corporate Controller (principal accounting officer)

2629


	October 31, 2021						July 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Total		Gross Carrying Amount		Accumulated Amortization		Total
Customer relationships	$	107.0	$	(57.8)	$	49.2	$	107.5	$	(56.4)	$	51.1
Patents, trademarks and technology	24.3		(14.3)		10.0		24.3		(13.8)		10.5
Total intangible assets	$	131.3	$	(72.1)	$	59.2	$	131.8	$	(70.2)	$	61.6


	Options	Weighted Average Exercise Price
Balance outstanding as of July 31, 2021	6,444,743	$	44.05
Granted	834,105	59.40
Exercised	(70,555)	38.41
Canceled/forfeited	(9,131)	50.21
Balance outstanding as of October 31, 2021	7,199,162	$	45.88



	Total Notional Amounts				Assets				Liabilities
	October 31,		July 31,		October 31,		July 31,		October 31,		July 31,
	2021		2021		2021		2021		2021		2021
Designated as hedging instruments
Forward foreign currency exchange contracts	$	86.1	$	117.2	$	1.8	$	1.0	$	1.2	$	1.2
Net investment hedge	55.8		55.8		1.1		1.1		0.7		2.0

Total designated	141.9		173.0		2.9		2.1		1.9		3.2

Not designated as hedging instruments
Forward foreign currency exchange contracts	222.0		154.2		1.6		0.5		0.6		0.4
Total not designated	222.0		154.2		1.6		0.5		0.6		0.4
Total	$	363.9	$	327.2	$	4.5	$	2.6	$	2.5	$	3.6


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Still Be Purchased Under the Plans or Programs
August 1 - August 31, 2021	799,537	$	67.78	799,537	7,503,177
September 1 - September 30, 2021	790,000	61.63		790,000	6,713,177
October 1 - October 31, 2021	—	—		—	6,713,177
Total	1,589,537	$	64.72	1,589,537	6,713,177