DONALDSON Co INC

Note 1. Summary of Significant Accounting Policies

Description of Business

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

Principles of Consolidation

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

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

Use of Estimates

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

Operating Environment

Foreign Currency Translation

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

Cash Equivalents

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

Revenue Recognition

Revenue is measured as the amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. The transaction price of a contract could be reduced by variable consideration including volume purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. The Company primarily relies on historical experience and anticipated future performance to estimate the variable consideration. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when the contingency is resolved. The Company accounts for amounts billed to customers for reimbursement of shipping and handling costs by recording these amounts as revenue and accruing costs when the related revenue is recognized.

For most customer contracts, the Company recognizes revenue at a point in time when control of the goods or services is transferred to the customer. For product sales, control is typically deemed to have transferred in accordance with the shipping terms, either at the time of shipment from the plants or distribution centers or the time of delivery to the customers. Revenue is recognized for services upon completion of those services. Payment terms vary by customer and the geographic location of the customer. The Company’s contracts with customers do not include significant financing components or non-cash consideration.

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

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

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

Shipping and Handling

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

Accounts Receivable, Net and Allowance for Doubtful Accounts

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

Factoring Arrangements

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

Inventories

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

Property, Plant and Equipment

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

Internal-Use Software and Cloud Computing Arrangements

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

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

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company performedits annual impairment assessment during the third quarter of fiscal 2024. The goodwill impairment assessment is conducted at a reporting unit level, which isone level below the operating segment level and utilizes either a qualitative or quantitative assessment. The Company determined the fair value for all its reporting units was substantially in excess of their respective carrying values and there were no indicators of impairment for any of the reporting units evaluated. An impairment loss would be recognized when the carrying amount of a reporting unit’s net assets exceeds the estimated fair value of the reporting unit, see Note 6.

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

Business Combinations

The Company allocates the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, where applicable, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, technology obsolescence, customer retention rates, discount rates, royalty rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.

During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Earnings.

Recoverability of Long-Lived Assets

The Company reviews its long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying value is reduced to the fair market value. There wereno indicators of impairment or impairment charges recorded for the years ended July 31, 2024, 2023 and 2022.

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

The Company maintains a reserve for uncertain tax benefits. Benefits of tax return positions are recognized in the financial statements when the position is more likely than not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that is greater than 50% likely to be realized, in the Company’s judgment, see Note 8.

Leases

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

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

Stock-Based Compensation

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

Treasury Stock

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

Research and Development Expenses

Research and development expenses include scientific research costs such as salaries, facility costs, testing, technical information technology and administrative expenditures. Research and development expenses are for the application of scientific advances to the development of new and improved products and their uses. Substantially all research and development is performed in-house. Expenses are charged against earnings in the year incurred.

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, see Notes 12, 15 and 16.

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 maturity dates range from 2027 to 2029, see Notes 12, 15 and 16.

Interest Rate Swaps - Cash Flow Hedges

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

Product Warranties

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

New Significant Accounting Standards Recently Adopted

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

New Significant Accounting Standards Not Yet Adopted

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

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

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

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

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

Note 2. Acquisitions and Equity Method Investments

Acquisitions

There have been no material acquisitions in fiscal 2024.

Univercells Technologies (UTEC)

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

Isolere Bio, Inc. (Isolere)

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

2023 Purchase Price Summary

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

Purilogics, LLC (Purilogics)

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

Solaris Biotechnology S.r.l. (Solaris)

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

Pearson Arnold Industrial Services (PAIS)

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

Equity Method Investments

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

Pro forma Financial Information

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

Note 3. Revenue

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

Revenue Disaggregation

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

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

Contract Assets and Liabilities

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

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

Note 4. Inventories, Net

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

Note 5. Property, Plant and Equipment, Net

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

Note 6. Goodwill and Intangible Assets

Goodwill

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

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

Intangible Assets

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

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

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

Intangible asset classes were as follows (in millions):

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

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

Short-Term Borrowings

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

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

Long-Term Debt

Long-term debt was as follows:

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

Certain debt agreements contain financial covenants related to interest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2024, the Company was in compliance with all such covenants.

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

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

Note 8. Income Taxes

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

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

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

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

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

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

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

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

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

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

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

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

Note 9. Leases

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

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

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

Additional information related to operating leases was as follows:

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

Note 10. Earnings Per Share

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

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

Note 11. Stockholders’ Equity

Share Repurchases

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

Treasury stock share activity was as follows:

Dividends Paid and Declared

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

Note 12. Accumulated Other Comprehensive Loss

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

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

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

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

Note 13. Stock-Based Compensation

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

Stock Options

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

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

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

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

Option activity was as follows:

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

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

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

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

For the year ended July 31, 2024, activity for non-vested stock options that contain vesting provisions was as follows:

As of July 31, 2024, there was $8.6 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over the remaining vesting period during fiscal 2025, 2026 and 2027.

Performance-Based Awards

Performance-based awards are payable in common stock and are based on a formula that measures Company performance over athree year period. These awards are settled after three years with payouts ranging from 0% to 200% of the target award depending on achievement. Pretax performance-based awards expense was $5.8 million, $6.3 million and $7.2 million for the years ended July 31, 2024, 2023 and 2022, respectively.

The weighted average grant date fair value related to the Company’s performance-based awards was as follows:

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

As of July 31, 2024, there was $6.2 million of total unrecognized compensation expense related to non-vested performance-based awards, which is expected to be recognized over the remaining vesting period during fiscal 2025 and 2026. Forfeited performance-based awards are recorded as an offset to operating expenses in the Consolidated Statements of Earnings in the period in which they occur.

Note 14. Employee Benefit Plans

Defined Benefit Pension Plans

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

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

The changes in projected benefit obligations, fair value of plan assets and funded status of the Company’s pension plans for the years ended July 31, 2024 and 2023 were as follows (in millions):

The net overfunded status of $9.6 million and $14.9 million as of July 31, 2024 and 2023, respectively, is recognized on the Consolidated Balance Sheets. The pension-related accumulated other comprehensive loss as of July 31, 2024 and 2023, prior to the consideration of income taxes, was $111.3 million and $109.0 million, respectively, and consisted primarily of unrecognized actuarial losses. The accumulated benefit obligation for all defined benefit pension plans was $385.1 million and $384.4 million as of July 31, 2024 and 2023, respectively. The increase in the accumulated benefit obligation during fiscal 2024 is due to actuarial losses. Pension settlement accounting was triggered in fiscal 2024 and 2023 as a result of the amount of lump sum distributions in the defined benefit pension plans exceeding the service and interest cost threshold.

The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $75.3 million and $49.1 million, respectively, as of July 31, 2024 and $73.5 million and $53.7 million, respectively, as of July 31, 2023.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $17.7 million, $16.4 million and $7.3 million, respectively, as of July 31, 2024 and $15.0 million, $15.0 million and $5.0 million, respectively, as of July 31, 2023.

Assumptions

The significant assumptions used in determining the actuarial present value of the projected benefit obligation were as follows:

The weighted average discount rates, expected returns on plan assets and rates of increase in future compensation levels used to determine the net periodic pension costs were as follows:

Discount Rates

The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income investments currently available and expected to be available, during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans.

Expected Long-Term Rate of Return on Plan Assets

The Company considers historical returns and future expected returns for each asset class, as well as the target asset allocation to develop the assumption for each of its U.S. pension plans. The assumption for non-U.S. pension plans reflects the investment allocation and expected total portfolio returns specific to each plan and country.

Mortality Rates

The Company’s actuary uses the Pri-2012 mortality table issued by the Society of Actuaries during the pre-retirement period and the Mercer Industry Longevity Experience Study (MILES) table for the Auto, Industrial Goods and Transportation industry group for post-retirement mortality, both reflecting the Scale MMP-2021 mortality improvement projection scale for its U.S. pension plans. These assumptions were used for determining the benefit obligations as of July 31, 2024 and for developing the annual expense for its U.S. pension plans for the fiscal year ending July 31, 2025. The Company follows the local actuaries’ recommendations for non-U.S. pension plans.

Service and Interest Costs

The Company uses a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. This method provides a precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rate on the yield curve.

Investments

Global Equity Securities

Global equity securities consist primarily of publicly traded U.S. and non-U.S. equities, mutual funds, collective investment trusts, diversified growth investment funds and private equity. Publicly traded equities and index funds are valued at the closing price reported in the active market in which the individual securities are traded. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured or distressed debt, growth equity, mezzanine or subordinated debt, real estate, special situation partnerships and venture capital investments. Interests in these funds are valued at net asset value (NAV).

Fixed Income Securities

Fixed income securities consist primarily of investment and non-investment grade debt securities, debt securities issued by the U.S. Treasury, multi-asset credit investment funds and exchange-traded funds. Government, corporate and other bonds and notes, interest rate and inflation swaps, physical inflation-linked and nominal gilts, synthetic gilts, money market instruments and cash are valued at the closing price reported if they are traded on an active market or if they are traded at yields currently available on comparable securities of issuers with similar credit ratings. Fixed income securities also include smaller allocations to alternative investments, private equity and alternative fixed income investments. Alternative investments consist primarily of private placement funds, private equity investments and alternative fixed income-like investments. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured or distressed debt, growth equity, mezzanine or subordinated debt, real estate, special situation partnerships and venture capital investments. Alternative fixed income securities consist primarily of private partnership interests in hedge funds. Interests in these funds are valued at NAV, which is determined by the administrator or custodian of the fund based on the fair value of the underlying assets owned by the fund less its liabilities.

Insurance Contracts

Insurance contracts are individual contracts whereby an insurance company offers a guaranteed minimum interest return. The Company does not have any influence on the investment decisions made by the insurer. European insurers, in general, are strictly regulated by an external control mechanism and have to invest for their guaranteed interest products within certain boundaries. Typically, they have a strategic asset allocation with 80% to 90% fixed income products and 10% to 20% equity-type products, including real estate.

Real Assets Funds

Real assets funds consist of interests in partnerships that invest in private real estate and commodities investments. Interests in partnerships are valued using NAV.

Fair Value of Plan Assets

Fair value measurements of plan assets 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.

The estimated fair value of pension plan assets and their respective levels in the fair value hierarchy by asset category were as follows (in millions):

Certain investments, valued at NAV, had the following unfunded commitments and/or redemption restrictions (in millions):

The changes in the fair values of the pension plans’ Level 3 assets were as follows (in millions):

Investment Policies and Strategies

For U.S. pension plans, the Company uses a total return on investment approach to achieve a long-term return on plan assets, with what the Company believes to be a prudent level of risk for the purpose of meeting its retirement income commitments to employees. The U.S. pension plans’ investments are diversified to assist in managing risk. During the year ended July 31, 2024, the Company’s asset allocation was as follows:

The target allocation guidelines are determined in conjunction with the Company’s investment consultant and through the use of modeling the risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected volatility/standard deviation of returns and expected correlations with other asset classes.

For non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure assets with appropriate liquidity that will generate income and capital growth to meet, together with any new contributions from members and the Company, the cost of current and future benefits. Investment policy and performance is measured and monitored on an ongoing basis.

Estimated Contributions and Future Payments

The Company’s general funding policy is to make at least the minimum required contributions as required by applicable regulations, plus any additional amounts it determines to be appropriate. The Company made contributions of $2.8 million to its pension plans during the year ended July 31, 2024. Future required pension plan contributions may change significantly depending on the actual rate of return on plan assets, discount rates and regulatory requirements.

Estimated future benefit required payments for the Company’s pension plans as of July 31, 2024 were as follows (in millions):

Retirement Savings

The Company provides a contributory employee savings plan to U.S. employees that permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. For eligible employees, employee contributions of up to 50% of compensation are matched at a rate equaling 100% of the first 3% contributed and 50% of the next 2% contributed. In addition, the Company contributes 3% of compensation annually for eligible employees. Total contribution expense for this plan was $32.7 million, $28.6 million and $27.2 million for the years ended July 31, 2024, 2023 and 2022, respectively.

Deferred Compensation and Other Benefit Plans

The Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows eligible employees to defer the receipt of all or a portion of their cash bonus and other stock-related compensation and up to 75% of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals that are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability of $1.2 million and $1.9 million as of July 31, 2024 and 2023, respectively, related primarily to its deferred compensation plans.

Note 15. Derivative Instruments and Hedging

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 July 31, 2024 and 2023, no collateral was posted.

The Company does not enter into derivative instrument agreements for trading or speculative purposes. For discussion on the fair value of the Company’s derivatives, see Note 16.

The Company buys materials from foreign suppliers. Those transactions can be denominated in those suppliers’ local currency. The Company also sells to customers in foreign countries. Those transactions can be denominated in those customers’ local currency. Both of these transaction types can create volatility in the Company’s financial statements. The Company uses foreign currency forward contracts to manage those exposures and fluctuations. These contracts generally mature in 12 months or less, which is consistent with the forecasts of the related purchases and sales. Certain contracts are designated as cash flow hedges, whereas the remaining contracts, most of which are related to certain intercompany transactions which offset balance sheet exposure, are not designated as hedging instruments. The total notional amounts of the foreign currency forward contracts designated as hedges as of July 31, 2024 and 2023 were $32.3 million and $84.9 million, respectively. The total notional amounts of the foreign currency forward contracts not designated as hedges as of July 31, 2024 and 2023 were $249.7 million and$147.5 million, respectively.

Changes in the fair value of the Company’s designated hedges are reported in accumulated other comprehensive loss on the Consolidated Balance Sheets until the related transaction occurs, see Note 12. Designated hedges are recognized as a component of net sales, cost of sales, operating expenses andother income, net in the Consolidated Statements of Earnings upon occurrence of the related hedged transaction.

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

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

The total notional amount of net investment hedges as of July 31, 2024 and 2023 was €80 million, or $88.8 million. The maturity dates range from 2027 to 2029.

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 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 Consolidated Statements of Earnings through their maturity.

Interest Rate Swaps - Cash Flow Hedges

As of July 31, 2024 and 2023, there wereno outstanding interest rate swap arrangements.

Cash Flows

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

Note 16. 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 July 31, 2024 and 2023, the carrying values of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value because of the short-term nature of these instruments and are classified as Level 1 in the fair value hierarchy.

Long-Term Debt

As of July 31, 2024, the estimated fair values of fixed interest rate long-term debt were $267.7 million compared to the carrying values of $300.0 million. As of July 31, 2023, the estimated fair values of fixed interest rate long-term debt were $378.9 million compared to the carrying values of $425.0 million. The fair values are estimated by discounting the projected cash flows using the interest rates at which similar amounts of debt could currently be borrowed. The carrying values of total variable interest rate long-term debt were $209.9 million and $198.4 million as of July 31, 2024 and 2023, respectively and approximate their fair values. Long-term debt is classified as Level 2 in the fair value hierarchy.

Investment in Joint Ventures

The Company holds investments in joint ventures, which are accounted for as equity method investments at fair value and are included in other long-term assets on the Consolidated Balance Sheets. The aggregate carrying amount of these investments was $26.9 million and $24.4 million as of July 31, 2024 and 2023, respectively. These equity method investments are measured at fair value on a non-recurring basis. The fair value of the Company’s equity method investments has not been adjusted as there have been no triggering events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event these investments are required to be measured, they would fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities.

The fair values of the Company’s foreign currency forward contracts, net investment hedges and interest rate swaps 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 foreign currency forward contracts, net investment hedges and interest rate swaps are classified as Level 2 in the fair value hierarchy. For discussion of the Company’s derivatives and hedging, see Note 15.

Fair Value of Derivative Contracts

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

Fair Value of Contingent Consideration

The fair value of the contingent consideration liability is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market and thus, represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, 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.

A reconciliation of the fair value of the Company’s contingent consideration liability that use unobservable inputs was as follows (in millions):

Note 17. 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):

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, of which the Company guarantees half, was $51.0 million and $59.6 million as of July 31, 2024 and 2023, respectively. AFSI has $63.0 million in a revolving credit facility which expires on July 31, 2027 and $17.0 million in an additional multi-currency revolving credit facility which terminates upon notification of either party.

Earnings from AFSI, which are recorded in other income, net in the Consolidated Statements of Earnings were $12.3 million and $8.5 million as of July 31, 2024 and 2023, respectively.

Note 18. Commitments and Contingencies

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

Contingent Compensation and Consideration

Purilogics

The Company’s acquisition purchase agreement with Purilogics includes deferred payment provisions representing potential milestone payments for its former owners. The provisions are made up of two general types of arrangements, contingent compensation and contingent consideration. The contingent compensation arrangement is contingent on the former owner’s future employment with the Company and the related amounts are recognized over the required employment period. The contingent consideration is not contingent on employment and is recorded as purchase consideration in both other current and other long-term liabilities on the Consolidated Balance Sheets at the time of the initial acquisition based on the fair value of the estimated liability. The amounts are paid over atwo tofive year period, contingent on the achievement of certain revenue and manufacturing milestones.

The total contingent compensation arrangement liability was $2.1 million as of July 31, 2024, which was included in accrued employee compensation and related taxes on the Consolidated Balance Sheets. The total contingent compensation arrangement liability was $1.1 million as of July 31, 2023, which was included in other long-term liabilities on the Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangement upon completion of the future performance periods was $3.0 million, inclusive of the $2.1 million and $1.1 million accrued as of July 31, 2024 and 2023, respectively.

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 total contingent consideration liability was $19.0 million and $23.2 million as of July 31, 2024 and 2023, respectively and was included in other current and other long-term liabilities on the Consolidated Balance Sheets. The maximum payout of the contingent consideration was $27.0 million and $29.0 million as of July 31, 2024 and 2023, respectively, inclusive of the $19.0 million and $23.2 million accrued as of July 31, 2024 and 2023, respectively. The total contingent consideration paid was $2.0 million as of July 31, 2024, consisting of $2.0 million paid during fiscal 2024. For additional discussion regarding the fair value of the Company’s contingent consideration liability, see Note 16.

Other Acquisitions

For other acquisitions, the total contingent compensation arrangement liability was $0.3 million and $0.9 million as of July 31, 2024 and July 31, 2023 respectively, which was included in other long-term liabilities on the Consolidated Balance Sheets. The maximum payout of the contingent compensation arrangements upon completion of the future performance periods was $0.8 million as of July 31, 2024, which will expire in 2 to 4 years. This is inclusive of the $0.3 million accrued as of July 31, 2024.

The total contingent consideration liability was $2.8 million as of July 31, 2024 and was included in other current liabilities on the Consolidated Balance Sheets. The total contingent consideration liability was $1.7 million as of July 31, 2023 and was included in other long-term liabilities on the Consolidated Balance Sheets. The maximum payout of the contingent consideration was $2.8 million and $1.7 million as of July 31, 2024 and 2023, respectively.

Warranty Reserves

The Company estimates warranty expense on certain products at the time of sale using quantitative measures based on historical warranty claim experience and evaluation of specific customer warranty issues. The Company’s accrued warranty reserves were $10.2 million and $5.5 million as of July 31, 2024 and 2023, respectively. There was a $4.1 million specific warranty reserved forone customer as of July 31, 2024. There were no other individually or collectively material specific warranty matters accrued for, or significant settlements made, during the years ended July 31, 2024 and 2023.

Note 19. Segment Reporting

The Company’s reportable segments are: Mobile Solutions, Industrial Solutions and Life Sciences. The organizational structure also includes Corporate and Unallocated which includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and business development expenses. The Company determines its operating segments consistent with the manner in which it manages its operations and evaluates performance for internal review and decision-making. In fiscal 2024, Corporate and Unallocated included a charge of $6.4 million related to restructuring, see Note 20.

The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.

The Industrial Solutions segment is organized based on product type and consists of Industrial Air Filtration, Industrial Gasses, Industrial Hydraulics, Power Generation and Aerospace and Defense products. These products are further organized by the Industrial Filtration Solutions and Aerospace and Defense business units. Within our industrial portfolio, Donaldson provides the widest product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gasses and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gasses purification systems, hydraulic and lubricated rotating filtration applications as well as gas and liquid filtration for industrial processes. Power Generation products consist of air inlet systems and filtration sold to gas compression, power generation and natural gas liquification industries. Aerospace and Defense products consist of air, fuel, lubrication and hydraulic filtration for fixed-wing and rotorcraft aerospace applications and ground defense vehicle and naval platforms. Industrial Solutions businesses sell through multiple channels which include OEMs, distributors and direct-to-consumer in some markets.

The Life Sciences segment is organized by end market and consists of the Bioprocessing Equipment and Consumables, Food and Beverage, Vehicle Electrification and Medical Device, Microelectronics and Disk Drive markets. Within these markets, products consist of micro-environment gas and liquid filtration for food and beverage and industrial processes, bioprocessing equipment, including bioreactors and fermenters, bioprocessing consumables including chromatography devices, reagents and filters, polytetrafluoroethylene membrane-based products, as well as specialized air and gas filtration systems for applications including hard disk drives, semiconductor manufacturing, sensors, battery systems and powertrain components. Life Sciences primarily sells to large OEMs and directly to various end users requiring cell growth, separation, purification, high purity filtration and device protection.

The Company has manufacturing facilities that serve multiple reportable segments. As such, capital expenditure information by reportable segment has not been provided because the Company does not produce or utilize such information internally. In addition, although depreciation and amortization expense is a component of each reportable segment’s operating results, it is not discretely identifiable.

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 and other financial information as stated below.

Segment details were as follows (in millions):

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

Net sales, generally disaggregated by location where the customer’s order was received and property, plant and equipment, net by geographic region were as follows (in millions):

Concentrations

There were no customers that accounted for over 10% of net sales for the years ended July 31, 2024, 2023 or 2022. There were no customers that accounted for over 10% of gross accounts receivable as of July 31, 2024 or 2023.

Note 20. Restructuring

During the fourth quarter of fiscal 2024, the Company initiated global footprint optimization and cost reduction actions to further improve its operating and manufacturing cost structure, primarily in EMEA. These activities resulted in restructuring expenses, primarily related to severance, of $6.4 million. Charges of $3.8 million were included in cost of sales and $2.6 million were included in operating expenses in the Consolidated Statement of Earnings for the year ended July 31, 2024. As of July 31, 2024, $6.4 million of accrued expenses were included in accrued employee compensation and related taxes in the Consolidated Balance Sheet. Estimated future costs associated with actions related to this restructuring initiative are not included due to the Company’s inability to reasonably quantify the anticipated restructuring charges.

During fiscal 2023, the Company announced a company-wide organizational redesign to further support the Company’s growth strategies and better serve its customers. In conjunction with the organizational redesign, the Company recorded $21.8 million of charges consisting of $15.3 million of severance charges and other organizational redesign costs and $6.5 million of costs mainly associated with the exiting of a lower-margin customer program and a lower-margin product. Charges of $2.9 million were included incost of sales and $18.9 million were included in selling, general and administrative expenses in the accompanying Consolidated Statements of Earnings.