Donaldson(US:DCI)2023-06-04 16:00PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the specified periods Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Donaldson Company, Inc. for the three and nine months ended April 30, 2023 Condensed Consolidated Statements of Earnings Net sales and net earnings increased year-over-year for both the three and nine-month periods ended April 30, 2023, driven by pricing and volume growth Consolidated Earnings Summary (YoY) | Metric | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Nine Months Ended April 30, 2023 | Nine Months Ended April 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $875.7M | $853.2M | $2,551.3M | $2,416.6M | | Gross profit | $288.8M | $269.0M | $860.5M | $775.8M | | Operating income | $124.0M | $111.0M | $359.6M | $314.2M | | Net earnings | $93.7M | $83.0M | $266.9M | $231.8M | | Diluted EPS | $0.76 | $0.67 | $2.16 | $1.85 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income significantly increased for both periods, primarily due to favorable foreign currency translation adjustments Comprehensive Income Summary (YoY) | Metric | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Nine Months Ended April 30, 2023 | Nine Months Ended April 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net earnings | $93.7M | $83.0M | $266.9M | $231.8M | | Foreign currency translation gain (loss) | $1.2M | $(42.8)M | $26.4M | $(70.4)M | | Comprehensive income | $94.4M | $40.8M | $293.0M | $167.7M | Condensed Consolidated Balance Sheets Total assets increased, while total liabilities decreased, leading to a rise in total stockholders' equity as of April 30, 2023 Balance Sheet Summary | Metric | April 30, 2023 | July 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,352.6M | $1,406.5M | | Total assets | $2,675.5M | $2,600.3M | | Total current liabilities | $712.0M | $629.6M | | Total liabilities | $1,376.8M | $1,467.1M | | Total stockholders' equity | $1,298.7M | $1,133.2M | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities substantially increased, while cash used in investing and financing activities also rose for the nine months ended April 30, 2023 Cash Flow Summary (Nine Months Ended April 30) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $353.7M | $143.9M | | Net cash used in investing activities | $(155.1)M | $(105.8)M | | Net cash used in financing activities | $(204.1)M | $(82.8)M | | Decrease in cash and cash equivalents | $(7.3)M | $(54.1)M | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased, primarily due to net earnings and other comprehensive income, partially offset by share repurchases and dividends - Key drivers of the change in stockholders' equity for the nine months ended April 30, 2023 include net earnings of $266.9 million, offset by $119.3 million in treasury stock purchases and $55.8 million in dividends20 Notes to Condensed Consolidated Financial Statements This section details accounting policies, segment reporting changes, the acquisition of Isolere Bio, Inc., and share repurchase activities - Effective November 1, 2022, the Company established a new segment reporting structure with three reportable segments: Mobile Solutions, Industrial Solutions, and Life Sciences2293 - In Q3 fiscal 2023, the Company acquired Isolere Bio, Inc. for cash consideration of $62.3 million, net of cash acquired. Isolere is reported within the Life Sciences segment29 - For the nine months ended April 30, 2023, the company repurchased 2.1 million shares for $119.3 million. As of April 30, 2023, authorization remained to repurchase 3.3 million shares48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, segment results, liquidity, and capital resources for the three and nine months ended April 30, 2023 Consolidated Results of Operations Consolidated net sales and net earnings grew, with gross margin expansion attributed to pricing actions offsetting inflationary pressures Q3 FY2023 vs Q3 FY2022 Operating Results | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $875.7M | $853.2M | +2.6% | | Gross Margin | 33.0% | 31.5% | +1.5 p.p. | | Operating Income | $124.0M | $111.0M | +11.7% | | Net Earnings | $93.7M | $83.0M | +13.0% | | Diluted EPS | $0.76 | $0.67 | +14.0% | Nine Months FY2023 vs FY2022 Operating Results | Metric | 9M 2023 | 9M 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,551.3M | $2,416.6M | +5.6% | | Gross Margin | 33.7% | 32.1% | +1.6 p.p. | | Operating Income | $359.6M | $314.2M | +14.5% | | Net Earnings | $266.9M | $231.8M | +15.2% | | Diluted EPS | $2.16 | $1.85 | +16.9% | - Sales growth was primarily driven by higher pricing, with a negative impact from foreign currency translation of $23.6 million in Q3 and $116.6 million for the nine-month period110120 Segment Results of Operations Industrial Solutions showed strong growth, Mobile Solutions was flat in Q3 but grew over nine months, and Life Sciences declined due to specific business weaknesses and acquisition impacts Net Sales by Segment (YoY % Change) | Segment | Q3 2023 vs Q3 2022 | 9M 2023 vs 9M 2022 | | :--- | :--- | :--- | | Mobile Solutions | -0.1% | +4.9% | | Industrial Solutions | +13.8% | +13.6% | | Life Sciences | -12.6% | -14.1% | Earnings Before Income Taxes by Segment (YoY % Change) | Segment | Q3 2023 vs Q3 2022 | 9M 2023 vs 9M 2022 | | :--- | :--- | :--- | | Mobile Solutions | +4.6% | +18.8% | | Industrial Solutions | +43.1% | +54.5% | | Life Sciences | -98.6% | -66.1% | - Mobile Solutions' Aftermarket sales decreased in Q3 as large OEM customers normalized inventories, reflecting improving global supply chains132 - Life Sciences' earnings decline was driven by lower disk drive sales volumes and the expected initial negative earnings impact from recent acquisitions146148 Liquidity, Capital Resources and Financial Condition The company maintained a strong liquidity position with increased cash from operations, reduced debt to capitalization, and improved working capital management - Cash provided by operating activities increased by $209.8 million for the nine months ended April 30, 2023, compared to the prior year, primarily due to inventory reduction and higher earnings151 - The company repurchased $119.3 million of its common stock and paid $84.1 million in dividends during the first nine months of fiscal 2023154 Working Capital Metrics | Metric | April 30, 2023 | July 31, 2022 | | :--- | :--- | :--- | | Days sales outstanding | 61 days | 62 days | | Days inventory outstanding | 72 days | 78 days | | Days payable outstanding | 47 days | 52 days | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages market risks related to foreign currency, interest rates, and commodity prices using derivative instruments - For the nine months ended April 30, 2023, foreign currency translation decreased reported net sales by $116.6 million and net earnings by $14.5 million171 - The company uses foreign currency forward contracts and net investment hedges to manage currency risk. As of April 30, 2023, the total notional amount of designated forward contracts was $69.3 million, and net investment hedges was €80 million174175 - A hypothetical 0.5 percentage point increase in short-term interest rates would have increased interest expense by approximately $0.7 million in the nine months ended April 30, 2023177 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report182 - No material changes to the Company's internal control over financial reporting occurred during the fiscal quarter ended April 30, 2023183 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits Item 1. Legal Proceedings The company assesses recorded liabilities for claims or litigation as not material to its financial position or results of operations - The Company believes the estimated liability for claims or litigation is adequate and not material to its financial position, results of operations, or liquidity186 Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for fiscal year 2022 have occurred - There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2022187 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 64,000 shares of common stock in Q3, with remaining authorization for 3.3 million shares Share Repurchases for the Three Months Ended April 30, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | February 2023 | — | $— | | March 2023 | — | $— | | April 2023 | 64,000 | $63.66 | | Total | 64,000 | $63.66 | - As of April 30, 2023, the Company had remaining authorization to repurchase 3.3 million shares under its plan188 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act and financial data formatted in iXBRL