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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.12pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.04pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.20pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+2
negatively+1
disrupt+1
retaliate+1
retaliatory+1
Positive rising
No words rose this year.
Risk Factors (Item 1A)
3,321 words
Item 1A. Risk Factors
The Company’s (we, our or us) business is subject to various risks and uncertainties. The following discussion outlines what we believe to be the risk factors that could materially and adversely affect our business, reputation, financial condition and results of operations. These risk factors should be considered with the Company’s cautionary comments related to forward-looking statements when evaluating information provided in this Annual Report. Risks not currently known to the Company, or which the Company currently believes are immaterial, may also impair the Company’s business, reputation, financial condition and results of operations. The Company periodically reviews its strategies, processes and controls with respect to risk identification, assessment and mitigation with the audit committee of the Company’s board of directors.
Macroeconomic and Geopolitical Risks
Global Operations - we have a broad footprint and global operations may present challenges.
We have operations throughout the world. Our stability, growth and profitability are subject to a number of risks of doing business globally including the following:
• political and military events, including the rise of nationalism and support for protectionist policies;
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
impairment+8
loss+5
retaliatory+2
straining+1
exacerbate+1
Positive rising
benefit+3
positively+3
achieving+2
effective+1
strength+1
MD&A (Item 7)
7,772 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides a comparison of the Company’s results of operations, liquidity and capital resources for the years ended July 31, 2025 and 2024. A discussion of the changes in the Company’s results of operations and liquidity and capital resources for the year ended July 31, 2024 from July 31, 2023 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended July 31, 2024 (the 2024 Annual Report), which was filed with the SEC on September 27, 2024.
The MD&A should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report, particularly Item 1A, “Risk Factors” and in the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.
Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including a number of financial measures that are not defined under generally accepted accounting principles (GAAP) in the U.S. Excluding foreign currency translation from net sales and net earnings (i.e. constant currency) are not measures of financial performance under GAAP; however, the Company believes they are useful in understanding its financial results and provide comparable measures for understanding the operating results of the Company between different fiscal periods. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
• tariffs, trade barriers and other trade restrictions;
• legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws and foreign exchange controls;
• potential difficulties in staffing and managing local operations;
• credit risk of local customers and distributors;
• deterioration in economic conditions, including the effect of inflation on our customers and suppliers;
• difficulties in protecting our intellectual property; and
• local economic, political and social conditions.
Due to the global reach of our operations, our business is subject to a complex system of commercial and trade laws, regulations and policies, including those related to data privacy, trade compliance, anti-corruption and anti-bribery. We experience exposure to and costs of complying with, these laws and regulations. Our global subsidiaries, joint venture partners and affiliates are governed by laws, rules and business practices that differ from those of the U.S. Our compliance programs may not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating laws, regulations or standards. We may incur defense costs, fines, penalties, damage to our reputation and business disruptions, which could resul t in an adverse effect on our results of operations, financial condition and cash flows.
Tariffs - costs associated with complying with potential new or incremental tariffs could negatively affect our business and results of operations.
Steps taken by governments to consider applying additional or new tariffs have the potential to disrupt existing supply chains, impose additional costs on our business, and could lead to other countries attempting to retaliate by imposing tariffs, which would make our products more expensive for customers, and, in turn, could make our products less competitive. Any additional tariffs in the United States or retaliatory tariffs imposed by other governments could exacerbate the impact. Any new, substantial tariff increases on imports to the United States from Mexico, China and the European Union (EU), should they be implemented and sustained for an extended period of time, could have a material adverse effect on our business and our supply chain. Changes in international trade policy could result in an adverse effect on our results of operations, financial condition and cash flows due to the international footprint of our Company.
Business Disruption - unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.
There could be an occurrence of one or more unexpected events, including a terrorist attack, war or civil unrest, a weather event, a natural disaster, a climate-related event, a pandemic or other catastrophes in countries in which we operate or in which our suppliers are located. Such an event could result in physical damage to and complete or partial closure of our headquarters, manufacturing facilities or distribution centers, temporary or long-term disruption in the supply of component products from some local and international suppliers, disruption in the transport of our products to customers and disruption of information systems. Existing insurance coverage may not provide protection for all costs that may arise from any such event. Any disruption in our operations could have an adverse impact on our ability to meet our customer needs or may require us to incur additional expense in order to produce sufficient inventory. Certain unexpected events could adversely impact our business, results of operations, financial condition and cash flows.
Operational Risks
Supply Chain - unavailable raw materials, significant demand fluctuations and material cost changes could have an impa ct on our sales and cost of sales.
We obtain raw materials, including steel, filter media, petroleum-based products and other components from third-party suppliers. We often concentrate our sourcing of some materials from one supplier or a few suppliers. We rely, in part, on our suppliers to ensure they meet required quality and delivery standards. An unanticipateddelay in delivery by our suppliers could result in the inability to deliver our products on time and to meet the expectations of our customers. We could experience an increase in the costs of doing business, including increasing raw material prices and transportation costs, which could have an adverse impact on our business, results of operations, financial condition and cash flows.
Personnel - our success has been and could in the future be affected, if we are not able to attract, engage, train and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, engage, train and retain highly skilled, qualified and diverse personnel globally and successfully execute management transitions at leadership levels of the Company. There is competition for talent with market-leading skills and capabilities in new technologies. Additionally, in some locations we have experienced labor shortages causing significant wage inflation. We may not be able to attract and retain qualified personnel and it may be difficult for us to compete effectively, which could adversely impact our business, results of operations, financial condition and cash flows.
Operations - complexity of manufacturing could cause inability to meet demand and result in the loss of customers.
Our ability to fulfill customer orders is dependent on our manufacturing and distribution operations. Unexpected or extreme changes in demand could result in longer lead times because additional plant capacity takes significant time to bring online. We cannot guarantee we will be able to adjust manufacturing capacity, in the short-term, to meet higher customer demand. Efficient operations require streamlining processes to maintain or reduce lead times, which we may not be capable of achieving. Unacceptable levels of service for key customers may result if we are not able to fulfill orders on a timely basis or if product quality, warranty or safety issues result from compromised production. We may not be able to adjust our production schedules to reflect changes in customer demand on a timely basis. Due to the complexity of our manufacturing operations, we may be unable to timely respond to fluctuations in demand, which could adversely impact our business, results of operations, financial condition and cash flows.
Products - maintaining a competitive advantage requires consistent investment with uncertain returns.
We operate in highly competitive markets and have numerous competitors that are already well-established in those markets. We expect our competitors to continue to improve the design and performance of their products and to introduce new products that could be competitive in both price and performance. We believe we have certain technological advantages over our competitors, but maintaining these advantages requires us to consistently invest in research and development, sales and marketing and customer service and support. There is no guarantee we will be successful in maintaining these advantages and we could encounter the commoditization of our key products. We make investments in new technologies that address increased performance and regulatory requirements around the globe. There is no guarantee we will be successful in completing development or achieving sales of these products or that the margins on such products will be acceptable. A competitor’s successful product innovation could reach the market before ours or gain broader market acceptance, which could adversely impact our business, results of operations, financial condition and cash flows.
Evolving Customer Needs - disruptive technologies may threaten our growth in certain industries.
Certain industry market trends guide decisions we make in operating the Company and our growth could be threatened by disruptive technologies. We may be adversely impacted by changes in technology that could reduce or eliminate the demand for our products. These risks include wider adoption of technologies providing alternatives to diesel engines such as electrification of equipment or other alternative power solutions. Such disruptiveinnovation could create new markets and displace existing companies and products, resulting in significantly negative consequences for the Company. If we do not properly address future customer needs, we may be slower to adapt to such disruption, which could adversely impact our business, results of operations, financial condition and cash flows.
Competition - we participate in highly competitive markets with pricing pressure.
The businesses and product lines in which we participate are very competitive and we risk losing business based on a wide range of factors, including pric e, technology, performance, reliability and availability, geographic coverage and customer service. Our customers continue to seek technological innovation, productivity gains, competitive prices, reliability and availability from us and their other suppliers. Additionally, we sell through a variety of channels (e.g., OEM, dealer, distributor and eCommerce) in a diverse set of highly competitive filtration markets. The variability complicates the supply chain, affects working capital needs, requires balance between relationships and drives a more targeted sales force. As a result of these and other factors, we may not be able to compete effectively, which could adversely impact our business, results of operations, financial condition and cash flows.
Customer Concentration and Retention - a number of our customers operate in similar cyclical industries. Changes in economic conditions in these industries could impact our sales.
No customer accounted for 10% or more of our net sales in fiscal 2025, 2024 or 2023. However, a number of our customers are concentrated in similar cyclical industries (e.g., construction, agriculture, mining, oil and gas, transportation, power generation and disk drive), resulting in additional risk based on their respective economic conditions. Our success is also dependent on retaining key customers, which requires us to successfully manage relationships and anticipate the needs of our customers in the channels in which we sell our products. Changes in economic conditions could materially and adversely impact our business, results of operations, financial condition and cash flows.
Productivity Improvements - if we do not successfully manage productivity improvements, we may not realize the expected benefits.
Our financia l projections assume certain ongoing productivity improvements as a key component of our business strategy to, among other things, contain manufacturing and operating expenses, maintain competitiveness, increase operating efficiencies and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost savings if we do not successfully execute these plans while continuing to invest in business growth. Such cost savings may not otherwise be realized or other difficulties could be encountered, which could adversely impact our business, results of operations, financial condition and cash flows.
Sustainability - achieving commitments could result in additional costs and our inability to achieve them could have an adverse impact on our reputation and performance.
We periodically communicate our strategies, commitments and targets related to sustainability matters, including greenhouse gas (GHG) emissions through the issuance of our Sustainability report. Although we intend to meet these strategies, commitments and targets, we may be unable to achieve them due to impacts on resources, operational costs and technological advancements. In addition, standards and processes for measuring and reporting GHG emissions and other sustainability metrics may change over time, resulting in inconsistent data or significant revisions to our strategies, commitments and targets, or our ability to achieve them. Our failure to achieve related strategies, commitments and targets or failure to meet sustainability requirements could negatively impact our reputation as well as the demand for our products and adversely affect our business, results of operations, financial condition and cash flow.
Acquisitions, Divestitures and Other Strategic Transactions - the execution of our acquisitions, divestitures and other strategic transactions may not provide the desired return on investment.
We have made and continue to pursue acquisitions and divestitures and may pursue joint ventures, strategic investments and other similar strategic transactions. Acquisitions, joint ventures and strategic investments could negatively impact our profitability and financial condition due to operating and integration inefficiencies, the incurrence of debt, contingent liabilities and amortization of expenses related to intangible assets. There are also a number of other risks involved in acquisitions including the potential loss of key customers or employees, difficulties in assimilating the acquired operations and the diversion of management’s time and attention away from other business matters. Further, during the pendency of a proposed transaction, we may be subject to risks related to a decline in the business and the risk the transaction may not close. Divestitures may involve significant challenges and risks, such as difficulty separating out portions of our business or the potential loss of revenue or negative impacts on margins. The divestitures may also result in o ngoing financial or legal proceedings, such as retained liabilities, which could have an adverse impact on our business, results of operations, financial condition and cash flows.
Cybersecurity Risks
Cybersecurity Risks - vulnerability of our information technology systems and security.
We have many information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information and to manage or support a variety of business processes and activities, which are critical to our operations. We could encounter difficulties in developing new systems, maintaining and upgrading our existing systems, managing access to these systems, managing the evolving use of artificial intelligence and preventing information security breaches. Additionally, we collect and store sensitive data, including intellectual property and proprietary business information, in data centers and on information technology networks.
Our data is subject to a variety of U.S. and international laws and regulations that pertain to the collection and handling of personal information. The laws require us to notify governmental authorities and affected individuals of data breaches involving certain personal information. These laws include the European GDPR and the CCPA. Regulatory litigation or actions that could impose significant penalties may be brought against us in the event of a breach of data or alleged non-compliance with such laws and regulations.
Information technology security threats are increasing in frequency and sophistication; to date, none of the threats faced by the Company have been material. We have invested in protection to prevent these threats; however, there can be no assurance our efforts will prevent all potential failures, cybersecurity attacks or breaches of our systems. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Should such an attack succeed, it could lead to the compromise of confidential information, manipulation and destruction of data, defective products, production downtimes and operation disruptions. The occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, potential liability, increased costs and operational consequences of implementing further data protection matters. The Company maintains insurance coverage for various cybersecurity and business continuity risks, however, there can be no guarantee all costs or losses incurred will be fully insured. Vulnerabilities could lead to significant additional expenses and an adverse effect on our reputation, business, results of operations, financial condition and cash flow s.
Legal and Regulatory Risks
Intellectual Property - demand for our products may be affected by new entrants that copy our products and/or infringe on our intellectual property.
The ability to protect and enforce intellectual property rights varies across jurisdictions. Where possible, we seek to preserve our intellectual property rights through patents. These patents have a limited life and, in some cases, have expired or will expire in the near future. Competitors and others may also initiate litigation to challenge the validity of our intellectual property rights or allege that we infringe their intellectual property rights. We may be required to pay substantial damages if it is determined our products infringe on their intellectual property rights. We may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license on terms that are unfavorable to us.
Protecting or defendingagainst such claims could significantly increase our costs and divert management’s time and attention away from other business matters, which could adversely impact our business, results of operations, financial condition and cash flows.
Legal and Regulatory - costs associated with lawsuits, investigations or complying with laws and regulations.
We are subject to many laws and regulations in the jurisdictions in which we operate. We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted by new or changing laws and regulations that affect both our operations and our ability to develop and sell products that meet our customers’ requirements. We are involved in various product liability, product warranty, intellectual property, environmental claims and other legal proceedings that arise in and outside of the ordinary course of our business. We are subject to increasingly stringent laws and regulations in the countries in which we operate, including those governing the environment (e.g., emissions to air; discharges to water; and the generation, handling, storage, transportation, treatment and disposal of waste materials; and the use of raw materials and goods such as iron, steel aluminum, electricity, natural gas and hydrogen) and data protection and privacy. It is not possible to predict the outcome of investigations and lawsuits and we could inc ur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have an adverse effect on our reputation, business, results of operations, financial condition and cash flows in any particular period. In addition, we may not be able to maintain our insurance at a reasonable cost or in sufficient amounts to protect us against any losses.
Financial Risks
Currency - an unfavorable fluctuation in foreign currency exchange rates could impact our results of operations.
We have operations in many countries, with a substantial portion of our annual revenue earned in currencies other than the U.S. dollar. We face transactional and translational risks associated with the fluctuations in foreign currency exchange rates. Transactional risk arises from changes in the value of cash flows denominated in different currencies. This can be caused by supply chains that cross borders resulting in revenues and costs being in different currencies. Translational risk arises from the remeasurement of our financial statements. In addition, decreased value of local currency may make it difficult for some of our customers, distributors and end users to purchase our products. Each of our subsidiaries reports its results of operations and financial position in its relevant functional currency, which is then translated into U.S. dollars. This translated financial information is included in our Consolidated Financial Statements. Significant fluctuations of the U.S. dollar in comparison to the foreign currencies of our subsidiaries during discrete periods may have a negative impact on our business, results of operations, financial condition and cash flows.
Liquidity - changes in the capital and credit markets may negatively affect our ability to access financing to support strategic initiatives.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. There can be no assurance the cost or availability of future borrowings will not be impacted by future capital market disruptions. Some of our existing borrowings contain covenants to maintain certain financial ratios that, under certain circumstances, could restrict our ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets.
Overview
Founded in 1915, Donaldson Company, Inc. is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. Donaldson’s diverse and skilled employees at more than 150 locations on six continents, 77 of which are manufacturing and/or distribution centers, partner with customers — from small business owners to the world’s largest original equipment manufacturer ( OEM) brands — to solve complex filtration challenges. Customers choose Donaldson's filtration solutions due to their stringent technical and performance requirements, the need for reliability and the value proposition of Donaldson's solutions and/or services.
The Company’s operating segments are Mobile Solutions, Industrial Solutions and Life Sciences. The Mobile Solutions segment is organized based on a combination of customers and products and consists of the Off-Road, On-Road and Aftermarket business units. Within these business units, products consist of replacement filters for both air and liquid filtration applications and filtration housings for new equipment production and systems related to exhaust and emissions. Applications include air filtration systems, fuel, lube and hydraulic systems, emissions systems and sensors, indicators and monitoring systems. Mobile Solutions sells to OEMs in the construction, mining, agriculture and transportation end markets and to independent distributors and OEM dealer networks.
The Industrial Solutions segment is organized based on product type and consists of Industrial Air Filtration, Industrial Gases, 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, the Company provides a wide product offering in the market to industrial customers consisting of equipment, ancillary components, replacement parts, performance monitoring and service globally, that cost-effectively enhances productivity and manufacturing efficiency. Industrial Air Filtration, Industrial Gases and Industrial Hydraulics products consist of dust, fume and mist collectors, compressed air and industrial gases 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 Food and Beverage, Disk Drive, Vehicle Electrification and Medical Device, Microelectronics and Bioprocessing Equipment and Consumables markets. Within these markets, products consist of micro-environment gas and liquid filtration for food and beverage and industrial processes, bioprocessing equipment, including bioreactors and fermenters, bioprocessing consumables including chromatography devices, reagents and filters, polytetrafluoroethylene membrane-based products, as well as specialized air and gas filtration systems for applications including hard disk drives, semiconductor manufacturing, sensors, battery systems and powertrain components. Life Sciences primarily sells to large OEMs and directly to various end users requiring cell growth, separation, purification, high purity filtration and device protection.
The Company’s results of operations are affected by conditions in the global economic and geopolitical environment. Under most economic conditions, the Company’s diversification between its diesel engine end markets, its global end markets, its diversification through technology and its OEM and replacement parts customers has helped to limit the impact of weakness in any one product line, market or geography on the consolidated operating results of the Company.
Operating Environment
Tariffs
The U.S. imposed tariffs on a wide range of imports, with the potential for further tariff actions, which resulted in retaliatory tariffs. These trade measures, along with updates to export controls and sanctions regimes, pose ongoing risks to global supply chains, potentially increasing the cost of goods, straining procurement cycles and impacting customer demand. The Company is closely monitoring the evolving trade landscape, as well as its ability to mitigate the impact of tariffs and its analysis of the potential impact. While the ultimate impact of tariffs remains uncertain, the Company continues to expect annual costs related to recently implemented or increased tariffs of approximately $35 million, which represents less than 1% of the Company’s total sales and is expected to be largely offset by pricing increases.
Any additional tariffs in the U.S. or retaliatory tariffs imposed by other governments could exacerbate the impact. Any new, substantial tariff increases on imports to the U.S. from Mexico, China and the EU, should they be implemented and sustained for an extended period of time, could have a significant adverse effect on the Company and its supply chain.
For additional information regarding the impact and potential impact of trade policy and tariffs on the Company, refer to Part I, Item 1A, “Risk Factors” of this Annual Report, which outlines the risks and uncertainties the Company believes are the most material to its business.
C onsolidated Results of Operations
Operating Results
Operating results were as follows (in millions, except per share amounts):
Year Ended July 31,
% of net sales
% of net sales
Net sales
Cost of sales
Gross profit
Selling, general and administrative
Loss on impairment of assets
Research and development
Operating expenses
Operating income
Interest expense
Other income, net
Earnings before income taxes
Income taxes
Net earnings
Net earnings per share (EPS) – diluted
Geographic Net Sales by Origination
Net sal es, generally disaggregated by l ocation where the customer’s order was received, were as follows (in millions):
Year Ended July 31,
% of net sales
% of net sales
U.S. and Canada
Europe, Middle East and Africa (EMEA)
Asia Pacific (APAC)
Latin America (LATAM)
Total Company
Net Sales
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales by segment (in millions):
July 31, 2024
Sales volume
Pricing
Currency translation
July 31, 2025
Mobile Solutions segment
Industrial Solutions segment
Life Sciences segment
Total Company
Net sales for the year ended July 31, 2025 increased $104.6 million, or 2.9% f rom fiscal 2024, refle cting higher sales in the Mobile Solutions segment of $40.2 million, or 1.8%, the Industrial Solutions segment of $37.9 million, or 3.6%, and the Life Sciences segment of $26.5 million, or 9.8%. Foreign currency translation increased net sales by $8.3 million, reflecting increases in the Industrial Solutions and Life Sciences segments of $4.7 million and $5.2 million, respectively, and a decrease in the Mobile Solutions segment of $1.6 million. In fiscal 2025, the Company’s net sales increased primarily from higher sales volume as well as pricing actions.
Cost of Sales and Gross Margin
Cost of sales for the year ended July 31, 2025 was $2,404.7 million, compared with $2,311.9 million for the year ended July 31, 2024, an increase of $92.8 million, or 4.0%. Gross margin as a percentage of net sales for the year ended July 31, 2025 was 34.8% compared with 35.5% for the year ended July 31, 2024, a decrease of 0.7%. The decrease in gross margin as a percentage of net sales was driven primarily by higher manufacturing costs associated with footprint optimization initiatives and tariff related inflation on the Company’s LIFO inventory valuation.
Selling, General and Administrative Expenses
Selling, gener al and administrative expenses for the year ended July 31, 2025 were $641.0 million, or 17.4% of net sales, compared with $636.7 million, or 17.8% of net sales, for the year ended July 31, 2024, an increase of $4.3 million, or 0.7%. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to ongoing disciplined expense management and a $4.0 million benefit from the reduction of the Purilogics’ contingent consideration liability, which represents the fair value based on the probability of achieving certain milestones, partially offset by restructuring, business development and other non-recurring expenses.
Loss on Impairment of Intangible Assets
Loss on impairment of intangible assets for the year ended July 31, 2025 was $62.0 million, or 1.6% of net sales, compared with no expense for the year ended July 31, 2024. The fiscal 2025 impairment expense included $46.6 million related to Univercells Technologies, reflecting lower-than-anticipated bioprocessing capital spending, particularly for early-stage assets, while drug development timelines are longer than previously anticipated. The remaining $15.4 million of impairment expense was related to Solaris as market demand for industrial bioreactors had significantly declined.
Research and Development Expenses
Resea rch and development expenses for the year ended July 31, 2025 were $87.8 million, or 2.4% of net sales, compared with $93.6 million, or 2.6% of net sales, for the year ended July 31, 2024, a decrease of $5.8 million, or 6.2%. The decrease in research and development expenses as a percentage of net sales was primarily driven by focused project prioritization.
Non-Operating Items
Intere st expense for the year ended July 31, 2025 was $24.2 million, compared with $21.4 million for the year ended July 31, 2024, an increase of $2.8 million, or 13.5%. The increase primarily reflects a higher average level of indebtedness during fiscal 2025 compared to the prior year.
Other income, net for the year ended July 31, 2025 was $21.0 million, compared with $12.6 million for the year ended July 31, 2024, an increase of $8.4 million, or 66.8%, driven primarily by lower pension related expenses in the current year.
Income Taxes
The effective tax rates were 25.4% and 22.7% for the years ended July 31, 2025 and 2024, respectively. The higher effective tax rate was primarily due to the fiscal 2025 third quarter loss on impairment of intangible assets, as the discrete tax benefit on the loss on impairment of intangible assets was reduced by an increase in valuation allowance. Excluding the impact of the loss on impairment of intangible assets, the effective tax rate is higher due to a decrease in discrete tax benefits.
The Organization for Economic Co-operation and Development (OECD) released the Model GloBE Rules for Pillar Two on December 20, 2021, which defined a 15% global minimum tax. Since the model rules have been released, many countries have enacted or continue to consider changes in their tax laws and regulations based on the Pillar Two proposals, some of which became effective for tax years beginning after January 1, 2024. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. The Company does not expect Pillar Two to have a material impact on its financial statements as most jurisdictions in which the Company operates have an effective tax above the 15% threshold.
Net Earnings
Net earnings for the year ended July 31, 2025 were $367.0 million, compared with $414.0 million for the year ended July 31, 2024, a decrease of $47.0 million, or 11.3%. Diluted EPS were $3.05 for the year ended July 31, 2025, compared with $3.38 for the year ended July 31, 2024.
Net earnings were impacted by fluctuations in foreign currency exchange rates. The impact of these fluctuations on net earnings was as follows (in millions):
Year Ended July 31,
Prior year net earnings
Change in net earnings excluding translation
Impact of foreign currency translation (1)
Current year net earnings
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net earnings into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year.
Restructuring
During fiscal 2025, the Company continued its global footprint and cost optimization actions to further improve the operating and manufacturing cost structure, which began in fiscal 2024. These activities resulted in restructuring expenses, primarily related to severance, of $16.8 million and $6.4 million for the years ended July 31, 2025 and 2024, respectively. Charges of $6.5 million and $3.8 million were included in cost of sales in the Consolidated Statements of Earnings for the years ended July 31, 2025 and 2024, respectively. Charges of $10.3 million and $2.6 million were included in operating expenses in the Consolidated Statements of Earnings for the years ended July 31, 2025 and 2024, respectively. As of July 31, 2025 and July 31, 2024, $7.1 million and $6.4 million of accrued expenses were included in accrued employee compensation and related taxes in the Consolidated Balance Sheets, respectively. The estimated range of future costs associated with actions related to this restructuring through fiscal 2026 is $5.0 million to $10.0 million.
During fiscal 2023, the Company announced a company-wide organizational redesign to further support the Company’s growth strategies and better serve its customers. I n conjunction with the organizational redesign, the Company recorded $21.8 million of charges consisting of $15.3 million of severance charges and other organizational redesign costs and $6.5 million of costs mainly associated with the exiting of a lower-margin customer program and a lower-margin product. Charges of $2.9 million were included in cost of sales and $18.9 million were included in selling, general and administrative expenses in the accompanying Consolidated Statements of Earnings.
Segment Results of Operations
Net sales and earnings before income taxes were as follows (in millions):
Year Ended July 31,
$ Change
% Change
Net sales
Mobile Solutions
Industrial Solutions
Life Sciences
Total Company
Earnings (loss) before income taxes
Mobile Solutions
Industrial Solutions
Life Sciences
Total Segment
Corporate and unallocated (1)
Total Company
(1) Corporate and unallocated includes interest expense and certain corporate expenses determined to be non-allocable to the segments, such as restructuring charges and business development expenses.
NM = Not meaningful
Mobile Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
Year Ended July 31,
$ Change
% Change
Net sales
Off-Road
On-Road
Aftermarket
Total Mobile Solutions segment
Mobile Solutions segment earnings before income taxes
Mobile Solutions segment earnings before income taxes % of net sales
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Mobile Solutions segm ent for the year ended July 31, 2025 were $2,291.0 million, compared with $2,250.8 million for the year ended July 31, 2024, an increase of $40.2 million, or 1.8%, driven by a $14.7 million volume increase and a $27.1 million increase from pricing benefits. The impact from foreign currency translation for the year ended July 31, 2025 was not material.
Net sales of Aftermarket increased $90.7 million due to volume increases driven by solid market demand and market share gains. Net sales of On-Road and Off-Road decreased $29.2 million and $21.3 million, respectively, primarily due to a decline in global equipment production driven by weak end market conditions, including transportation and agriculture.
Earnings before income taxes for t he Mobile Solutions segment for the year ended July 31, 2025 were $417.6 million, or 18.2% of net sales, an increase from 18.0% of net sales for the year ended July 31, 2024. The increase was driven by timing of inventory cost adjustments and leverage on higher sales.
Industrial Solutions Segment
Net sales and earnings before income taxes were as follows (in millions):
Year Ended July 31,
$ Change
% Change
Net sales
Industrial Filtration Solutions (IFS)
Aerospace and Defense
Total Industrial Solutions segment
Industrial Solutions segment earnings before income taxes
Industrial Solutions segment earnings before income taxes % of net sales
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Industrial Solutions segment for the year ended July 31, 2025 were $1,104.4 million, compared with $1,066.5 million for the year ended July 31, 2024, an increase of $37.9 million, or 3.6%, driven by a $22.4 million volume increase and a $10.8 million increase from pricing benefits. Foreign currency translation positively impacted net sales for the Industrial Solutions segment by 0.5%. Both IFS and Aerospace and Defense were positively impacted by foreign currency translation.
Net sales of IFS increased $13.1 million, driven by new equipment and replacement part sales strength in several key businesses. Net sales of Aerospace and Defense increased by $24.8 million due to ongoing strength in these end markets.
Earnings before income taxes for the Industrial Solutions segment f or the year ended July 31, 2025 were $197.7 million, or 17.9% of net sales, a decrease from 18.6% of net sales for the year ended July 31, 2024. The decrease was driven primarily by unfavorable mix.
Life Sciences Segment
Net sales and earnings before income taxes were as follows (in millions):
Year Ended July 31,
$ Change
% Change
Life Sciences segment net sales
Life Sciences segment (losses) earnings before income taxes
Life Sciences segment (losses) earnings before income taxes % of net sales
(1) The impact of foreign currency translation was calculated by translating current fiscal year foreign currency net sales into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year. The impact of currency translation does not change the underlying drivers of revenue shown in this chart.
Net sales for the Life Sciences segment for the year ended July 31, 2025 were $295.5 million, compared with $269.0 million for the year ended July 31, 2024, an increase of $26.5 million, or 9.8%, driven by a $22.9 million volume increase, partially offset by a $1.6 million decrease from pricing. The net sales increase was primarily driven by strong market demand in Disk Drive and strong market demand and market share gains in Food and Beverage. Foreign currency translation positively impacted net sales for the Life Sciences segment by 1.9%.
Earnings before income taxes for the Life Sciences segment for the year ended July 31, 2025 were $4.4 million, or 1.5% of net sales, an increase from losses of $10.4 million, or 3.9% of net sales, for the year ended July 31, 2024. The increase in net earnings was driven by higher volume, benefits from restructuring activities, and a $4.0 million benefit from the reduction of the Purilogics’ contingent consideration liability, which represents the fair value based on the probability of achieving certain milestones.
Liquidity, Capital Resources, Capital Requirements and Financial Condition
Liquidity
Liquidity is assessed in terms of the Company’s ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding s hares, adequacy of available credit facilities an d 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):
July 31,
$ Change
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
(Decrease) increase in cash and cash equivalents
Operating Activities
Cash provided by operating activities for the year ended July 31, 2025 was $418.8 million, compared with $492.5 million for the year ended July 31, 2024, a decrease of $73.7 million. The decrease in cash provided by operating activities was primarily driven by higher working capital requirements and the timing of income tax related payments.
Investing Activities
Cash used in investing activities for the year ended July 31, 2025 was $150.4 million, compared with $86.9 million for the year ended July 31, 2024, an increase in cash used of $63.5 million. The increase in cash used was primarily due to the equity method investment in Medica of $71.2 million.
Financing Activities
Cash used in financing activities generally relates to the use of cash for payment of dividends and repurchases of the Company’s common stock, net of borrowing activity and proceeds from the exercise of stock options. Cash used in financing activities for the year ended July 31, 2025 was $321.7 million, compared with $355.9 million for the year ended July 31, 2024, a decrease of $34.2 million. The decrease was primarily driven by net proceeds from long-term debt of $123.1 million in the current year compared to a net repayment of long-term debt of $109.1 million in the prior year, partially offset by an increase in the repurchases of the Company’s common stock of $168.8 million and lower proceeds from the exercise of stock options.
To determine the level of dividend and share repurchases, the Company considers recent and projected performance across key financial metrics, including earnings, cash flow from operations and total debt. Dividends paid for the years ended July 31, 2025 and 2024 were $131.9 million and $122.8 million, respectively. Cash paid for share repurchases for the years ended July 31, 2025 and 2024 were $331.5 million and $162.7 million, respectively.
Capital Resources
Additional sources of liquidity are existing cash and available credit facilities. Cash and cash equivalents as of July 31, 2025 was $180.4 million, compared with $232.7 million as of July 31, 2024. A significant portion of the Company’s cash and cash equivalents is held by subsidiaries throughout the world as over half of the Company’s earnings occur outside the U.S. Additionally, the Company has capacity of $759.6 million available for further borrowing under existing credit facilities as of July 31, 2025.
Short-term borrowing capacity as of July 31, 2025 was as follows (in millions):
European Commercial Paper Program
U.S. Credit Facilities
European Operations Credit Facilities
Rest of the World Credit Facilities
Total
Available short-term credit facilities
Reductions to borrowing capacity:
Outstanding borrowings
Other non-borrowing reductions
Total reductions
Remaining borrowing capacity
Weighted average interest rate as of July 31, 2025
Other non-borrowing reductions include financial instruments such as bank guarantees and foreign exchange instruments.
Long-term borrowing capacity is maintained through a $600.0 million unsecured rev olving credit facility. Borrowings against the credit facility are reported on the Consolidated Balance Sheets. Borrowing capacity as of July 31, 2025 was as follows (in millions):
Revolving credit facility
Reductions to borrowing capacity:
Outstanding borrowings
Contingent liability for standby letters of credit
Total reductions
Remaining borrowing capacity
Weighted average interest rate as of July 31, 2025
Certain debt agreements contain financial covenants related to i nterest coverage and leverage ratios, as well as other non-financial covenants. As of July 31, 2025, the Company was in compliance with all such covenants.
Capital Requirements
The Company’s cash requirements within the next 12 months include short-term borrowings, accounts payable, accrued expenses, income taxes payable, dividends payable, purchase commitments and other current liabilities. Additionally, in fiscal 2026, the Company expects its cash paid for capital expenditures to be between $65 million and $85 million, primarily associated with capacity expansion, new products and technologies and maintaining the Company’s existing assets.
The Company’s cash requirements greater than 12 months from various contractual obligations and commitments primarily include:
• debt obligations and interest payments - see Note 7. Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report for further detail of the Company’s debt and the timing of expected future principal and interest payments; and
• operating leases - see Note 9. Leases in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report for further detail of our lease obligations and the timing of expected future payments.
The Company believes the liquidity available from the combination of expected cash generated by operating activities, existing cash and available credit under existing credit facilities will be sufficient to meet its cash requirements for the next 12 months and beyond, including working capital needs, debt service obligations, capital expenditures, payment of dividends, share repurchase activity and potential acquisitions.
Financial Condition
The Company’s total capitalization components and debt-to-capitalization ratio were as follows (in millions):
July 31,
% of total capitalization
% of total capitalization
Short-term borrowings
Current maturities of long-term debt
Long-term debt
Total debt
Total stockholders’ equity
Total capitalization
As of July 31, 2025, total debt, including short-term borrowings and long-term debt, represented 31.5% of total capitalization, defined as total debt plus total stockholders’ equity, compared with 26.5% as of July 31, 2024.
Long-te rm deb t outstanding as of July 31, 2025 was $637.1 million compared with $508.4 million as of July 31, 2024, an increase of $128.7 million. In fiscal 2025, the increase in debt was driven primarily by financing needs for the equity method investment in Medica.
During the fourth quarter of fiscal 2025, the Company entered into an amendment to its $500.0 million revolving credit facility. The amendment provides for the following modifications to the existing agreement: (i) the maturity date of the revolving credit facility was extended from May 21, 2026 to June 12, 2030, (ii) the aggregate revolving credit limit was increased from $500.0 million to $600.0 million , (iii) a new term loan facility was added in the amount of $200.0 million with a maturity date of June 12, 2028, which was fully advanced on the closing date, (iv) the revolving credit facility was repaid in part with the proceeds of the term loan facility, and (v) the incremental credit facility option was increased from $250.0 million to $350.0 million and may be in the form of an increase to the revolving credit facility and/or incremental term loans.
Working Capital
In order to help measure and analyze the impact of working capital management, the Company calculates days sales outstanding as the average accounts receivable, net for the quarter, divided by net sales for the quarter multiplied by the number of days in the quarter. The Company calculates days inventory outstanding as the average inventories, net for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter. The Company calculates days payable outstanding as the average accounts payable for the quarter, divided by cost of sales for the quarter multiplied by the number of days in the quarter. The Company calculates net cash cycle as the sum of days sales outstanding and days inventory outstanding, less days payables outstanding.
Working capital measurements and analysis were as follows (in millions, except days):
July 31,
Change
Accounts receivable, net
Days sales outstanding
Inventories, net
Days inventory outstanding
Accounts payable
Days payable outstanding
Net cash cycle
Off-Balance Sheet Arrangements
Joint Venture Guarantee
The Company has an unconsolidated joint venture, Advanced Filtration Systems Inc. (AFSI), established by the Company and Caterpillar Inc. (Caterpillar) in 1986. AFSI designs and manufactures high-efficiency fluid filters use d 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 $43.9 million and $51.0 million as of July 31, 2025 and 2024, respectively. AFSI has $63.0 million in a revolving credit facility which expires in 2027 and $17.0 million in an additional multi-currency revolving credit facility which terminates upon notification of either party. The Company does not believe this guarantee will have a current or future effect on its financial condition, results of operations, liquidity or capital resources.
Critical Accounting Estimates
The Company’s Consolidated Financial Statements are prepared in conformity with GAAP. Our significant accounting policies are disclosed in Note 1 in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report. The preparation of these Consolidated Financial Statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the periods presented. Management bases estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about recorded amounts. The Company believes its use of estimates and underlying accounting assumptions adheres to GAAP and are reasonable and consistently applied. The Company’s Critical Accounting Estimates are those which require more significant assumptions and judgments used in the preparation of its Consolidated Financial Statements and are the most important to aid in fully understanding its financial results. The Company’s Critical Accounting Estimates are as follows:
Revenue Recognition - Variable Consideration
Revenue is measured as the amount of consideration the Company expects to receive in exchange for the fulfillment of performance obligations. The transaction price of a contract could be reduced by variable consideration including volume purchase rebates and discounts, product refunds and returns. At the time of sale to a customer, the Company records an estimate of variable consideration as a reduction from gross sales. The Company primarily relies on historical experience and anticipated future performance to estimate the variable consideration. Revenue is recognized to the extent it is probable a significant reversal of revenue will not occur when the contingency is resolved.
For volume, purchase rebates and discounts, management estimates are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume in quantity or mix of purchases of product during a specified time period and expectations for changes in relevant trends in the future. Actual results may differ from estimates if competitive factors create the need to enhance or reduce sales promotion and incentive accruals or if customer usage and field inventory levels vary from historical trends. Adjustments to sales promotions and incentive accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
For product refunds and returns, estimates are based primarily on the expected number of products sold, the trend in the historical ratio of returns to sales and the historical length of time between the sale and resulting return. Actual refunds and returns could be higher or lower than amounts estimated due to such factors as performance of new products or significant manufacturing or design defects not discovered until after the product is delivered to customers.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company performed its annual impairment assessment during the third quarter of fiscal 2025. The goodwill impairment assessment is conducted at a reporting unit level, which is one level below the operating segment level and utilizes either a qualitative or quantitative assessment. The Company determined the fair value for all its reporting units was substantially in excess of their respective carrying values and there were no indicators of impairment for any of the reporting units evaluated. An impairmentloss would be recognized when the carrying amount of a reporting unit’s net assets exceeds the estimated fair value of the reporting unit.
The optional qualitative assessment evaluates general economic, industry and entity-specific factors that could impact the reporting units’ fair values. For reporting units evaluated using a qualitative assessment, if it is determined the fair value more likely than not exceeds the carrying value, no further assessment is necessary. For reporting units evaluated using a quantitative assessment, the fair values are determined using an income approach, a market approach or a weighting of the two. The income approach determines fair value based on discounted cash flow models derived from the reporting units’ long-term forecasts. The market approach determines fair value based on earnings multiples derived from prices investors paid for the stocks of comparable publicly traded companies. Estimates and assumptions are utilized in the valuations, including discounted projected cash flows, earnings before interest, taxes, depreciation and amortization margins, terminal value growth rates, revenue growth rates, discount rates and the determination of comparable, publicly traded companies. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment.
Income Taxes
Management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating current tax exposure and assessing future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. These deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are anticipated to reverse based on future taxable income projections and the impact of tax planning strategies. The Company intends to indefinitely reinvest undistributed earnings for certain of its non-U.S. subsidiaries and thus has not provided for income taxes on these earnings.
Additionally, benefits of tax return positions are recognized in the Consolidated Financial Statements when the position is more likely than not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50% likely to be realized. The Company maintains a reserve for uncertain tax benefits that are currently unresolved and routinely monitors the potential impact of such situations. The liability for unrecognized tax benefits, accrued interest and penalties was $24.7 million and $23.0 million as of July 31, 2025 and 2024, respectively.
The Company believes it is remote that any adjustment necessary to the reserve for income taxes for the next 12 months will be material. However, it is possible the ultimate resolution of audits or disputes may result in a material change to the Company’s reserve for income taxes, although the quantification of such potential adjustments cannot be made at this time.
Defined Benefit Pension Plans
The Company incurs expenses for employee benefits provided through defined benefit pension plans. In accounting for these defined benefit pension plans, management must make a variety of estimates and assumptions including discount rates and expected return on plan assets. The Company considers current and historical data and uses a third-party specialist to assist management in determining these estimates.
Discount Rates
The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at the rates of return on high-quality fixed-income investments currently available and expected to be available, during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans.
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.
Alternative Assumptions
If the Company were to use alternative assumptions for its pension plans as of July 31, 2025, a one percentage point change in the assumptions would impact fiscal 2025 net periodic benefit cost as follows (in millions):
Rate of return
Discount rate
The Company’s net periodic benefit cost recognized in the Consolidated Statements of Earnings was $0.5 million, $6.6 million and $6.2 million for the years ended July 31, 2025, 2024 and 2023, respectively. While changes to the Company’s pension plan assumptions would not be expected to impact its net periodic benefit cost by a material amount, such changes could significantly impact the Company’s projected benefit obligation.
Business Combinations
The Company allocates the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, where applicable, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, technology obsolescence, customer retention rates, discount rates, royalty rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.
The Company estimates the fair value of acquired customer relationships using the multi-period excess earnings method. This approach is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group which includes the particular asset. Fair value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the economic returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated economic returns from contributory assets. Assumptions used in these calculations include same-customer revenue growth rates, estimated earnings and customer attrition rates.
The Company estimates the fair value of trade names and/or trademarks using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Royalty rates are selected based on the attributes of the asset, including reputation and recognition within the industry.
The Company estimates the fair value of technology utilizing the multi-period excess earnings method or the relief from royalty method, depending on the technology asset acquired. The multi-period excess earnings method is consistent with the approach used to value acquired customer relationships and the relief from royalty method is consistent with the approach used to value trade names and/or trademarks.
While the Company uses its best estimates and assumptions, especially at the acquisition date, including its estimates for intangible assets, pre-acquisition contingencies and any contingent consideration, where applicable, the fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Earnings. The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income.
New Accounting Standards Not Yet Adopted
For new accounting standards not yet adopted, refer to Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and expectations, such as forecasts, plans, trends and projections relating to the Company’s business and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Part I, Item 1A, “Risk Factors” of this Annual Report, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases such as “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” “plan” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.
These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that could affect the Company’s performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed. These factors include, but are not limited to, challenges in global operations; changes in international trade policy; impacts of global economic, industrial and political conditions on product demand; impacts from unexpected events; effects of unavailable raw materials, significant demand fluctuations or material cost changes; inability to attract and retain qualified personnel; inability to meet customer demand; inability to maintain competitive advantages; threats from disruptive technologies; effects of highly competitive markets with pricing pressure; exposure to customer concentration in certain cyclical industries; inability to manage productivity improvements; inability to achieve commitments related to sustainability; results of execution of any acquisition, divestiture and other strategic transactions; vulnerabilities associated with information technology systems and security; inability to protect and enforce intellectual property rights; costs associated with governmental laws and regulations; impacts of foreign currency fluctuations; and effects of changes in capital and credit markets. These and other factors are described in Part I, Item 1A, “Risk Factors” of this Annual Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
