UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2018 OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________.
Commission File Number 1-7891
DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
41-0222640
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
1400 West 94th Street
Minneapolis, Minnesota 55431
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (952) 887-3131
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
 
 
 
 
Non-accelerated filer o  
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $5 Par Value - 129,873,356 shares as of February 28, 2018 .
 



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS
(In millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018

 
2017

Net sales
$
664.7

 
$
550.6

 
$
1,309.5

 
$
1,103.6

Cost of sales
445.8

 
362.7

 
866.3

 
721.5

Gross profit
218.9

 
187.9

 
443.2

 
382.1

Operating expenses
137.3

 
118.5

 
270.9

 
236.3

Operating income
81.6

 
69.4

 
172.3

 
145.8

Interest expense
5.1

 
4.8

 
10.3

 
9.6

Other expense (income), net
0.1

 
(1.7
)
 
0.9

 
(9.8
)
Earnings before income taxes
76.4

 
66.3

 
161.1

 
146.0

Income taxes
129.3

 
19.8

 
153.1

 
41.5

Net (loss) earnings
$
(52.9
)
 
$
46.5

 
$
8.0

 
$
104.5

 
 
 
 
 
 
 
 
Weighted average shares – basic
130.6

 
132.9

 
130.7

 
133.2

Weighted average shares – diluted
130.6

 
134.4

 
132.8

 
134.5

Net (loss) earnings per share – basic
$
(0.40
)
 
$
0.35

 
$
0.06

 
$
0.78

Net (loss) earnings per share – diluted
$
(0.40
)
 
$
0.35

 
$
0.06

 
$
0.78

 
 
 
 
 
 
 
 
Cash dividends paid per share
$
0.180

 
$
0.175

 
$
0.360

 
$
0.350

 
See Notes to Condensed Consolidated Financial Statements.

3


DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018

 
2017

Net (loss) earnings
$
(52.9
)
 
$
46.5

 
$
8.0

 
$
104.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation income (loss)
55.5

 
(8.4
)
 
50.4

 
(20.8
)
Pension liability adjustment, net of deferred taxes of $(0.4), $(0.8), $(0.9) and $(1.8), respectively
0.2

 
1.3

 
1.0

 
3.7

(Loss) gain on hedging derivatives, net of deferred taxes of $0.3, $0.1, $(0.9) and $(0.4), respectively
(0.6
)
 
(0.3
)
 
1.7

 
0.7

Comprehensive income
$
2.2

 
$
39.1

 
$
61.1

 
$
88.1

 
See Notes to Condensed Consolidated Financial Statements.

4


DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
(Unaudited)
 
 
January 31,
2018

 
July 31,
2017

Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
362.2

 
$
308.4

Accounts receivable, less allowance of $8.5 and $8.7, respectively
509.9

 
497.7

Inventories, net
344.9

 
293.5

Prepaid expenses and other current assets
62.9

 
51.4

Total current assets
1,279.9

 
1,151.0

Property, plant and equipment, net
507.7

 
484.6

Goodwill
242.0

 
238.1

Intangible assets, net
38.2

 
40.6

Deferred income taxes
24.9

 
30.3

Other long-term assets
38.6

 
35.1

Total assets
$
2,131.3

 
$
1,979.7

 
 
 
 
Liabilities and shareholders' equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
17.7

 
$
23.3

Current maturities of long-term debt
0.4

 
50.6

Trade accounts payable
200.0

 
194.0

Other current liabilities
216.9

 
216.2

Total current liabilities
435.0

 
484.1

Long-term debt
667.7

 
537.3

Deferred income taxes
4.7

 
3.6

Other long-term liabilities
197.0

 
100.2

Total liabilities
1,304.4

 
1,125.2

 
 
 
 
Commitments and contingencies (Note 14)


 


 
 
 
 
Shareholders' Equity:
 
 
 
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued
—

 
—

Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued
758.2

 
758.2

Retained earnings
1,016.4

 
1,056.9

Non-controlling interests
4.6

 
4.4

Accumulated other comprehensive loss
(103.9
)
 
(157.0
)
Treasury stock, 21,784,693 and 21,037,353 shares, respectively, at cost
(848.4
)
 
(808.0
)
Total shareholders' equity
826.9

 
854.5

Total liabilities and shareholders' equity
$
2,131.3

 
$
1,979.7

 
See Notes to Condensed Consolidated Financial Statements.

5


DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Six Months Ended
January 31,
 
2018

 
2017

Operating Activities
 

 
 

Net earnings
$
8.0

 
$
104.5

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37.9

 
37.3

Deferred income taxes
7.0

 
(0.8
)
Stock-based compensation expense
9.6

 
5.8

Other, net
98.1

 
0.7

Changes in operating assets and liabilities, excluding effect of acquired businesses
(50.8
)
 
22.0

Net cash provided by operating activities
109.8

 
169.5

 
 
 
 
Investing Activities
 
 
 
Net expenditures on property, plant and equipment
(45.8
)
 
(25.0
)
Acquisitions, net of cash acquired
0.8

 
(10.9
)
Net cash used in investing activities
(45.0
)
 
(35.9
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from long-term debt
140.0

 
—

Repayments of long-term debt
(60.2
)
 
(0.5
)
Change in short-term borrowings
(4.1
)
 
12.0

Purchase of treasury stock
(62.9
)
 
(51.8
)
Dividends paid
(46.8
)
 
(46.3
)
Tax withholding for stock compensation transactions
(2.2
)
 
(2.2
)
Exercise of stock options
13.6

 
12.1

Net cash used in financing activities
(22.6
)
 
(76.7
)
Effect of exchange rate changes on cash
11.6

 
(3.8
)
Increase in cash and cash equivalents
53.8

 
53.1

Cash and cash equivalents, beginning of year
308.4

 
243.2

Cash and cash equivalents, end of period
$
362.2

 
$
296.3

 
See Notes to Condensed Consolidated Financial Statements.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Donaldson Company, Inc. and its subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of earnings, comprehensive income, financial position and cash flows have been included and are of a normal recurring nature. Operating results for the three and six month period ended January 31, 2018 are not necessarily indicative of the results that may be expected for future periods. The year-end condensed balance sheet information was derived from the Company's audited financial statements but does not include all disclosures required by GAAP. For further information, refer to the Audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 .
New Accounting Standards Recently Adopted In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which amended the guidance requiring companies not using the last-in, first-out (LIFO) method to measure inventory at the lower of cost and net realizable value rather than the lower of cost or market. This accounting guidance was effective for the Company beginning in the first quarter of fiscal 2018 and did not have an impact on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 was effective for the Company beginning in the first quarter of fiscal 2018 and the guidance affecting the effective tax rate was adopted prospectively. The Condensed Consolidated Statements of Cash Flows is also presented retrospectively with the guidance of this new standard and, for the six months ended January 31, 2017 , resulted in an increase of $5.2 million to net cash provided by operating activities and a corresponding $5.2 million increase to net cash used in financing activities.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company adopted ASU 2016-15 in the first quarter of fiscal 2018 and it did not have an impact on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. ASU 2016-16 is effective for the Company beginning in the first quarter of fiscal 2019 , and early adoption is permitted. The Company adopted ASU 2016-16 in the first quarter of fiscal 2018 and it did not have an impact on its Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) (ASU 2017-09). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company adopted ASU 2017-09 in the first quarter of fiscal 2018 and it did not have an impact on its Consolidated Financial Statements.
New Accounting Standards Not Yet Adopted In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations and accounting for licenses of intellectual property. This accounting guidance is effective for the Company beginning

7


in the first quarter of fiscal 2019 , and early adoption is permitted. The amendments in this update are to be applied on a retrospective basis, either to each prior reporting period presented or by presenting the cumulative effect of applying the update recognized at the date of initial application. The Company is evaluating the impact of the adoption of the standard on its Consolidated Financial Statements. A project team has been established, has conducted surveys of the businesses and is performing revenue contract analyses to gather information and identify where potential differences could result in applying the requirements of the new standard. Based on the results of the surveys and contract analyses, the Company will assess the financial impact of the new standard on its Consolidated Financial Statements and determine the method of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which amends the guidance requiring companies to recognize assets and liabilities for leases with lease terms of more than twelve months. The new guidance will require companies to record both capital and operating leases on the balance sheet. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2020 on a modified retrospective basis, and early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (ASU 2017-01). The new guidance provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments provide more consistency in applying the guidance, reduce the costs of application and make the definition of a business more operable. ASU 2017-01 is effective for the Company beginning in the first quarter of fiscal 2019 . The Company does not expect the application of ASU 2017-01 will have a material impact on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) (ASU 2017-07). The new guidance requires employers to disaggregate and present separately the current service cost component from the other components of net benefit cost within the consolidated statement of earnings. ASU 2017-07 is effective for the Company beginning in the first quarter of fiscal 2019 , and early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2017-07 on its Consolidated Statements of Earnings.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The guidance expands the ability to hedge non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. ASU 2017-12 is effective for the Company beginning in the first quarter of fiscal 2020 , and early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2017-12 on its Consolidated Financial Statements.
Note 2. Acquisitions
On May 1, 2017, the Company acquired 100% of the shares of Hy-Pro Corporation (Hy-Pro). Hy-Pro designs and manufactures filtration systems and replacement filters for stationary hydraulic and industrial lubrication applications. Hy-Pro has manufacturing locations in Anderson, Indiana and Vancouver, Washington. Total consideration for the transaction was $21.9 million after recording a working capital adjustment in accordance with the purchase agreement. The Company received cash of $0.8 million for this adjustment during the first quarter of fiscal 2018, which reduced the purchase price and goodwill by a corresponding amount.
On August 31, 2016, the Company acquired the net assets of Industrias Partmo S.A. (Partmo) in Colombia. Partmo is a leading manufacturer of replacement air, lube and fuel filters in Colombia for medium and heavy duty engines. Total consideration for the transaction was $12.1 million .
For the two acquisitions that occurred during the year ended July 31, 2017, the Company acquired $18.1 million of net tangible assets, $8.6 million of intangible assets that had estimated useful lives ranging from seven to twenty years at the time of acquisition and $7.3 million of goodwill. Pro forma financial information for these acquisitions have not been presented because they are not material to the Company's consolidated results of operations.

8


Note 3. Supplemental Balance Sheet Information
The components of net inventories are as follows (in millions):
 
January 31,
2018

 
July 31,
2017

Raw materials
$
111.3

 
$
96.3

Work in process
26.0

 
19.7

Finished products
207.6

 
177.5

Inventories, net
$
344.9

 
$
293.5

    
The components of net property, plant and equipment are as follows (in millions):
 
January 31,
2018

 
July 31,
2017

Land
$
21.3

 
$
20.6

Buildings
305.6

 
292.5

Machinery and equipment
910.3

 
866.8

Construction in progress
65.6

 
48.9

Less: accumulated depreciation
(795.1
)
 
(744.2
)
Property, plant and equipment, net
$
507.7

 
$
484.6

Note 4. Earnings Per Share
The Company’s basic net (loss) earnings per share is computed by dividing net (loss) earnings by the weighted average number of outstanding common shares. The Company’s diluted net (loss) earnings per share is computed by dividing net (loss) earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options and stock incentive plans. All common share equivalents were excluded from the diluted net (loss) earnings per share calculation for the three months ended January 31, 2018 because the Company incurred a net loss for the period. Certain outstanding options were excluded from the diluted net (loss) earnings per share calculations for the other periods because their exercise prices are greater than the average market price of the Company’s common stock during those periods. Options excluded from the diluted net (loss) earnings per share calculation were 2.2 million and 0.1 million for the three and six months ended January 31, 2018 , respectively. Options excluded from the diluted net (loss) earnings per share calculation were 1.6 million for the three and six months ended January 31, 2017 .
The following table presents the information necessary to calculate basic and diluted net earnings per share (in millions, except per share amounts):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018

 
2017

Net (loss) earnings for basic and diluted earnings per share computation
$
(52.9
)
 
$
46.5

 
$
8.0

 
$
104.5

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Weighted average common shares – basic
130.6

 
132.9

 
130.7

 
133.2

Dilutive impact of share based awards
—

 
1.5

 
2.1

 
1.3

Weighted average common shares – diluted
130.6

 
134.4

 
132.8

 
134.5

 
 
 
 
 
 
 
 
Net (loss) earnings per share – basic
$
(0.40
)
 
$
0.35

 
$
0.06

 
$
0.78

Net (loss) earnings per share – diluted
$
(0.40
)
 
$
0.35

 
$
0.06

 
$
0.78

Note 5. Goodwill and Other Intangible Assets
Goodwill is assessed for impairment annually or more frequently if an event occurs or circumstances change that would indicate impairment. The Company performed its annual impairment assessment during the third quarter of fiscal 2017. The results

9


of this assessment were that the estimated fair values of the reporting units to which goodwill is assigned continued to exceed the corresponding carrying values of the reporting units, resulting in no goodwill impairment.
The following is a reconciliation of goodwill by reportable segment for the six months ended January 31, 2018 (in millions):
 
Engine
Products
 
Industrial
Products
 
Total
Goodwill
Balance as of July 31, 2017
$
84.3

 
$
153.8

 
$
238.1

Goodwill acquired
0.6

 
—

 
0.6

Foreign exchange translation
0.4

 
2.9

 
3.3

Balance as of January 31, 2018
$
85.3

 
$
156.7

 
$
242.0

The following is a reconciliation of net intangible assets for the six months ended January 31, 2018 (in millions):
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Intangible Assets
Balance as of July 31, 2017
$
106.6

 
$
(66.0
)
 
$
40.6

Amortization expense
—

 
(2.8
)
 
(2.8
)
Foreign exchange translation
(2.2
)
 
2.6

 
0.4

Balance as of January 31, 2018
$
104.4

 
$
(66.2
)
 
$
38.2

Note 6. Warranty
The Company estimates warranty expense on certain products at the time of sale. The following is a reconciliation of warranty reserves, included in other current liabilities and other long-term liabilities, for the six months ended January 31, 2018 and 2017 (in millions):
 
Six Months Ended
January 31,
 
2018

 
2017

Balance at beginning of period
$
14.6

 
$
11.9

Accruals for warranties issued during the reporting period
1.5

 
1.5

Accruals related to pre-existing warranties (including changes in estimates)
1.1

 
3.8

Less: settlements made during the period
(2.6
)
 
(2.5
)
Balance at end of period
$
14.6

 
$
14.7

There were no material specific warranty matters accrued for or significant settlements made in the six months ended January 31, 2018 or 2017 . The Company’s warranty matters are not expected to have a material impact on the Company's results of operations, liquidity or financial position.
Note 7. Stock-Based Compensation
Stock-based compensation expense is recognized using the fair-value method for all awards. The Company determines the fair value of stock option awards using the Black-Scholes option pricing model. Options are granted whereby the option exercise price is equivalent to the market price of the Company's common stock at the date of grant. For the three and six months ended January 31, 2018 , the Company recorded pretax stock-based compensation expense associated with stock options of $1.7 million and $ 5.5 million , respectively, and recorded $0.1 million and $ 1.3 million , respectively, of related tax benefits. For the three and six months ended January 31, 2017 , the Company recorded pretax stock-based compensation expense associated with stock options of $3.8 million and $ 4.9 million , respectively, and recorded $1.3 million and $ 1.6 million , respectively, of related tax benefits. In addition, for the three and six months ended January 31, 2018 , the Company recorded expense associated with performance-based awards of $1.0 million and $3.7 million , respectively. For the three and six months ended January 31, 2017 , the Company recorded expense associated with performance-based awards of $0.3 million and $0.5 million , respectively.

10


The following table summarizes stock option activity during the six months ended January 31, 2018 :
 
Options
Outstanding
 
Weighted
Average
Exercise Price
Outstanding as of July 31, 2017
6,685,551

 
$
32.60

Granted
877,050

 
$
45.69

Exercised
(530,916
)
 
$
26.32

Canceled
(21,193
)
 
$
37.60

Outstanding as of January 31, 2018
7,010,492

 
$
34.70

The total intrinsic value of options exercised during the six months ended January 31, 2018 and 2017 was $11.8 million and $8.6 million , respectively. The weighted average fair value for options granted during the six months ended January 31, 2018 and 2017 was $9.29 and $ 10.09 per share, respectively.
The following table summarizes information concerning outstanding and exercisable options as of January 31, 2018 :
Range of Exercise Prices
 
Number Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price of Outstanding Options
 
Number
Exercisable
 
Weighted
Average
Exercise
Price of Exercisable Options
$ 0.00 to $22.69
 
983,883

 
1.54
 
$
19.68

 
983,883

 
$
19.68

$22.70 to $28.69
 
861,049

 
7.86
 
$
28.06

 
567,606

 
$
28.05

$28.70 to $34.69
 
1,383,480

 
3.92
 
$
31.64

 
1,366,082

 
$
31.64

$34.70 to $40.69
 
1,380,549

 
5.64
 
$
37.03

 
1,370,383

 
$
37.03

$40.70 and above
 
2,401,531

 
8.34
 
$
43.65

 
947,730

 
$
42.39

 
 
7,010,492

 
5.92
 
$
34.70

 
5,235,684

 
$
32.36

As of January 31, 2018 , the aggregate intrinsic value of options outstanding and exercisable was $111.9 million and $95.8 million , respectively.
As of January 31, 2018 , there was $9.9 million of total unrecognized compensation expense related to non-vested stock options granted under the 2010 Master Stock Incentive Plan. This unvested expense is expected to be recognized during fiscal years 2018 , 2019 , 2020 and 2021 .
Note 8. Employee Benefit Plans
The Company and certain of its international subsidiaries have defined benefit pension plans. There are two types of U.S. plans. The first type of U.S. plan (Hourly Pension Plan) is a traditional defined benefit pension plan primarily for union employees. The second plan (Salaried Pension Plan) is for some salaried and non-union production employees that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The Company no longer allows entrants into the U.S. Salaried Pension Plan and the employees in this plan no longer continue to accrue Company contribution credits under the plan. Employees are instead eligible for a 3% annual Company retirement contribution to their 401(k) in addition to the Company’s normal 401(k) match. The non-U.S. plans generally provide pension benefits based on years of service and compensation level.

11


Net periodic benefit costs for the Company’s pension plans include the following components (in millions):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018

 
2017

Net periodic benefit costs:
 

 
 

 
 

 
 

Service cost
$
2.1

 
$
2.0

 
$
4.1

 
$
4.1

Interest cost
3.7

 
3.4

 
7.4

 
6.7

Expected return on assets
(6.6
)
 
(6.6
)
 
(13.1
)
 
(13.2
)
Prior service cost amortization
0.2

 
0.2

 
0.3

 
0.4

Actuarial loss amortization
1.1

 
1.8

 
2.3

 
3.6

Net periodic benefit costs
$
0.5

 
$
0.8

 
$
1.0

 
$
1.6

The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum tax deductible contribution. For the six months ended January 31, 2018 , the Company made contributions of $1.4 million to its U.S. pension plans and $0.7 million to its non-U.S. pension plans. The estimated minimum funding requirement for the Company’s U.S. plans for the year ending July 31, 2018 is $3.7 million . In accordance with the Pension Protection Act of 2006, this contribution obligation may be met with existing credit balances that resulted from payments above the minimum obligation in prior years. The Company has sufficient credit balances to meet the minimum obligation for fiscal 2018 . Due to favorable provisions in the U.S. Tax Cuts and Jobs Act, the Company is considering making additional contributions to one or both of its U.S. pension plans during fiscal 2018. The Company estimates that it will contribute an additional $0.7 million to its non-U.S. pension plans during the remainder of fiscal 2018 based upon the local government prescribed funding requirements.
Note 9. Income Taxes
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (TCJA) was enacted into law. The TCJA significantly reforms the Internal Revenue Code of 1986, including but not limited to reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent and moving toward a territorial tax system with a one-time transition tax imposed on previously unremitted foreign earnings and profits.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies to use a measurement period that should not extend beyond one year from the TCJA enactment date to account for the impacts of the law in their financial statements. The Company has accounted for certain income tax effects of the TCJA to the extent a reasonable estimate could be made during the three months ended January 31, 2018.
The most significant impacts of the enacted legislation for the Company’s current fiscal year include lowering of the U.S. federal corporate income tax rate, the re-measurement of the Company’s net deferred tax assets to reflect their value at the reduced tax rate and the one-time transition tax on the deemed repatriation of certain foreign earnings. The Company’s U.S. federal statutory tax rate will be a blended rate of 26.9 percent for fiscal 2018 and 21 percent for fiscal 2019. The Company recorded a discrete tax charge of $1.4 million during the three months ended January 31, 2018 for the re-measurement of its net deferred tax assets. The Company also recorded a discrete tax charge of  $108.3 million  during the period for the one-time transition tax on deemed repatriated earnings of its non-U.S. subsidiaries. This charge is inclusive of U.S. state income tax on the portion of the earnings expected to be repatriated. The one-time transition tax is based on the Company’s post-1986 earnings and profits not previously subjected to U.S. taxation. The tax is payable over an eight year period, and the portion not due within 12 months of $99.4 million is classified within other long-term liabilities in the Condensed Consolidated Balance Sheet as of January 31, 2018. Although the Company made reasonable estimates in accounting for the impacts of the TCJA, these tax charges are provisional, as the Company is still analyzing certain aspects of the legislation and refining calculations as information becomes available during the measurement period as allowed by SAB 118. The accounting for the income tax effects of the TCJA is expected to be completed at fiscal year-end and any future adjustments will be recognized as discrete income tax expense or benefit in the period the adjustments are determined.
The TCJA also adds many new provisions that do not apply to the Company until fiscal 2019, including the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). The Company has not made any adjustments in its financial statements related to these new provisions during the three months ended January 31, 2018 and continues to evaluate the future impact of these provisions.
The TCJA moves toward a territorial tax system through the provision of a 100% dividends received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, the Company is in the process of evaluating

12


its indefinite reinvestment assertions with regard to unremitted earnings for certain of its foreign subsidiaries. As part of this evaluation, the Company will consider estimated global working capital levels, capital investment requirements and the potential tax liabilities that would be incurred if the foreign subsidiaries distribute cash to the U.S. parent and make a determination in the SAB 118 measurement period as to whether earnings of these subsidiaries remain permanently invested or not. If the Company determines that a subsidiary should no longer remain subject to the indefinite reinvestment assertion, additional tax charges will be accrued, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. As of January 31, 2018, the Company has determined that the earnings of certain subsidiaries are no longer subject to the indefinite reinvestment assertion and recorded an immaterial provisional estimate of the withholding taxes due on the repatriation of those earnings. The Company will continue to evaluate its global cash needs and opportunities to repatriate cash as part of an effort to more precisely compute this tax impact.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2008. The United States Internal Revenue Service (IRS) has completed examinations of the Company’s U.S. federal income tax returns through 2013. Currently, the Company is under examination by the IRS for fiscal years 2015 and 2016.
As of January 31, 2018, the gross unrecognized tax benefits were $19.8 million and accrued interest and penalties on these unrecognized tax benefits were $2.6 million . The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of approximately five years, up to $2.4 million of the unrecognized tax benefits could potentially expire in the next 12-month period, unless extended by an audit.
It is reasonably possible that matters associated with either current or future audits and disputes could cause adjustments to previously recorded reserves in the next 12-month period. Quantification of an estimated range and timing of future audit adjustments cannot be made at this time.
Note 10. Fair Value Measurements
As of January 31, 2018 , the carrying values of cash and cash equivalents, accounts receivables, short-term borrowings and trade accounts payable approximate fair value because of the short-term nature of these instruments. As of January 31, 2018 , the estimated fair value of long-term debt with fixed interest rates was $271.8 million compared to its carrying value of $275.0 million . The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed. Long-term debt would be classified as Level 2 in the fair value hierarchy. The carrying values of long-term debt with variable interest rates approximate fair value.
Note 11. Shareholders' Equity
The Company’s Board of Directors authorized the repurchase of up to 14.0 million shares of common stock under the Company's stock repurchase plan. This repurchase authorization is effective until terminated by the Board of Directors. During the six months ended January 31, 2018 , the Company repurchased 1.3 million shares for $62.9 million . As of January 31, 2018 , the Company had remaining authorization to repurchase 5.8 million shares under this plan.
On January 26, 2018, the Company's Board of Directors declared a cash dividend in the amount of 18.0 cents per common share, payable March 6, 2018, to shareholders of record as of February 14, 2018.

13


Note 12. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the three months ended January 31, 2018 and 2017 are as follows (in millions):
 
Foreign
Currency
Translation
Adjustment
 
Pension
Benefits
 
Derivative
Financial
Instruments
 
Total
Balance as of October 31, 2017, net of tax
$
(63.9
)
 
$
(94.3
)
 
$
(0.8
)
 
$
(159.0
)
Other comprehensive income (loss) before reclassifications and tax
55.5

 
—

 
(0.4
)
 
55.1

Tax benefit
—

 
—

 
0.1

 
0.1

Other comprehensive income (loss) before reclassifications, net of tax
55.5

 
—

 
(0.3
)
 
55.2

Reclassifications, before tax
—

 
0.6

 
(0.5
)
 
0.1

Tax (expense) benefit
—

 
(0.4
)
 
0.2

 
(0.2
)
Reclassifications, net of tax
—

 
0.2

(1)  
(0.3
)
(2)  
(0.1
)
Other comprehensive income (loss), net of tax
55.5

 
0.2

 
(0.6
)
 
55.1

Balance as of January 31, 2018, net of tax
$
(8.4
)
 
$
(94.1
)
 
$
(1.4
)
 
$
(103.9
)
 
 
 
 
 
 
 
 
Balance as of October 31, 2016, net of tax
$
(101.7
)
 
$
(113.4
)
 
$
0.5

 
$
(214.6
)
Other comprehensive (loss) income before reclassifications and tax
(8.4
)
 
—

 
0.3

 
(8.1
)
Tax expense
—

 
—

 
(0.1
)
 
(0.1
)
Other comprehensive (loss) income before reclassifications, net of tax
(8.4
)
 
—

 
0.2

 
(8.2
)
Reclassifications, before tax
—

 
2.1

 
(0.7
)
 
1.4

Tax (expense) benefit
—

 
(0.8
)
 
0.2

 
(0.6
)
Reclassifications, net of tax
—

 
1.3

(1)  
(0.5
)
(2)  
0.8

Other comprehensive (loss) income, net of tax
(8.4
)
 
1.3

 
(0.3
)
 
(7.4
)
Balance as of January 31, 2017, net of tax
$
(110.1
)
 
$
(112.1
)
 
$
0.2

 
$
(222.0
)
(1)
Primarily includes net amortization of prior service costs and actuarial losses included in net periodic benefit cost (see Note 8) that were reclassified from accumulated other comprehensive loss to operating expenses or cost of sales.
(2)
Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to other income, net.

14



Changes in accumulated other comprehensive loss by component for the six months ended January 31, 2018 and 2017 are as follows (in millions):
 
Foreign
Currency
Translation
Adjustment
 
Pension
Benefits
 
Derivative
Financial
Instruments
 
Total
Balance as of July 31, 2017, net of tax
$
(58.8
)
 
$
(95.1
)
 
$
(3.1
)
 
$
(157.0
)
Other comprehensive income before reclassifications and tax
50.4

 
—

 
2.0

 
52.4

Tax expense
—

 
—

 
(0.7
)
 
(0.7
)
Other comprehensive income before reclassifications, net of tax
50.4

 
—

 
1.3

 
51.7

Reclassifications, before tax
—

 
1.9

 
0.6

 
2.5

Tax expense
—

 
(0.9
)
 
(0.2
)
 
(1.1
)
Reclassifications, net of tax
—

 
1.0

(1)  
0.4

(2)  
1.4

Other comprehensive income, net of tax
50.4

 
1.0

 
1.7

 
53.1

Balance as of January 31, 2018, net of tax
$
(8.4
)
 
$
(94.1
)
 
$
(1.4
)
 
$
(103.9
)
 
 
 
 
 
 
 
 
Balance as of July 31, 2016, net of tax
$
(89.3
)
 
$
(115.8
)
 
$
(0.5
)
 
$
(205.6
)
Other comprehensive (loss) income before reclassifications and tax
(20.8
)
 
—

 
1.9

 
(18.9
)
Tax expense
—

 
—

 
(0.6
)
 
(0.6
)
Other comprehensive (loss) income before reclassifications, net of tax
(20.8
)
 
—

 
1.3

 
(19.5
)
Reclassifications, before tax
—

 
5.5

 
(0.8
)
 
4.7

Tax (expense) benefit
—

 
(1.8
)
 
0.2

 
(1.6
)
Reclassifications, net of tax
—

 
3.7

(1)  
(0.6
)
(2)  
3.1

Other comprehensive (loss) income, net of tax
(20.8
)
 
3.7

 
0.7

 
(16.4
)
Balance as of January 31, 2017, net of tax
$
(110.1
)
 
$
(112.1
)
 
$
0.2

 
$
(222.0
)
(1)
Primarily includes net amortization of prior service costs and actuarial losses included in net periodic benefit cost (see Note 8) that were reclassified from accumulated other comprehensive loss to operating expenses or cost of sales.
(2)
Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to other income, net.
Note 13. Guarantees
The Company and Caterpillar Inc. equally own the shares of Advanced Filtration Systems Inc. (AFSI), an unconsolidated joint venture, and guarantee certain debt of the joint venture. As of January 31, 2018 , AFSI had $31.2 million of outstanding debt, of which the Company guarantees half. In addition, during the three months ended January 31, 2018 and 2017 , the Company recorded earnings from this equity method investment of $0.4 million and $0.3 million , respectively. The Company recorded $0.5 million and $0.9 million of earnings from this equity method investment during the six months ended January 31, 2018 and 2017 , respectively. During the three months ended January 31, 2018 and 2017 , the Company recorded royalty income related to AFSI of $1.7 million and $1.4 million , respectively, in other expense (income), net. During the six months ended January 31, 2018 and 2017 , the Company recorded royalty income related to AFSI of $3.6 million and $2.7 million , respectively, in other expense (income), net.
As of January 31, 2018 and July 31, 2017 , the Company had a contingent liability for standby letters of credit totaling $8.4 million and $10.5 million , respectively, that have been issued and are outstanding. The letters of credit guarantee payment to third parties in the event the Company is in breach of contract terms as detailed in each letter of credit. As of January 31, 2018 and July 31, 2017 , there were no amounts drawn upon these letters of credit.

15


Note 14. Commitments and Contingencies
The Company records provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the recorded estimated liability in its Condensed Consolidated Financial Statements is adequate in light of the probable and estimable outcomes. The recorded liabilities were not material to the Company’s results of operations, liquidity or financial position and 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.
Note 15. Segment Reporting
The Company has identified two reportable segments: Engine Products and Industrial Products. Segment determination is based on the internal organization structure, management of operations and performance evaluation by management and the Company’s Board of Directors. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest income and interest expense.
The Company has an internal measurement system to evaluate performance and allocate resources based on earnings before income taxes. The Company’s manufacturing facilities serve both reporting segments. Therefore, the Company uses an allocation methodology to assign costs and assets to the segments. A certain amount of costs and assets relate to general corporate purposes and are not assigned to either segment.
The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the earnings before income taxes and other financial information shown below.
Segment detail is summarized as follows (in millions):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018

 
2017

Net sales
 
 
 
 
 
 
 
Engine Products segment
$
442.4

 
$
361.9

 
$
884.5

 
$
715.7

Industrial Products segment
222.3

 
188.7

 
425.0

 
387.9

Total
$
664.7

 
$
550.6

 
$
1,309.5

 
$
1,103.6

 
 

 
 

 
 
 
 
Earnings before income taxes
 
 
 
 
 
 
 
Engine Products segment
$
54.5

 
$
48.7

 
$
118.1

 
$
94.1

Industrial Products segment
32.2

 
24.3

 
62.2

 
62.6

Corporate and Unallocated
(10.3
)
 
(6.7
)
 
(19.2
)
 
(10.7
)
Total
$
76.4

 
$
66.3

 
$
161.1

 
$
146.0

There were no customers that accounted for over 10% of net sales for the three or six months ended January 31, 2018 or 2017 . There were no customers that accounted for over 10% of gross accounts receivable as of January 31, 2018 or July 31, 2017 .
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company’s core strengths are leading filtration technology, strong customer relationships and its global presence. Products are manufactured at 44 plants around the world and through three joint ventures.
The Company has two reportable segments: Engine Products and Industrial Products. Products in the Engine Products segment consist of replacement filters for both air and liquid filtration applications, air filtration systems, liquid filtration systems for fuel, lube and hydraulic applications and exhaust and emissions systems. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture, aerospace, defense and truck end markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, air filtration systems for gas turbines, polytetrafluoroethylene (PTFE) membrane-based products and specialized air and gas filtration systems for applications

16


including hard disk drives and semi-conductor manufacturing. The Industrial Products segment sells to various dealers, distributors, OEMs of gas-fired turbines and OEMs and end users requiring clean filtration solutions and replacement filters.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and Notes included in Item 1 of this report.
Consolidated Results of Operations
Three months ended January 31, 2018 compared with three months ended January 31, 2017
Operating results for the three months ended January 31, 2018 and 2017 are as follows (in millions):
 
Three Months Ended January 31,
 
2018

 
% of sales

 
2017

 
% of sales

Net sales
$
664.7

 
 
 
$
550.6

 
 
Cost of sales
445.8

 
67.1
 %
 
362.7

 
65.9
 %
Gross profit
218.9

 
32.9
 %
 
187.9

 
34.1
 %
Operating expenses
137.3

 
20.6
 %
 
118.5

 
21.5
 %
Operating income
81.6

 
12.3
 %
 
69.4

 
12.6
 %
Interest expense
5.1

 
0.8
 %
 
4.8

 
0.9
 %
Other expense (income), net
0.1

 
—
 %
 
(1.7
)
 
(0.3
)%
Earnings before income taxes
76.4

 
11.5
 %
 
66.3

 
12.0
 %
Income taxes
129.3

 
19.5
 %
 
19.8

 
3.6
 %
Net (loss) earnings
$
(52.9
)
 
(8.0
)%
 
$
46.5

 
8.4
 %
Net loss for the three months ended January 31, 2018 was $52.9 million , compared with net earnings of $46.5 million for the three months ended January 31, 2017 , a decrease of $99.4 million . Included in net loss for the current year quarter is provisional tax charges of $109.7 million related to TCJA, which was enacted into law during the quarter. As a result of the TCJA, during the three months ended January 31, 2018, the Company recorded a tax charge of $1.4 million for the re-measurement of its net deferred tax assets and a tax charge of $108.3 million for the one-time transition tax on deemed repatriated earnings of its non-U.S. subsidiaries. See Note 9 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report for additional information on the impact of TCJA.
Net sales for the three months ended January 31, 2018 were $664.7 million , compared with $550.6 million for the three months ended January 31, 2017 , an increase of $114.1 million , or 20.7% . Net sales increased $80.5 million , or 22.3% , in the Engine Products segment and increased $33.6 million , or 17.7% , in the Industrial Products segment compared with the same period in the prior fiscal year. Refer to the Segment Results of Operations section for further discussion on the Engine Products and Industrial Products segments. Net sales for the three months ended January 31, 2018 were positively impacted by foreign currency translation, which increased net sales by $25.6 million compared with the same period in the prior fiscal year.
Cost of sales for the three months ended January 31, 2018 was $445.8 million , compared with $362.7 million for the three months ended January 31, 2017 , an increase of $83.1 million , or 22.9% . Gross margin for the current year quarter was 32.9% , compared with 34.1% during the same period in the prior fiscal year. The decrease in gross margin resulted from selling an unfavorable mix of products and higher supply chain and raw material costs.
Operating expenses for the three months ended January 31, 2018 were $137.3 million , compared with $118.5 million for the three months ended January 31, 2017 , an increase of $18.8 million , or 15.8% . As a percent of net sales, operating expenses for the current year quarter were 20.6% , compared with 21.5% during the same period in the prior fiscal year. The decrease in operating expenses as a percentage of sales was primarily driven by expense leverage gained on increasing sales, partially offset by higher incentive compensation expense.
Other expense (income), net for the three months ended January 31, 2018 was $0.1 million of expense, compared with $1.7 million of income for the three months ended January 31, 2017 , a decrease of $1.8 million . The decrease was primarily due to higher losses on foreign exchange of $2.9 million in the current year quarter compared with the prior year quarter. Interest expense was $5.1 million for the three months ended January 31, 2018 , compared with $4.8 million for the three months ended January 31, 2017 , an increase of $0.3 million , or 6.8% . The increase was due to an increase in the average level of debt outstanding in the current year quarter compared with the prior year quarter.
The effective tax rate for the three months ended January 31, 2018 was 169.2% , compared with 29.8% for the three months ended January 31, 2017 . Excluding the impact of the TCJA one-time adjustments, the effective tax rate for the three months ended

17


January 31, 2018 was 25.7%, compared with 29.8% for the three months ended January 31, 2017. The decrease was primarily due to $2.2 million of excess tax benefits on stock-based compensation expense resulting from the adoption of ASU 2016-09 (refer to Note 1 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report for further discussion of the new accounting standard), and the net impact of the TCJA enactment, which decreased the Company’s base effective tax rate by 1.1 percentage points. The net impact of the TCJA enactment reflects a benefit from the reduced U.S. corporate income tax rate that is partially offset by a negative impact from foreign withholding tax and other matters related to the TCJA.
Six months ended January 31, 2018 compared with six months ended January 31, 2017
Operating results for the six months ended January 31, 2018 and 2017 are as follows (in millions):
 
Six Months Ended January 31,
 
2018

 
% of sales

 
2017

 
% of sales

Net sales
$
1,309.5

 
 
 
$
1,103.6

 
 
Cost of sales
866.3

 
66.2
%
 
721.5

 
65.4
 %
Gross profit
443.2

 
33.8
%
 
382.1

 
34.6
 %
Operating expenses
270.9

 
20.7
%
 
236.3

 
21.4
 %
Operating income
172.3

 
13.2
%
 
145.8

 
13.2
 %
Interest expense
10.3

 
0.8
%
 
9.6

 
0.9
 %
Other expense (income), net
0.9

 
0.1
%
 
(9.8
)
 
(0.9
)%
Earnings before income taxes
161.1

 
12.3
%
 
146.0

 
13.2
 %
Income taxes
153.1

 
11.7
%
 
41.5

 
3.8
 %
Net earnings
$
8.0

 
0.6
%
 
$
104.5

 
9.5
 %
Net earnings for the six months ended January 31, 2018 was $8.0 million , compared with net earnings of $104.5 million for the six months ended January 31, 2017 , a decrease of $96.5 million . Included in net loss for the current year period is provisional tax charges of $109.7 million related to TCJA, which was enacted into law during the period. As a result of the TCJA, during the six months ended January 31, 2018 the Company recorded a tax charge of $1.4 million for the re-measurement of its net deferred tax assets and a tax charge of $108.3 million for the one-time transition tax on deemed repatriated earnings of its non-U.S. subsidiaries. See Note 9 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report for additional information on the impact of TCJA.
Net sales for the six months ended January 31, 2018 were $1,309.5 million , compared with $1,103.6 million for the six months ended January 31, 2017 , an increase of $205.9 million , or 18.7% . Net sales increased $168.8 million , or 23.6% , in the Engine Products segment and increased $37.1 million , or 9.6% , in the Industrial Products segment compared with the same period in the prior fiscal year. Refer to the Segment Results of Operations section for further discussion on the Engine Products and Industrial Products segments. Net sales for the six months ended January 31, 2018 were positively impacted by foreign currency translation, which increased net sales by $35.1 million compared with the same period in the prior fiscal year.
Cost of sales for the six months ended January 31, 2018 was $866.3 million , compared with $721.5 million for the six months ended January 31, 2017 , an increase of $144.8 million , or 20.1% . Gross margin for the current year quarter was 33.8% , compared with 34.6% during the same period in the prior fiscal year. The decrease in gross margin resulted from selling an unfavorable mix of products and higher supply chain and raw material costs, partially offset by improved fixed cost absorption on higher sales than the prior year.
Operating expenses for the six months ended January 31, 2018 were $270.9 million , compared with $236.3 million for the six months ended January 31, 2017 , an increase of $34.6 million , or 14.6% . As a percent of net sales, operating expenses for the current year quarter were 20.7% , compared with 21.4% during the same period in the prior fiscal year. The decrease in operating expenses as a percentage of sales was primarily driven by expense leverage gained on increasing sales, partially offset by higher incentive compensation costs.
Other expense (income), net for the six months ended January 31, 2018 was $0.9 million of expense, compared with $9.8 million of income for the six months ended January 31, 2017 , a decrease of $10.7 million . The decrease was primarily due to $6.8 million of income recognized in the prior year period that was related to a favorable settlement of claims associated with general representations and warranties in connection with the Company's acquisition of Northern Technical. The decrease is also due to $4.7 million of higher losses on foreign exchange in the current period compared with the prior period. Interest expense was $10.3 million for the six months ended January 31, 2018 , compared with $9.6 million for the six months ended January 31, 2017 , an increase of $0.7 million , or 7.9% . The increase was due to an increase in the average level of debt outstanding in the current year period compared with the prior year period.

18


The effective tax rate for the six months ended January 31, 2018 was 95.0% , compared with 28.4% for the six months ended January 31, 2017 . Excluding the impact of the TCJA one-time adjustments, the effective tax rate for the six months ended January 31, 2018 was 26.9%, compared with 28.4% for the six months ended January 31, 2017. The decrease was primarily due to $3.5 million of excess tax benefits on stock-based compensation expense resulting from the adoption of ASU 2016-09 (refer to Note 1 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report for further discussion of the new accounting standard), and the net impact of the TCJA enactment, which decreased the Company’s base effective tax rate by 1.1 percentage points. The decrease in the effective tax rate for the six months ended January 31, 2018 was partially offset by an unfavorable shift in the mix of earnings between tax jurisdictions, which increased the Company’s base effective tax rate by 1.7 percentage points.
Segment Results of Operations
Net sales and earnings before income taxes for the Engine Products and Industrial Products segments are summarized as follows (in millions):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018
 
2017
Net sales:
 
 
 
 
 
 
 
Engine Products segment
$
442.4

 
$
361.9

 
$
884.5

 
$
715.7

Industrial Products segment
222.3

 
188.7

 
425.0

 
387.9

Total
$
664.7

 
$
550.6

 
$
1,309.5

 
$
1,103.6

 
 
 
 
 
 
 
 
Earnings before income taxes:
 
 
 
 
 
 
 
Engine Products segment
$
54.5

 
$
48.7

 
$
118.1

 
$
94.1

Industrial Products segment
32.2

 
24.3

 
62.2

 
62.6

Corporate and Unallocated (1)
(10.3
)
 
(6.7
)
 
(19.2
)
 
(10.7
)
Total
$
76.4

 
$
66.3

 
$
161.1

 
$
146.0

(1)
Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest income and expense.
Engine Products Segment
The following is a summary of net sales by product group within the Company's Engine Products segment (in millions):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018
 
2017
Engine Products segment:
 
 
 
 
 
 
 
Off-Road
$
78.9

 
$
57.6

 
$
153.9

 
$
112.4

On-Road
35.2

 
23.3

 
68.5

 
49.9

Aftermarket
303.5

 
256.6

 
612.6

 
504.2

Aerospace and Defense
24.8

 
24.4

 
49.5

 
49.2

Total Engine Products segment
$
442.4

 
$
361.9

 
$
884.5

 
$
715.7

 
 
 
 
 
 
 
 
Engine Products segment earnings before income taxes
$
54.5

 
$
48.7

 
$
118.1

 
$
94.1

Net sales for the Engine Products segment for the three months ended January 31, 2018 were $442.4 million , compared with $361.9 million for the three months ended January 31, 2017 , an increase of $80.5 million , or 22.3% . Of this increase, $15.1 million is attributable to foreign currency translation. The increase in Engine Products sales was driven by increases in Aftermarket of 18.3% , Off-Road of 37.0% , On-Road of 50.6% and Aerospace and Defense of 2.0% . Within Aftermarket, sales increased in all major regions as the Company benefited from improving market conditions and end-user demand and growth in innovative product categories, including both air and liquid filtration products. Additionally, Aftermarket sales included approximately $8.5 million of incremental sales from the Company's acquisition of Hy-Pro. The increase in Off-Road sales was driven by further strengthening of market conditions across all regions for heavy-duty off-road equipment production. The increase in On-Road sales reflects increasing production of heavy-duty trucks compared with depressed sales in the prior year, primarily in the U.S., combined with

19


benefits from new customer agreements. Sales within Aerospace and Defense were mixed, with an increase in sales of Aerospace products being partially offset by declining sales in Defense ground vehicles.
Net sales for the Engine Products segment for the six months ended January 31, 2018 were $884.5 million , compared with $715.7 million for the six months ended January 31, 2017 , an increase of $168.8 million , or 23.6% . Of this increase, $21.3 million is attributable to foreign currency translation. The increase in Engine Products sales was driven by increases in Aftermarket of 21.5% , Off-Road of 37.0% , On-Road of 37.3% and Aerospace and Defense of 0.8% . Within Aftermarket, sales increased in all major regions as the Company benefited from improving market conditions and end-user demand and growth in innovative product categories, including both air and liquid filtration products. Additionally, Aftermarket sales included approximately $17.2 million of incremental sales from the Company's acquisitions of Partmo and Hy-Pro. The increase in Off-Road sales was driven by further strengthening of market conditions across all regions for heavy-duty off-road equipment production. The increase in On-Road sales reflects increasing production of heavy-duty trucks compared with depressed sales in the prior year, primarily in the U.S., combined with benefits from new customer agreements. Sales within Aerospace and Defense were mixed, with an increase in sales of Aerospace products being partially offset by declining sales in Defense ground vehicles.
Earnings before income taxes for the Engine Products segment for the three months ended January 31, 2018 were $54.5 million , or 12.3% of Engine Products' sales, a decrease from 13.5% for the three months ended January 31, 2017 . The decrease is primarily due to selling an unfavorable mix of products and higher supply chain and raw material costs, partially offset by operating expense leverage on higher sales than the prior year.
Earnings before income taxes for the Engine Products segment for the six months ended January 31, 2018 were $118.1 million , or 13.4% of Engine Products' sales, an increase from 13.1% for the six months ended January 31, 2017 . Improved cost absorption on higher sales than the prior year drove the improvement, which was partially offset by higher raw material costs and incremental costs related to meeting higher-than-expected demand.
Industrial Products Segment
The following is a summary of net sales by product group within the Company's Industrial Products segment (in millions):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2018

 
2017

 
2018
 
2017
Industrial Products segment:
 
 
 
 
 
 
 
Industrial Filtration Solutions
$
145.1

 
$
127.8

 
$
279.6

 
$
254.2

Gas Turbine Systems
33.0

 
21.2

 
59.3

 
53.7

Special Applications
44.2

 
39.7

 
86.1

 
80.0

Total Industrial Products segment
$
222.3

 
$
188.7

 
$
425.0

 
$
387.9

 
 
 
 
 
 
 
 
Industrial Products segment earnings before income taxes
$
32.2

 
$
24.3

 
$
62.2

 
$
62.6

Net sales for the Industrial Products segment for the three months ended January 31, 2018 were $222.3 million , compared with $188.7 million for the three months ended January 31, 2017 , an increase of $33.6 million , or 17.7% . Of this increase, $10.5 million is attributable to foreign currency translation. The increase in Industrial Products sales was driven by increases in Industrial Filtration Solutions of 13.4% , Gas Turbine Systems of 55.7% and Special Applications of 11.3% . The increase in Industrial Filtration Solutions sales was driven by growth in sales of both new equipment and replacement parts, reflecting some stabilization in the global markets combined with the Company’s efforts to proactively manage the replacement cycle for its large customer base and grow its business in under-penetrated existing and new markets. The increase in Special Applications sales was widespread. Sales of disk drive filters increased, reflecting temporary moderation in the secular declining hard disk drive market combined with share gains with certain customers, sales of Membrane products improved following a sharp decline in the prior year quarter, and sales of Integrated Venting Solutions are benefitting from the Company’s efforts to increase its product assortment and further penetrate new markets. The increase in Gas Turbine Systems sales was expected and reflects comparing against soft sales in the prior year quarter, particularly in first-fit, combined with continued strength in sales of replacement parts.
Net sales for the Industrial Products segment for the six months ended January 31, 2018 were $425.0 million , compared with $387.9 million for the six months ended January 31, 2017 , an increase of $37.1 million , or 9.6% . Of this increase, $13.8 million is attributable to foreign currency translation. The increase in Industrial Products sales was driven by increases in Industrial Filtration Solutions of 10.0% , Special Applications of 7.6% and Gas Turbine Systems of 10.5% . The increase in Industrial Filtration Solutions sales was driven by growth in sales of both new equipment and replacement parts, reflecting some stabilization in the global markets combined with the Company’s efforts to proactively manage the replacement cycle for its large customer base and

20


grow its business in under-penetrated existing and new markets. The increase in Special Applications sales was widespread. Sales of disk drive filters increased, reflecting temporary moderation in the secular declining hard disk drive market combined with share gains with certain customers, sales of Membrane products improved following a decline in the prior year, and sales of Integrated Venting Solutions are benefitting from the Company’s efforts to increase its product assortment and further penetrate new markets. The increase in Gas Turbine Systems sales was expected and reflects comparing against soft sales in the prior year period combined with continued strength in sales of replacement parts. While sales increased for the three month period, the first-fit sales within Gas Turbine Systems continue to be impacted by the Company's strategic decision to be more selective in pursuing new large-turbine projects combined with lower demand for new project installations and customer delays at project sites.
Earnings before income taxes for the Industrial Products segment for the three months ended January 31, 2018 were $32.2 million , or 14.5% of Industrial Products' sales, an increase from 12.9% for the three months ended January 31, 2017 . The earnings before income taxes percentage increase was primarily driven by selling a more favorable mix of products and expense leverage on higher sales than the prior year, partially offset by higher raw material costs.
Earnings before income taxes for the Industrial Products segment for the six months ended January 31, 2018 were $62.2 million , or 14.6% of Industrial Products' sales, a decrease from 16.1% for the six months ended January 31, 2017 . The earnings before income taxes percentage decrease was primarily driven by the $6.8 million of income recognized in the prior year period that was related to a favorable settlement of claims associated with general representations and warranties in connection with the Company's acquisition of Northern Technical, partially offset by selling a more favorable mix of products and expense leverage on higher sales than the prior year.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended January 31, 2018 was $109.8 million , compared with $169.5 million for the six months ended January 31, 2017 , a decrease in cash generated from operating activities of $59.7 million . This decrease is primarily the result of changes in working capital associated with higher levels of sales and expected demand, as cash flows provided by accounts receivable decreased by $35.1 million and cash flows used in inventories increased by $11.7 million between the periods.
Cash used in investing activities for the six months ended January 31, 2018 was $45.0 million , compared with $35.9 million for the six months ended January 31, 2017 . The increase in cash used in investing activities of $9.1 million resulted from an increase in capital expenditures of $20.8 million to expand capacity and invest in technology, partially offset by a decrease in net cash used for acquisitions of $11.7 million .
Cash used in financing activities for the six months ended January 31, 2018 was $22.6 million , compared with $76.7 million for the six months ended January 31, 2017 . The decrease in cash used in financing activities of $54.1 million was primarily driven by an increase in cash provided by long-term debt of $80.3 million , partially offset by a decrease in cash provided by short-term borrowings of $16.1 million and an increase in cash used to purchase treasury stock of $11.1 million .
Cash and cash equivalents as of January 31, 2018 were $362.2 million , compared with $308.4 million as of July 31, 2017 . As of January 31, 2018 , the Company had $442.9 million available under existing credit facilities. The Company believes that the combination of existing cash, available credit under existing credit facilities and the expected cash generated by operating activities will be adequate to meet cash requirements for the next twelve months, including debt repayments and pension funding, payment of anticipated dividends, possible share repurchase activity, potential acquisitions and capital expenditures.
Accounts receivable, net as of January 31, 2018 were $509.9 million , compared with $497.7 million as of July 31, 2017 , an increase of $12.2 million . Days sales outstanding were 69 days as of January 31, 2018 and 67 days as of July 31, 2017 . Days sales outstanding is calculated using the count back method, which calculates the number of days of most recent revenue that is reflected in the net accounts receivable balance. These increases were driven by the impact of foreign exchange translation.
Inventories, net as of January 31, 2018 were $344.9 million , compared with $293.5 million as of July 31, 2017 , an increase of $51.4 million . Inventory turns were 5.4 times per year as of January 31, 2018 , compared to 6.1 times per year as of July 31, 2017 . Inventory turns are calculated by taking the annualized cost of sales based on the trailing three-month period divided by the average of the beginning and ending net inventory values of the three-month period. These changes were primarily driven by increases across the regions to meet current and expected customer demand given the sales momentum.
Long-term debt outstanding was $667.7 million as of January 31, 2018 , compared with $537.3 million as of July 31, 2017 , an increase of $130.4 million . This increase is primarily to fund share repurchases and dividends and to support working capital needs associated with the higher levels of sales. In addition, during the period, $50.0 million of current maturities of long-term debt was refinanced into long-term debt. As of January 31, 2018 , long-term debt represented 44.7% of total long-term capital, defined as long-term debt plus total shareholders’ equity, compared with 38.6% as of July 31, 2017 .

21


The Company guarantees 50% of certain debt of its joint venture, AFSI, as further discussed in Note 13 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.
New Accounting Standards Not Yet Adopted
For new accounting standards not yet adopted, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements included in Item 1 of this report.
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 .
SAFE HARBOR STATEMENT UNDER THE SECURITIES 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 financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Part I, Item 1A, "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 , which could cause actual results to differ materially from historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the Company wishes to advise readers that the factors listed in Part I, Item 1A, "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 , as well as other factors, 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, world economic and industrial market conditions; the Company's ability to maintain certain competitive advantages over competitors; pricing pressures; the Company's ability to protect and enforce its intellectual property rights; the Company's dependence on global operations; customer concentration in certain cyclical industries; commodity availability and pricing; the Company's ability to develop new information technology systems and maintain and upgrade existing systems; information security and data breaches; foreign currency fluctuations; governmental laws and regulations; changes in tax laws, regulations and results of examinations; the Company's ability to attract and retain key personnel; changes in capital and credit markets; execution of the Company's acquisition strategy; the possibility of asset impairment; execution of restructuring plans; the Company's ability to maintain an effective system of internal control over financial reporting and other factors included in Part I, Item 1A, "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 . The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the reported market risk of the Company since July 31, 2017 . See further discussion of these market risks in the Company’s Annual Report on Form 10-K for the year ended July 31, 2017 .
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period. Based on their evaluation, as of the end of the period covered, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective. The Company’s disclosure controls and procedures are designed so that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and

22


forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the fiscal quarter ended January 31, 2018 , that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

23


PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
The Company believes the recorded estimated liability in its Condensed Consolidated Financial Statements for claims or litigation is adequate in light of the probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial position, results of operations or liquidity and 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. The Company records provisions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and litigation are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter.
Item 1A.
Risk Factors
There are inherent risks and uncertainties associated with the Company’s global operations that involve the manufacturing and sale of products for highly demanding customer applications throughout the world. These risks and uncertainties could adversely affect the Company’s operating performances or financial condition. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017 outlines the risks and uncertainties that the Company believes are the most material to its business.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
The following table summarizes information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the three months ended January 31, 2018 :
Period
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum
Number
of Shares
that May Yet
Be Purchased
Under the Plans
or Programs
November 1 - November 30, 2017
 
—

 
$
—

 
—

 
6,241,152

December 1 - December 31, 2017
 
—

 
—

 
—

 
6,241,152

January 1 - January 31, 2018
 
400,000

 
50.55

 
400,000

 
5,841,152

Total
 
400,000

 
$
50.55

 
400,000

 
5,841,152

(1)
The Board of Directors has authorized the repurchase of up to 14.0 million shares of the Company's common stock. This repurchase authorization is effective until terminated by the Board of Directors. There were no repurchases of common stock made outside of the Company's current repurchase authorization during the three months ended January 31, 2018 . While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under stock-based awards to cover the withholding of taxes due as a result of exercising stock options or payment of stock-based awards.
Item 3.
Defaults Upon Senior Securities
Not applicable.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
Not applicable.

24


Item 6.
Exhibits
 
 
 
*4 – **
 
 
 
 
 
 
 
101 – The following information from the Donaldson Company, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2018, as filed with the Securities and Exchange Commission, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of (Loss) Earnings, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.
*
Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit.
**
Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A), copies of instruments defining the rights of holders of certain long-term debts of the Registrant and its subsidiaries are not filed and in lieu thereof the Registrant agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.

25


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
DONALDSON COMPANY, INC.
 
(Registrant)
 
Date: March 9, 2018
By:  
 /s/ Tod E. Carpenter
 
 
Tod E. Carpenter
Chairman, President and
Chief Executive Officer
(duly authorized officer)
 
 
 
 
 
 
Date: March 9, 2018
By:
 /s/ Scott J. Robinson
 
 
Scott J. Robinson
Senior Vice President and
Chief Financial Officer
(principal financial officer)
 
 
 
 
 
 
Date: March 9, 2018
By:
 /s/ Melissa A. Osland
 
 
Melissa A. Osland
Corporate Controller
(principal accounting officer)

26

Exhibit 10-A
DONALDSON COMPANY, INC.

COMPENSATION PLAN
FOR
NON‑EMPLOYEE DIRECTORS
As Amended on December 13, 2017,
but Effective January 1, 2018
I. Introduction
The Board of Directors of Donaldson Company, Inc. (the “Company”) has adopted stock ownership guidelines attached hereto as Exhibit A because it believes that it is in the best interests of the Company and its stockholders for non‑employee directors of the Company to have a significant equity interest in the Company in order to align their financial interests with those of the Company’s stockholders. The Company has previously established an automatic equity grant program and a deferred compensation program for non‑employee directors, both of which are intended to assist non‑employee directors in meeting the Company’s stock ownership guidelines. Set forth in writing below are the provisions of both programs combined into one restated plan document entitled the Donaldson Company, Inc. Compensation Plan for Non‑Employee Directors (hereinafter, the “Plan”).
All equity awards granted hereunder, as well as any amounts deferred that are payable in shares of the Company’s common stock, par value of US$5.00 per share (“Common Stock”) are subject to the terms, conditions, and restrictions set forth in under the Company’s 2010 Master Stock Incentive Plan (the “Master Stock Plan”). In the event of any inconsistency between the terms contained herein and in the Plan, the Master Stock Plan shall govern. All capitalized terms that are not defined herein have the meanings set forth in the Master Stock Plan.
II. Plan Year
The Plan shall operate on a calendar year basis.
III. Eligibility
All members of the Board of Directors who are not employees of the Company (“Eligible Directors”) are eligible for the Plan.
IV. Automatic Equity Grant Program
1. Annual Award Grants
(a)
Stock Options . On the first day following January 1 that the New York Stock Exchange is open for trading (the “First Trading Day”), each Eligible Director shall automatically be granted a Non‑Qualified Stock Option with a fair market value (computed as of the date of grant in accordance with applicable financial accounting rules) equal to $70,000 (the “Annual Option Grant”). The number of shares subject to the Annual Option Grant shall be determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares. With respect to an individual who becomes an Eligible Director during a calendar year after the First Trading Day, such Eligible Director’s Annual Option Grant for that year

1

shall have a fair market value obtained by multiplying $70,000 by a fraction, the numerator of which is the number of whole calendar months remaining in the calendar year and the denominator of which is twelve. Such prorated grant shall be made upon the first trading day of the calendar month, within the Company’s open trading window, following the date such individual becomes an Eligible Director, with the number of shares determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares.
(b)
Restricted Stock Unit . On the First Trading Day, each Eligible Director shall automatically be granted a Restricted Stock Unit Award with a fair market value (computed as of the date of grant in accordance with applicable financial accounting rules) equal to $70,000 (the “Annual Restricted Stock Unit Grant”). The number of shares subject to the Annual Restricted Stock Unit Grant shall be determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares. With respect to an individual who becomes an Eligible Director during a calendar year after the First Trading Day, such Eligible Director’s Annual Restricted Stock Unit Grant for that year shall have a fair market value obtained by multiplying $70,000 by a fraction, the numerator of which is the number of whole calendar months remaining in the calendar year and the denominator of which is twelve. Such prorated grant shall be made upon the first trading day of the calendar month, within the Company’s open trading window, following the date such individual becomes an Eligible Director, with the number of shares determined using the closing price of the Common Stock on the grant date, and rounding this number to the nearest integer multiple of one hundred (100) shares.
2.      Award Terms
(a)
Options . All Non‑Qualified Stock Options granted under the Plan shall have: (i) a per share exercise price equal to the closing price of the Common Stock on the day on which such options are granted; and (ii) vesting, expiration and such other terms as provided in the Company’s form of Non‑Employee Director Non‑Qualified Stock Option Agreement attached hereto as Exhibit B.
(b)
Restricted Stock Units . All Restricted Stock Units granted under the Plan shall have vesting and such other terms as provided in the Company’s form of Non‑Employee Director Restricted Stock Unit Award Agreement attached hereto as Exhibit C .
V. Director Deferred Compensation Program
1.      Compensation Covered by the Plan
Eligible Director compensation covered by this Plan includes annual retainers (including committee retainers) generally payable on or shortly after January 1 of each calendar year (hereinafter “Eligible Fees”). The Plan permits Eligible Directors to elect to receive this compensation in one or more of the following methods:
(a)
In cash on a current basis;
(b)
In cash on a deferred basis (a “Deferred Cash Election”); or
(c)
In Company stock on a deferred basis (a “Deferred Stock Election”).
No other compensation or fees otherwise payable to an Eligible Director shall be eligible for an election under this Plan.

2

Notwithstanding the foregoing, a portion of each Eligible Director’s annual retainer for Board service shall be automatically deferred in Phantom Shares in accordance with Section V.3 below.
2.      Election to Defer
An Eligible Director may elect to defer payment of Eligible Fees under Section V.4 or V.5 of this Plan by filing, no later than the last day of a Plan Year (or by such earlier date as the Plan administrator shall determine), an irrevocable election with the administrator on a form provided for that purpose. The Annual Deferral Election shall be effective with respect to the Eligible Fees payable during the following Plan Year. The Deferral Election Form shall specify an amount to be deferred expressed as a percentage of the Eligible Director’s annual retainer, as provided in the form attached hereto as Exhibit D .
That portion of Eligible Fees for which a valid form has not been timely received by the Company (other than the portion of the annual retainer subject to an automatic exchange election, as provided in Section V.3) will be paid in cash in accordance with the Company’s customary practice of paying such Eligible Fees. Once a Plan Year has commenced, all Deferral Elections under this Plan for such Plan Year shall be irrevocable.
3.      Automatic Receipt of Phantom Shares
In addition to an Eligible Director’s voluntary election provided under Section V.4(b), if any, a portion of each Eligible Director’s annual retainer payable to each Director for service on the Board shall be automatically exchanged for Phantom Shares (in the same manner as provided in Section V.4(b)). The retainer amount automatically exchanged for Phantom Shares shall be $15,000, unless otherwise determined by the Board from time to time but in all events prior to the first day of the Plan Year for which the annual retainer is awarded.
4.      Deferral Elections
(a)
Deferred Cash Election
For Directors who make an Annual Deferred Cash Election, the Company will establish a bookkeeping account for cash deferred for that Plan Year (an “Annual Deferred Cash Account”) and will credit to the Annual Deferred Cash Account the amount of the Eligible Fees earned and deferred by him/her as of the date such fees would normally be payable by the Company (the “Credit Date”). Amounts credited to an Eligible Director’s Annual Deferred Cash Account will be adjusted for gains and/or losses to the same extent that equal amounts would have been adjusted if they had been invested in one or more notional investments designated by the Company. The use of notional investments herein is solely as a device for computing the amount of benefits to be paid under the Plan, and the Company shall not be required to purchase such investments.
(b)
Deferred Stock Election
Eligible Directors may elect to exchange part or all of their Eligible Fees for a Plan Year for the Company’s commitment to issue to such Eligible Directors a fixed number of shares of common stock of the Company at a future date. The Company’s commitment to issue shares shall be referred to as “Phantom Shares” held in an “Annual Deferred Stock Account”.
As of the Credit Date, an Eligible Director shall receive a credit to his or her Annual Deferred Stock Account. The amount of the credit shall be the number of Phantom Shares (rounded to the nearest whole Share) determined by dividing (i) an amount equal to Eligible Fees payable to the Eligible

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Director on the Credit Date and specified for deferral, by (ii) the fair market value of one share of Common Stock on such date.
For purposes of this paragraph (b), the following rules shall apply:
(i)
Fair Market Value
The fair market value of each share of Common Stock shall be equal to the closing price of one share of the Company’s common stock on the New York Stock Exchange‑Composite Transactions on the Credit Date as of which Phantom Shares are credited to the Eligible Director’s Deferred Stock Account.
(ii)
No Actual Shares Prior to Distribution
No actual shares of Common Stock shall be issued until the distribution date described below. The Phantom Shares shall not be considered issued and outstanding shares for purposes of stockholder voting rights.
(iii)
Dividend Credit
Each time a dividend is paid on Common Stock, an Eligible Director shall receive a credit to his or her Deferred Stock Account equal to that number of shares of common stock (rounded to the nearest whole share) having a fair market value on the dividend payment date equal to the amount of the dividend payable on the number of Phantom Shares credited to the Eligible Director’s Deferred Stock Account on the dividend record date.
(iv)
Restrictions on Phantom Shares
All Phantom Shares issued under and subject to the terms of this Plan will be issued under the Master Stock Plan (and/or its successor plans) and shall be deemed to be “other stock‑based awards” for purposes of such plan; provided, that except that any Phantom Shares credited before November 19, 2010 are subject to the Donaldson Company, Inc. 2001 Master Stock Incentive Plan.
5.      Distributions of Annual Deferred Accounts
(a)
Timing of Distributions
At the time an Eligible Director’s Annual Deferral Election is made for a Plan Year, each Eligible Director shall specify the time and manner in which his/her Annual Deferred Cash Account and/or Annual Deferred Stock Account shall be distributed. If an Eligible Director does not specify an election for the timing and manner of a distribution, the balance of an Eligible Director’s Annual Deferred Accounts shall be distributed in a lump sum in accordance with option (i) below. The Eligible Director shall be entitled to receive, or to commence receiving, his/her Annual Deferred Accounts as soon as practicable after the following:
(i)
the first anniversary of his/her separation from service (as that term is defined under Section 409A of the Code) with the Company; or
(ii)
a specified date or specified age set by him/her.

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(b)
Manner of Distribution
Each Eligible Director shall be entitled to receive the balance in his/her Annual Deferred Accounts in any one of the following manners:
(i)
in a lump sum; or
(ii)
in annual installments over a period of years stipulated by him/her not to exceed ten (10). The amount of the installments will be determined by annually dividing the value of the benefits in the Account by the number of installments remaining to be paid.
Notwithstanding anything to the contrary above, the Company may make an immediate lump sum payment of the Eligible Director’s Annual Deferral Accounts if the balance of such Accounts, combined with any other amounts required to be treated as deferred under a single plan pursuant to Section 409A of the Code, does not exceed the applicable dollar amount under Section 402(g)(1)(B) of the Code, provided any other such aggregated amounts are also distributed in a lump sum at the same time.
Each Eligible Director’s Annual Deferred Stock Account shall be distributed in Common Stock.
(c)
Distribution in Event of Death
In the event of the Eligible Director’s death, either before or after commencement of payments, distribution of the Eligible Director’s entire Account balance will be made in a single lump sum to the beneficiary named by the Eligible Director (on such form or forms prescribed by the Plan administrator) or to that person who would have a right to receive such distribution by will or by the applicable laws of descent and distribution.
(d)
Distribution to Specified Employees
Notwithstanding any other provision in this Plan, in the event that an Eligible Director in this Plan is determined to be a “specified employee” (as that term is defined under Section 409A of the Code), any distribution to the Eligible Director on account of the Eligible Director’s separation from service shall be delayed as necessary to comply with the requirements of Section 409A of the Code.
(e)
Distribution in Event of Change of Control
Notwithstanding any other provision of this Plan, in the event of a Change of Control (as defined below), each Eligible Director who separates from service with the Company for any reason during the two (2) year period following such Change of Control shall receive within ten (10) business days after the date of separation the following:
(i)
If a Eligible Director has a balance in an Annual Deferred Cash Account, a lump sum payment of the entire balance contained in his/her Annual Deferred Cash Account, together with applicable earnings adjustment, on the average daily balance in such Deferral Account for the period since the last earnings adjustment through the date of separation; and
(ii)
If an Eligible Director has a balance in an Annual Deferred Stock Account, a distribution of the number of shares represented by the Phantom Shares issued pursuant to such election; and

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Notwithstanding paragraph (e)(i) above, with respect to any Eligible Director who separated from service before the date of a Change of Control, the balance of the Annual Deferred Accounts shall be paid at the time and in the manner as elected by the Eligible Director (and shall not be commuted to a lump sum or otherwise accelerated by the Change of Control). For purposes of this section, a “Change of Control” shall have the meaning given to such phrase in the Company’s 401(k) Excess Plan, as may be amended from time to time.
VI. General Provisions
1.      Unsecured Obligation
The amounts credited to each Eligible Director’s Account shall not be held by the Company in a trust, escrow or similar fiduciary capacity, and neither the Eligible Director, nor any legal representative, shall have any right against the Company with respect to any portion of the Account except as a general unsecured creditor of the Company.
2.      Administration of the Plan
The Plan shall be administered by the Human Resources Committee of the Board of Directors.
3.      Amendment, Termination and Governing Law
This Plan may be amended or terminated at any time by the Board of Directors or the Human Resources Committee of the Board of Directors. This Plan shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law.
4.      Cautionary Statement
Eligible Directors should be aware that their participation in the Plan involves the following risks, among others:
(a)
Balances in the Annual Deferred Accounts represent unfunded, unsecured general obligations of the Company. If the Company is unable to pay its debts as they become due, Eligible Directors may not be able to collect the balances in their Annual Deferral Accounts.
(b)
The value of an Eligible Director’s Non‑Qualified Stock Options, Restricted Stock Unit and Phantom Shares will depend on the value of the Company’s Common Stock. An investment in the Company’s Common Stock involves risk. Eligible Directors are encouraged to review the Company’s filings with the U.S. Securities and Exchange Commission for a description of some of the risk factors associated with an investment in the Company’s Common Stock.



6


Exhibit 10-B

NON‑EMPLOYEE DIRECTOR
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Restricted Stock Unit Award Agreement (the “Agreement”) is made as of the date specified in the individual grant summary by and between Donaldson Company, Inc., a Delaware corporation (hereinafter, together with its subsidiaries, called “Donaldson” or “Company”), and the person specified in the individual grant summary, a non‑Employee Director of Donaldson (hereinafter called the “Participant”).
In consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration the parties hereto agree as follows:
1.     Grant of Restricted Stock Units . Donaldson hereby grants to the Participant the number of Restricted Stock Units representing the right to receive shares of common stock, par value of US$5.00 per share, of Donaldson (“Common Stock”) specified in the grant summary for no cash consideration, and dividend equivalent amounts corresponding to the shares, subject to the following terms and conditions:
(a)
This Award is granted pursuant to the Donaldson Company, Inc. Compensation Plan for Non‑Employee Directors and the 2010 Master Stock Incentive Plan of Donaldson (collectively, the “Plan”), and is subject to all of the terms and conditions of the Plan. The Participant acknowledges receipt of a copy of the Plan and the Plan Prospectus. Capitalized terms not defined in this Agreement shall have the meaning ascribed to such terms in the Plan.
(b)
Date of grant shall be as specified on your individual grant summary made available to you on‑line (“Grant Date”).
(c)
Neither the Restricted Stock Units, nor the shares of Common Stock to which the units relate, may be sold, assigned, hypothecated or transferred (including without limitation, transfer by gift or donation) until the first anniversary of the Grant Date (“Restriction Period”). Restricted Stock Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book‑keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of shares of Common Stock to be issued to or in respect of the Participant pursuant to this Agreement.
(d)
The Restricted Stock Units subject to the Award shall be forfeited to Donaldson if, at any time within the Restriction Period, the Participant’s service as a Director of the Company is terminated for any reason unless:
(i)
the Participant’s termination is due to retirement or resignation from service as a Director of the Company in accordance with the age and term limits of the Corporate Governance Guidelines of the Company; or
(ii)
a majority of the members of the Board of Directors other than the eligible Director consent to the continued vesting of the Restricted Stock in accordance with the original vesting schedule.
(e)
Upon the expiration of the Restriction Period, the Company shall cause to be issued to the Participant, or to the Participant’s designated beneficiary or estate in the event of the Participant’s death, one share

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of Common Stock in payment and settlement of each vested Restricted Stock Unit. The Company shall cause the shares issuable in connection with the vesting of any such Restricted Stock Units to be issued as soon as practicable after the Restriction Period, but in all events no later than 30 days after the Restriction Period, and the Participant shall have no power to affect the timing of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer agent of the Company and shall be in complete settlement and satisfaction of such vested Restricted Stock Units.
(f)
Notwithstanding anything herein to the contrary such restrictions shall lapse and all of the shares of Common Stock shall become fully vested in the event of a Change in Control as defined in section 2 below.
2.     Vesting upon Change in Control . In the event of a “Change in Control” of Donaldson, the Restricted Stock Units shall immediately become fully vested and the shares subject to the Award shall be delivered to the Participant. The term “Change in Control” shall have the following meaning assigned to it in this Agreement. A “Change in Control” of Donaldson shall have occurred if (i) any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than Donaldson, any trustee or other fiduciary holding securities under an employee benefit plan of Donaldson or any corporation owned, directly or indirectly, by the stockholders of Donaldson in substantially the same proportions as their ownership of stock of Donaldson), either is or becomes the “beneficial owner” (as defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of Donaldson representing 30% or more of the combined voting power of Donaldson’s then outstanding securities, (ii) during any period of 2 consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new Director (other than a Director designated by a person who has entered into an agreement with Donaldson to effect a transaction described in clause (i), (iii) or (iv) of this subparagraph) whose election by the Board of Directors or nomination for election by Donaldson’s stockholders was approved by a vote of at least two‑thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, unless the approval of the election or nomination for election of such new Directors was in connection with an actual or threatened election or proxy contest, (iii) the stockholders of Donaldson approve a merger or consolidation of Donaldson with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Donaldson outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of Donaldson or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of Donaldson (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 30% of the combined voting power of Donaldson’s then outstanding securities or (iv) the stockholders of Donaldson approve a plan of complete liquidation of Donaldson or an agreement for the sale or disposition by Donaldson of all or substantially all of Donaldson’s assets or any transaction having a similar effect. Notwithstanding the foregoing, if any payment due under this Section 2 is deferred compensation subject to Section 409A of the Code, and if the Change in Control is not a “change in control event” that serves as a permissible payment event under Treasury Regulation § 1.409A‑3(i)(5) or such other regulation or guidance issued under Section 409A of the Code, then the Restricted Stock Units shall vest upon the Change in Control as provided above but delivery of the shares subject to the Award shall be delayed until the end of the Restriction Period.
3.     Miscellaneous .
(a)
The Restricted Stock Units do not entitle the Participant to any rights of a stockholder of the Company. Notwithstanding the foregoing, the Participant shall accumulate an unvested right to dividend equivalent amounts on the shares of Common Stock underlying Restricted Stock Units if cash dividends are declared

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by Donaldson on the shares on or after the Grant Date. Each time a dividend is paid on Common Stock, the Participant shall accrue an additional number of Restricted Stock Units (rounded to the nearest whole share) having a Fair Market Value on the dividend payment date equal to the amount of the dividend payable on the Participant’s Restricted Stock Units on the dividend record date. The additional Restricted Stock Units shall be subject to the same vesting, forfeiture and share delivery terms in Section 1 and Section 2 above as if they had been awarded on the Grant Date. The Participant shall not be entitled to dividend equivalents with respect to dividends declared prior to the Grant Date. All dividend equivalents accumulated with respect to forfeited Restricted Stock Units shall also be irrevocably forfeited. As of the date of issuance of shares underlying Restricted Stock Units, the Participant shall have all of the rights of a stockholder of the Company with respect to any shares issued pursuant hereto.
(b)
Upon any stock dividend or split, recapitalization, consolidation, or the like, occurring after the date hereof, as a result of which securities of any class shall be issued in respect of outstanding shares of Common Stock, or shares of Common Stock shall be changed into the same or a different number of shares or other securities of the same or other class or classes, then the Board of Directors shall determine if any equitable adjustment is necessary to protect the Participant against dilution and shall determine the terms of such adjustment, if any. In the case of any stock dividend or split effected after the date hereof, the number of shares of Common Stock to be issued hereunder shall be automatically adjusted to prevent dilution of the potential benefits intended to be made available hereunder.
(c)
This Award shall be effective only after the Participant agrees to the terms and conditions of the Agreement.
(d)
This agreement shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law. The Participant consents to the exclusive jurisdiction of the state and federal courts of the state of Minnesota in connection with any controversies relating to or arising out of this Agreement, and agrees that any and all litigation relating to or arising out of this Agreement shall be venued in Hennepin County, Minnesota.
(e)
As a condition of the grant of this Award, the Participant agrees to repatriate all payments attributable to the shares of Common Stock and/or cash acquired under the Plan (including, but not limited to, dividends and any proceeds derived from the sale of the shares of Common Stock) in accordance with local foreign exchange rules and regulations in the Participant’s country of residence. In addition, the Participant also agrees to take any and all actions, and consents to any and all actions taken by Donaldson, as may be required to allow Donaldson to comply with local laws, rules and regulations in the Participant’s country of residence. Finally, the Participant agrees to take any and all actions as may be required to comply with the Participant’s personal legal and tax obligations under local laws, rules and regulations in the Participant’s country of residence.
(f)
Donaldson, in its sole discretion, may decide to deliver any documents related to the Restricted Stock Units or other Awards granted to the Participant under the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on‑line or electronic system established and maintained by Donaldson or a third party designated by Donaldson.
(g)
The Participant acknowledges and agrees that it is the Participant’s express intent that this Agreement, the Plan and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the grant of this Award, be drawn up in English. If the Participant has received this Agreement, the Plan or any other documents related to the Award translated into a language other than English, and if

3

the meaning of the translated version is different than the English version, the English version shall control.
(h)
Notwithstanding any provisions in this Agreement to the contrary, this Award shall be subject to any special terms and conditions for the Participant’s country of residence, as set forth in the applicable addendum to this Agreement, if any. Further, if the Participant transfers residency to another country reflected in an addendum to this Agreement, the special terms and conditions for such country will apply to the Participant to the extent Donaldson determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Award and the Plan (or Donaldson may establish alternative terms and conditions as may be necessary or advisable to accommodate the Participant’s transfer). Any applicable addendum shall constitute part of this Agreement.
(i)
Donaldson reserves the right to impose other requirements on this Award, any shares of Common Stock underlying the Award, and the Participant’s participation in the Plan, to the extent Donaldson determines, in its sole discretion, that such other requirements are necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Award and the Plan. Such requirements may include (but are not limited to) requiring the Participant to sign any agreements or undertakings that may be necessary to accomplish the foregoing.
(j)
If the Participant is resident outside the United States, the grant of the Award is not intended to be a public offering of securities in the Participant’s country of residence. Donaldson has not submitted any registration statement, prospectus or other filings with the local securities authorities (unless otherwise required under local law), and the grant of the Award is not subject to the supervision of the local securities authorities. Investment in shares of Common Stock involves a degree of risk. The Participant should consult with the Participant’s personal advisor for professional investment advice.
(k)
The Participant’s country of residence may have insider trading and/or market abuse laws that may affect the Participant’s ability to acquire or sell shares of Common Stock under the Plan during such times the Participant is considered to have “inside information” (as defined in the laws in Participant’s country of residence). These laws may be the same or different from any Donaldson insider trading policy. The Participant acknowledges that it is the Participant’s responsibility to be informed of and compliant with such regulations, and the Participant is advised to speak to his / her personal advisor on this matter.
(l)
The invalidity or unenforceability of any provision of the Plan or this Agreement will not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement will be severable and enforceable to the extent permitted by law.
4.     Consent to Collection/Processing/Transfer of Personal Data . Pursuant to applicable personal data protection laws, Donaldson hereby notifies the Participant of the following in relation to the Participant’s personal data and the collection, use, processing and transfer of such data in relation to Donaldson’s grant of this Award and the Participant’s participation in the Plan. The collection, use, processing and transfer of the Participant’s personal data is necessary for Donaldson’s administration of the Plan and the Participant’s participation in the Plan, and the Participant’s denial and/or objection to the collection, use, processing and transfer of personal data may affect the Participant’s participation in the Plan. As such, the Participant hereby voluntarily acknowledges and consents (where required under applicable law) to the collection, use, processing and transfer of personal data as described in this paragraph.
Donaldson holds certain personal information about the Participant, including the Participant’s name, home address, email address and telephone number, date of birth, social security number, passport number or other employee

4

identification number, salary, nationality, job title, any shares of Common Stock or directorships held in Donaldson, details of all stock awards or any other entitlement to shares of Common Stock awarded, canceled, purchased, vested, unvested or outstanding in the Participant’s favor, for the purpose of managing and administering the Plan (“Data”). Data may be provided by the Participant or collected, where lawful, from third parties, and Donaldson will process Data for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Data processing will take place through electronic and non‑electronic means according to logics and procedures strictly correlated to the purposes for which Data are collected and with confidentiality and security provisions as set forth by applicable laws and regulations in the Participant’s country of residence. Data processing operations will be performed minimizing the use of personal and identification data when such operations are unnecessary for the processing purposes sought. Data will be accessible within Donaldson’s organization only by those persons requiring access for purposes of the implementation, administration and operation of the Plan and for the Participant’s participation in the Plan.
Donaldson will transfer Data within the Donaldson organization as necessary for the purpose of implementation, administration and management of the Participant’s participation in the Plan, and Donaldson may further transfer Data to any third parties assisting Donaldson in the implementation, administration and management of the Plan. These recipients may be located in the European Economic Area, or elsewhere throughout the world, such as the United States. The Participant hereby authorizes (where required under applicable law) them to receive, possess, use, retain and transfer Data, in electronic or other form, for purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of Common Stock on the Participant’s behalf to a broker or other third party with whom the Participant may elect to deposit any shares of Common Stock acquired pursuant to the Plan.
The Participant may, at any time, exercise his or her rights provided under applicable personal data protection laws, which may include the right to (a) obtain confirmation as to the existence of Data, (b) verify the content, origin and accuracy of Data, (c) request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of Data, and (d) to oppose, for legal reasons, the collection, processing or transfer of Data which is not necessary or required for the implementation, administration and/or operation of the Plan and the Participant’s participation in the Plan. The Participant may seek to exercise these rights by contacting Donaldson Legal Department.
By execution of this Agreement as of the Grant Date, the Participant hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan.
PARTICIPANT:

SIGNED BY ELECTRONIC SIGNATURE *

* BY ELECTRONICALLY ACCEPTING THIS AWARD, THE PARTICIPANT AGREES THAT (i) SUCH ACCEPTANCE CONSTITUTES THE PARTICIPANT’S ELECTRONIC SIGNATURE IN EXECUTION OF THE AGREEMENT; (ii) THE PARTICIPANT AGREES TO BE BOUND BY THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iii) THE PARTICIPANT HAS REVIEWED THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY) IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO ACCEPTING THIS AWARD AND FULLY UNDERSTANDS ALL OF THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iv) THE PARTICIPANT HAS BEEN PROVIDED WITH A COPY

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OR ELECTRONIC ACCESS TO A COPY OF THE U.S. PROSPECTUS FOR THE PLAN AND THE TAX SUPPLEMENT TO THE U.S. PROSPECTUS FOR EMPLOYEE’S COUNTRY, IF APPLICABLE; AND (v) THE PARTICIPANT HEREBY AGREES TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE HUMAN RESOURCES COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY).


6

Exhibit 10-C

NON‑EMPLOYEE DIRECTOR
NON‑QUALIFIED STOCK OPTION AWARD AGREEMENT
This Stock Option Award Agreement (the “Agreement”) is made as of the date specified in the individual grant summary by and between Donaldson Company, Inc., a Delaware corporation (hereinafter, together with its subsidiaries, called “Donaldson” or “Company”), and the person specified in the individual grant summary, a non‑Employee Director of Donaldson (hereinafter called the “Participant”).
In consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties agree as follows:
1.     Grant of Option . Donaldson irrevocably grants to the Participant a Non‑Qualified Stock Option (hereinafter, the “Option”) representing the right to purchase all or any part of an aggregate of the number of shares specified in the grant summary of common stock, par value of US$5.00 per share, of Donaldson (“Common Stock”). This Option is granted pursuant to the Donaldson Company, Inc. Compensation Plan for Non‑Employee Directors and the 2010 Master Stock Incentive Plan of Donaldson (collectively, the “Plan”). The Participant acknowledges receipt of a copy of the Plan. Capitalized terms not defined in this Agreement shall have the meaning ascribed to such terms in the Plan.
The purchase price of the shares of Common Stock subject to this Option is specified in the grant summary which shall be 100% of the Fair Market Value of Donaldson Common Stock on the date the award is granted (the “Date of Grant”). The Date of Grant is the date specified in your individual grant summary made available to you on‑line. The term of this Option is for the period of ten (10) years from and after the Date of Grant, or such shorter period as may be provided by the provisions of the Plan.
2.     Transferability . This Option shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercised during the lifetime of the Participant only by the Participant; provided, however, that notwithstanding the above, this Option shall be transferable by the Participant to family members and related estate planning entities.
3.     Vesting of Option Right . Each Option grant may be exercised by the Participant under the following schedule except as otherwise provided in this Agreement. The Option may not be exercised for a period of one (1) year from the Date of Grant. Following that one‑year period, the Option vests in equal one‑third increments:
•
one‑third vests on the one‑year anniversary of the Date of Grant;
•
one‑third vests on the two‑year anniversary of the Date of Grant;
•
one‑third vests on the three‑year anniversary of the Date of Grant.
The Option may be exercised as to any portion of the Option that is vested. An unvested portion of the Option shall only vest so long as:
(1)
the Participant remains a Director of the Company on the date that the Option vests,
(2)
the Participant retires or resigns from service as a Director of the Company in accordance with the age and term limits of the Corporate Governance Guidelines of the Company, or

1

(3)
the Participant’s service as a Director of the Company is terminated for any other reason and a majority of the members of the Board of Directors other than the eligible Director consent to the continued vesting of such portion of the Option in accordance with the original vesting schedule.
The vesting of the Option also is subject to acceleration in the event of a Change in Control of Donaldson as defined in the Plan.
4.     Exercise of Option . Once vested, the Participant may exercise this Option, in whole or in part, at any time during the term as specified above but not after ten (10) years from the Date of Grant; provided, that if the Participant dies, this Option, if vested, may be exercised within three (3) years after death, but not after ten (10) years from the Date of Grant, by the Participant’s estate or by the person or persons who acquire the right to exercise this Option by bequest, inheritance or otherwise by reason of such death. Donaldson and the Participant recognize that this Agreement in no way restricts the right of Donaldson to terminate the Participant’s membership consistent with applicable Delaware laws.
5.     Method of Exercise of Option . Subject to the terms and conditions of this Agreement, the Option may be exercised only within the Option period by serving written notice of exercise on Donaldson at its principal office which is as of this date located at 1400 W. 94th Street, Bloomington, Minnesota, Attention: General Counsel, or such other forms of written or electronic notice as are designated by the Company. The notice must state the number of shares being exercised and include payment in full of the purchase price. Payment of the purchase price shall be made in cash or, with the approval of Donaldson (which may be given in its sole discretion), in shares of Common Stock of Donaldson having a Fair Market Value equal to the full purchase price of the shares of Common Stock being acquired or a combination of cash and such shares of Common Stock.
6.     Acceleration of Exercisability upon Change in Control . In the event of a Change in Control of Donaldson (as defined below), any outstanding Option granted under this Agreement not previously vested and exercisable shall become fully vested and exercisable and shall remain exercisable thereafter until they are either exercised or expire by their terms. The term “Change in Control” shall have the following meaning assigned to it in this Agreement. A “Change in Control” of Donaldson shall have occurred if (i) any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than Donaldson, any trustee or other fiduciary holding securities under an Employee benefit plan of Donaldson or any corporation owned, directly or indirectly, by the stockholders of Donaldson in substantially the same proportions as their ownership of stock of Donaldson), either is or becomes the “beneficial owner” (as defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of Donaldson representing 30% or more of the combined voting power of Donaldson’s then outstanding securities, (ii) during any period of 2 consecutive years (not including any period prior to the effective date of this Plan), individuals who at the beginning of such period constitute the Board of Directors, and any new Director (other than a Director designated by a person who has entered into an agreement with Donaldson to effect a transaction described in clause (i), (iii) or (iv) of this subparagraph) whose election by the Board of Directors or nomination for election by Donaldson’s stockholders was approved by a vote of at least two‑thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, unless the approval of the election or nomination for election of such new Directors was in connection with an actual or threatened election or proxy contest, (iii) the stockholders of Donaldson approve a merger or consolidation of Donaldson with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Donaldson outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of Donaldson or such surviving entity outstanding immediately after such merger or consolidation or (B) a

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merger or consolidation effected to implement a recapitalization of Donaldson (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 30% of the combined voting power of Donaldson’s then outstanding securities or (iv) the stockholders of Donaldson approve a plan of complete liquidation of Donaldson or an agreement for the sale or disposition by Donaldson of all or substantially all of Donaldson’s assets or any transaction having a similar effect.
7.     Miscellaneous .
(a)
Donaldson shall not be liable for any foreign exchange rate fluctuation, where applicable, between the Participant’s local currency and the United States dollar that may affect the value of the Option or any amounts due to the Participant pursuant to the exercise of the Option or the subsequent sale of any shares of Common Stock acquired upon exercise.
(b)
The exercise of all or any parts of the Option shall only be effective at such time that the sale of shares of Common Stock pursuant to such exercise will not violate any U.S. federal, state or foreign securities or other laws.
(c)
It is understood and agreed that the Option price is the per share market value of a share of Common Stock on the Date of Grant. The Option is not intended to be an Incentive Option within the meaning of Section 422 of the Code. The Option is issued pursuant to the Plan and is subject to its terms.
(d)
If all or any portion of the Option is exercised subsequent to any stock dividend or split, recapitalization, consolidation, or the like, occurring after the date hereof, as a result of which securities of any class shall be issued in respect of outstanding shares of Common Stock, or shares of Common Stock shall be changed into the same or a different number of shares or other securities of the same or other class or classes, then the Board of Directors shall determine if any equitable adjustment is necessary to protect the Participant against dilution and shall determine the terms of such adjustment, if any. In the case of any stock dividend or split effected after the date hereof, the number of shares of Common Stock to be granted hereunder shall be automatically adjusted to prevent dilution of the potential benefits intended to be made available hereunder.
(e)
This Option grant shall be effective only after the Participant agrees to the terms and conditions of the Agreement.
(f)
This agreement shall be construed and enforced in accordance with the laws of the state of Delaware, except with respect to its rules relating to conflicts of law. The Participant consents to the exclusive jurisdiction of the state and federal courts of the state of Minnesota in connection with any controversies relating to or arising out of this Agreement, and agrees that any and all litigation relating to or arising out of this Agreement shall be venued in Hennepin County, Minnesota.
(g)
As a condition of the grant of this Option, the Participant agrees to repatriate all payments attributable to the shares of Common Stock and/or cash acquired under the Plan (including, but not limited to, dividends and any proceeds derived from the sale of the shares of Common Stock acquired pursuant to the Option) in accordance with local foreign exchange rules and regulations in the Participant’s country of residence. In addition, the Participant also agrees to take any and all actions, and consents to any and all actions taken by Donaldson, as may be required to allow Donaldson to comply with local laws, rules and regulations in the Participant’s country of residence. Finally, the Participant agrees to take any and all actions as may be required to comply with the Participant’s personal legal and tax obligations under local laws, rules and regulations in the Participant’s country of residence.

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(h)
Donaldson, in its sole discretion, may decide to deliver any documents related to the Option or other awards granted to the Participant under the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on‑line or electronic system established and maintained by Donaldson or a third party designated by Donaldson.
(i)
The Participant acknowledges and agrees that it is the Participant’s express intent that this Agreement, the Plan and all other documents, notices and legal proceedings entered into, given or instituted pursuant to the grant of this Option, be drawn up in English. If the Participant has received this Agreement, the Plan or any other documents related to the Option translated into a language other than English, and if the meaning of the translated version is different than the English version, the English version shall control.
(j)
Notwithstanding any provisions in this Agreement to the contrary, this Option shall be subject to any special terms and conditions for the Participant’s country of residence, as set forth in the applicable addendum to this Agreement, if any. Further, if the Participant transfers residency to another country reflected in an addendum to this Agreement, the special terms and conditions for such country will apply to the Participant to the extent Donaldson determines, in its sole discretion, that the application of such terms and conditions is necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Option and the Plan (or Donaldson may establish alternative terms and conditions as may be necessary or advisable to accommodate the Participant’s transfer). Any applicable addendum shall constitute part of this Agreement.
(k)
Donaldson reserves the right to impose other requirements on this Option, any shares of Common Stock acquired pursuant to this Option, and the Participant’s participation in the Plan, to the extent Donaldson determines, in its sole discretion, that such other requirements are necessary or advisable in order to comply with local laws, rules and/or regulations or to facilitate the operation and administration of the Option and the Plan. Such requirements may include (but are not limited to) requiring the Participant to sign any agreements or undertakings that may be necessary to accomplish the foregoing.
(l)
If the Participant is resident outside the United States, the grant of the Option is not intended to be a public offering of securities in the Participant’s country of residence. Donaldson has not submitted any registration statement, prospectus or other filings with the local securities authorities (unless otherwise required under local law), and the grant of the Option is not subject to the supervision of the local securities authorities. No employee of Donaldson or any Affiliate is permitted to advise the Participant on whether the Participant should acquire shares of Common Stock by exercising the Option under the Plan. Investment in shares of Common Stock involves a degree of risk. Before deciding to acquire shares of Common Stock by exercising the Option, the Participant should carefully review all of the materials related to the Option and the Plan. In addition, the Participant should consult with the Participant’s personal advisor for professional investment advice.
(m)
The Participant’s country of residence may have insider trading and/or market abuse laws that may affect the Participant’s ability to acquire or sell shares of Common Stock under the Plan during such times the Participant is considered to have “inside information” (as defined in the laws in Participant’s country of residence). These laws may be the same or different from any Donaldson insider trading policy. The Participant acknowledges that it is the Participant’s responsibility to be informed of and

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compliant with such regulations, and the Participant is advised to speak to his / her personal advisor on this matter.
(n)
The invalidity or unenforceability of any provision of the Plan or this Agreement will not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement will be severable and enforceable to the extent permitted by law.
8.     Consent to Collection/Processing/Transfer of Personal Data . Pursuant to applicable personal data protection laws, Donaldson hereby notifies the Participant of the following in relation to the Participant’s personal data and the collection, use, processing and transfer of such data in relation to Donaldson’s grant of this Option and the Participant’s participation in the Plan. The collection, use, processing and transfer of the Participant’s personal data is necessary for Donaldson’s administration of the Plan and the Participant’s participation in the Plan, and the Participant’s denial and/or objection to the collection, use, processing and transfer of personal data may affect the Participant’s participation in the Plan. As such, the Participant hereby voluntarily acknowledges and consents (where required under applicable law) to the collection, use, processing and transfer of personal data as described in this paragraph.
Donaldson holds certain personal information about the Participant, including the Participant’s name, home address, email address and telephone number, date of birth, social security number, passport number or other employee identification number, salary, nationality, job title, any shares of Common Stock or directorships held in Donaldson, details of all stock options or any other entitlement to shares of Common Stock awarded, canceled, purchased, vested, unvested or outstanding in the Participant’s favor, for the purpose of managing and administering the Plan (“Data”). Data may be provided by the Participant or collected, where lawful, from third parties, and Donaldson will process Data for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. Data processing will take place through electronic and non‑electronic means according to logics and procedures strictly correlated to the purposes for which Data are collected and with confidentiality and security provisions as set forth by applicable laws and regulations in the Participant’s country of residence. Data processing operations will be performed minimizing the use of personal and identification data when such operations are unnecessary for the processing purposes sought. Data will be accessible within Donaldson’s organization only by those persons requiring access for purposes of the implementation, administration and operation of the Plan and for the Participant’s participation in the Plan.
Donaldson will transfer Data within the Donaldson organization as necessary for the purpose of implementation, administration and management of the Participant’s participation in the Plan, and Donaldson may further transfer Data to any third parties assisting Donaldson in the implementation, administration and management of the Plan. These recipients may be located in the European Economic Area, or elsewhere throughout the world, such as the United States. The Participant hereby authorizes (where required under applicable law) them to receive, possess, use, retain and transfer Data, in electronic or other form, for purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of Common Stock on the Participant’s behalf to a broker or other third party with whom the Participant may elect to deposit any shares of Common Stock acquired pursuant to the Plan.
The Participant may, at any time, exercise his or her rights provided under applicable personal data protection laws, which may include the right to (a) obtain confirmation as to the existence of Data, (b) verify the content, origin and accuracy of Data, (c) request the integration, update, amendment, deletion, or blockage (for breach of applicable laws) of Data, and (d) to oppose, for legal reasons, the collection, processing or transfer of Data which is not necessary or required for the implementation, administration and/or operation of the Plan and the Participant’s participation in the Plan. The Participant may seek to exercise these rights by contacting Donaldson Legal Department.

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By executing this Agreement as of the Date of Grant, the Participant hereby accepts and agrees to be bound by all terms and conditions of this Agreement and the Plan.
PARTICIPANT:
SIGNED BY ELECTRONIC SIGNATURE *

* BY ELECTRONICALLY ACCEPTING THE OPTION, THE PARTICIPANT AGREES THAT (i) SUCH ACCEPTANCE CONSTITUTES THE PARTICIPANT’S ELECTRONIC SIGNATURE IN EXECUTION OF THE AGREEMENT; (ii) THE PARTICIPANT AGREES TO BE BOUND BY THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iii) THE PARTICIPANT HAS REVIEWED THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY) IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO ACCEPTING THE OPTION AND FULLY UNDERSTANDS ALL OF THE PROVISIONS OF THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY); (iv) THE PARTICIPANT HAS BEEN PROVIDED WITH A COPY OR ELECTRONIC ACCESS TO A COPY OF THE U.S. PROSPECTUS FOR THE PLAN AND THE TAX SUPPLEMENT TO THE U.S. PROSPECTUS FOR EMPLOYEE’S COUNTRY, IF APPLICABLE; AND (v) THE PARTICIPANT HEREBY AGREES TO ACCEPT AS BINDING, CONCLUSIVE AND FINAL ALL DECISIONS OR INTERPRETATIONS OF THE HUMAN RESOURCES COMMITTEE UPON ANY QUESTIONS ARISING UNDER THE PLAN, THE AGREEMENT AND THE ADDENDUM TO THE AGREEMENT (IF ANY).



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Exhibit 31-A
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Tod E. Carpenter, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
March 9, 2018
 /s/ Tod E. Carpenter
 
 
Tod E. Carpenter
Chairman, President and Chief Executive Officer

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Exhibit 31-B
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Scott J. Robinson, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
March 9, 2018
 /s/ Scott J. Robinson
 
 
Scott J. Robinson
Senior Vice President and Chief Financial Officer

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Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following certifications are being made to accompany the Form 10-Q for the quarter ended January 31, 2018 , for Donaldson Company, Inc.:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Tod E. Carpenter, Chief Executive Officer of Donaldson Company, Inc., certify that:
1.
The Form 10-Q of Donaldson Company, Inc. for the quarter ended January 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.
Date:
March 9, 2018
 /s/ Tod E. Carpenter
 
 
Tod E. Carpenter
Chairman, President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Scott J. Robinson, Chief Financial Officer of Donaldson Company, Inc., certify that:
1.
The Form 10-Q of Donaldson Company, Inc. for the quarter ended January 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.
Date:
March 9, 2018
 /s/ Scott J. Robinson
 
 
Scott J. Robinson
Senior Vice President and Chief Financial Officer


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