Donaldson Company, Inc.

and expect this to continue through the balance of the year. That said, our pricing discipline remains critical as we are still experiencing pockets of inflation. APS in the quarter was 81 cents, an 8% increase versus prior year as gross margin improvement and favorability in other income and tax were partially offset by investments in long-term growth, including in our life sciences business. Backlogs remain strong and give us confidence in our outlook through the balance of the year. While overall supply chain conditions have improved, we are seeing some challenging areas, such as certain material shortages. That said, our customers come first, and through our global operations teams, we are continually working to improve our on-time delivery rates and work down our backlog. We are striving for optimal execution today and are also building for tomorrow through our investments in R&D and capital expenditures. As of the end of the second quarter, we remain on track to increase R&D investments by double digits this fiscal year, ensuring we remain the leader in technology-led filtration for decades to come. CapEx's quarter included investments in capacity, IT and infrastructure, as well as new products and technology, including for the support of the further commercialization of our life sciences acquisitions. Now I'll provide some detail on second quarter sales. Total company sales were $877 million, up 6% compared with prior year. Pricing was a benefit of approximately 2%. In mobile solutions, total sales were $550 million, a 5% increase versus 2023. Pricing added 3%, and volumes grew year over year. Within the mobile segment, strength in aftermarket offset declines in the first fit businesses. Aftermarket sales of $425 million were up 11% year-over-year, driven by market share gains in both the independent and OE channels and by elevated levels of global equipment utilization. In the independent channel, sales continued to be solid and increased high single digits. OE channel sales grew mid-teens. As we mentioned last quarter, we believe destocking is largely behind us. The destocking began in Q2 of last year, and we are now seeing a return to more normalized growth rates. Sales in on-road of $34 million declined 3% due to lower levels of equipment production in APAC. Off-road sales of $92 million were down 13% as weaker end-market conditions, including in agricultural markets and in China, persist. We are generating solid overall growth and strong profitability in the mobile solutions segment, despite softer first-fit performance. And I would like to highlight a few ways in which our strategic execution is driving these results. First, on the aftermarket side. We are developing and expanding our relationships with key customers in both channels. Our relationship with NAPA, which we announced in August of 2023, is a great example. Through this relationship, our heavy-duty air filtration products are being sold through NAPA's extensive U.S. network. As a reminder, Donaldson is focused on heavy-duty applications and are not targeting the light truck or car market. While we have not provided specifics on the financials around this partnership, this has been and will continue to be a meaningful driver of performance and market share gains. On the OE side, while first fit results have been impacted by weaker end market conditions, our customers value our technology and innovation. In air filtration, our power core intake filters provide high quality, compact solutions in demanding commercial applications. Our ability to meet stringent customer requirements recently yielded a significant commercial win in Europe, increasing share in this important category. In China, while the broader market remains weak, we have gained traction with our power core investments and are optimistic about our ability to gain share in the future. In liquid, we are expanding our position with our Syntec XP advanced fuel filtration technology. This is a specific area in which we see tremendous opportunity, and we are seeing growth with OEM customers, particularly in India and Japan. Across the entire mobile business, we're focused on our profitability enablers, which remain consistent with what we outlined at Investors Day last April. These include continually optimizing our footprint while efficiently managing costs, refining our supply chain while maintaining quality for our customers, optimizing prices, in other words, consistently managing the price equation, and consistently striving for operational excellence through ongoing initiatives to eliminate waste and improve performance. Now, before moving to the industrial segment, I'll take this opportunity to make a few comments about performance in China. The market continues to be very challenging. Sales were approximately flat versus 2023 and increased 3% in constant currency. Aftermarket showed particular strength in the quarter, offsetting significant declines in first fifth. It is important to note that while year-over-year performance improved this quarter, prior year's results were negatively impacted by COVID lockdowns and the inclusion of Chinese New Year a year ago. This resulted in fewer shipping days in the prior year period. Turning to the industrial solution segment. Industrial segment sales increased 7% to $263 million with our project-based products driving much of the growth. Industrial filtration solutions, or IFS, sales grew 6% to $225 million. Market share gains and supportive end market conditions continue to drive IFS sales strength. Aerospace and defense sales rose 12% to $39 million from program wins in defense. On the life sciences segment, life sciences sales were $63 million, a 6% year-over-year increase driven by a rebound in disk drive performance. As expected, sales are slowly recovering, supported by stronger data center and cloud computing demand. With the first half of fiscal 2024 behind us, I'm pleased with our performance, which reflects ongoing efforts and progress on delivering on our commitments to all of our stakeholders, including our global customers and shareholders. Given our strong year-to-date performance and our expectations for the balance of the year, we remain on track to deliver record sales, record operating margin, and record earnings in fiscal 2024. Now, I will turn it over to Scott, who will provide more details on the financials and our outlook for fiscal 24. Scott?

Thanks, Todd. Good morning, everyone. I would like to start by expressing my gratitude to our employees around the globe who once again came together and helped Donaldson deliver a strong quarter. I am continually impressed by their ongoing efforts, which are driving the company forward. I will provide color on our outlook for fiscal 2024 in a few minutes, but first we'll give additional details on the results for the second quarter. In summary, sales increased 6% versus 2023, operating income increased 3%, and EPS of 81 cents was up 8% year-over-year. Gross margin was 35.2%, a 70 basis point improvement versus prior year. Benefits from pricing combined with deflation of freight and select material costs were the largest drivers of the year-over-year increase. Operating expenses as a percent of sales were 20.4%, compared with 19.3% a year ago. Expense fee leveraging in the quarter was driven by increased people-related expenses due in part to higher headcount and approximately half of the year-over-year increase in operating expense dollars was related to the scaling of our life sciences acquisitions. Operating margin was 14.8%, 40 basis points below 2023, as the operating expense fee leveraging more than offset the gross margin increase. Now I'll discuss segment profitability. Mobile Solutions' pre-tax profit margin was 18.0%, up 300 basis points from prior year, as the segment benefited from mixed pricing and deflation of freight and select material costs. Industrial Solutions' pre-tax profit margin was 18.0%, down 80 basis points year over year, We are pleased with the ongoing strength of the industrial segment, and while margins decline versus 2023 due to a sales mix shift towards lower margin products, they remain at a high level. Life Sciences pre-tax loss was roughly $6 million, including a headwind from acquisitions of approximately $15 million. Our Life Sciences profitability targets have not material changed, and we are confident in the profitable growth potential of our acquired business Turning to a few balance sheet and cash flow statement highlights, second quarter capital expenditures were approximately $22 million. Cash conversion in the quarter was 67% versus 78% in 2023. Conversion was lower year over year to an increase in working capital, including higher receivables as a result of January sales strength. In terms of other capital employment, we returned approximately $63 million to shareholders, inclusive of $30 million in the form of dividends and $33 million in share repurchases. We ended the quarter with a net debt-to-evita ratio of 0.7 times. Now moving to our fiscal 24 outlook. First on sales, we are reiterating our full-year sales guidance of an increase between 3% and 7%, which includes pricing of approximately 2%, and a currency translation benefit of about 1%. For mobile solutions, we are forecasting a sales increase of between 1% and 5%, consistent with our previous expectations. Within mobile, we are now expecting operating sales to be down low double digits versus our previous guidance of down mid-single digits, as in-market conditions in agriculture markets and in China continue to soften. Onward sales are forecast to be flat, in line with previous expectations. Our outlook for aftermarket is unchanged at mid-single-digit growth as market share gains and elevated levels of equipment utilization continue to benefit results. In industrial solutions, sales are expected to increase between 3% and 7%, with IFS sales and aerospace and defense sales forecast to grow mid-single digits, consistent with our previous guidance. Within IFS, demand strength and market share gains in dust collection and power generation are expected to continue. Within aerospace and defense, defense sales strength and supportive overall end market conditions are forecast to drive results. In life sciences, we continue to expect sales to increase approximately 20% with a notable step up in sales in the second half of the year. We have started to see a return to growth in our disk drive business. and anticipate continued improvement. We are also anticipating sales momentum through the balance of the year in food and beverage as we expand geographically and in bioprocessing equipment and consumables with the scaling of those businesses. With respect to profitability of the segment, we expect to be approximately breakeven. On a consolidated basis, with the benefit of our first half operating performance, We are increasing total company operating margin guidance to a record level of between 15.0 and 15.4% from the previous range of between 14.7 and 15.3%. The midpoint of our guidance rate represents a 60 basis point year-over-year improvement from adjusted operating margin of 14.6% in fiscal 2023. Gross margin expansion is expected to be the driver of the improvement. With respect to gross margin, we are pleased with our performance through the first half of the year and expect our second half gross margin rate to approximate that of the first half. For the full year, higher operating expenses as a rate of sales should partially offset the gross margin increase as we continue investing for future profitable growth.

We are expecting additional benefits for the full year from non-operating items, including higher other income and a tax rate at the lower end of our previously guided range.