EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following discussion of the company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto (including Note H, Segment Reporting) and other
financial information included elsewhere in this Report.
FISCAL 2000 COMPARED TO FISCAL 1999 The company exceeded one billion dollars in
sales in 2000, reporting record sales of $1.092 billion. This was an increase of
15.7 percent over prior-year sales of $944.1 million. Businesses acquired in
this fiscal year contributed $56.7 million of revenues for the year. Excluding
the impact of acquisitions, sales for the year ended July 31, 2000 were up 9.7
percent over the prior year. Sales for the Engine Products segment of $674.0
million were up 10.2 percent over the prior year. Sales for the Industrial
Products segment of $418.3 million were up 25.7 percent over the prior year.
Overall, growth was strong across essentially all the markets within both the
Engine Products and Industrial Products segments with the exception of a 5.9
percent decline in sales of transportation products within the Engine Products
segment, reflecting a slowdown in the North America heavy-duty truck market and
a decrease in automotive sales due to the loss of the CK platform business.
Continued increases in sales for the gas turbine systems and special application
products reflected continued high demand in those markets. The increase in sales
also reflected strengthening in other markets such as dust collection, engine
aftermarket and off-road products.
Domestic Engine Products sales were up 8.7 percent from the prior year.
This increase was led by strong sales in engine aftermarket products, which
increased domestically by 23.6 percent including businesses acquired during the
year. Exclusive of acquisitions, domestic aftermarket product sales increased
10.4 percent. Domestic sales in off-road equipment products were also strong
with an increase of 14.7 percent from the prior year reflecting growth in the
agricultural, mining and large equipment markets compared to the prior year.
Domestic sales in transportation products were down 1.8 percent with mixed
results coming from an increase of 10.2 percent in domestic truck sales offset
by a sharp decline in domestic automotive sales. Domestic Industrial Products
sales increased 17.8 percent from the prior year including businesses acquired
during the year. Exclusive of acquisitions, domestic Industrial Products sales
were still strong with an increase of 15.6 percent. This increase was led by
continued strong sales of gas turbine systems products (55.4 percent increase
from the prior year) reflecting continued demand for large turbines in North
America. Domestic dust collection product sales grew at a more modest rate with
an increase of 7.2 percent while increases in special applications products
increased only slightly overall.
In U.S. dollars, total international sales increased 23.0 percent from the
prior year. Excluding the negative impact of foreign currency translation of
$12.3 million, sales increased 26.8 percent over the prior year. Total
international Engine Products sales were up 13.3 percent compared to the prior
year despite lower overall sales of automotive products. International sales of
off-road products and aftermarket products were strong, posting increases of
21.9 percent and 20.1 percent from the prior year, respectively. International
Industrial Products sales were up 39.0 percent from the prior year including
businesses acquired during the year. Businesses acquired during the year
contributed $28.7 million of international sales in the Industrial Products
segment. Excluding these sales, the Industrial Products segment showed an
increase of 15.9 percent in international sales from the prior year. A sharp
increase in international sales in dust collection products was due largely to
acquisitions during the year but excluding acquisitions, sales still showed an
increase of 6.7 percent. Also contributing to the increase in international
sales for the Industrial Products segment were disk drive products and gas
turbine products with increases of 18.8 percent and 14.9 percent, respectively,
over the prior year.
The company reported record net earnings for 2000 of $70.2 million compared
to $62.4 million in 1999, an increase of 12.5 percent. Net earnings per share -
diluted were $1.51, up 15.3 percent from the prior year and reflects revenue
growth as well as the impact of the company's stock repurchase program. An
increase in sales levels from the prior year and the benefit from continued cost
reduction efforts were the primary reasons for the higher earnings. The
Industrial Products segment contributed almost half of the operating profit and
all of the earnings growth for 2000. International operating income totaled
approximately 62.1 percent and 57.6 percent of consolidated operating income in
2000 and 1999, respectively.
Gross margin for 2000 increased to 30.0 percent compared to 29.2 percent in
the prior year. The increase in gross margin for the year reflects the growth in
net sales achieved in both operating segments of the company as well as the
positive impact of the continuous focus on productivity improvements.
14
<PAGE>
Operating expenses as a percentage of sales for 2000 and 1999 were 20.3
percent and 19.8 percent, respectively. Operating expenses in 2000 totaled
$221.9 million compared to $187.3 million in 1999, an increase of $34.6 million,
or 18.5 percent. The increase in operating expenses relative to the prior year
reflects higher sales levels and the impact of the acquired businesses. Selling
expenses in 2000 increased $17.1 million, primarily due to the higher sales
levels. General and administrative expenses increased $13.8 million from the
prior year due to several factors including increased programming and
information technology costs associated with Year 2000 efforts, increases in
workers' compensation, increases in medical costs and employee compensation. In
addition, there was $1.8 million of goodwill amortization related to the
businesses acquired during the year.
Interest expense increased $2.9 million, or 41.3 percent, primarily due to
an increase in debt for the financing of acquisitions in the year as well as an
increase in short-term borrowing. Other income totaled $4.6 million in 2000
compared to other income of $7.8 million in the prior year. The major components
of other income in 2000 were: interest income of $2.7 million, earnings from
non-consolidated joint ventures of $4.4 million, charitable contributions of
$0.9 million, loss on sale of fixed assets of $1.0 million, and other
miscellaneous income and expense items netting to $0.6 million of miscellaneous
expense.
The effective income tax rate of 30.0 percent in 2000 was unchanged from
the 30.0 percent tax rate in 1999. The company anticipates that its effective
income tax rate will remain at approximately 30.0 percent in 2001.
Total backlogs of $331.3 million were up 16.8 percent from the prior
year-end. Hard order backlogs, goods scheduled for delivery in 90 days, were
$183.7 million and $157.1 million at July 31, 2000 and 1999, respectively. Hard
order backlog for the Engine Products segment decreased slightly from 1999. This
decrease resulted from a decrease in backlog for truck and automotive products
of 32.1 percent, offset by double-digit increases in both aftermarket products
and off-road equipment products of 22.2 percent and 15.5 percent, respectively.
Hard order back log for the Industrial Products segment increased $28.2 million
from 1999. This increase was due to significant increases in backlog for both
dust collection and gas turbine products of 81.1 percent and 45.6 percent,
respectively, followed by a more modest increase in special application products
of 6.6 percent.
FISCAL 1999 COMPARED TO FISCAL 1998 The company reported record sales in 1999 of
$944.1 million, a slight increase over prior-year sales of $940.4 million. Sales
for the Engine Products segment of $611.0 million were down 1.7 percent over the
prior year. Sales for the Industrial Products segment of $333.0 million were up
4.6 percent from the prior year. Overall, end-market conditions varied widely
for the various products and geographic locations. Demand in some markets, such
as agricultural equipment, was down sharply, while other markets, such as gas
turbine systems, experienced rapid growth. Most of the markets served by the
company experienced sluggish growth or modest contractions in demand.
Domestic Engine Products sales were down 3.0 percent from the prior year.
This decrease is primarily due to an ongoing weakness in the agricultural
equipment markets and, to a lesser extent, lower production of mining and large
equipment resulting in a decrease in sales in off-road equipment products of 9.5
percent. This decrease was offset by an increase in sales of truck products of
13.6 percent from the prior year. Domestic Industrial Products sales increased
6.7 percent. This increase was led by strong sales of gas turbine systems
products (38.5 percent increase from the prior year) as well as modest sales
growth in dust collection products. This increase was partially offset by lower
sales in special applications products.
In U.S. dollars, total international sales increased 1.0 percent from the
prior year. Excluding the negative impact of foreign currency translation of
$1.2 million, sales increased 1.4 percent over the prior year. Total
international Engine Products sales were up 0.9 percent compared to the prior
year despite lower overall sales of off-road and truck products. Aftermarket
product sales showed an increase of 8.2 percent over the prior year largely due
to increased activity in Mexico. Total international Industrial Products sales
increased 1.2 percent from the prior year. This increase was primarily a result
of an increase in sales of filters for computer disk drives partially offset by
a decrease in sales of gas turbine systems products of 24.0 percent.
The company reported record net earnings for 1999 of $62.4 million compared
to $57.1 million in 1998, an increase of 9.5 percent. Net earnings per share -
diluted were $1.31, up 14.9 percent from the prior year and reflects the impact
of the company's stock repurchase program. The increase in net earnings, with
only a slight increase in net sales, was primarily due to cost reduction and
productivity initiatives, an increase in other income as discussed below and a
reduction in the effective income tax rate. International operating income
totaled approximately 57.6 percent and 50.3 percent of consolidated operating
income in 1999 and 1998, respectively.
15
<PAGE>
Gross margin for 1999 increased to 29.2 percent compared to 28.0 percent in
the prior year. Gross margin improved over the course of the year; gross margin
in the second half of 1999 was 30.3 percent. The improvement in gross margin
reflects the positive impact of cost reduction and productivity initiatives
partially offset by the negative impact of lower production volumes in some
facilities.
Operating expenses as a percentage of sales for 1999 and 1998 were 19.8
percent and 18.8 percent, respectively. Operating expenses in 1999 totaled
$187.3 million compared to $176.5 million in 1998, an increase of $10.8
million, or 6.1 percent. Selling expenses in 1999 decreased $2.1 million,
reflecting the positive impact of cost reduction and productivity initiatives,
while general and administrative expenses increased $12.8 million consisting
primarily of increases in product liability expense, legal expense, system and
programming costs and employee compensation. In addition, there were $2.8
million of costs related to the closing of the Oelwein plant.
Interest expense increased $2.3 million, or 49.7 percent, primarily due to
the increase in long-term debt for the full year. Other income totaled $7.8
million in 1999 compared to other income of $4.3 million in the prior year. The
major components of other income in 1999 were: interest income of $1.4 million,
earnings from non-consolidated joint ventures of $3.6 million, gain on sale of
assets and product lines of $0.9 million, and other miscellaneous items of $1.9
million.
The effective income tax rate of 30.0 percent in 1999 was lower compared to
34.0 percent in 1998, primarily due to lower international taxes and foreign tax
credits from foreign dividends. The company anticipates that its effective
income tax rate will remain at 30.0 percent in 2000.
Total backlogs of $283.7 million were up 16.6 percent from the prior
year-end. Hard order backlogs, goods scheduled for delivery in 90 days, were
$157.1 million and $138.8 million at July 31, 1999 and 1998, respectively. Hard
order backlog for the Engine Products segment increased $7.7 million from 1998.
This increase was due primarily to an increase in backlog for truck and
automotive products of 25.5 percent, offset by a decrease in off-road equipment
products backlog of 8.2 percent. Hard order backlog for the Industrial Products
segment increased $10.7 million from 1998. This increase was due to significant
increases in backlog for both gas turbine and special applications products of
53.0 percent and 58.6 percent, respectively, offset by a decrease in dust
collection products backlog of 19.1 percent.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION At July 31, 2000, the company's capital structure was
comprised of $85.3 million of current debt, $92.6 million of long-term debt and
$280.2 million of shareholders' equity. The ratio of long-term debt to total
long-term capital was 24.9 percent and 24.8 percent at July 31, 2000 and July
31, 1999, respectively.
Total debt outstanding increased $70.6 million to $178.0 million
outstanding at July 31, 2000. The increase resulted from an increase in
short-term borrowings outstanding at the end of the year of $64.7 million as
compared to the prior year. Additionally, during the year the company obtained
$8.0 million in Industrial Development Revenue Bond Financing for the
construction of a new manufacturing facility of which $5.7 million was
outstanding as of July 31, 2000.
The company has a multi-currency revolving credit facility totaling $100.0
million with a group of banks and an additional $35.0 million available for use
under uncommitted facilities which provide unsecured borrowings for general
corporate purposes. There was $62.6 million outstanding under these facilities
at July 31, 2000. The company believes that the combination of present capital
resources, internally generated funds, and unused financing sources are more
than adequate to meet cash requirements for 2001.
Shareholders' equity increased $17.4 million in 2000 to $280.2 million. The
increase was primarily due to current year earnings of $70.2 million offset
primarily by $35.9 million of treasury stock repurchases and $12.4 million of
dividend payments.
CASH FLOWS During 2000, $88.3 million of cash was generated from operating
activities, compared with $99.8 million in 1999 and $37.0 million in 1998. The
decrease in 2000 was primarily due to an increase in inventory of $26.2 million
during the year in contrast to the prior year when inventory decreased. In
addition, increased earnings offset by changes in other working capital items
resulted in increased operating cash flow in 2000.
In addition to cash generated from operating activities, the company
obtained an additional $66.3 million in short-term debt and $1.2 million in net
long-term debt. These cash flows were used primarily to support $36.4 million
for capital expenditures, $35.9 million for stock repurchases and $12.4 million
for dividend payments. Cash and cash equivalents decreased $17.8 million during
2000.
16
<PAGE>
Capital expenditures for property, plant and equipment totaled $36.4
million in 2000, compared to $29.5 million in 1999 and $54.7 million in 1998.
Capital expenditures primarily related to productivity enhancing investments at
various plants worldwide and continuing upgrades to the U.S. information
systems.
Capital spending in 2001 is planned to be $55.0 million. Significant
planned expenditures include the further upgrade of U.S. information systems and
investment in manufacturing equipment and tooling. It is anticipated that 2001
capital expenditures will be financed primarily from funds from operations.
DIVIDENDS The company's dividend policy is to maintain a payout ratio which
allows dividends to increase with the long-term growth of earnings per share,
while sustaining dividends in down years. The company's dividend payout ratio
target is 20.0 percent to 25.0 percent of the average earnings per share of the
last three years. The current quarterly dividend of 7 cents per share equates to
21.2 percent of the 1998 through 2000 average net earnings per share.
SHARE REPURCHASE PLAN In November 1998, the Board of Directors authorized the
company to repurchase 5.0 million shares of common stock. At July 31, 2000, the
company had approximately 2.0 million remaining shares under the repurchase
authorizations. Management and the Board of Directors believe the share
repurchase program is an excellent means of returning value to the shareholders.
In 2000, the company repurchased 1.7 million shares of common stock on the
open market for $35.9 million, at an average price of $21.65 per share. The
company repurchased 2.4 million shares for $44.5 million in 1999 and 1.3 million
shares for $33.3 million in 1998.
ENVIRONMENTAL MATTERS The company has established reserves for potential
environmental liabilities and plans to continue to accrue reserves in
appropriate amounts. While uncertainties exist with respect to the amounts and
timing of the company's ultimate environmental liabilities, management believes
that such liabilities, individually and in the aggregate, will not have a
material adverse effect on the company's financial condition or results of
operations.
NEW ACCOUNTING STANDARDS The company will adopt Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," which is effective beginning fiscal 2001. SFAS 133 requires
a company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the hedged assets, liabilities or firm commitments are
recognized through earnings or in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The company has
determined that the effect of adopting SFAS 133 and SFAS 138 is immaterial to
the earnings and the financial position of the company as of August 1, 2000.
The company has adopted Statement of Position (SOP) No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
effective beginning fiscal 2000. This SOP provides guidance on accounting for
the costs of computer software developed or obtained for internal use. The
company has determined that the effect of SOP 98-1 is immaterial to the earnings
and the financial position of the company.
MARKET RISK The company's market risk includes the potential loss arising from
adverse changes in foreign currency exchange rates and interest rates. The
company manages foreign currency market risk, from time to time, through the use
of a variety of financial and derivative instruments. The company does not enter
into any of these instruments for trading purposes to generate revenue. Rather,
the company's objective in managing these risks is to reduce fluctuations in
earnings and cash flows associated with changes in foreign currency exchange
rates. The company uses forward exchange contracts and other hedging activities
to hedge the U.S. dollar value resulting from anticipated foreign currency
transactions. The company's market risk on interest rates is the potential
increase in fair value of long-term debt resulting from a potential decrease in
interest rates. See further discussion of these market risks below.
17
<PAGE>
FOREIGN CURRENCY In 2000, the U.S. dollar was mixed relative to the currencies
of foreign countries where the company operates. A stronger dollar generally has
a negative impact on international results because foreign-currency denominated
earnings translates into less U.S. dollars; a weaker dollar generally has a
positive translation effect.
It is not possible to determine the true impact of foreign currency
translation changes; however, the direct effect on net sales and net earnings
can be estimated. For 2000, the impact of foreign currency translation resulted
in a decrease in net sales by $12.3 million and a decrease in net earnings by
$16.5 million. During 1999, the impact of foreign currency translation resulted
in a decrease in net sales by $1.2 million and an increase in net earnings by
$0.8 million.
The company maintained significant assets and operations in Europe,
countries of the Asia-Pacific Rim, South Africa and Mexico. As a result,
exposure to foreign currency gains and losses exists. A portion of foreign
currency exposure is hedged by incurring liabilities, including bank debt,
denominated in the local currency where subsidiaries are located.
The subsidiaries of the company purchase products and parts in various
currencies. As a result, the company may be exposed to cost increases relative
to local currencies in the markets to which it sells. To mitigate such adverse
trends, the company, from time to time, enters into forward exchange contracts
and other hedging activities. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure.
Some products made in the United States are sold abroad, primarily in
Canada. As a result, sales of such products are affected by the value of the
U.S. dollar relative to other currencies. Any long-term strengthening of the
U.S. dollar could depress these sales. Also, competitive conditions in the
company's markets may limit its ability to increase product pricing in the face
of adverse currency movements.
INTEREST At July 31, 2000, the fair value of the company's long-term debt
approximates market. Market risk is estimated as the potential decrease in fair
value resulting from a hypothetical one-half percent increase in interest rates
and amounts to approximately $3.6 million.
FORWARD-LOOKING STATEMENTS
The company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is making this cautionary
statement in connection with such safe harbor legislation. This Annual Report to
Shareholders, any Form 10-K, Form 10-Q or Form 8-K of the company or any other
written or oral statements made by or on behalf of the company may include
forward-looking statements which reflect the company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "estimate," "forecast," "project," "should"
and similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
forecasts and projections in this Annual Report are "forward-looking
statements," and are based on management's current expectations of the company's
near-term results, based on current information available pertaining to the
company, including the risk factors noted below.
The company wishes to caution investors that any forward-looking statements
made by or on behalf of the company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other risk factors include, but are not
limited to: changing economic and political conditions in the United States and
in other countries, changes in governmental spending and budgetary policies,
governmental laws and regulations surrounding various matters such as
environmental remediation, contract pricing, and international trading
restrictions, customer product acceptance, continued access to capital markets
and foreign currency risks. For a more detailed explanation of the foregoing and
other risks, see exhibit 99, which is filed with the Securities and Exchange
Commission. The company wishes to caution investors that other factors may in
the future prove to be important in affecting the company's results of
operations. New factors emerge from time to time and it is not possible for
management to predict all such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or a combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only to the company's views as of the
date the statement is made. 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.
18
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
--------------------------------------------------------------------------------
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except share and per share amounts) Year ended July 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,092,294 $ 944,139 $ 940,351
Cost of sales 764,773 668,458 677,089
---------------------------------------------------------------------------------------------------------------------------------
Gross Margin 327,521 275,681 263,262
Selling, general and administrative 194,623 163,688 152,954
Research and development 27,304 23,603 23,509
---------------------------------------------------------------------------------------------------------------------------------
Operating Income 105,594 88,390 86,799
Interest expense 9,880 6,993 4,671
Other (income) expense (4,619) (7,813) (4,313)
---------------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 100,333 89,210 86,441
Income taxes 30,100 26,763 29,390
---------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 70,233 $ 62,447 $ 57,051
=================================================================================================================================
Weighted Average Shares - Basic 45,716,482 46,899,127 49,332,266
=================================================================================================================================
Weighted Average Shares - Diluted 46,664,196 47,793,180 50,229,005
=================================================================================================================================
Net Earnings Per Share - Basic $ 1.54 $ 1.33 $ 1.16
=================================================================================================================================
Net Earnings Per Share - Diluted $ 1.51 $ 1.31 $ 1.14
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except share amounts) At July 31, 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 24,149 $ 41,944
Accounts receivable, less allowance of $4,380 and $4,341 202,361 178,419
Inventories
Raw materials 45,064 32,722
Work in process 20,171 13,758
Finished products 54,128 35,618
-------------------------------------------------------------------------------------------------------------
Total Inventories 119,363 82,098
Deferred income taxes 18,411 14,911
Prepaids and other current assets 11,195 9,016
-------------------------------------------------------------------------------------------------------------
Total Current Assets 375,479 326,388
Property, Plant and Equipment, at cost
Land 7,432 7,166
Buildings 119,203 105,913
Machinery and equipment 333,310 296,038
Construction in progress 9,756 12,308
-------------------------------------------------------------------------------------------------------------
469,701 421,425
Less accumulated depreciation (265,156) (239,245)
-------------------------------------------------------------------------------------------------------------
204,545 182,180
Deferred Income Taxes 408 --
Intangible Assets 63,885 10,984
Other Assets 25,340 22,694
-------------------------------------------------------------------------------------------------------------
$ 669,657 $ 542,246
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 85,034 $ 20,287
Current maturities of long-term debt 279 409
Trade accounts payable 82,320 63,361
Accrued employee compensation and related taxes 29,759 23,720
Income taxes payable 58 4,448
Accrued liabilities 27,974 22,680
Other current liabilities 10,298 7,150
-------------------------------------------------------------------------------------------------------------
Total Current Liabilities 235,722 142,055
Long-term Debt 92,645 86,691
Deferred Income Taxes -- 132
Other Long-term Liabilities 61,125 50,605
Commitments and Contingencies (Note J)
Shareholders' Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $5.00 par value, 80,000,000 shares authorized,
49,655,954 shares issued in 2000 and 1999 248,280 248,280
Additional paid-in capital 2,018 1,611
Retained earnings 143,125 87,909
Accumulated other comprehensive income (10,523) (5,670)
Treasury stock - 4,998,342 and 3,458,670 shares in 2000 and 1999, at cost (102,735) (69,367)
-------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 280,165 262,763
-------------------------------------------------------------------------------------------------------------
$ 669,657 $ 542,246
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars) Year ended July 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 70,233 $ 62,447 $ 57,051
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 34,326 27,686 25,272
Write-down of impaired assets -- -- 1,000
Equity in earnings of affiliates 74 (2,187) (1,944)
Deferred income taxes (449) 489 4,226
Other 2,454 10,344 (6,817)
Changes in operating assets and liabilities, net of acquired businesses
Accounts receivable (6,441) (13,244) (6,780)
Inventories (26,227) 21,382 (20,037)
Prepaids and other current assets (4,913) (3,095) 417
Trade accounts payable and other accrued expenses 19,261 (4,066) (15,350)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 88,318 99,756 37,038
INVESTING ACTIVITIES
Purchases of property and equipment, net (36,417) (29,539) (54,705)
Acquisitions and investments in affiliates (88,220) (230) (920)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (124,637) (29,769) (55,625)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,752 35,546 50,000
Repayments of long-term debt (4,522) (404) (2,890)
Change in short-term borrowings 66,328 (24,422) 4,582
Payment received from ESOP -- -- 2,730
Purchase of treasury stock (35,923) (44,535) (33,250)
Dividends paid (12,384) (10,830) (9,630)
Exercise of stock options 326 1,617 2,619
----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities 19,577 (43,028) 14,161
Effect of exchange rate changes on cash (1,053) (1,084) 6,217
----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (17,795) 25,875 1,791
Cash and Cash Equivalents, Beginning of Year 41,944 16,069 14,278
----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 24,149 $ 41,944 $ 16,069
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
(Thousands of dollars, except per COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECEIVABLE
share amounts) STOCK CAPITAL EARNINGS INCOME STOCK FROM ESOP TOTAL
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1997 $ 135,317 $ 6,212 $ 167,444 $ 934 $ (63,312) $ (2,730) $ 243,865
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 57,051 57,051
Foreign currency translation (6,069) (6,069)
----------
Comprehensive income 50,982
Treasury stock acquired (33,250) (33,250)
Stock options exercised 143 (5,145) 3,135 (1,867)
Performance awards (1,546) 594 1,349 397
Payment received from ESOP 2,730 2,730
Tax reduction - employee plans 2,444 2,444
Two-for-one stock split 112,963 (6,054) (170,349) 63,440 --
Cash dividends ($.19 per share) (9,630) (9,630)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998 248,280 1,199 39,965 (5,135) (28,638) -- 255,671
Comprehensive income
Net earnings 62,447 62,447
Foreign currency translation (535) (535)
----------
Comprehensive income 61,912
Treasury stock acquired (44,535) (44,535)
Stock options exercised 149 (3,499) 3,004 (346)
Performance awards (1,071) (174) 802 (443)
Tax reduction - employee plans 1,334 1,334
Cash dividends ($.23 per share) (10,830) (10,830)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1999 248,280 1,611 87,909 (5,670) (69,367) -- 262,763
Comprehensive income
Net earnings 70,233 70,233
Foreign currency translation (4,853) (4,853)
----------
Comprehensive income 65,380
Treasury stock acquired (35,923) (35,923)
Stock options exercised (727) (2,633) 2,555 (805)
Tax reduction - employee plans 1,134 1,134
Cash dividends ($.27 per share) (12,384) (12,384)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 2000 $ 248,280 $ 2,018 $ 143,125 $ (10,523) $(102,735) $ -- $ 280,165
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Donaldson Company, Inc. and Subsidiaries
NOTE A
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Donaldson Company, Inc., is a leading worldwide
manufacturer of filtration systems and replacement parts. The company's product
mix includes air and liquid filters and exhaust and emission control products
for mobile equipment; in-plant air cleaning systems; air intake systems and
exhaust products for industrial gas turbines; and specialized filters for such
diverse applications as computer disk drives, aircraft passenger cabins and semi
conductor processing. Products are manufactured at more than three dozen
Donaldson plants around the world and through five joint ventures.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Donaldson Company, Inc. and all majority-owned subsidiaries (the
company). All significant intercompany accounts and transactions have been
eliminated. The company also has four joint ventures that are not
majority-owned; three are accounted for on the equity method and one on the cost
method. Additionally, the company has one majority-owned joint venture. Certain
amounts in prior periods have been reclassified to conform to the current
presentation. The reclassifications had no impact on the net earnings as
previously reported.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION For most foreign operations, local currencies are
considered the functional currency. Assets and liabilities are translated using
the exchange rates in effect at the balance sheet date. Results of operations
are translated using the average exchange rates prevailing throughout the
period. Translation gains or losses, net of applicable deferred taxes, are
accumulated in the foreign currency adjustment in accumulated other
comprehensive income in shareholders' equity. Foreign currency transaction
losses of $0.2 million in 2000, gains of $0.2 million in 1999 and losses of $1.4
million in 1998 are included in earnings before income taxes.
CASH EQUIVALENTS The company considers all highly liquid temporary investments
with a maturity of three months or less when purchased to be cash equivalents.
Cash equivalents are carried at cost which approximates market value.
INVENTORIES Inventories are stated at the lower of cost or market. Domestic
inventories are valued using the last-in, first-out (LIFO) method, while the
international subsidiaries use the first-in, first-out (FIFO) method.
Inventories valued at LIFO were approximately 52 percent and 53 percent of total
inventories at July 31, 2000 and 1999, respectively.
The FIFO cost of inventories valued under the LIFO method exceeded the LIFO
carrying values by $21.2 million and $19.7 million at July 31, 2000 and 1999,
respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost.
Additions, improvements or major renewals are capitalized, while expenditures
that do not enhance or extend the asset's useful life are charged to operating
expense as incurred. Depreciation is computed principally by use of declining
balance methods on facilities and equipment acquired on or prior to July 31,
1992. The company adopted the straight-line depreciation method for all property
acquired after July 31, 1992. Accelerated depreciation methods are generally
used for income tax purposes.
The estimated useful lives of property, plant and equipment are as follows:
--------------------------------------------------------------------------------
Buildings 10 to 40 YEARS
Machinery and equipment 3 to 10 YEARS
================================================================================
INTANGIBLE ASSETS Intangible assets, primarily consisting of goodwill, are
amortized on a straight-line basis over periods ranging up to 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS The company reviews the long-lived assets,
including identifiable intangibles and associated goodwill, for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If impairment indicators are present and the estimated
future undiscounted cash flows are less than the carrying value of the assets
and any related goodwill, the carrying value is reduced to the estimated fair
value as measured by the discounted cash flows.
INCOME TAXES Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be reversed.
23
<PAGE>
COMPREHENSIVE INCOME The company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income," in the first quarter of
fiscal 1999. Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statements of
Changes in Shareholders' Equity. Accumulated other comprehensive income consists
only of accumulated foreign currency translation adjustment. The adoption of
SFAS 130 has no impact on the company's net earnings or shareholders' equity.
EARNINGS PER SHARE The company follows SFAS 128, "Earnings per Share," to
present earnings per share calculations.
The company's basic net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares. The
company's diluted net earnings per share is computed by dividing net earnings by
the weighted average number of outstanding common shares and dilutive shares
relating to stock options.
The following table presents information necessary to calculate basic and
diluted earnings per share:
--------------------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 1998
--------------------------------------------------------------------------------
Weighted average shares - basic 45,716 46,899 49,332
Dilutive shares 948 894 897
--------------------------------------------------------------------------------
Weighted average shares - diluted 46,664 47,793 50,229
================================================================================
Net earnings for basic and diluted
earnings per share computation $70,233 $62,447 $57,051
================================================================================
Net earnings per share - basic $ 1.54 $ 1.33 $ 1.16
================================================================================
Net earnings per share - diluted $ 1.51 $ 1.31 $ 1.14
================================================================================
TREASURY STOCk Repurchased Common Stock is stated at cost and is presented as a
separate reduction of shareholders' equity.
RESEARCH AND DEVELOPMENT All expenditures for research and development are
charged against earnings in the year incurred.
STOCK-BASED COMPENSATION SFAS 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation cost for
performance equity units is recorded based on the quoted market price of the
company's stock at the end of the period.
REVENUE RECOGNITION Revenue is recognized when product is shipped and invoiced
or performance of services is complete.
PRODUCT WARRANTIES The company provides for estimated warranty costs and accrues
for specific items at the time their existence is known and the amounts are
determinable.
NEW ACCOUNTING STANDARDS The company will adopt Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," which is effective beginning fiscal 2001. SFAS 133 requires
a company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the hedged assets, liabilities or firm commitments are
recognized through earnings or in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The company has
determined that the effect of adopting SFAS 133 and SFAS 138 is immaterial to
the earnings and the financial position of the company as of August 1, 2000.
The company has adopted Statement of Position (SOP) No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
effective beginning fiscal 2000. This SOP provides guidance on accounting for
the costs of computer software developed or obtained for internal use. The
company has determined that the effect of SOP 98-1 is immaterial to the earnings
and the financial position of the company.
24
<PAGE>
NOTE B
ACQUISITIONS, PLANT CLOSURE
AND PLANT OPENING
ACQUISITIONS All acquisitions were accounted for as purchases. The purchase
prices assigned to the net assets acquired were based on the fair value of such
assets and liabilities at the respective acquisition dates. The operating
results of these acquired companies have been included in the consolidated
statement of earnings from the dates of acquisition. Consolidated pro forma
earnings and earnings per share would not be materially different from the
reported amounts for all years presented.
During the second quarter of fiscal 2000, the company completed the
purchase of all of the outstanding shares of AirMaze Corporation, for $31.9
million in cash. AirMaze is a privately held supplier of heavy-duty air and
liquid filters, air/oil separators and high purity air filter products. AirMaze
has manufacturing facilities in Stow, Ohio and Greeneville, Tennessee. The
excess of purchase price over the fair values of the net assets acquired was
$27.2 million and has been recorded as goodwill which is being amortized on a
straight-line basis over 20 years. AirMaze operations are a part of the
company's Engine Products segment.
During the third quarter of fiscal 2000, the company acquired the DCE dust
control business of Invensys plc, for $56.4 million. DCE, headquartered in
Leicester, England (UK) with smaller facilities in Germany and the United States
and assembly operations in South Africa, Australia and Japan, is a major
participant in the global dust collection industry. The excess of purchase price
over the fair values of the net assets acquired was $31.5 million and has been
recorded as goodwill which is being amortized on a straight-line basis over 20
years. DCE operations are a part of the company's Industrial Products segment.
The purchase price allocations for AirMaze and DCE are based on preliminary
estimates of the fair value of assets and liabilities and are subject to change.
PLANT CLOSURE During 2000, the company closed its manufacturing facilities
located in Oelwein, Iowa. The closure of the facility was completed by the end
of the calendar year. A pretax charge of $2.8 million was recorded in fiscal
1999 in general and administrative expense in the company's consolidated
statement of earnings. The charge was primarily related to severance and other
employee related costs associated with the elimination of approximately 125
positions. As of July 31, 2000, $0.2 million remains as a liability which
relates to costs associated with building maintenance.
PLANT OPENING During 2000, the company opened a new manufacturing facility in
Auburn, Alabama. The facility was constructed to produce mufflers for the truck
manufacturers located in the southwestern U.S. region and employs approximately
100 employees.
NOTE C
CREDIT FACILITIES
In December 1997, the company amended and renewed a five-year multi-currency
revolving facility with a group of participating banks under which it may borrow
up to $100.0 million. The agreement provides that loans may be made under a
selection of currencies and rate formulas including Base Rate Advance or
Eurocurrency Rate Advance. The interest rate on each advance is based on certain
adjusted leverage and debt-to-capitalization ratios. Facility fees and other
fees on the entire loan commitment are payable for the duration of this
facility. There was $50.0 million outstanding under this credit facility at July
31, 2000 and no amounts outstanding at July 31, 1999, leaving $50.0 million and
$100.0 million available for further borrowing under such facility at July 31,
2000 and 1999, respectively. The weighted average interest rate on short-term
borrowings outstanding at July 31, 2000 was 6.83 percent.
At July 31, 2000, there was an additional $35.0 million available for use
under uncommitted facilities which provide unsecured borrowings for general
corporate purposes. There was $12.6 million outstanding under these facilities
at July 31, 2000 and no amounts outstanding under these facilities at July 31,
1999. The weighted average interest rate on short-term borrowings outstanding at
July 31, 2000 was 6.89 percent.
International subsidiaries may borrow under various credit facilities. As
of July 31, 2000 and 1999, borrowings under these facilities were $22.4 million
and $20.3 million, respectively. The weighted average interest rate on these
international borrowings outstanding at July 31, 2000 and 1999 was 4.07 percent
and 3.04 percent, respectively.
25
<PAGE>
NOTE D
LONG-TERM DEBT
Long-term debt consists of the following:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
6.20% Unsecured senior notes due July 15, 2005,
interest payable semi-annually, principal
payment of $23.0 million is due July 15, 2005 $23,000 $23,000
6.31% Unsecured senior notes due July 15, 2008,
interest payable semi-annually, principal
payment of $27.0 million is due July 15, 2008 27,000 27,000
6.39% Unsecured senior notes due August 15, 2010,
interest payable semi-annually, principal
payments of $5.0 million, to be paid annually
commencing August 16, 2006 25,000 25,000
1.9475% Guaranteed senior note due January 29, 2005,
interest payable semi-annually, principal amount of
1.2 billion Yen is due January 29, 2005 10,962 10,358
Variable Rate Industrial Development Revenue
Bonds ("Lower Floaters") due September 1, 2024,
principal amount of $8.0 million, interest payable
monthly, and an interest rate of 4.40% as of
July 31, 2000 5,667 --
Other 1,295 1,742
--------------------------------------------------------------------------------
Total 92,924 87,100
Less current maturities 279 409
--------------------------------------------------------------------------------
Total long-term debt $92,645 $86,691
================================================================================
Annual maturities of long-term debt for the next five years are $0.3
million in 2001 and $34.0 million in 2005. Annual maturities in 2002, 2003 and
2004 are not significant. The company estimates that the carrying value of
long-term debt approximates its fair market value.
Total interest paid relating to all debt was $ 9.1 million, $6.0 million
and $4.6 million in 2000, 1999 and 1998, respectively. In addition, total
interest expense recorded in 2000, 1999 and 1998 was $9.9 million, $7.0 million
and $4.7 million, respectively. Certain note agreements contain debt covenants
related to working capital levels and limitations on indebtedness. Further, the
company is restricted from paying dividends or repurchasing Common Stock if its
tangible net worth (as defined) does not exceed certain minimum levels. At July
31, 2000, under the most restrictive agreement, tangible net worth exceeded the
minimum by $70.4 million.
NOTE E
EMPLOYEE BENEFIT PLANS
PENSION PLANS Donaldson Company, Inc. and certain of its subsidiaries have
defined benefit pension plans for substantially all hourly and salaried
employees. The domestic plan provides defined benefits pursuant to a cash
balance feature whereby a participant accumulates a benefit comprised of a
percentage of current salary which varies with years of service, interest
credits and transition credits. The international plans generally provide
pension benefits based on years of service and compensation level. The company's
general funding policy is to make contributions as required by applicable
regulations. The assets are primarily invested in diversified equity and debt
portfolios. In 2000, the actuarial valuation date was changed from July 31 to
April 30. This change did not have a material impact on the actuarial valuation.
Cost for the company's domestic pension plans includes the following
components:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------
Net periodic cost:
Service cost $ 6,025 $ 5,609 $ 4,833
Interest cost 9,506 9,188 8,465
Expected return on assets (11,081) (10,006) (8,838)
Transition amount amortization (1,097) (1,097) (1,097)
Prior service cost amortization 64 30 (18)
Actuarial loss amortization 71 1,094 259
Curtailment loss -- 684 --
--------------------------------------------------------------------------------
Net periodic benefit cost $ 3,488 $ 5,502 $ 3,604
================================================================================
26
<PAGE>
The funded status of the company's domestic pension plans as of April 30,
2000 and July 31, 1999, is as follows:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 131,996 $ 121,213
Adjustment for change in measurement date 1,841 N/A
--------------------------------------------------------------------------------
Benefit obligation, new measurement date 133,837 N/A
Service cost 6,025 5,609
Interest cost 9,506 9,188
Plan amendments 568 1,338
Actuarial (gain)/loss (11,025) 1,392
Benefits paid (7,663) (6,744)
--------------------------------------------------------------------------------
Benefit obligation at April 30 and July 31 $ 131,248 $ 131,996
================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 130,387 $ 123,956
Adjustment for change in measurement date 17,461 N/A
-------------------------------------------------------------------------------
Fair value of plan assets,
new measurement date 147,848 N/A
Actual return on plan assets (2,072) 9,282
Company contributions 2,132 3,893
Benefits paid (7,663) (6,744)
--------------------------------------------------------------------------------
Fair value of plan assets at April 30 and July 31 $ 140,245 $ 130,387
================================================================================
Reconciliation of funded status:
Funded (unfunded) status $ 8,997 $ (1,609)
Unrecognized actuarial (gain) loss (11,678) 1,885
Unrecognized prior service cost 2,472 1,968
Unrecognized net transition obligation (3,769) (4,866)
--------------------------------------------------------------------------------
Net amount recognized in consolidated
balance sheet $ (3,978) $ (2,622)
================================================================================
Amounts recognized in consolidated balance
sheet consist of:
Prepaid benefit cost $ 4,614 $ 3,500
Accrued benefit liability (8,592) (6,122)
Additional minimum liability (280) (653)
Intangible asset 280 653
--------------------------------------------------------------------------------
Net amount recognized in consolidated
balance sheet $ (3,978) $ (2,622)
================================================================================
The projected benefit obligation and accumulated benefit obligation for
domestic pension plans with accumulated benefit obligations in excess of plan
assets were $7.8 million and $4.6 million, respectively, as of April 30, 2000
and $7.9 million and $4.4 million, respectively, as of July 31, 1999. There was
no fair value of plan assets for domestic pension plans with accumulated benefit
obligations in excess of plan assets as of April 30, 2000 and July 31, 1999,
respectively.
--------------------------------------------------------------------------------
Weighted-average APRIL 30 JULY 31 JULY 31
actuarial assumptions 2000 1999 1998
--------------------------------------------------------------------------------
Discount rate 8.00% 7.50% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00%
--------------------------------------------------------------------------------
Rate of compensation increase 6.00% 6.00% 6.00%
================================================================================
Pension expense related to international plans were $2.5 million, $2.5
million and $1.7 million for 2000, 1999 and 1998, respectively.
401(k) SAVINGS PLAN The company provides a contributory employee savings plan
which permits participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The company's contributions under
this plan are based on the level of employee contributions including a variable
contribution based on performance of the company. Total contribution expense was
$4.2 million, $4.9 million and $2.9 million for the years ended July 31, 2000,
1999 and 1998, respectively.
27
<PAGE>
NOTE F
SHAREHOLDERS' EQUITY
STOCK RIGHTS On January 12, 1996, the Board of Directors of the company approved
the extension of the benefits afforded by the company's existing rights plan by
adopting a new share holder rights plan. Pursuant to the new Rights Agreement,
dated as of January 12, 1996, by and between the company and Norwest Bank
Minnesota, National Association, as Rights Agent, one Right was issued on March
4, 1996 for each outstanding share of Common Stock, par value $5.00 per share,
of the company upon the expiration of the company's existing Rights. Each of the
new Rights entitles the registered holder to purchase from the company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
without par value, at a price of $130.00 per one one-thousandth of a share. The
Rights, however, will not become exercisable unless and until, among other
things, any person acquires 15 percent or more of the outstanding Common Stock
of the company. If a person acquires 15 percent or more of the outstanding
Common Stock of the company (subject to certain conditions and exceptions more
fully described in the Rights Agreement), each Right will entitle the holder
(other than the person who acquired 15 percent or more of the outstanding Common
Stock) to purchase Common Stock of the company having a market value equal to
twice the exercise price of a Right. The new Rights are redeemable under certain
circumstances at $.01 per Right and will expire, unless earlier redeemed, on
March 3, 2006.
EMPLOYEE INCENTIVE PLANS In November 1991, shareholders approved the 1991 Master
Stock Compensation Plan. The Plan extends through December 2001 and allows for
the granting of nonqualified stock options, incentive stock options, restricted
stock, stock appreciation rights (SARs), dividend equivalents,
dollar-denominated awards and other stock-based awards. The 1980 Master Stock
Compensation Plan allows for the granting of nonqualified stock options and
incentive stock options. Both plans allow for the granting of performance awards
to a limited number of key executives. The awards are payable in Common Stock
and are based on a formula which measures performance of the company over a
three-year period. Performance award expense totaled $1.7 million and $0.7
million in 2000 and 1998, respectively. There was no performance award expense
in 1999. Options under both Plans are granted to key employees at or above 100
percent of the market price at the date of grant. Options are exercisable for up
to 10 years from the date of grant.
STOCK OPTIONS Stock options issued during fiscal 1999 and 2000 become
exercisable for non-executives in each of the following three years, in an equal
number of shares each year and become exercisable for executives immediately
upon the date of grant. Stock options issued during fiscal 1997 and 1998 become
exercisable in each of the following three years, in an equal number of shares
each year, for both executives and non-executives. Stock options issued prior to
fiscal l997 for non-executives and during fiscal 1996 for executives become
exercisable in a four-year period in an equal number of shares each year. Prior
to fiscal 1996, stock options vested immediately for executives. At July 31,
2000, options to purchase 3,652,936 shares are outstanding under these plans.
In fiscal 1997, the company adopted the disclosure-only provisions of SFAS
123, "Accounting for Stock-Based Compensation." SFAS 123 encourages entities to
adopt a fair value-based method of accounting for employee stock compensation
plans, but allows companies to continue to account for those plans using the
accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to
Employees." The company has elected to continue to account for stock-based
compensation using APB 25, making pro forma disclosures of net earnings and
earnings per share as if the fair value-based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option
plans. Had compensation expense for the stock option plans been determined under
SFAS 123 in fiscal 2000, 1999 and 1998, the company's net income and earnings
per share would have been approximately $67.7 million and $1.45, $61.1 million
and $1.28, and $55.7 million and $1.11, respectively. The pro forma effect on
net income and earnings per share is not representative of the pro forma net
earnings in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996.
28
<PAGE>
For purposes of computing compensation cost of stock options granted, the
fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate of 6.50 percent, 5.50 percent and 5.63
percent in 2000, 1999 and 1998, respectively; two or seven year lives in 2000,
two, three, or seven year lives in 1999 and three, six, seven, or nine year
lives in 1998; expected volatility of 29.7 percent, 26.3 percent and 22.5
percent in 2000, 1999 and 1998, respectively; and 1 percent expected dividend
yield in 2000, 1999 and 1998. Black-Scholes is a widely accepted stock option
pricing model; however, the ultimate value of stock options granted will be
determined by the actual lives of options granted and the actual future price
levels of the company's common stock.
The weighted average fair value for options granted during fiscal 2000,
1999 and 1998 is $7.49, $5.62 and $6.35 per share, respectively.
The number and option price of options granted under these plans were as
follows:
-------------------------------------------------------------------------------
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
-------------------------------------------------------------------------------
Outstanding at July 31, 1997 3,317,308 $10.98
Granted 472,595 22.83
Exercised (419,728) 8.40
Canceled (21,999) 14.98
-------------------------------------------------------------------------------
Outstanding at July 31, 1998 3,348,176 12.95
Granted 495,149 20.10
Exercised (432,505) 8.65
Canceled (28,498) 18.35
-------------------------------------------------------------------------------
Outstanding at July 31, 1999 3,382,322 14.50
Granted 489,086 23.01
Exercised (204,004) 10.09
Canceled (14,468) 20.41
-------------------------------------------------------------------------------
OUTSTANDING AT JULY 31, 2000 3,652,936 $15.86
===============================================================================
At July 31, 2000 and 1999 there were 3,109,926 and 2,451,657 options
exercisable, respectively. Shares reserved at July 31, 2000 for outstanding
options and future grants were 9,237,912.
The following table summarizes information concerning currently outstanding
and exercisable options:
--------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------------------------------------------------------------------------
$5 to $10 718,592 1.24 $ 8.85 718,592 $ 8.85
$10 to $15 1,096,624 3.90 12.30 1,092,624 12.30
$15 to $20 841,251 7.22 18.23 697,835 17.86
$20 and
above 996,469 8.22 22.82 600,875 22.83
--------------------------------------------------------------------------------
3,652,936 5.32 $ 15.86 3,109,926 $ 14.79
================================================================================
NOTE G
INCOME TAXES
The components of earnings before income taxes are as follows:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------
Earnings before income taxes:
United States $ 54,913 $55,811 $60,673
Foreign 45,420 33,399 25,768
--------------------------------------------------------------------------------
Total $100,333 $89,210 $86,441
================================================================================
The components of the provision for income taxes are as follows:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------
Income Taxes:
Current:
Federal $18,192 $16,717 $15,931
State 2,361 2,471 1,837
Foreign 9,996 7,086 7,396
--------------------------------------------------------------------------------
30,549 26,274 25,164
--------------------------------------------------------------------------------
Deferred:
Federal 52 426 3,410
State 3 24 195
Foreign (504) 39 621
--------------------------------------------------------------------------------
(449) 489 4,226
--------------------------------------------------------------------------------
Total $30,100 $26,763 $29,390
================================================================================
29
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
--------------------------------------------------------------------------------
(Thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------
Deferred tax assets:
Compensation and retirement plans $ 12,839 $ 8,950 $ 5,705
Accrued expenses 7,818 9,617 8,365
Brazilian asset write-down -- -- 720
NOL carryforwards 6,120 3,560 2,070
Inventories 1,526 1,595 1,095
Investment in joint venture 754 588 1,195
Cumulative translation adjustment 4,574 2,494 2,646
Other 3,162 3,267 3,630
--------------------------------------------------------------------------------
Gross deferred tax assets 36,793 30,071 25,426
Valuation allowance (2,445) (2,432) (1,172)
--------------------------------------------------------------------------------
Net deferred tax assets 34,348 27,639 24,254
Deferred tax liabilities:
Depreciation and amortization (14,626) (11,235) (8,573)
Other (903) (1,625) (2,224)
--------------------------------------------------------------------------------
Gross deferred tax liabilities (15,529) (12,860) (10,797)
--------------------------------------------------------------------------------
Net deferred tax assets $ 18,819 $ 14,779 $ 13,457
================================================================================
The following table reconciles the U.S. statutory income tax rate with the
effective income tax rate:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes 1.5 1.8 1.4
Foreign taxes at lower rates (6.1) (5.5) (1.3)
Other (.4) (1.3) (1.1)
--------------------------------------------------------------------------------
30.0% 30.0% 34.0%
================================================================================
At July 31, 2000, certain international subsidiaries had available net
operating loss carryforwards of approximately $10.0 million to offset future
taxable income. The majority of such carryforwards expire after 2002. Unremitted
earnings of international subsidiaries amounted to approximately $104.6 million
at July 31, 2000. The majority of those earnings are intended to be indefinitely
reinvested and, accordingly, no deferred U.S. income taxes have been provided.
If a portion were to be remitted, foreign tax credits would substantially offset
any resulting incremental U.S. income tax liability. It is not practicable to
estimate the amount of unrecognized taxes on these undistributed earnings due to
the complexity of the computation.
The company made cash payments for income taxes of $24.6 million, $20.8
million and $22.5 million in 2000, 1999 and 1998, respectively.
NOTE H
SEGMENT REPORTING
The company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective with fiscal year-end 1999. This standard
requires companies to disclose selected financial data by operating segment. A
segment is defined as a component with business activity resulting in revenue
and expense that has separate financial information evaluated regularly by the
company's chief operating decision maker in determining resource allocation and
assessing performance.
30
<PAGE>
The company has identified two reportable segments: Engine Products and
Industrial Products. Segment selection was based on the internal organizational
structure, management of operations and performance evaluation by management and
the company's Board of Directors.
The Engine Products segment sells to original equipment manufacturers
(OEMs) in the construction, industrial, mining, agriculture and transportation
markets and to independent distributors, OEM dealer networks, private label
accounts and large private fleets. Products include air intake systems, exhaust
systems, liquid filtration systems and replacement filters.
The Industrial Products segment sells to various industrial end-users, OEMs
of gas-fired turbines, OEMs and end-users requiring highly purified air.
Products include dust, fume and mist collectors, static and pulse-clean air
filter systems and specialized air filtration systems.
Corporate and Unallocated include corporate expenses determined to be
non-allocable to the segments, interest income and expense, non-operating income
and expense, and expenses not allocated to the business segments in the same
period. Assets included in Corporate and Unallocated principally are cash and
cash equivalents, inventory reserves, certain prepaids, certain investments,
other assets and assets allocated to intercompany transactions.
The company has developed an internal measurement system to evaluate
performance and allocate resources based on profit or loss from operations
before income taxes. The company's manufacturing facilities serve both reporting
segments. Therefore, the company uses a complex allocation methodology to
assign costs and assets to the segments. A certain amount of costs and assets
are assigned to intercompany activity and are not assigned to either segment.
Certain accounting policies applied to the reportable segments differ from those
described in the summary of significant accounting policies. The reportable
segments account for receivables on a gross basis and account for inventory on a
standard cost basis.
Segment allocated assets are primarily accounts receivable, inventories and
property, plant and equipment. Reconciling items included in Corporate and
Unallocated are created based on accounting differences between segment
reporting and the consolidated, external reporting as well as internal
allocation methodologies.
Segment detail is summarized as follows (in thousands):
--------------------------------------------------------------------------------
ENGINE INDUSTRIAL CORPORATE & TOTAL
PRODUCTS PRODUCTS UNALLOCATED COMPANY
--------------------------------------------------------------------------------
2000
Net sales $ 673,982 $ 418,312 $ -- $1,092,294
Depreciation and
amortization 20,959 8,509 4,858 34,326
Equity in earnings
of unconsolidated
affiliates 4,392 -- -- 4,392
Earnings before
income taxes 57,453 53,862 (10,982) 100,333
Assets 320,805 172,837 176,015 669,657
Equity investments
in unconsolidated
affiliates 13,600 -- -- 13,600
Capital expenditures,
net of acquired
businesses 22,236 9,028 5,153 36,417
================================================================================
1999
Net sales $ 611,378 $ 332,761 $ -- $ 944,139
Depreciation and
amortization 18,486 7,506 1,694 27,686
Equity in earnings
of unconsolidated
affiliates 3,610 -- -- 3,610
Earnings before
income taxes 61,896 36,373 (9,059) 89,210
Assets 327,035 160,201 55,010 542,246
Equity investments
in unconsolidated
affiliates 13,833 -- -- 13,833
Capital expenditures,
net of acquired
businesses 19,723 8,008 1,808 29,539
================================================================================
1998
Net sales $ 622,096 $ 318,255 $ -- $ 940,351
Depreciation and
amortization 16,551 6,437 2,284 25,272
Equity in earnings
of unconsolidated
affiliates 3,654 -- -- 3,654
Earnings before
income taxes 62,987 29,057 (5,603) 86,441
Assets 321,872 151,221 39,894 512,987
Equity investments
in unconsolidated
affiliates 11,414 -- -- 11,414
Capital expenditures,
net of acquired
businesses 35,826 13,934 4,945 54,705
================================================================================
31
<PAGE>
Geographic sales by origination and property, plant and equipment (in
thousands):
--------------------------------------------------------------------------------
PROPERTY, PLANT &
NET SALES EQUIPMENT - NET
--------------------------------------------------------------------------------
2000
United States $ 690,899 $ 135,480
Europe 206,429 37,698
Asia Pacific 166,221 22,304
Other 30,745 9,063
--------------------------------------------------------------------------------
Total $1,092,294 $ 204,545
================================================================================
1999
United States $ 616,254 $ 122,513
Europe 166,431 28,616
Asia Pacific 138,453 21,911
Other 23,001 9,140
--------------------------------------------------------------------------------
Total $ 944,139 $ 182,180
================================================================================
1998
United States $ 615,770 $ 119,623
Europe 160,211 29,620
Asia Pacific 139,606 18,848
Other 24,764 10,776
--------------------------------------------------------------------------------
Total $ 940,351 $ 178,867
================================================================================
There were no sales over 10 percent of net sales to one customer in 2000.
Sales to one customer accounted for 11 percent of net sales in 1999 and 1998.
NOTE I
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
(Thousand of dollars, FIRST SECOND THIRD FOURTH
except per share amounts) QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------------------------
2000
Net Sales $246,550 $259,256 $285,277 $301,211
Gross Margin 73,881 79,595 84,812 89,233
Net Earnings 17,008 17,406 17,450 18,369
Diluted Earnings
Per Share .36 .37 .38 .40
Dividends Declared
Per Share .07 .07 .07 .07
================================================================================
1999
Net Sales $225,431 $220,249 $244,219 $254,240
Gross Margin 62,329 62,262 74,212 76,878
Net Earnings 13,369 13,172 17,418 18,488
Diluted Earnings
Per Share .28 .27 .37 .39
Dividends Declared
Per Share .06 .06 .06 .06
================================================================================
NOTE J
COMMITMENTS AND CONTINGENCIES
The company is involved in litigation arising in the ordinary course of
business. In the opinion of management, the outcome of litigation currently
pending will not materially affect the company's results of operations,
financial condition or liquidity.
32
<PAGE>
ELEVEN-YEAR COMPARISON OF RESULTS
--------------------------------------------------------------------------------
Donaldson Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Thousands of dollars, except per share amounts) 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,092,294 $ 944,139 $ 940,351 $ 833,348
Gross margin $ 327,521 275,681 263,262 250,273
Gross margin percentage 30.0% 29.2% 28.0% 30.0%
Operating income $ 105,594 88,390 86,799 82,715
Operating income percentage 9.7% 9.4% 9.2% 9.9%
Interest expense $ 9,880 6,993 4,671 2,358
Earnings before income taxes $ 100,333 89,210 86,441 79,094
Income taxes $ 30,100 26,763 29,390 28,474
Effective income tax rate 30.0% 30.0% 34.0% 36.0%
Net earnings $ 70,233 62,447 57,051 50,620
Return on sales 6.4% 6.6% 6.1% 6.1%
Return on average shareholders' equity 25.9% 24.1% 22.8% 21.4%
Return on investment 19.4% 19.0% 20.5% 20.8%
FINANCIAL POSITION
Total assets $ 669,657 542,246 512,987 467,501
Current assets $ 375,479 326,388 300,817 283,367
Current liabilities $ 235,722 142,055 165,068 177,346
Working capital $ 139,757 184,333 135,749 106,021
Current ratio 1.6 2.3 1.8 1.6
Current debt $ 85,313 20,696 45,896 42,674
Long-term debt $ 92,645 86,691 51,553 4,201
Total debt $ 177,958 107,387 97,449 46,875
Shareholders' equity $ 280,165 262,763 255,671 243,865
Long-term capitalization ratio 24.9% 24.8% 16.8% 1.7%
Property, plant and equipment, net $ 204,545 182,180 178,867 154,595
Net expenditures on property, plant and equipment $ 36,417 29,539 54,705 47,327
Depreciation and amortization $ 34,326 27,686 25,272 21,494
SHAREHOLDER INFORMATION
Net earnings per share - Diluted $ 1.51 1.31 1.14 .99
Dividends paid per share $ .27 .23 .19 .17
Shareholders' equity per share $ 6.27 5.69 5.28 4.93
Shares outstanding (000s) 44,658 46,197 48,382 49,452
Common stock price range, per share
High $ 24 13/16 25 7/8 27 3/16 20 3/8
Low $ 19 1/8 14 7/16 18 9/16 12 5/8
=================================================================================================================
</TABLE>
Amounts are adjusted for all stock splits and reflect adoption of SFAS 128.
Operating income is gross margin less selling, general and administrative, and
research and development expense.
Return on investment is net earnings divided by average long-term debt plus
average shareholders' equity.
Long-term capitalization ratio is long-term debt divided by long-term debt plus
shareholders' equity.
(1) Excludes the cumulative effect of an accounting change of $2,206, or $.08
per share, in 1994.
34
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$758,646 $703,959 $593,503 $533,327 $482,104 $457,692 $422,885
222,874 197,979 166,599 152,236 133,574 129,858 121,454
29.4% 28.1% 28.1% 28.5% 27.7% 28.4% 28.7%
75,642 65,531 52,079 45,246 41,249 41,304 44,354
10.0% 9.3% 8.8% 8.5% 8.6% 9.0% 10.5%
2,905 3,089 3,362 2,723 2,681 3,526 3,731
71,120 63,172 50,193 44,682 41,721 39,385 34,875
27,684 24,636 18,244 16,468 15,952 15,337 13,849
38.9% 39.0% 36.3% 36.9% 38.2% 38.9% 39.7%
43,436 38,536 31,949(1) 28,214 25,769 24,048 21,026
5.7% 5.5% 5.4% 5.3% 5.3% 5.3% 5.0%
19.3% 18.8% 17.6% 16.9% 17.2% 18.0% 17.8%
18.5% 17.6% 16.0% 15.0% 14.8% 14.9% 14.2%
402,850 381,042 337,360 300,217 286,348 253,194 245,947
250,751 247,904 220,308 196,014 187,360 169,398 168,522
138,578 123,747 115,757 93,666 89,956 77,537 79,917
112,173 124,157 104,551 102,348 97,404 91,861 88,605
1.8 2.0 1.9 2.1 2.1 2.2 2.1
13,145 20,800 16,956 7,595 11,425 6,380 11,384
10,041 10,167 16,028 18,920 23,482 25,673 28,320
23,186 30,967 32,984 26,515 34,907 32,053 39,704
228,880 221,173 189,697 174,008 160,303 138,947 128,787
4.2% 4.4% 7.8% 9.8% 12.8% 15.6% 18.0%
124,913 110,640 99,559 90,515 84,899 72,863 68,290
39,297 25,334 24,642 15,005 15,538 16,208 16,055
21,674 20,529 16,365 14,752 14,047 12,187 10,857
.84 .73 .59(1) .51 .46 .42 .37
.15 .14 .12 .10 .09 .07 .06
4.52 4.23 3.58 3.19 2.91 2.51 2.23
50,650 52,370 53,020 54,564 55,138 55,478 57,728
14 14 13 1/16 10 1/16 7 15/16 6 9/16 5 13/16
11 15/16 10 15/16 9 1/8 7 5 3/16 4 1/16 2 13/16
===============================================================================================
</TABLE>
35
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
NYSE LISTING
The common shares of Donaldson Company, Inc. are traded on the New York Stock
Exchange, under the symbol DCI.
SHAREHOLDER INFORMATION
For any concerns relating to your current or prospective shareholdings, please
contact Shareowner Services at (800) 468-9716 or (651) 450-4064.
DIVIDEND REINVESTMENT PLAN
As of September 26, 2000, 1,116 of Donaldson Company's approximately 1,870
shareholders of record were participating in the Dividend Reinvestment Plan.
Under the plan, shareholders can invest Donaldson Company dividends in
additional shares of company stock. They may also make periodic voluntary cash
investments for the purchase of company stock.
Both alternatives are provided without service charges or brokerage
commissions. Shareholders may obtain a brochure giving further details by
writing Wells Fargo Bank Minnesota, N.A., Shareowner Services, P.O. Box 64854,
St. Paul, MN 55164-0854.
ANNUAL MEETING
The annual meeting of shareholders will be held at 10 a.m. on Friday, November
17, 2000, at The Conference Center at Atrium Center, 3105 E. 80th Street,
Bloomington, Minnesota. You are welcome to attend.
10-K REPORTS
Copies of the Report 10-K, filed with the Securities and Exchange Commission,
are available on request from Shareholder Services, Donaldson Company, Inc.,
M.S. 101, P.O. Box 1299, Minneapolis, MN 55440.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, Minneapolis, Minnesota
PUBLIC RELATIONS COUNSEL
Padilla Speer Beardsley Inc., Minneapolis, Minnesota
TRANSFER AGENT AND REGISTRAR
Wells Fargo Bank Minnesota, N.A., South St. Paul, Minnesota
SIX-YEAR QUARTERLY HIGH-LOW STOCK PRICES
[BAR CHART]
High Low
--------------------------------------------------
1995
1st Quarter 13 10 7/16
2nd Quarter 12 1/8 10 7/16
3rd Quarter 12 7/8 11 1/4
4th Quarter 14 12 1/16
--------------------------------------------------
1996
1st Quarter 13 3/16 11 15/16
2nd Quarter 13 1/16 12 1/16
3rd Quarter 13 15/16 12 13/16
4th Quarter 14 12
--------------------------------------------------
1997
1st Quarter 14 5/8 12 11/16
2nd Quarter 17 14 5/16
3rd Quarter 18 5/16 15 3/8
4th Quarter 20 3/8 17 3/4
--------------------------------------------------
1998
1st Quarter 27 3/16 20 5/16
2nd Quarter 25 11/16 22 1/4
3rd Quarter 26 3/16 22 5/8
4th Quarter 25 1/8 18 9/16
--------------------------------------------------
1999
1st Quarter 21 15/16 14 7/16
2nd Quarter 21 17 11/16
3rd Quarter 23 1/2 17 1/4
4th Quarter 25 7/8 21 15/16
--------------------------------------------------
2000
1st Quarter 23 1/2 19 1/2
2nd Quarter 24 13/16 20 5/8
3rd Quarter 24 1/16 20 1/4
4th Quarter 24 1/4 19 1/8
36
<PAGE>
BOARD OF DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS
F. Guillaume Bastiaens, 57
VICE CHAIRMAN,
CARGILL INC., MINNEAPOLIS
(AGRIBUSINESS).
DIRECTOR SINCE 1995. (2) (3)
Paul B. Burke, 44
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
BMC INDUSTRIES, INC., MINNEAPOLIS
(MANUFACTURING).
DIRECTOR SINCE 1996. (1) (3)
Janet M. Dolan, 51
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
TENNANT COMPANY, MINNEAPOLIS
(MANUFACTURING).
DIRECTOR SINCE 1996. (2) (3)
Jack W. Eugster, 55
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
THE MUSICLAND GROUP, INC., MINNEAPOLIS
(CONSUMER PRODUCTS).
DIRECTOR SINCE 1993. (1) (3)
John F. Grundhofer, 61
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
U.S. BANCORP, MINNEAPOLIS
(FINANCIAL SERVICES).
DIRECTOR SINCE 1997. (1) (3)
Kendrick B. Melrose, 60
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
THE TORO COMPANY, MINNEAPOLIS
(MANUFACTURING).
DIRECTOR SINCE 1991. (1) (2)
S. Walter Richey, 64
RETIRED CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
MERITEX, INC., MINNEAPOLIS,
(DISTRIBUTION SERVICES).
DIRECTOR SINCE 1991. (2) (3)
Stephen W. Sanger, 54
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
GENERAL MILLS, INC., MINNEAPOLIS
(CONSUMER PRODUCTS).
DIRECTOR SINCE 1992. (1) (2)
William G. Van Dyke, 55
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
DONALDSON COMPANY, INC.
DIRECTOR SINCE 1994.
(1) HUMAN RESOURCES COMMITTEE
(2) AUDIT COMMITTEE
(3) DIRECTORS' AFFAIRS COMMITTEE
CORPORATE OFFICERS
William G. Van Dyke, 55
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER.
28 YEARS SERVICE.
William M. Cook, 47
SENIOR VICE PRESIDENT, INTERNATIONAL.
20 YEARS SERVICE.
James R. Giertz, 43
SENIOR VICE PRESIDENT,
COMMERCIAL AND INDUSTRIAL.
7 YEARS SERVICE.
Nickolas Priadka, 54
SENIOR VICE PRESIDENT,
ENGINE SYSTEMS AND PARTS.
31 YEARS SERVICE.
Lowell F. Schwab, 52
SENIOR VICE PRESIDENT, OPERATIONS.
21 YEARS SERVICE.
Thomas W. VanHimbergen, 52
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER.
1 YEAR SERVICE.
Dale M. Couch, 57
VICE PRESIDENT AND
GENERAL MANAGER, ASIA PACIFIC.
3 YEARS SERVICE.
Norman C. Linnell, 41
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY.
5 YEARS SERVICE.
John E. Thames, 50
VICE PRESIDENT, HUMAN RESOURCES.
12 YEARS SERVICE.
Geert Henk Touw, 55
VICE PRESIDENT AND GENERAL MANAGER,
EUROPE/AFRICA/MIDDLE EAST.
15 YEARS SERVICE.
Thomas A. Windfeldt, 51
VICE PRESIDENT, CONTROLLER AND TREASURER.
20 YEARS SERVICE.
<PAGE>
WORLDWIDE OPERATIONS
WORLD HEADQUARTERS
Donaldson Company, Inc.
MINNEAPOLIS, MINNESOTA
U.S. PLANTS
AUBURN, ALABAMA
OLD SAYBROOK, CONNECTICUT
DIXON, ILLINOIS
FRANKFORT, INDIANA
CRESCO, IOWA
GRINNELL, IOWA
LOUISVILLE, KENTUCKY
NICHOLASVILLE, KENTUCKY
PORT HURON, MICHIGAN
CHILLICOTHE, MISSOURI
MOORESVILLE, NORTH CAROLINA
STOW, OHIO
PHILADELPHIA, PENNSYLVANIA
GREENEVILLE, TENNESSEE
BALDWIN, WISCONSIN
STEVENS POINT, WISCONSIN
DISTRIBUTION CENTERS
ONTARIO, CALIFORNIA
RENSSELAER, INDIANA
ANTWERP, BELGIUM
JOINT VENTURES
Advanced Filtration Systems Inc.
CHAMPAIGN, ILLINOIS
MSCA, LLC
MONTICELLO, INDIANA
Air Master China Ltd.
HONG KONG, S.A.R., PEOPLE'S REPUBLIC OF CHINA
Guilin Air King Enterprises Ltd.
GUILIN, PEOPLE'S REPUBLIC OF CHINA
PT Panata Jaya Mandiri
JAKARTA, INDONESIA
SUBSIDIARIES
Torit Australia Pty. Ltd.
SYDNEY, AUSTRALIA
Donaldson Australasia Pty. Limited
WYONG, AUSTRALIA
Donaldson Sales, Inc.
BARBADOS
Donaldson Coordination Center, B.V.B.A.
LEUVEN, BELGIUM
Donaldson Europe, B.V.B.A.
LEUVEN, BELGIUM
DCE Scandinavia APS
HORSHOLM, DENMARK
Donaldson France, S.A.S.
BRON, FRANCE
Tecnov Donaldson, S.A.S.
DOMJEAN, FRANCE
DCE S.A.
PARIS, FRANCE
DCE Neotechnik GmbH
BIELEFELD, GERMANY
Donaldson Gesellschaft m.b.H.
DULMEN, GERMANY
D.I. Filter Systems Pvt. Ltd.
NEW DELHI, INDIA
PT Donaldson Systems Indonesia
JAKARTA, INDONESIA
Donaldson Italia s.r.l.
OSTIGLIA, ITALY
Nippon Donaldson Limited
TOKYO, JAPAN
Donaldson Luxembourg S.a.r.l.
LUXEMBOURG
Donaldson, S.A. de C.V.
AGUASCALIENTES, MEXICO
Diemo S.A. de C.V.
GUADALAJARA, MEXICO
Donaldson Filtration Industrial S. de R.L. de C.V.
MONTERREY, MEXICO
Donaldson Torit B.V.
HAARLEM, NETHERLANDS
DCE Benelux B.V.
KROMMENIE, NETHERLANDS
Donaldson Far East Limited
HONG KONG, S.A.R., PEOPLE'S REPUBLIC OF CHINA
Donaldson (Wuxi) Filters Co., Ltd.
WUXI, PEOPLE'S REPUBLIC OF CHINA
Donaldson Filtration (Asia Pacific) Pte. Ltd.
SINGAPORE
Donaldson Filtration Systems (Proprietary) Ltd.
CAPE TOWN, SOUTH AFRICA
Donaldson Korea Co., Ltd.
SEOUL, SOUTH KOREA
DCE Donaldson Sistemas de Filtracion, S.L.
BARCELONA, SPAIN
Donaldson Filtros Iberica S.L.
MADRID, SPAIN
Donaldson Filter Components Limited
HULL, UNITED KINGDOM
DCE Donaldson Ltd.
LEICESTER, UNITED KINGDOM
DCE Group Ltd.
LEICESTER, UNITED KINGDOM
Tetratec Europe Limited
WIGAN, UNITED KINGDOM
Donaldson International, Inc.
U.S. VIRGIN ISLANDS
LICENSEE
Parker Hannifin Ind. Com. Ltda.
SAO PAULO, BRAZIL
[LOGO]
DONALDSON(R)
FILTRATION SOLUTIONS
Donaldson Company, Inc.
1400 West 94th Street
Minneapolis, Minnesota
U.S.A.
(952) 887-3131
www.donaldson.com
MAILING ADDRESS:
P.O. Box 1299
Minneapolis, Minnesota
55440 U.S.A
