Donaldson Company Annual Report 2000

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FY2000 Annual Report · Donaldson Company

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INDUSTRIAL

strength

Eleven Record Years

2000 Annual Report

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.

Our financial objective is to build shareholder value through superior share

price appreciation and consistent dividend payouts. We believe value is created

by delivering consistent, double-digit growth in earnings per share. Growth

will be achieved by aggressively pursuing new opportunities in our existing and

related markets. Consistency will be reinforced by maintaining a diversified

portfolio of related ﬁltration businesses around the world.

Mission Statement To provide superior return for our shareholders,
through consistent, long-term earnings growth built on global leadership in

ﬁltration solutions thereby creating security, opportunity and challenge for our

employees.

Industrial Strength
Financial Highlights
Letter to Shareholders
Operating Segment Information

12
14 Management’s Discussion and Analysis
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes
in Shareholders’ Equity

23 Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Eleven-Year Comparison of Results
Corporate and Shareholder Information
Board of Directors and Corporate Officers

IBC

Back Worldwide Operations

Industrial strength. It’s a good descriptor of

Donaldson, a strong, rock-solid company with

11 consecutive years of double-digit earnings growth. A company that has

grown and diversiﬁed into numerous industries with a wide geographic reach.

Industrial strength also highlights the Industrial side of our business (dust

collection, gas turbine systems and special applications), which by the end of

the current ﬁscal year will make up an estimated 43 percent of total revenues,

up nine percentage points from just three years ago. Although our Engine

business continues its solid growth, we anticipate Industrial will grow twice

as fast due to tremendous international opportunities and untapped market

segments.

industrial
STRENGTH

We’ll capitalize on the opportunities by focusing on our core

strengths: customer relationships, technology and interna-

tional presence. Some examples… our relationship with

General Electric has enabled us to beneﬁt from their explosive

growth in the gas turbine business. The same holds true with IBM in the disk

drive arena. Our acquisition of England-based DCE is providing solid infra-

structure in Europe for future acquisitions, not to mention the growth of our

dust collection business. And in the technology ﬁeld, our proprietary EonTM

ﬁne ﬁber technology – the crown jewel of Donaldson

technology that enables us to create self-cleaning

ﬁlters – has been a big boost, enabling us to create

unique solutions and ultimately solidifying client

relationships. In the following pages, we’ve high-

lighted a few of our Industrial businesses, as well as a story focusing on

expansion on the Engine side – all demonstrating our potential as an industry

leader poised for growth.

STRATEGIC
acquisition

Complementary Products. Complementary Markets. Combined Force.
It is the perfect fit – Donaldson’s Torit® business and DCE, a major player in the

European industrial dust collection industry. In February 2000, the two combined

when Donaldson acquired DCE, creating a new entity – Donaldson Dust Collection.

Both Torit and DCE design, manufacture and market in-plant air ﬁltration and pol-

lution control systems and products. Torit’s strength is in North America where

we primarily offer products configured with replaceable cylindrical filter car-

tridges. DCE, headquartered in Leicester, England, sells filter-bag-configured

products, with approximately 70 percent of revenue coming from the United

Kingdom and Europe.

Together, Torit and DCE are complementary companies, with complementary

products and markets. Customers receive greater access to Donaldson’s products

and services, and Donaldson beneﬁts from new markets. The end result? Broad

geographic range and unparalleled product strength that enable us to develop

the right industrial dust collection configuration for any customer application.

Fact: Donaldson provides ﬁltration

solutions to a wide range

of applications and dust

collection markets around

the globe.

Fact: Worldwide, the compressor
ﬁltration market is estimated

at $150 million.

Delivering Comprehensive Compressor Filtration Solutions
When Donaldson acquired privately owned AirMaze® in November 1999, it not only gained broad access to the com-

pressor ﬁltration market, we gained a technology leader in ﬁltration solutions as well. Donaldson is now the premier

provider of air/oil separators to compressor OEMs in the United States, in addition to offering its extensive range of

existing compressor filtration products. Our line of air/oil separators is used throughout construction and manufac-

turing in both portable and stationary air compressors, which drive things like air-tools and assembly lines. Our strong

domestic market presence allows us to offer comprehensive ﬁltration solutions to a range of new customers and OEMs.

What’s more, with Donaldson’s global reach and experience in marketing to international customers, our worldwide

opportunities are extensive and untapped. Utilizing an experienced engineering staff, we will innovate and apply tech-

nology to offer the most advanced compressor ﬁltration products.

market

LEADERSHIP

Fact: Donaldson’s Tetratex ﬁlter
media is stable in almost

any environment ranging

in temperature from -450°

to +500°F (-270° to +260°C).

From Waterproof Clothing to Pollution Control
Comprised of millions of small, randomly connected ﬁbers, Donaldson’s Tetratex® membrane repels water while allowing

air and moisture vapor to flow freely through the membrane. The Tetratec™ business unit produces membranes in a

broad range of pore structures at made-to-order lengths, which can be bonded to an array of fabric and filtration

materials. This makes it ideal for a wide variety of applications including industrial dust collection and fabric for high-

performance garments. We expect continued high growth from this business as it expands its share in filtration and

fabric markets worldwide. Tetratec is a departure from our normal business model in that it produces and markets ﬁlter

media rather than ﬁltration products.

versatile

MEMBRANE

HIGH

power

Meeting Energy Needs Worldwide
Industry deregulation, outdated equipment and an insatiable need for power are

taxing today’s energy infrastructure. This has fueled growing demand for energy-

producing gas turbines, which are low-cost and highly efﬁcient power sources –

resulting in a 39 percent increase in gas turbine systems business in 2000.

Donaldson designs and manufactures ﬁltration systems and silencing products

that protect combustion turbines and other rotating equipment used in power gen-

eration, oil and gas production, and transmission and petrochemical industries.

Our customers include leading gas turbine OEMs General Electric and Seimens

Westinghouse, as well as other independent power producers and end-users in

emerging economies. We expect high demand for our systems and products to

continue through 2001 and beyond. As cost effective and efﬁcient energy sources

become even more important in the future, Donaldson plans to be there with pro-

gressive ﬁltration solutions.

Fact: World electricity consumption

is projected to increase by

60 percent from 1997 to 2020*.

*International Energy Outlook 2000, Energy Information Administration

CLEANER
air

Helping Customers Meet EPA Requirements
In its persistent effort to improve the quality of air we breathe, the EPA continues to impose regulations that further

reduce harmful emissions related to diesel engine use in the United States. Other regulatory bodies are making similar

demands internationally. These step reductions mean manufacturers must reduce levels of nitrogen oxide and par-

ticulate in emissions by 2004 and again in 2007. That’s good news for the environment and for Donaldson. To help engine

and truck manufacturers meet regulations, we’re responding with a “total ﬁltration” approach including enhanced air,

liquid and exhaust products. Higher performing products with improved technology will provide better ﬁltration levels

and longer wear. And the higher performance translates into higher value products.

Regulations focusing specifically on exhaust may lead to a tremendous market potential for exhaust systems and

an increase in the amount of Donaldson product on each vehicle. In addition, regulations now applicable to new on-

road vehicles will eventually affect off-road and older vehicles, greatly expanding our opportunities for both ﬁrst-ﬁt and

retroﬁt products.

Fact: The proposed EPA requirements

for 2007 (as compared to 2004

requirements) will further reduce

by 90 percent the levels of

nitrogen oxide and particulate
released into the air by diesel

engines.

Fact: Donaldson sells more than
250 million disk drive ﬁlters

per year.

(Actual Size)

New Initiatives in an Emerging Region
The Asia Pacific region is known for its developing economies, untapped markets and tremendous opportunities for

growth. And while many companies are just beginning to capitalize on the potential, Donaldson has been committed

to the region for more than 30 years, with a presence today in Japan, China, Australia, India, South Korea, Indonesia

and Singapore. In fiscal 2000, we began to see a resurgence in the Asia Pacific economy, which has languished in

recent years. Sales from our disk drive ﬁltration products manufacturing facility in Wuxi, China increased dramatically,

and we began consolidation efforts to revitalize business in Japan. We made a signiﬁcant investment to open a new

headquarters in Singapore that unites all of our operations in Asia Paciﬁc and provides central leadership for ongoing

initiatives. Additionally, we enhanced manufacturing and sales facilities in Australia. As the Asia Pacific economy

continues to ramp up, Donaldson is poised to capitalize on the opportunities and expand.

eastern

SYNERGY

Financial Highlights

Donaldson Company, Inc. and Subsidiaries

Year ended July 31

Net sales (000s)

Net earnings (000s)

Return on sales

Return on average shareholders’ equity

Long-term capitalization ratio

Diluted earnings per share

Dividends paid per share

Shareholders’ equity per share

Diluted shares outstanding (000s)

Employees at year-end

Sales per employee (000s)

2000

1999

Change

$1,092,294

$70,233

$944,139

$62,447

6.4%

25.9%

24.9%

$1.51

$.27

$6.27

46,664

8,478

$128.8

6.6%

24.1%

24.8%

$1.31

$ .23

$5.69

47,793

7,056

$133.8

15.7%

12.5%

(.2) pts

1.8 pts

.1 pts

15.3%

17.4%

10.2%

(2.4)%

20.2%

(3.7)%

Return on Equity
(% Per annum)

Net Sales
(Millions of dollars)

25.9

24.1

22.8

21.4

17.8

18.0

17.2

16.9

17.6

18.8

19.3

1,092

940

944

833

759

704

594

533

482

458

423

Donaldson Company is delivering shareholder value
through consistently high returns on shareholders’ equity.

Donaldson has posted 17 consecutive years of
revenue increases.

Earnings Per Share
(Dollars)

Dividends Per Share
(Dollars)

1.51

1.31

1.14

.99

.84

.73

.27

.23

.19

.17

.15

.14

.12

.59

.51

.46

.42

.37

.10

.09

.07

.06

Earnings per share were up 15 percent in 2000, the 11th
consecutive year of double-digit increases in EPS.

Dividends paid per share increased 17 percent in 2000.
The company distributes about 20 percent of net income
to shareholders through regular quarterly dividends.

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Pictured from left to right:

James R. Giertz

Senior Vice President, Commercial and Industrial

William M. Cook

Senior Vice President, International

Lowell F. Schwab

Senior Vice President, Operations

Nickolas Priadka

Senior Vice President, Engine Systems and Parts

Thomas W. VanHimbergen

Senior Vice President and Chief Financial Ofﬁcer

William G. Van Dyke

Chairman, President and Chief Executive Ofﬁcer

Fiscal 2000 was another strong year for us. We crossed the $1 billion revenue mark with sales

growth of 16 percent and delivered on our promise of double-digit earnings growth for the

11th consecutive year. These results are evidence that the people who are this company have

done a lot of things right, and I thank them for their dedication, commitment and hard work.

Our fundamental ﬁnancial model is that consistent, above-average earnings growth will

bring above-average returns to our shareholders. For the last 11 years we’ve posted sales

growth averaging 10 percent and never-miss, double-digit earnings growth averaging 17

percent. By my assessment, our people have done a ﬁne job of executing the game plan.

With return to shareholders over that period well above 20 percent, the model would seem

to hold up pretty well. But the stock has not appreciated for three years, while EPS marched

forward at a steady 15 percent per year.

The stock market’s unwillingness to recognize our performance compelled us to carefully

examine whether our model is outdated. In sum, we don’t think so. If this business isn’t

“all about” cash ﬂow and long-term return on investment (we use consistent, long-term

EPS growth as a proxy for these), then we don’t understand the game. The stock market

will swing for us and against us, but we’ll hold to our long-term view: if we continue to

perform every year as we have, our shareholders will win.

HIGHLIGHTS We’ve helped to ensure our success – and remove cyclicality from our

performance – by diversifying our business over the years. Since the mid-’80s, we’ve used our

highly successful franchise in diesel engine ﬁltration to fund expansion into other ﬁltration

markets. The payback is that while the Engine Products segment remains the keel of our ship,

logging double-digit growth in 2000, the Industrial Products segment in the current year will

deliver an estimated 43 percent of Donaldson’s revenue and almost half of its operating proﬁt.

Long-Term Performance
(Cumulative total return)
Year ended July 31

- = DCI - = S&P 400

280

228

225

203

148

142

173

172

100
100
88

133

687

623

796

580

642

590

492

461

384

317

412

294

373

236

We’re highlighting the Industrial Products group with our Industrial Strength theme for

this year’s report to give you a good sense of our current strength on this side of the

business and our future opportunities. We’re not yet to our revenue target of 50 percent

Industrial, but we’ve made good progress from the mid-’80s when that sector contributed

only 15 percent of sales.

Engine’s strong showing in 2000, despite a 6 percent decline in the transportation business,

reﬂects continued share gains in the aftermarket unit, as well as a double-digit rebound from

last year in the off-road group. Concurrently, Industrial posted double-digit growth in both

gas turbines and disk drives. In each case, strong underlying market growth was accom-

panied by signiﬁcant Donaldson share gains.

On the international front, we had a banner year. Europe turned in a powerful performance

with impressive revenue and proﬁt gains across all business units. Asia Paciﬁc, buoyed by

our operations in China, likewise posted strong sales and proﬁt growth; however, Japan

continues to drift in the doldrums.

Two acquisitions during the year – AirMaze, a supplier of air/oil separators and heavy-duty air

and liquid ﬁlters, and DCE, a global leader in industrial dust collection – added $57 million to

our portfolio. You will ﬁnd more detailed information about these acquisitions on pages 2

and 3 of our report. Generally, we expect acquisitions to continue to provide about a third of

our targeted 10 to12 percent revenue growth over the long term. The fragmented ﬁltration

industry continues to offer acquisition opportunities that match up well with Donaldson’s

broad global base and established market positions.

LOOKING AHEAD The coming year looks to be the logical extension of the one past.

We expect continued strong ﬁnancial performance and market share gains from gas turbine.

Our signiﬁcant infrastructure investments over the last several years have left us uniquely

positioned to respond to today’s unprecedented demand for gas turbines.

Consistent Double-Digit EPS Growth
(Annual EPS % change)

10%
Goal
0

-2

We anticipate that the sharp downturn in North American heavy trucks will likely continue.

However, because our ﬁrst-ﬁt sales in this sector are less than 10 percent of our total, the

downturn slows rather than threatens another successful year. This makes the case for the

diversiﬁcation we’ve relentlessly pursued for so many years.

Aftermarket’s uptrend, past and future, is closely linked to e-commerce. Now in the third

year since the launch of its DYNAMICTM online order-processing tool, aftermarket is handling

more than 50 percent of its orders electronically. In the year ahead, we’ll look intently at how

we can utilize this powerful tool in other areas of our business.

We’ll also continue our efforts to assimilate and leverage the operations we’ve acquired in

the last few years. With multiple plants and operations around the world, DCE’s integration

promised to be hard work, and it has lived up to that promise. That said, Donaldson has

the only global franchise in the dust collection industry and the two best known brand

names in Torit and DCE. The inevitable surprises that come with an acquisition have been

overwhelmingly positive, and we’re excited about the upside potential, particularly in the

international arena.

Overall, it’s an exciting time for Donaldson. Today’s remarkably rapid pace of change means

the only sure thing in the coming year is the unexpected. But, that doesn’t leave us confused

about our objective.

We look forward to delivering our 12th consecutive year of double-digit growth in 2001.

Thank you for your continuing support.

Sincerely,

William G. Van Dyke

Chairman and Chief Executive Ofﬁcer

ENGINE PRODUCTS Operating Segment

2000 Revenue: $674 million

End-Markets

Representative Customers

2000 Revenue

Product Families

OFF-ROAD EQUIPMENT:

Products sold to industrial

Caterpillar, John Deere,

Komatsu and Volvo

equipment OEMs for agriculture,

Construction Equipment

construction, mining and other

industrial applications.

I N M I L L I O N S

$193

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DEFENSE:

Products sold to military

contractors supplying land-based

military equipment.

General Dynamics,

Stewart & Stevenson

TRUCKS:

Freightliner, Paccar,

Products sold to manufacturers of

Volvo, Scania, Renault

medium- and heavy-duty trucks.

and Mitsubishi

$153

AUTOMOTIVE:

General Motors,

Products sold to manufacturers of

DaimlerChrysler, Ford,

passenger cars, SUVs and light-duty

Audi and Hino

commercial vehicles.

AFTERMARKET:

Broad line of replacement ﬁlters

and hard parts for all of the

equipment applications noted above.

Original equipment dealers

(such as Freightliner dealers

or Caterpillar dealers), inde-

pendent distributors and

private label accounts

$328

INDUSTRIAL PRODUCTS Operating Segment

2000 Revenue: $418 million

Products

2000 Revenue

Applications

Routes to Market

DUST COLLECTION:

I N M I L L I O N S

Product is applied in a wide variety

Dedicated ﬁeld sales force

Under the trade names Torit, DCE and

Aercology, Donaldson provides equipment

to control and capture process dust, fumes

and mist in manufacturing and industrial

processing plants. In addition, a full line

of replacement ﬁlter cartridges, bags and

spare parts are offered.

GAS TURBINE SYSTEMS:

Donaldson provides complete systems to

deliver clean air to combustion turbines.

Products include self-cleaning ﬁlter units,

static air ﬁlter units, inlet ducting and

silencing, evaporative coolers, chiller

coils, inlet heating and anti-icing systems.

Also, a full line of replacement ﬁlters and

parts is offered.

$193

of industrial settings including metal

coordinates multiple selling

working plants, paint operations,

channels to end-user includ-

welding stations, woodworking

ing: direct selling, distribu-

shops and food processing plants.

tion, installers, OEM

accounts and telemarketing.

$117

Essentially all combustion turbines

Products are primarily

require inlet air ﬁltration and noise

sold to gas turbine OEMs

attenuation systems. These turbines

(e.g., General Electric,

provide base electricity, peaking

Alstom Power, Seimens

capacity, remote power generation

Westinghouse). Replacement

for special applications such as

parts are sold direct to end-

pipelines and off-shore oil drilling

users.

platforms.

SPECIAL APPLICATIONS:

Donaldson provides a wide range of high

efﬁciency media, ﬁlters and ﬁltration

$108

Products for the computer disk drive

Products are sold to disk

market include particulate ﬁlters,

drive manufacturers by a

desiccant pouches and chemical

direct sales force supported

systems for various commercial, industrial

adsorbing ﬁlter pouches. Customers

by product development and

and product applications.

include major disk drive manufac-

application engineers.

turers such as IBM, Seagate and

Western Digital.

Products for special market appli-

Products are primarily sold

cations include aircraft cabin air

direct to end-users.

ﬁlters, chemical ﬁlter systems for

semi-conductor processing facilities,

as well as other ﬁlters for process-

critical applications.

Donaldson sells expanded PTFE

Membrane and laminates

membrane through its Tetratec

are sold to various ﬁlter and

unit. Primary applications for

garment manufacturers.

this membrane are industrial dust

collection, product recovery appli-

cations and specialty fabrics.

Donaldson sells a broad line of

Products are sold through

ﬁlters and housings for industrial

an extensive network of

hydraulic and lubricating ﬂuids.

industrial distributors.

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 mar-
kets 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 con-
tinued 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 per-
cent 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 prod-
ucts (55.4 percent increase from the prior year) reﬂecting con-
tinued 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 per-
cent from the prior year. Excluding the negative impact of for-
eign 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 con-
tributed almost half of the operating proﬁt and all of the earn-
ings 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.

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 mil-
lion 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 fac-
tors including increased programming and information technol-
ogy 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 acquisi-
tions 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 com-
pany 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 auto-
motive 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 geo-
graphic locations. Demand in some markets, such as agricul-
tural 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 result-
ing 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 per-

cent 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 per-
cent 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 approx-
imately 57.6 percent and 50.3 percent of consolidated operating
income in 1999 and 1998, respectively.

Gross margin for 1999 increased to 29.2 percent compared

Liquidity and Capital Resources

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 vol-
umes 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 liabil-
ity 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, respec-
tively, offset by a decrease in dust collection products backlog of
19.1 percent.

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 share-
holders’ 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 mil-
lion in Industrial Development Revenue Bond Financing for the
construction of a new manufacturing facility of which $5.7 mil-
lion 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 pur-
poses. 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 require-
ments 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 addi-
tion, increased earnings offset by changes in other working capi-
tal 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 expen-
ditures, $35.9 million for stock repurchases and $12.4 million
for dividend payments. Cash and cash equivalents decreased
$17.8 million during 2000.

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 expen-
ditures 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 repur-
chase 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 com-
prehensive income until the hedged item is recognized in earn-
ings. 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 antici-
pated 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.

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 interna-
tional 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 mil-
lion. 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 mar-
kets to which it sells. To mitigate such adverse trends, the com-
pany, 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 curren-
cies. Any long-term strengthening of the U.S. dollar could
depress these sales. Also, competitive conditions in the com-
pany’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 state-
ments 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 fore-
casts 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 cur-
rent 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 sur-
rounding various matters such as environmental remediation,
contract pricing, and international trading restrictions,
customer product acceptance, continued access to capital mar-
kets 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 com-
pany undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new infor-
mation, future events or otherwise.

Consolidated Statements of Earnings

Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except share and per share amounts) Year ended July 31,

2000

1999

1998

Net sales

Cost of sales

Gross Margin

Selling, general and administrative

Research and development

Operating Income

Interest expense

Other (income) expense

Earnings Before Income Taxes

Income taxes

Net Earnings

Weighted Average Shares – Basic

Weighted Average Shares – Diluted

Net Earnings Per Share – Basic

Net Earnings Per Share – Diluted

The accompanying notes are an integral part of these consolidated ﬁnancial statements.

$1,092,294

$944,139

$940,351

764,773

327,521

194,623

27,304

105,594

9,880

(4,619)

100,333

30,100

668,458

275,681

163,688

23,603

88,390

6,993

(7,813)

89,210

26,763

677,089

263,262

152,954

23,509

86,799

4,671

(4,313)

86,441

29,390

70,233

$62,447

$ 57,051

45,716,482

46,899,127

49,332,266

46,664,196

47,793,180

50,229,005

1.54

1.51

1.33

1.31

1.16

1.14

Consolidated Balance Sheets

Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except share amounts) At July 31,

2000

1999

ASSETS

Current Assets

Cash and cash equivalents

Accounts receivable, less allowance of $4,380 and $4,341

Inventories

Raw materials

Work in process

Finished products

Total Inventories

Deferred income taxes

Prepaids and other current assets

Total Current Assets

Property, Plant and Equipment, at cost

Land

Buildings

Machinery and equipment

Construction in progress

Less accumulated depreciation

Deferred Income Taxes

Intangible Assets

Other Assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Short-term borrowings

Current maturities of long-term debt

Trade accounts payable

Accrued employee compensation and related taxes

Income taxes payable

Accrued liabilities

Other current liabilities

Total Current Liabilities

Long-term Debt

Deferred Income Taxes

Other Long-term Liabilities

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

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income

Treasury stock – 4,998,342 and 3,458,670 shares in 2000 and 1999, at cost

Total Shareholders’ Equity

The accompanying notes are an integral part of these consolidated ﬁnancial statements.

$ 24,149

202,361

$ 41,944

178,419

45,064

20,171

54,128

119,363

18,411

11,195

375,479

7,432

119,203

333,310

9,756

469,701

(265,156)

204,545

408

63,885

25,340

32,722

13,758

35,618

82,098

14,911

9,016

326,388

7,166

105,913

296,038

12,308

421,425

(239,245)

182,180

–

10,984

22,694

$ 669,657

$ 542,246

$ 85,034

$ 20,287

279

82,320

29,759

27,974

10,298

235,722

92,645

–

61,125

409

63,361

23,720

4,448

22,680

7,150

142,055

86,691

132

50,605

–

248,280

2,018

143,125

(10,523)

(102,735)

280,165

248,280

1,611

87,909

(5,670)

(69,367)

262,763

$ 669,657

$ 542,246

Consolidated Statements of Cash Flows

Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars) Year ended July 31,

OPERATING ACTIVITIES

Net earnings

Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation and amortization

Write-down of impaired assets

Equity in earnings of afﬁliates

Deferred income taxes

Other

Changes in operating assets and liabilities, net of acquired businesses

Accounts receivable

Inventories

Prepaids and other current assets

Trade accounts payable and other accrued expenses

Net Cash Provided by Operating Activities

INVESTING ACTIVITIES

Purchases of property and equipment, net

Acquisitions and investments in afﬁliates

Net Cash Used in Investing Activities

FINANCING ACTIVITIES

Proceeds from long-term debt

Repayments of long-term debt

Change in short-term borrowings

Payment received from ESOP

Purchase of treasury stock

Dividends paid

Exercise of stock options

Net Cash (Used in) Provided by Financing Activities

Effect of exchange rate changes on cash

Increase (Decrease) in Cash and Cash Equivalents

Cash and Cash Equivalents, Beginning of Year

Cash and Cash Equivalents, End of Year

The accompanying notes are an integral part of these consolidated ﬁnancial statements.

2000

1999

1998

$ 70,233

$ 62,447

$ 57,051

34,326

–

(449)

2,454

(6,441)

(26,227)

(4,913)

19,261

88,318

(36,417)

(88,220)

(124,637)

5,752

(4,522)

66,328

–

(35,923)

(12,384)

326

19,577

(1,053)

(17,795)

41,944

27,686

–

(2,187)

489

10,344

(13,244)

21,382

(3,095)

(4,066)

99,756

(29,539)

(230)

(29,769)

35,546

(404)

(24,422)

–

(44,535)

(10,830)

1,617

(43,028)

(1,084)

25,875

16,069

$ 24,149

$ 41,944

25,272

1,000

(1,944)

4,226

(6,817)

(6,780)

(20,037)

417

(15,350)

37,038

(54,705)

(920)

(55,625)

50,000

(2,890)

4,582

2,730

(33,250)

(9,630)

2,619

14,161

6,217

1,791

14,278

$ 16,069

Consolidated Statements of Changes in Shareholders’ Equity

Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except per share amounts)

Common

Stock

Additional

Paid-in

Capital

Accumulated

Other

Retained Comprehensive

Treasury

Receivable

Earnings

Income

Stock

from ESOP

Total

BALANCE JULY 31, 1997

$ 135,317

$ 6,212

$ 167,444

934

$ (63,312)

$(2,730)

$ 243,865

Comprehensive income

Net earnings

Foreign currency translation

Comprehensive income

Treasury stock acquired

Stock options exercised

Performance awards

Payment received from ESOP

Tax reduction – employee plans

Two-for-one stock split

Cash dividends ($.19 per share)

57,051

(6,069)

143

(5,145)

(1,546)

594

2,444

(33,250)

3,135

1,349

2,730

112,963

(6,054)

(170,349)

63,440

BALANCE JULY 31, 1998

248,280

1,199

Comprehensive income

Net earnings

Foreign currency translation

Comprehensive income

Treasury stock acquired

Stock options exercised

Performance awards

Tax reduction – employee plans

Cash dividends ($.23 per share)

149

(1,071)

1,334

BALANCE JULY 31, 1999

248,280

1,611

(5,135)

(28,638)

–

255,671

(535)

(44,535)

3,004

802

62,447

(535)

61,912

(44,535)

(346)

(443)

1,334

(10,830)

(5,670)

(69,367)

–

262,763

(9,630)

39,965

62,447

(3,499)

(174)

(10,830)

87,909

70,233

Comprehensive income

Net earnings

Foreign currency translation

Comprehensive income

Treasury stock acquired

Stock options exercised

Tax reduction – employee plans

Cash dividends ($.27 per share)

(4,853)

(35,923)

2,555

(727)

1,134

(2,633)

(12,384)

57,051

(6,069)

50,982

(33,250)

(1,867)

397

2,730

2,444

–

(9,630)

70,233

(4,853)

65,380

(35,923)

(805)

1,134

(12,384)

BALANCE JULY 31, 2000

$248,280

$2,018

$143,125

$(10,523) $(102,735)

$ –

$280,165

The accompanying notes are an integral part of these consolidated ﬁnancial statements.

Notes to Consolidated Financial Statements
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 equip-
ment; 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, air-
craft passenger cabins and semiconductor 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 state-
ments 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 mar-
ket. 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 inven-
tories 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

Machinery and equipment

10 to 40 years

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 associ-
ated 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 differ-
ences between the ﬁnancial statement carrying amounts of exist-
ing 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.

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 earn-
ings 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 cal-

culate 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, com-
panies 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, compen-
sation 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 com-
prehensive income until the hedged item is recognized in earn-
ings. 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.

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 respec-
tive 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 differ-
ent 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 manufac-
turing 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 state-
ment of earnings. The charge was primarily related to severance

and other employee related costs associated with the elimina-
tion 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 approxi-
mately 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 participat-
ing 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 mil-
lion 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 inter-
national borrowings outstanding at July 31, 2000 and 1999
was 4.07 percent and 3.04 percent, respectively.

Note E
Employee Beneﬁt Plans

Pension Plans Donaldson Company, Inc. and certain of its sub-
sidiaries 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 contri-
butions 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)

Net periodic cost:

Service cost

Interest cost

2000

1999

1998

$ 6,025

$ 5,609

$ 4,833

9,506

9,188

8,465

Expected return on assets

(11,081)

(10,006)

(8,838)

Transition amount amortization

(1,097)

Prior service cost amortization

Actuarial loss amortization

Curtailment loss

–

1,094

684

(18)

259

–

Net periodic beneﬁt cost

$ 3,488

$ 5,502

$ 3,604

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

6.31% Unsecured senior notes due July 15, 2008,

interest payable semi-annually, principal
payment of $27.0 million is due July 15, 2008

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

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

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

Other

Total

Less current maturities

Total long-term debt

$23,000

27,000

25,000

10,962

10,358

5,667

1,295

–

1,742

92,924

87,100

279

409

$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, respec-
tively. 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 indebted-
ness. 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.

The funded status of the company’s domestic pension plans

The projected beneﬁt obligation and accumulated beneﬁt

as of April 30, 2000 and July 31, 1999, is as follows:

(Thousands of dollars)

Change in beneﬁt obligation:

2000

1999

Beneﬁt obligation at beginning of year

$131,996

$121,213

Adjustment for change in measurement date

Beneﬁt obligation, new measurement date

Service cost

Interest cost

Plan amendments

Actuarial (gain) /loss

Beneﬁts paid

1,841

133,837

6,025

9,506

568

(11,025)

N/A

5,609

9,188

1,338

1,392

(7,663)

(6,744)

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 accumu-
lated beneﬁt obligations in excess of plan assets as of April 30,
2000 and July 31, 1999, respectively.

Weighted-average

actuarial assumptions

Discount rate

Expected return on plan assets

Rate of compensation increase

April 30
2000

8.00%

9.00%

6.00%

July 31
1999

7.50%

9.00%

6.00%

July 31
1998

7.25%

9.00%

6.00%

Beneﬁt obligation at April 30 and July 31

$131,248

$131,996

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.

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

Actual return on plan assets

Company contributions

Beneﬁts paid

147,848

(2,072)

2,132

N/A

9,282

3,893

(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

Unrecognized prior service cost

(11,678)

2,472

1,885

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

Accrued beneﬁt liability

Additional minimum liability

Intangible asset

Net amount recognized in consolidated

balance sheet

$ 4,614

$ 3,500

(8,592)

(6,122)

(280)

280

(653)

653

$ (3,978)

$ (2,622)

Stock Options Stock options issued during ﬁscal 1999 and
2000 become exercisable for non-executives in each of the fol-
lowing 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 compen-
sation 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 mil-
lion 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.

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 out-
standing 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 per-
cent 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.

For purposes of computing compensation cost of stock

The following table summarizes information concerning

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 assump-
tions: 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 com-
mon 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.

currently outstanding and exercisable options:

Weighted
Average
Remaining
Number Contractual

Outstanding Life (Years)

Range of
Exercise
Prices

$5 to $10

718,592

$10 to $15

1,096,624

$15 to $20

841,251

1.24

3.90

7.22

Weighted
Average
Exercise

Number
Price Exercisable

Weighted
Average
Exercise
Price

$ 8.85

718,592

$ 8.85

12.30

1,092,624

18.23

697,835

12.30

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 number and option price of options granted under

The components of earnings before income taxes are as follows:

these plans were as follows:

Outstanding at July 31, 1997

3,317,308

$ 10.98

Weighted
Average
Outstanding Exercise Price

Options

Granted

Exercised

Canceled

Outstanding at July 31, 1998

Granted

Exercised

Canceled

Outstanding at July 31, 1999

Granted

Exercised

Canceled

472,595

(419,728)

(21,999)

3,348,176

495,149

(432,505)

(28,498)

3,382,322

489,086

(204,004)

(14,468)

22.83

8.40

14.98

12.95

20.10

8.65

18.35

14.50

23.01

10.09

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.

(Thousands of dollars)

2000

1999

1998

Earnings before income taxes:

United States

$ 54,913

$55,811

$60,673

Foreign

Total

45,420

33,399

25,768

$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

State

Foreign

Deferred:

Federal

State

Foreign

$18,192

$16,717

$15,931

2,361

9,996

2,471

7,086

1,837

7,396

30,549

26,274

25,164

(504)

(449)

426

489

3,410

195

621

4,226

Total

$30,100

$26,763

$29,390

The tax effects of temporary differences that give rise to

The following table reconciles the U.S. statutory income

deferred tax assets and liabilities are as follows:

tax rate with the effective income tax rate:

(Thousands of dollars)

Deferred tax assets:

2000

1999

1998

2000

1999

1998

Statutory U.S. federal rate

35.0%

Compensation and retirement plans

$ 12,839

$ 8,950

$ 5,705

State income taxes

Accrued expenses

7,818

9,617

8,365

Foreign taxes at lower rates

720

Other

1.5

(6.1)

(.4)

1.8

(5.5)

(1.3)

1.4

(1.3)

(1.1)

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.

Brazilian asset write-down

NOL carryforwards

Inventories

Investment in joint venture

Cumulative translation adjustment

Other

–

6,120

1,526

754

4,574

3,162

–

3,560

1,595

588

2,494

3,267

2,070

1,095

1,195

2,646

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 company has identiﬁed two reportable segments: Engine
Products and Industrial Products. Segment selection was based
on the internal organizational structure, management of opera-
tions 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 com-
pany’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 detail is summarized as follows (in thousands):

Engine
Products

Industrial Corporate &
Unallocated
Products

Total
Company

$673,982

$418,312

– $1,092,294

20,959

8,509

4,858

34,326

4,392

–

4,392

57,453

53,862

(10,982)

100,333

2000

Net sales

Depreciation and
amortization

Equity in earnings

of unconsolidated
afﬁliates

Earnings before
income taxes

Assets

320,805

172,837

176,015

669,657

Equity investments
in unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

1999

Net sales

Depreciation and
amortization

Equity in earnings

of unconsolidated
afﬁliates

Earnings before
income taxes

13,600

–

13,600

22,236

9,028

5,153

36,417

$ 611,378

$ 332,761

– $

944,139

18,486

7,506

1,694

27,686

3,610

–

3,610

61,896

36,373

(9,059)

89,210

Assets

327,035

160,201

55,010

542,246

Equity investments
in unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

13,833

–

13,833

19,723

8,008

1,808

29,539

Segment allocated assets are primarily accounts receivable,

1998

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.

Net sales

$ 622,096

$ 318,255

–

940,351

Depreciation and
amortization

Equity in earnings

of unconsolidated
afﬁliates

Earnings before
income taxes

16,551

6,437

2,284

25,272

3,654

–

3,654

62,987

29,057

(5,603)

86,441

Assets

321,872

151,221

39,894

512,987

Equity investments
in unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

11,414

–

11,414

35,826

13,934

4,945

54,705

Geographic sales by origination and property, plant and

equipment (in thousands):

2000

United States

Europe

Asia Paciﬁc

Other

Total

1999

United States

Europe

Asia Paciﬁc

Other

Total

1998

United States

Europe

Asia Paciﬁc

Other

Total

Property, Plant &
Net Sales Equipment – Net

$ 690,899

$135,480

206,429

166,221

30,745

37,698

22,304

9,063

$1,092,294

$204,545

$ 616,254

$ 122,513

166,431

138,453

23,001

28,616

21,911

9,140

944,139

$ 182,180

$ 615,770

$ 119,623

160,211

139,606

24,764

29,620

18,848

10,776

$ 940,351

$ 178,867

There were no sales over 10 percent of net sales to one cus-
tomer 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,

except per share amounts)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2000

Net Sales

Gross Margin

Net Earnings

Diluted Earnings
Per Share

Dividends Declared

Per Share

1999

Net Sales

Gross Margin

Net Earnings

Diluted Earnings

Per Share

Dividends Declared

Per Share

$246,550

$259,256

$285,277

$301,211

73,881

79,595

84,812

89,233

17,008

17,406

17,450

18,369

.36

.07

.37

.07

.38

.07

.40

.07

$ 225,431

$ 220,249

$ 244,219

$ 254,240

62,329

62,262

74,212

76,878

13,369

13,172

17,418

18,488

.28

.06

.27

.06

.37

.06

.39

.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.

Report of Independent Public Accountants

To the Shareholders and Board of Directors

of Donaldson Company, Inc.

We have audited the accompanying consolidated balance sheet of Donaldson Company, Inc.

(a Delaware corporation) and subsidiaries as of July 31, 2000, and the related consolidated

statements of earnings, changes in shareholders’ equity and cash ﬂows for the year then

ended. These ﬁnancial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these ﬁnancial statements based on our audit.

The consolidated ﬁnancial statements of Donaldson Company, Inc. and subsidiaries as of

July 31, 1999 and 1998, were audited by other auditors whose report dated September 8,

1999, expressed an unqualiﬁed opinion on those statements.

We conducted our audit in accordance with auditing standards generally accepted in the

United States. Those standards require that we plan and perform the audit to obtain rea-

sonable assurance about whether the ﬁnancial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and dis-

closures in the ﬁnancial statements. An audit also includes assessing the accounting

principles used and signiﬁcant estimates made by management, as well as evaluating the

overall ﬁnancial statement presentation. We believe that our audit provides a reasonable

basis for our opinion.

In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all

material respects, the ﬁnancial position of Donaldson Company, Inc. and subsidiaries as

of July 31, 2000, and the results of their operations and their cash ﬂows for the year then

ended, in conformity with accounting principles generally accepted in the United States.

Minneapolis, Minnesota,

August 29, 2000

Eleven-Year Comparison of Results

Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except per share amounts)

2000

1999

1998

1997

OPERATING RESULTS

Net sales

Gross margin

Gross margin percentage

Operating income

Operating income percentage

Interest expense

Earnings before income taxes

Income taxes

Effective income tax rate

Net earnings

Return on sales

Return on average shareholders’ equity

Return on investment

FINANCIAL POSITION

Total assets

Current assets

Current liabilities

Working capital

Current ratio

Current debt

Long-term debt

Total debt

Shareholders’ equity

Long-term capitalization ratio

Property, plant and equipment, net

Net expenditures on property, plant and equipment

Depreciation and amortization

SHAREHOLDER INFORMATION

Net earnings per share – Diluted

Dividends paid per share

Shareholders’ equity per share

Shares outstanding (000s)

Common stock price range, per share

High

Low

$1,092,294

$ 327,521

30.0%

$ 105,594

9.7%

9,880

$ 100,333

30,100

30.0%

70,233

6.4%

25.9%

19.4%

$ 669,657

$ 375,479

$ 235,722

$ 139,757

1.6

85,313

92,645

$ 177,958

$ 280,165

$944,139

275,681

$940,351

263,262

$833,348

250,273

29.2%

88,390

9.4%

6,993

89,210

26,763

30.0%

62,447

6.6%

24.1%

19.0%

542,246

326,388

142,055

184,333

2.3

20,696

86,691

107,387

262,763

28.0%

86,799

9.2%

4,671

86,441

29,390

34.0%

57,051

6.1%

22.8%

20.5%

512,987

300,817

165,068

135,749

1.8

45,896

51,553

97,449

30.0%

82,715

9.9%

2,358

79,094

28,474

36.0%

50,620

6.1%

21.4%

20.8%

467,501

283,367

177,346

106,021

1.6

42,674

4,201

46,875

255,671

243,865

24.9%

24.8%

16.8%

1.7%

$ 204,545

36,417

34,326

1.51

.27

6.27

182,180

29,539

27,686

1.31

.23

5.69

178,867

54,705

25,272

1.14

.19

5.28

154,595

47,327

21,494

.99

.17

4.93

44,658

46,197

48,382

49,452

2413⁄16

191⁄8

25 7⁄8

14 7⁄16

27 3⁄16

18 9⁄16

20 3⁄8

125⁄8

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.

1996

1995

1994

1993

1992

1991

1990

$758,646

222,874

$703,959

197,979

$593,503

166,599

$533,327

152,236

$482,104

133,574

$457,692

129,858

$422,885

121,454

29.4%

75,642

10.0%

2,905

71,120

27,684

38.9%

43,436

5.7%

19.3%

18.5%

402,850

250,751

138,578

112,173

1.8

13,145

10,041

23,186

28.1%

65,531

9.3%

3,089

63,172

24,636

39.0%

38,536

5.5%

18.8%

17.6%

381,042

247,904

123,747

124,157

2.0

20,800

10,167

30,967

28.1%

52,079

8.8%

3,362

50,193

18,244

36.3%

31,949 (1)

5.4%

17.6%

16.0%

337,360

220,308

115,757

104,551

1.9

16,956

16,028

32,984

28.5%

45,246

8.5%

2,723

44,682

16,468

36.9%

28,214

5.3%

16.9%

15.0%

300,217

196,014

93,666

102,348

2.1

7,595

18,920

26,515

27.7%

41,249

8.6%

2,681

41,721

15,952

38.2%

25,769

5.3%

17.2%

14.8%

286,348

187,360

89,956

97,404

2.1

11,425

23,482

34,907

28.4%

41,304

9.0%

3,526

39,385

15,337

38.9%

24,048

5.3%

18.0%

14.9%

253,194

169,398

77,537

91,861

2.2

6,380

25,673

32,053

28.7%

44,354

10.5%

3,731

34,875

13,849

39.7%

21,026

5.0%

17.8%

14.2%

245,947

168,522

79,917

88,605

2.1

11,384

28,320

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

39,297

21,674

.84

.15

4.52

110,640

25,334

20,529

.73

.14

4.23

50,650

52,370

1115⁄16

10 15⁄16

99,559

24,642

16,365

.59 (1)

.12

3.58

53,020

131⁄16

9 1⁄8

90,515

15,005

14,752

.51

.10

3.19

84,899

15,538

14,047

.46

.09

2.91

72,863

16,208

12,187

.42

.07

2.51

68,290

16,055

10,857

.37

.06

2.23

54,564

55,138

55,478

57,728

10 1⁄16

715⁄16

53⁄16

6 9⁄16

4 1⁄16

5 13⁄16

2 13⁄16

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 share-
holdings, 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

High
Low

121⁄8

127⁄8

13 3⁄16 131⁄16 1315⁄16

107⁄16 107⁄16 111⁄4

121⁄16

1115⁄16 121⁄16 1213⁄16

145⁄8

18 5⁄16 20 3⁄8

273⁄16 2511⁄16 263⁄16

251⁄8

2115⁄16 21

231⁄2 257⁄8

231⁄2 2413⁄16 241⁄16 241⁄4

1211⁄16 145⁄16 153⁄8

173⁄4

20 5⁄16 221⁄4

22 5⁄8

18 9⁄16

147⁄16 1711⁄16 171⁄4 2115⁄16

191⁄2 20 5⁄8

201⁄4

191⁄8

1995

1996

1997

1998

1999

2Q
2000

Board of Directors and Corporate Ofﬁcers

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

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)

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.

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 Ibérica 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.
São Paulo, Brazil

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
Singapore

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

Donaldson Company, Inc.
1400 West 94th Street
Minneapolis, Minnesota
U.S.A.

(952) 887-3131
www.donaldson.com

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.
Dülmen, 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

Mailing Address:
P.O. Box 1299
Minneapolis, Minnesota
55440 U.S.A