Donaldson Company Annual Report 2002

FY2002 Annual Report · Donaldson Company

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WE’RE HERE BECAUSE...
WE’RE HERE BECAUSE...

THIRTEEN CONSECUTIVE RECORD YEARS
2002 Annual Report

WE’RE HERE BECAUSE…diversiﬁcation means much more than diversity of
products – a keystone of our strategy. It also means global diversiﬁcation – by end market,

supply sources, labor expertise and logistical advantage. It is this global focus that drives

decisions to locate our high-volume disk drive ﬁlter business (cover) in Wuxi, China.

> WUXI, CHINA. Donaldson Company operations in China represent a major – and growing –
component of our global strategy. Our two state-of-the-art cleanrooms in Wuxi produced more
than 175 million disk drive ﬁlters during ﬁscal 2002. We also have facilities producing industrial
air ﬁltration equipment and ﬁltration membranes.

About the Company

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; compressed air puriﬁcation systems; air intake systems for
industrial gas turbines; and specialized ﬁlters for such diverse applications as computer disk drives, aircraft
passenger cabins and semiconductor processing. Products are manufactured at more than three dozen
Donaldson plants around the world and through four joint ventures.

Our ﬁnancial objective is to build shareholder value through superior share price appreciation and con-
sistent dividend payouts. We believe value is created by delivering consistent, double-digit growth in earn-
ings 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.

Contents

1
2
3
4
5
6
7
10
12
14

Perfecting Production in Mexico
Optimized to Compete in Europe
Aggressive in Asia-Paciﬁc
Capitalizing on the Aftermarket
Growth Through Business Balance
Letter to Shareholders
Financial Highlights
Operating Segments
Eleven-Year Comparison of Results
Management’s Discussion and Analysis

23
24
25
26

Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in
Shareholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Accountants
Corporate and Shareholder Information
Board of Directors
Corporate Ofﬁcers

27
39
40
40
41
Back Worldwide Operations

PERFECTING PRODUCTION IN MEXICO
PERFECTING PRODUCTION IN MEXICO

> MONTERREY, MEXICO. Today, one year after opening the Monterrey plant, about two-thirds of our
North American gas turbine output is manufactured here. The plant is continuing to develop its highly
motivated workforce and grow its capabilities.

ONE OF OUR MOST NOTABLE SUCCESSES is our year-over-year gross margin improvement – even as we’ve
responded to price reduction pressure in our markets. One factor: aggressive cost management from the design phase through
delivery to our customer. This includes relocation of our manufacturing capabilities when it makes good sense. The evolution
in bringing gas turbine solutions to the market is a good example. First, we shifted to a modular design strategy for these large
systems, increasing both production capacity and product margins. We then moved a portion of our production to lower-cost
suppliers in Mexico, and ﬁnally, last year opened our own dedicated plant in Monterrey. Our Mexican presence now consists
of three manufacturing plants and a sales ofﬁce in Mexico City.

OPTIMIZED TO COMPETE IN EUROPE
OPTIMIZED TO COMPETE IN EUROPE

> HULL, ENGLAND. This geographically critical manufacturing and distribution operation supports
our industrial air, gas turbine and engine businesses throughout the European markets. Dramatic
increases in production volume over the past 10 years parallel our progress growing our air ﬁlter
business through the combination of new products, new customers and geographic expansion.

DONALDSON COMPANY’S PAN-EUROPEAN STRUCTURE is complex and compelling. Complex because
we conduct business daily in 10 different currencies and at least 10 distinct languages. Compelling because we sustain both a
targeted, local-market approach and the big-picture perspective required to win global opportunities. Our customers’ business
models drive us to structure, produce, sell and service markets that expand daily. In addition to balanced growth in existing
Western European markets, our strategy emphasizes diversiﬁed expansion into Eastern Europe and the Middle East. Our
European presence now consists of 11 manufacturing plants and more than 20 ofﬁces in 20 countries.

AGGRESSIVE IN ASIA-PACIFIC
AGGRESSIVE IN ASIA-PACIFIC

> GUNMA, JAPAN. During the past two years, a comprehensive program to improve return-on-

investment at Nippon Donaldson has tripled the ROI from single-digit levels to above 20 percent,
despite the on-going Japanese recession.

FISCAL 2002 MADE THE THIRD YEAR of a region-wide diversiﬁcation focus, which includes signiﬁcant progress
expanding our product offerings and leveraging our low-cost production capabilities. China, the base for our disk drive business,
also is now home to our Asian industrial air ﬁltration production. Additional gas turbine capabilities have come on line in India.
Engine aftermarket distribution increased in Southeast Asia, mainland China and New Zealand. Our Asian presence now consists
of eight manufacturing plants and more than 20 ofﬁces in 11 countries.

CAPITALIZING ON THE AFTERMARKET
CAPITALIZING ON THE AFTERMARKET

> AGUASCALIENTES, MEXICO. Aguascalientes is strategically important for supplying customers in the
United States, Mexico and South America with replacement ﬁlters and parts. Aguascalientes’ low cost
structure, skilled workforce and central location allow us to deliver high-quality ﬁlters and parts where
and when the customer needs them.

SIGNIFICANT SALES AND EARNINGS GROWTH opportunities exist where Donaldson’s unique ﬁltration
technologies intersect with ever-growing aftermarket demand. Expertise in the science of ﬁltration leads to development of
value-added solutions that provide us with the competitive edge supplying end-users with replacement parts. The higher-
margin aftermarket business will also grow along with our expanding international presence. North America also remains a
growth territory as we continue to introduce new products and expand distribution outlets and channels to win more share
of the replacement parts business.

GROWTH THROUGH BUSINESS BALANCE
GROWTH THROUGH BUSINESS BALANCE

> DÜLMEN, GERMANY. Opened in 1970, the Dülmen plant and sales ofﬁce is one of our longest estab-
lished international operations. It’s also at the leading edge of capitalizing on steadily growing European
opportunities in applications ranging from engine air intake systems to industrial air ﬁltration systems.

OUR INDUSTRIAL/COMMERCIAL BUSINESS represented only one-third of Donaldson’s revenue a decade
ago. In ﬁscal 2002, our Industrial/Commercial segment comprised almost one-half of sales. We achieved this strategic balance
by leveraging our existing customer relationships, extending our technologies into new markets and products, and using our
applications expertise to increase customer value. Examples include: miniature disk drives migrating into consumer devices
such as digital cameras; leveraging our PowerCore™ technology into our gas turbine business, reducing both the footprint and
cost to our customers; and Donaldson Torit Downﬂo® Oval 1™ providing more effective and efﬁcient ﬁltration while requiring
signiﬁcantly less ﬂoor space.

> WILLIAM G. VAN DYKE

Chairman, President and Chief Executive Ofﬁcer

DEAR SHAREHOLDERS > After 30 years here, I’m still sometimes surprised,
impressed – and delighted – with what a good company this is.
I am pleased to be writing to you about our 13th consecutive year
of double-digit earnings growth – our best ever.

The Donaldson people rose to the challenge of a second

this business cycle was going to have on their lives.

consecutive difﬁcult revenue year. Despite those conditions,

They refocused on making the business run better. In

resulting in a year of no revenue growth, we improved

dozens of locations around the world, we saw truly

all other lines of our income statement, improved inven-

stunning operating improvements. Processes changed.

tory and overall working capital levels and used record

Product lines pared. Facilities closed; more cost-efﬁcient

cash ﬂow to reduce debt costs, buy back stock and fund

ones were opened and brought on line ahead of schedule.

our acquisition activity.

The list goes on, but it has a simple manifestation: six

The past ﬁscal year was the most difﬁcult revenue

consecutive quarters of climbing gross margin, yielding

environment in 20 years, and yet we not only extended

a record 31 percent for the year. Most exciting of all:

our string of double-digit earnings growth, but clearly

the work that delivered these results is a work in process

strengthened our business in the process. There is no

and promises additional lift going forward.

magic to this. What it took was a commitment from

people all over our company to control the impact that

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)

2002

$1,126,005
86,883

7.7%
24.8%
21.5%

$ 1.90
$ .310
$ 8.72
45,714
8,166
$ 137.9

2001

$1,137,015
75,548

6.6%
25.2%
23.7%

$ 1.66
$ .295
$ 7.19
45,612
8,230
$ 138.2

% change

(1.0)%
15.0%
1.1 pts.
(.4) pts.
(2.2) pts.
14.5%
5.1%
21.3%
.2%
(.8)%
(.2)%

Our fundamental business model is that effective

end markets for our other businesses, and expect organic

diversiﬁcation of our end markets will support consistent,

growth from our existing businesses to roughly offset

superior results. That model was once again tested

the slowdown in gas turbine.

and reinforced in ﬁscal 2002, as continued strength in

Having said that, none of us takes this North American

gas turbine and an upturn in truck offset weakness in

gas turbine contraction lightly. Manufacturers’ forecasts

industrial capital spending, which impacted most of our

are strikingly severe. Still, our North American downturn

industrial product offering.

will be softened by increased market share in Europe,

Geographic diversiﬁcation again played an important

where demand remains strong. Replacement ﬁlters

role. Overseas revenues grew faster than U.S. revenues

should see solid growth, as plants we equipped during

in all six of our major product groups. With 39 percent

the early part of the boom are starting to come due for

of sales coming from outside the United States, we moved

their ﬁrst ﬁlter replacements.

closer to our goal of a 50:50 split between domestic and

To ﬁll the gas turbine hole, the Engine business

overseas. The results reinforced our belief in the great

appears to be turning up. Incoming orders have trended

growth opportunities outside the United States.

up strongly since the second quarter – especially

A recurring question from investors concerns how

overseas. New equipment orders in the fourth quarter

Donaldson will cope with the now certain contraction in

were up 5 percent domestically and 24 percent overseas

gas turbine. It is a fact that we expect the North American

from last year. Coupling higher volume with ongoing

gas turbine contraction to be severe, dropping perhaps

improvements in Engine proﬁtability gives us important

$50 million from next year’s gas turbine sales. However,

leverage for the coming year.

the larger fact is that we are seeing improvements in the

LONG-TERM PERFORMANCE

(Cumulative total return) Year ended July 31

= DCI

= S&P 400

1,115

1,015

796

687

729

623

580

630

642

590

373

412

384

492

461

294

317

236

280

228

225

203

148

142

173

172

100

100
88

133

82
89

We think that too much has been made of the North

projected gas turbine drop. Revenue from the recently

American “pre-buy” in heavy trucks – at least as it per-

completed ultraﬁlter acquisition will likely add another

tains to Donaldson. Yes, it will buoy our ﬁrst quarter

$100 million.

numbers and deﬂate at least the second quarter. But, in

So with our operations in solid shape and continuing

the end, we expect to equip more trucks this year than

to improve, and a cautious, modest, careful optimism

last – truck sales will be a helpful, though not a critical,

about the revenue outlook, the other piece of the story

piece of ﬁscal 2003. More important will be the impact

for next year is the marrying of our latest acquisition,

of increased volume in emissions products and of several

ultraﬁlter, into the company. As a European manufacturer

new light truck intake programs coming on line this year.

of replacement parts for compressed air puriﬁcation,

In industrial air ﬁltration – dust collection – the good

ultraﬁlter satisﬁes all three dimensions of our diversiﬁ-

news is that the business contraction appears ﬁnally to

cation strategy. In one transaction we achieved better

be at an end. Fourth quarter delivered the ﬁrst positive

balance between the U.S. and overseas economies,

sequential quarter in two years. While this doesn’t yet

between capital equipment and replacement parts and

translate into an upturn, we’ve pared our product line

between the mobile-diesel and industrial markets. This

and our cost structure so that incremental revenue, when

better-balanced portfolio should enhance the stability

it comes, will have an immediate bottom line impact.

of our performance over time.

In sum, fourth quarter order volume for Engine was up

This acquisition builds on the AirMaze acquisition of

10 percent and, exclusive of North American gas turbine,

two years ago. Where AirMaze brought us to the ﬁltra-

Industrial was up 6 percent. If we do no better than hold

tion needs of the compressor itself, ultraﬁlter moves out

gains like that for ‘03, we’ll comfortably backﬁll the

of the compressor room to all points of use in the factory.

CONSISTENT DOUBLE-DIGIT EPS GROWTH

(Annual EPS % change)

10%
Goal

Ultraﬁlter’s products remove particulate, mist and mois-

The headwind is abating. This year, while coping with

ture from the compressed air stream that ultimately ﬁnds

the gas turbine change, we expect some modest sales lift

its way to conveying systems, pneumatic tools, controls,

from our other businesses, and we’re a long way from

spraying operations and many other applications.

done with tuning our operations. We remain committed

Ultraﬁlter is about a $100 million business and has

to sustaining our earnings growth record.

grown at a rate of 14 percent over the past ﬁve years,

but operating margins have been slim as the business

Sincerely,

was run as a privately held German company. Combining

ultraﬁlter’s growth track with Donaldson’s operating

controls, systems and infrastructure yields a business

opportunity that will play a meaningful role in our future

financial performance.

Cyclical markets inevitably deliver periods of low

sales growth – 2003 will be the third consecutive year

where a down cycle has subtracted $50 million from one

of our prime markets. Yet, through the strength of our

solid operations and the dedication of our employees,

we have reafﬁrmed our commitment to earnings growth.

WILLIAM G. VAN DYKE

Chairman, President and Chief Executive Ofﬁcer

INDUSTRIAL PRODUCTS OPERATING SEGMENT

2002 REVENUE $514 MILLION

INDUSTRIAL
DUST COLLECTION
AIR FILTRATION

GAS TURBINE SYSTEMS

SPECIAL APPLICATIONS

Under the trade names
Donaldson Torit®and Donaldson
Torit DCE®, Donaldson provides
equipment to control and cap-
ture process dust, fumes and
mist in manufacturing and
industrial processing plants.
In addition, a full line of replace-
ment ﬁlter cartridges, bags and
spare parts are offered.

Donaldson provides complete
systems to deliver clean air to
combustion turbines. Products
include self-cleaning ﬁlter units,
static air ﬁlter units, inlet duct-
ing and silencing, evaporative
coolers, chiller coils, inlet
heating and anti-icing systems.
Also, a full line of replacement
ﬁlters and parts is offered.

Donaldson provides a wide
range of high efﬁciency media,
ﬁlters and ﬁltration systems for
various commercial, industrial
and product applications.

Product is applied in a wide
variety of industrial settings
including metal working plants,
paint operations, welding
stations, woodworking shops
and food processing plants.

Essentially all combustion tur-
bines require inlet air ﬁltration
and noise attenuation systems.
These turbines provide base
electricity, peaking capacity
and remote power generation
for special applications such
as pipelines and off-shore oil
drilling platforms.

Products for the computer disk
drive market include particulate
filters, desiccant pouches
and chemical adsorbing ﬁlter
pouches. Customers include
major disk drive manufacturers
such as IBM, Seagate and
Western Digital.

Products for special market
applications include aircraft
cabin air ﬁlters, chemical ﬁlter
systems for semi-conductor
processing facilities, as well as
other ﬁlters for process-critical
applications.

Donaldson sells expanded
PTFE membrane through its
Tetratec unit. Primary appli-
cations for this membrane
are industrial dust collection,
product recovery applications
and specialty fabrics.

$175

MILLION

$231

MILLION

$108

MILLION

Dedicated ﬁeld sales force uses
multiple selling channels to
end-users including: direct sell-
ing, distribution, installers, OEM
accounts and telemarketing.

Products are primarily sold
to gas turbine OEMs (e.g.,
General Electric, Solar,
Siemens Westinghouse).
Replacement parts are sold
direct to end-users.

Products are sold to disk drive
manufacturers by a direct sales
force supported by product
development and application
engineers.

Products are primarily sold
direct to end-users.

Membrane and laminates
are sold to various ﬁlter and
garment manufacturers.

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ENGINE PRODUCTS OPERATING SEGMENT

2002 REVENUE $612 MILLION

Donaldson sells a broad line
of ﬁlters and housings for
industrial hydraulic and
lubricating ﬂuids.

Products are sold through
an extensive network of
industrial distributors.

OFF-ROAD EQUIPMENT

TRUCKS

AFTERMARKET

Products sold to industrial
equipment and defense con-
tractor OEMs for agriculture,
construction, mining, military
and other industrial applica-
tions.

Products sold to manufactur-
ers of medium- and heavy-duty
trucks.

Broad line of replacement
ﬁlters and hard parts for all
of the equipment applications
noted at left.

Caterpillar, John Deere,
Komatsu, CNH, Volvo
Construction Equipment,
General Dynamics and Stewart
& Stevenson

Freightliner, PACCAR,
Volvo, Scania, International
and Mitsubishi

Original equipment dealers
(such as Freightliner dealers
or Caterpillar dealers),
independent distributors
and private label accounts

$186

MILLION

$91

MILLION

$335

MILLION

Engine Intake Air
Filtration Systems

Exhaust Systems

Hydraulic Filtration
Systems

Lube, Fuel and Coolant
Filtration Systems

Cabin Air Filters

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✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
ELEVEN-YEAR COMPARISON OF RESULTS
Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except per share amounts)

2002

2001

2000

1999

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 – assuming dilution

Dividends paid per share

Shareholders’ equity per share

Shares outstanding (000s)

Common stock price range, per share

High

Low

$1,126,005

$ 349,492

$1,137,015

$1,092,294

341,734

327,521

$944,139

275,681

31.0%

30.1%

30.0%

$ 123,850

112,108

105,594

11.0%

9.9%

9.7%

$ 6,531

$ 119,018

$ 32,135

27.0%

$ 86,833

7.7%

24.8%

19.2%

$ 850,131

$ 456,484

$ 272,790

$ 183,694

1.7

$ 60,394

$ 105,019

$ 165,413

$ 382,621

11,608

104,928

29,380

28.0%

75,548

6.6%

25.2%

19.1%

706,830

407,227

217,279

189,948

1.9

59,416

99,259

158,675

319,093

9,880

100,333

30,100

30.0%

70,233

6.4%

25.9%

19.4%

677,525

383,347

243,590

139,757

1.6

85,313

92,645

177,958

280,165

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

21.5%

23.7%

24.9%

24.8%

$ 240,913

$ 40,529

$ 31,751

$ 1.90

$ .31

$ 8.72

43,885

$ 44.99

$ 26.93

207,658

38,924

38,577

1.66

.295

7.19

204,545

36,417

34,326

1.51

.27

6.27

182,180

29,539

27,686

1.31

.23

5.69

44,383

44,658

46,197

33.05

19.13

24 .81

19.13

25.88

14.44

Amounts are adjusted for all stock splits and reﬂect adoption of SFAS 128.

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.

1998

1997

1996

1995

1994

1993

1992

$940,351

263,262

$833,348

250,273

$758,646

222,874

$703,959

197,979

$593,503

166,599

$533,327

152,236

$482,104

133,574

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

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

255,671

243,865

228,880

221,173

189,697

174,008

16.8%

1.7%

4.2%

4.4%

7.8%

9.8%

178,867

54,705

25,272

1.14

.19

5.28

154,595

47,327

21,494

.99

.17

4.93

124,913

39,297

21,674

.84

.15

4.52

110,640

25,334

20,529

.73

.14

4.23

99,559

24,642

16,365

.59 (1)

.12

3.58

90,515

15,005

14,752

.51

.10

3.19

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

160,303

12.8%

84,899

15,538

14,047

.46

.09

2.91

48,382

49,452

50,650

52,370

53,020

54,564

55,138

27.19

18.56

20.38

12.69

14.00

11.94

14.00

10.94

13.06

9.13

10.06

7.00

7.94

5.19

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 and other ﬁnancial information
included elsewhere in this Report.

Fiscal 2002 Compared to Fiscal 2001 The company reported
sales in 2002 of $1.126 billion, down 1.0 percent from
$1.137 billion last year. Despite a decrease in sales, the
company achieved its 13th consecutive year of double-
digit earnings growth. The company’s diversiﬁcation of
filtration products was important to its success in ﬁscal
2002 in a difﬁcult economic environment. Decreased sales
in the Industrial Products segment were partially offset by
increased sales in the Engine Products segment.

Sales for the Industrial Products segment were $514.4
million, down 3.0 percent from a record $530.2 million
in the prior year. Sales totals do not include results from
ultraﬁlter international AG (“ultraﬁlter”), which was
acquired immediately prior to the end of the ﬁscal year.
Within the Industrial Products segment, sales of gas
turbine products were a record $230.9 million, up 18.4
percent from a record $195.0 million in the prior year.
Sales of gas turbine products were strong domestically
as well as internationally as market conditions remained
steady outside of North America. Based on public
comments from gas turbine manufacturers, the company
expects the North American gas turbine contraction to be

severe, possibly reducing gas turbine sales in the next ﬁscal
year by $50 million. Sales in industrial air ﬁltration prod-
ucts (formerly referred to as dust collection) of $175.7 mil-
lion decreased 19.2 percent from $217.3 million in the
prior year, impacted by weakness in industrial capital
spending. Although these sales decreased from the prior
year, sales of industrial air ﬁltration products improved
21.8 percent in the fourth quarter of ﬁscal 2002 over the
third quarter, showing the ﬁrst meaningful improvement
on a sequential quarter basis in two years. Sales of special
application products were $107.8 million, an 8.5 percent
decrease from a record $117.8 million in the prior year,
reﬂecting weakness in the markets served by these products
such as the computer, electronics, semiconductor and air-
craft markets.

Sales for the Engine Products segment were $611.6 mil-
lion, up 0.8 percent from $606.8 million in the prior year.
This increase from the prior year reﬂects improved business
conditions in some of the markets served by products in
this segment. Within the Engine Products segment, sales of
truck products were $91.2 million, up 14.5 percent from
$79.7 million in the prior year, reﬂecting increased demand
for new truck orders in the North American truck market
prior to the new October 2002 diesel emissions regulations.
Sales of off-road products were $185.6 million, an increase
of 2.1 percent from $181.8 million in the prior year. After-
market product sales of $334.8 million decreased 3.1 per-
cent from $345.3 million in the prior year.

NET SALES Revenue has grown more than 8 percent
per year, on average, over the last 13 years.

EARNINGS PER SHARE Earnings per share were up
14.5 percent in 2002, the 13th consecutive year of double-digit
increases in EPS.

(Millions of dollars)

(Dollars)

1,137 1,126

1,092

940

944

833

759

704

594

533

482

.84

.73

.59

.51

.46

1.90

1.66

1.51

1.31

1.14

.99

Domestic sales in the Industrial Products segment
decreased 5.8 percent from the prior year. Within this
segment, domestic gas turbine product sales posted an
increase of 16.0 percent from the prior year. Offsetting this
increase was a decrease in sales of industrial air ﬁltration
products of 25.7 percent from the prior year, as the pace
of recovery in the U.S. manufacturing economy remained
slow with historically high levels of excess capacity.
Additionally, domestic sales of special application products
decreased 23.0 percent from the prior year reﬂecting a gen-
eral weakness in the served markets.

Domestic sales in the Engine Products segment were
down 1.3 percent from the prior year. Within this segment,
higher demand in the North American truck market drove
an increase of domestic truck product sales of 12.6 percent
from the prior year. Offsetting this increase was a decrease
in domestic aftermarket product sales of 4.8 percent result-
ing from weakness in U.S. truck and construction equip-
ment utilization. Domestic sales of off-road products
also declined from the prior year posting a decrease of
1.9 percent.

In U.S. dollars, total international sales increased
2.9 percent from the prior year. Excluding the negative
impact of foreign currency translation of $5.2 million,
sales increased 4.1 percent over the prior year. Total inter-
national sales in the Industrial Products segment were up
1.1 percent from the prior year. International sales of
products within this segment were mixed. International

sales of gas turbine products increased 25.7 percent, reﬂect-
ing positive market conditions outside of North America
with Europe showing the most improvement in these sales.
International sales of industrial air ﬁltration products and
special applications products decreased 9.4 percent and 2.0
percent, respectively. Total international sales in the Engine
Products segment were up 4.8 percent from the prior year.
International sales of aftermarket products were ﬂat while
international sales of off-road and truck products increased
from the prior year by 9.5 percent and 20.3 percent,
respectively.

The company reported record net earnings for 2002
of $86.9 million compared to $75.5 million in 2001, an
increase of 15.0 percent. Net earnings per share – diluted
were $1.90, up 14.5 percent from $1.66 in the prior year.
Despite a decrease in sales for the year, the company
achieved its 13th consecutive year of double-digit earnings
growth. This was a result of the company’s efforts in
improving operating performance as well as improvements
made to the company’s manufacturing infrastructure, prod-
uct costs and expenses. These efforts have resulted in more
efﬁcient operations across the company. The company’s
operating income increased from the prior year by 10.5
percent. Operating income in the Engine Products segment
showed signiﬁcant growth from the prior year as it grew to
over 50 percent of total operating income in the year from
about 40 percent in the prior year. This growth reﬂects the
efforts in improving operating efﬁciencies in the North

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

DIVIDENDS PER SHARE Dividends paid per share increased
5 percent in 2002. The company distributes about 20 percent of
net income to shareholders through regular quarterly dividends.

(% Per annum)

(Dollars)

25.9

25.2

24.8

24.1

22.8

21.4

19.3

18.8

17.2

16.9

17.6

.19

.17

.15

.14

.12

.10

.09

.31

.295

.27

.23

American Engine business. Operating income in the
Industrial Products segment grew slightly during the year.
International operating income totaled 68.9 percent of
consolidated operating income in 2002 as compared to
64.6 percent in 2001. Of the 2002 international operating
income, Europe contributed 41.0 percent while Asia-Paciﬁc
contributed 55.1 percent. Total international operating
income increased 3.5 percent from the prior year. In U.S.
dollars, Europe’s operating income increased 14.6 percent
and on a local currency basis increased 10.9 percent from
strong results throughout the Engine Products segment
and gas turbine products within the Industrial Products
segment. On a local currency basis, Asia-Paciﬁc’s operating
income increased 0.9 percent with mixed results across the
entities within Asia-Paciﬁc. In U.S. dollars, Asia-Paciﬁc’s
operating income decreased by 3.2 percent due to contin-
ued weakness in the Japanese yen.

Gross margin for 2002 increased to 31.0 percent com-

pared to 30.1 percent in the prior year. Ongoing efforts
to reduce product costs and improve the company’s manu-
facturing infrastructure through plant rationalization
drove margin improvements, more than offsetting contin-
ued strong pricing pressures from major customers.

Operating expenses as a percentage of sales for 2002
and 2001 were 20.0 percent and 20.2 percent, respectively.
Operating expenses in 2002 totaled $225.6 million com-
pared to $229.6 million in 2001, a decrease of $4.0 mil-
lion, or 1.7 percent. The decrease in operating expenses
relative to the prior year reﬂects the company’s expense
reduction initiatives, implemented late in ﬁscal 2001,
which reduced the number of contractors and temporary
employees and managed discretionary spending levels.

Interest expense decreased $5.1 million, or 43.7 percent,

partially due to lower interest rates and lower short-term
debt levels throughout most of the year. This decrease is
also due to a decrease in interest expense ($1.2 million)
on a portion of the company’s long-term debt as a result
of an interest rate swap agreement entered into in ﬁscal
2001. Other income, net totaled $1.7 million in 2002
compared to $4.4 million in the prior year. Components
of other income for 2002 were as follows: interest income
of $0.9 million, earnings from non-consolidated joint
ventures of $4.2 million, $2.5 million of funding to the
Donaldson Foundation, foreign exchange losses of $1.3
million resulting from the movement of cash into Europe
to complete the ultraﬁlter acquisition and other miscella-
neous income and expense items netting to $0.4 million
of miscellaneous income.

The effective income tax rate of 27.0 percent in 2002
decreased from the 28.0 percent tax rate in 2001. The tax
rate was adjusted in the second quarter of ﬁscal 2002 to
reﬂect state tax savings from infrastructure improvements.
The company anticipates maintaining the 27.0 effective
income tax rate for the foreseeable future.

Total backlog was $307.6 million, down 13.4 percent
from the same period in the prior year. In the Industrial
Products segment, total backlog decreased 29.4 percent
from the same period in the prior year reﬂecting the
projected downturn in the North American gas turbine
market. In the Engine Products segment, total backlog
increased 3.4 percent compared to the same period in the
prior year, reﬂecting improvement in business conditions in
the markets served. Hard order backlog, goods scheduled
for delivery within 90 days, was $178.3 million, down
0.9 percent from $179.9 million in the prior year. In the
Industrial Products segment, overall hard order backlog
decreased 10.9 percent from the prior year. Within this
segment, hard order backlog for gas turbine products and
industrial air ﬁltration products decreased 21.1 percent
and 7.4 percent from the prior year, respectively. These
decreases were somewhat offset by a strong increase in
special application products of 34.3 percent. In the Engine
Products segment, overall hard order backlog increased
8.7 percent from the prior year. Within this segment, truck
products showed a solid increase of 22.9 percent from the
prior year. Hard order backlog for aftermarket products
decreased slightly at 0.3 percent, while off-road products
posted an increase of 7.6 percent.

The company completed the acquisition of ultraﬁlter for

$68.3 million in cash on July 12, 2002. The acquisition is
reﬂected in the consolidated balance sheet as of July 31,
2002. Ultraﬁlter’s results of operations will be included in
the consolidated ﬁnancial statements beginning with ﬁscal
2003 as the results in ﬁscal 2002 were not material to the
company as a whole. Ultraﬁlter is a global leader in the
design and manufacture of components, replacement parts
and complete systems for the compressed air puriﬁcation
industry. Ultraﬁlter’s operations will be included in the
Industrial Products segment.

Fiscal 2001 Compared to Fiscal 2000 The company reported
record sales in 2001 of $1.137 billion. This was an increase
of 4.1 percent over prior year sales of $1.092 billion.
Excluding the impact of businesses acquired in 2000, sales
for the year ended July 31, 2001 were up 0.5 percent over
the prior year. This modest growth in sales for the year
reﬂected the diversiﬁcation of our Industrial Products and
Engine Products segments as shown by the strength in
the gas turbine market offsetting the slump in the North

American truck market. Sales for the Industrial Products
segment were a record $530.2 million, up 26.7 percent over
the prior year. Excluding the acquisition of DCE dust con-
trol business of Invensys, plc (“DCE”), sales for the year
were up 18.9 percent from the prior year. Leading this
increase were sales in gas turbine products with an increase
over the prior year of 66.6 percent to record sales of
$195.0 million, reﬂecting the continued high demand in
this market. Sales in industrial air ﬁltration and special
application products also increased from the prior year
by 12.5 percent and 8.9 percent, respectively. Excluding
the acquisition of DCE, sales of industrial air ﬁltration
products decreased 4.4 percent from the prior year. Sales
for the Engine Products segment of $606.8 million were
down 10.0 percent over the prior year reﬂecting the U.S.
economic weakness and the strong U.S. dollar overseas.
Worldwide markets for medium and heavy-duty trucks
were severely depressed, reﬂected in a decrease in truck
product sales of 47.6 percent from the prior year. Excluding
the company’s second quarter exit from a block of truck
related business due to unfavorable commercial terms,
sales were down 37.1 percent from the prior year. Sales
in off-road products decreased 5.9 percent from the prior
year while aftermarket product sales increased 5.0 percent.
Domestic Industrial Products sales increased 28.1 percent

from the prior year. This increase was led by strong sales
of gas turbine systems products domestically, reﬂecting
continued demand for large turbines in North America,
with domestic sales almost doubling from the prior year.
Domestic sales of industrial air ﬁltration products grew
slightly with an increase of 1.7 percent, while sales of special
application products domestically decreased 8.2 percent.
Domestic Engine Products sales were down 10.5 percent
from the prior year. The medium and heavy-duty truck
market continued to show its effects on the company’s
truck product sales domestically with a decrease of 51.8
percent from the prior year. This was somewhat offset by
increases in domestic aftermarket and off-road product
sales of 1.7 percent and 13.1 percent, respectively.

In U.S. dollars, total international sales increased 5.6 per-

cent from the prior year. Excluding the negative impact of
foreign currency translation of $35.6 million, sales increased
14.4 percent over the prior year. Total international
Industrial Products sales were up 24.9 percent from the
prior year. Sales of all products within this segment were
strong internationally, with increases across the board.
Leading this growth were sales of industrial air ﬁltration
products with an increase of 34.1 percent from the prior
year. Sales of gas turbine products and special application
products increased 20.2 percent and 18.9 percent from the

prior year, respectively. Total international Engine Products
sales were down 8.9 percent compared to the prior year
despite an increase in aftermarket product sales of 11.3
percent. International sales of off-road and truck products
decreased from the prior year by 28.3 percent and 29.0
percent, respectively.

The company reported record net earnings for 2001
of $75.5 million compared to $70.2 million in 2000, an
increase of 7.6 percent. Net earnings per share – diluted
were $1.66, up 10.0 percent from $1.51 in the prior year.
With only a modest increase in sales, the increase in net
earnings is also a result of cost management, particularly
in plant rationalization efforts throughout the year and
other cost reduction initiatives in the second half of the
year. This along with the decrease in the company’s effec-
tive tax rate due to increased proﬁtability from foreign
operations helped to offset the effect of negative foreign
currency exchange rates. The Industrial Products segment
continued to grow, contributing 46.6 percent of consoli-
dated sales, approximately 70.0 percent of the operating
income and all of the growth in operating income for the
year. International operating income totaled approximately
68.9 percent and 62.1 percent of consolidated operating
income in 2001 and 2000, respectively. International
operations also contributed all of the growth in operating
income. Europe’s operating income increased 7.1 percent
(16.2 percent in local currency) as a result of strong gas
turbine results, the completion of the DCE integration and
improved results in most markets. Asia-Paciﬁc’s operating
income increased by 38.0 percent (44.4 percent in local
currency), led by increases from Japan’s ROI improvement
project and strong disk drive results in the Hong Kong and
Wuxi, China, operations.

Gross margin for 2001 remained virtually ﬂat with only
a slight increase to 30.1 percent compared to 30.0 percent
in the prior year. This reﬂects an improved product mix
and beneﬁts of plant rationalization efforts, offsetting
strong pricing pressure from major customers.

Operating expenses as a percentage of sales for 2001
and 2000 were 20.2 percent and 20.3 percent, respectively.
Operating expenses in 2001 totaled $229.6 million com-
pared to $221.9 million in 2000, an increase of $7.7 mil-
lion, or 3.5 percent. The increase in operating expenses
relative to the prior year reﬂects higher sales levels and
the continued impact of the businesses acquired in 2000.

Interest expense increased $1.7 million, or 17.5 percent,
primarily due to higher short-term debt levels throughout
the year related to last year’s acquisitions. Other income
totaled $4.4 million in 2001 compared to other income
of $4.6 million in the prior year. The major components

of other income in 2001 were: interest income of $1.2
million, earnings from non-consolidated joint ventures of
$3.0 million, and other miscellaneous income and expense
items netting to $0.2 million of miscellaneous income.

The effective income tax rate of 28.0 percent in 2001
decreased from the 30.0 percent tax rate in 2000. The tax
rate was adjusted in the third quarter to provide for the
increased contributions from the company’s international
operations in lower tax rate countries and reﬂects the
foreign tax credit generated by the receipt of a dividend
from the company’s operations in Japan. The company
anticipates that it will have a comparable proportion of
income coming from its international operations located in
lower tax rate countries in 2002. The company anticipates
that its effective income tax rate will be approximately
28.0 percent in 2002.

Total backlog was $355.3 million, up 7.2 percent from
the same period last year. In the Industrial Products segment,
total backlog increased 16.8 percent from the same period
last year. In the Engine Products segment, total backlog
was down 1.3 percent compared to the same period last
year. Hard order backlog, goods scheduled for delivery
in 90 days, was $179.9 million, down 2.1 percent from
$183.7 million in the prior year. Within the Industrial
Products segment, hard order backlog for gas turbine
products increased 28.7 percent from the prior year. This
increase was offset by decreases in industrial air ﬁltration
and special application products of 26.2 percent and
24.1 percent, respectively, resulting in a slight overall
increase in the Industrial Products segment from the prior
year. In the Engine Products segment, overall hard order
backlog decreased 4.5 percent from the prior year. Within
this segment, off-road and truck products posted decreases
of 6.4 percent and 16.3 percent, respectively, while after-
market hard order backlog increased 4.5 percent from
the prior year.

Liquidity and Capital Resources

Financial Condition At July 31, 2002, the company’s capital
structure was comprised of $60.4 million of current debt,
$105.0 million of long-term debt and $382.6 million of
shareholders’ equity. The ratio of long-term debt to total
capital was 21.5 percent and 23.7 percent at July 31, 2002
and 2001, respectively.

Total debt outstanding increased $6.7 million for the
year to $165.4 million outstanding at July 31, 2002. The
increase is a result of an increase in long-term debt of
$5.8 million from the prior year. The increase in long-term
debt is primarily due to an increase in an unsecured senior

note of $1.5 million as a result of an interest rate swap
agreement entered into in ﬁscal 2001 and the addition of
capitalized lease obligations of $3.5 million resulting from
the acquisition of ultraﬁlter. Long-term debt also increased
by $0.7 million due to foreign exchange translation for two
guaranteed notes in our Japan operations due to continued
weakness in the Japanese yen. Short-term borrowings out-
standing at the end of the year increased $0.9 million as
compared to the prior year.

The company has a multi-currency revolving credit
facility totaling $100.0 million with a group of banks
and an additional $45.0 million available for use under
uncommitted facilities which provide unsecured borrow-
ings for general corporate purposes. There was $35.5 mil-
lion outstanding under these facilities at July 31, 2002.
The following table summarizes the company’s ﬁxed
cash obligations as of July 31, 2002 over various future
years (in thousands):

Contractual Cash

Obligations

Less than

1 Year

Total

1 – 3

Years

4 – 5

Years

After 5

Years

Payments Due by Period

Long-term debt

$105,076

$ 57

$39,660

$38,640

$26,719

Short-term debt

60,337

–

Total

$165,413

$60,394

$39,660

$38,640

$26,719

At July 31, 2002, the company had a contingent liability
for standby letters of credit totaling $14.8 million that have
been issued and are outstanding. Currently, there are no
amounts drawn on these letters of credit.

The company believes that the combination of present
capital resources, internally generated funds, and unused
ﬁnancing sources are adequate to meet cash requirements
for ﬁscal 2003.

Shareholders’ equity increased $63.5 million in 2002
to $382.6 million. The increase was due to current year
earnings of $86.9 million offset by $21.3 million of trea-
sury stock repurchases, $13.7 million of dividend payments
and a net increase in other comprehensive income of
$9.9 million and $1.7 million of other miscellaneous stock
activity. The increase in other comprehensive income con-
sisted primarily of a foreign currency translation adjus-
tment of $13.5 million offset by an additional minimum
pension liability of $3.3 million.

Cash Flows During ﬁscal 2002, $154.3 million of cash was
generated from operating activities, compared with $82.8
million in 2001 and $88.5 million in 2000. The increase in
2002 was primarily due to a decrease in accounts receivable
of $8.1 million, a decrease in inventory of $13.6 million
and an increase in accounts payable and other accrued
expenses of $25.2 million during the year.

In addition to cash generated from operating activities,

the company increased its outstanding short-term debt
by $3.0 million while net long-term debt increased by
$1.6 million. Cash ﬂow generated by operations was used
primarily to support $40.5 million for capital expenditures,
$21.3 million for stock repurchases and $13.7 million for
dividend payments. Cash and cash equivalents increased
$9.5 million during 2002.

Capital expenditures for property, plant and equipment
totaled $40.5 million in 2002, compared to $38.9 million
in 2001 and $36.4 million in 2000. Capital expenditures
primarily related to productivity enhancing investments
at various plants worldwide and continuing upgrades to
the U.S. information systems.

Capital spending in 2003 is planned at $45.0 million.

Signiﬁcant planned expenditures include the further
upgrade of U.S. information systems and investment in
manufacturing equipment and tooling. It is anticipated
that 2003 capital expenditures will be ﬁnanced primarily
by cash generated from operations and existing lines of
credit.

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 8.5 cents per share equates to 20.1
percent of the average net earnings per share for 2000
through 2002.

Share Repurchase Plan In ﬁscal 2002, the company repur-
chased 0.7 million shares of common stock on the open
market for $21.3 million under the share repurchase
plan authorized in January 2001, at an average price of
$32.37 per share. The company repurchased 0.5 million
shares for $10.3 million in 2001 and 1.7 million shares
for $35.9 million in 2000.

Environmental Matters The company has established reserves
for potential environmental liabilities and plans to continue
to accrue reserves in appropriate amounts. While uncertain-
ties exist with respect to the amounts and timing of the
company’s ultimate environmental liabilities, management
believes that such liabilities, individually and in the aggre-
gate, will not have a material adverse effect on the
company’s ﬁnancial condition or results of operations.

New Accounting Standards In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141, “Business
Combinations,” and SFAS No. 142, “Goodwill and Other
Intangible Assets.” Major provisions of these statements
are as follows: all business combinations must now use the
purchase method of accounting; intangible assets acquired
in a business combination must be recorded separately
from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as a part of a related contract, asset or lia-
bility; goodwill and intangible assets with indeﬁnite lives
are not amortized but tested for impairment annually and
whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting. The company
adopted the provisions of these statements as of August 1,
2001. As required by SFAS No. 142, the company has per-
formed step one of the impairment testing of goodwill for
the balances as of August 1, 2001. The results of this test
show that the fair market value of the reporting units that
the goodwill is assigned to is higher than the book values
of those reporting units resulting in no goodwill impair-
ment. The company will perform impairment tests annu-
ally and whenever events or circumstances occur indicating
that goodwill or other intangible assets might be impaired.
As of August 1, 2001, the company is no longer amortizing
goodwill. Goodwill amortization expense was $2.7 million
and $1.9 million, net of income taxes, for the year ended
July 31, 2001 and 2000, respectively. The company esti-
mates that goodwill amortization expense would have been
approximately $2.6 million, net of income taxes, for the
year ended July 31, 2002.

The following table presents a reconciliation of net
income and earnings per share adjusted for the exclusion
of goodwill, net of income taxes:

(In thousands, except per share amounts)

2002

2001

2000

Reported net income

$86,883

$75,548

$70,233

Add goodwill amortization, net of tax

–

2,722

1,895

Adjusted net income

$86,883

$78,270

$72,128

Basic earnings per share:

Reported basic earnings per share

$ 1.97

$ 1.70

$ 1.54

Add goodwill amortization, net of tax

–

.06

.04

Adjusted basic earnings per share

$ 1.97

$ 1.76

$ 1.58

Diluted earnings per share:

Reported diluted earnings per share

$ 1.90

$ 1.66

$ 1.51

Add goodwill amortization, net of tax

–

.06

.04

Adjusted diluted earnings per share

$ 1.90

$ 1.72

$ 1.55

As of July 31, 2002 and 2001, goodwill was $86.4 mil-
lion and $57.5 million, respectively. In ﬁscal 2002, goodwill
increased $28.1 million for the acquisition of ultraﬁlter and
decreased $0.5 million for the reversal of restructuring
reserves that were unused from previous acquisitions.
The remaining increase of $1.3 million was due to foreign
exchange translation. For the Industrial Products and
Engine Products segments, goodwill as of July 31, 2002
totaled $62.6 million and $23.8 million, respectively, and
as of July 31, 2001 totaled $33.4 million and $24.1 mil-
lion, respectively.

In June 2001, the FASB issued SFAS No. 143,
“Accounting for Asset Retirement Obligations.” This
statement addresses ﬁnancial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
SFAS No. 143 is effective for the company in ﬁscal 2003.
Management does not expect this statement to have a
material impact on the company’s consolidated ﬁnancial
statements.

In August 2001, the FASB issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-
Lived Assets.” SFAS No. 144 establishes a single model
for the impairment of long-lived assets and broadens the
presentation of discontinued operations to include more
disposal transactions. SFAS No. 144 is effective for the
company in ﬁscal 2003. Management does not expect
this statement to have a material impact on the company’s
consolidated ﬁnancial statements.

In June 2002, the FASB issued SFAS No. 146,

“Accounting for Costs Associated with Exit or Disposal
Activities.” SFAS No. 146 addresses signiﬁcant issues
relating to the recognition, measurement and reporting of
costs associated with exit and disposal activities including
restructuring. SFAS No. 146 is effective for the company
in ﬁscal 2003.

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 cur-
rency market risk, from time to time, through the use of a
variety of ﬁnancial and derivative instruments. The com-
pany does not enter into any of these instruments for trad-
ing 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 for-
eign currency exchange rates. The company uses forward
exchange contracts and other hedging activities to hedge
the U.S. dollar value resulting from anticipated foreign
currency transactions. The company’s market risk on inter-
est 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 During 2002, overall the U.S. dollar
strengthened throughout the year relative to the currencies
of the foreign countries in which the company operates.
The stronger dollar had a negative impact on the com-
pany’s international net sales results because the foreign
denominated revenues translated into fewer U.S. dollars.
The overall impact to net earnings, though, was nominal.
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 the year
ended July 31, 2002, the impact of foreign currency trans-
lation resulted in an overall decrease in net sales of $5.2
million but had a nominal impact on net earnings. Foreign
currency translation had a negative impact in Japan, where
the stronger U.S. dollar relative to the Japanese yen resulted
in a decrease in net sales of $6.4 million and a decrease in
net earnings of $0.3 million. The stronger U.S. dollar rela-
tive to the South African rand also had a negative impact
on foreign currency translation with a decrease in net sales
of $4.7 million and a decrease in net earnings of $0.2 mil-
lion. In Europe, the euro strengthened, and almost reached
parity with the U.S. dollar by the end of the ﬁscal year. This
resulted in an increase in net sales of $5.7 million and an
increase in net earnings of $0.4 million. Going forward, the
company expects local currency results to remain strong;
excluding the effect of translation, revenues outside the
United States increased 4.1 percent for the year ended
July 31, 2002.

The company maintains 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 the company’s foreign
currency exposure is naturally hedged by incurring liabili-
ties, including bank debt, denominated in the local currency
in which the company’s foreign subsidiaries are located.

The foreign subsidiaries of the company purchase prod-

ucts and parts in various currencies. As a result, the com-
pany may be exposed to cost increases relative to local

currencies in the markets to which it sells. To mitigate such
adverse trends, the company, from time to time, enters into
forward exchange contracts and other hedging activities.
Additionally, foreign currency positions are partially offset-
ting and are netted against one another to reduce exposure.
Some products made in the United States are sold abroad,

primarily in Canada. As a result, sales of such products are
affected by the value of the U.S. dollar relative to other
currencies. Any long-term strengthening of the U.S. dollar
could depress these sales. Also, competitive conditions in the
company’s markets may limit its ability to increase product
pricing in the face of adverse currency movements.

Interest The company’s exposure to market risks for
changes in interest rates relates primarily to our short-term
investments, short-term borrowings and interest rate swap
agreement. We have no earnings or cash ﬂow exposure
due to market risks on our long-term debt obligations as a
result of the ﬁxed-rate nature of the debt. However, interest
rate changes would affect the fair market value of the debt.
At July 31, 2002, 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 hypotheti-
cal one-half percent increase in interest rates and amounts
to approximately $3.3 million.

During ﬁscal 2001, the company entered into an inter-
est rate swap agreement effectively converting a portion
of the company’s interest rate exposure from a ﬁxed-rate
to a variable rate basis to hedge against the risk of higher
borrowing costs in a declining interest rate environment.
The company does not enter into interest rate swap con-
tracts for speculative or trading purposes, as the differential
to be paid or received on the interest rate swap agreement
is accrued and recognized as an adjustment to interest
expense as interest rates change. The interest rate swap
agreement has an aggregate notional amount of $27.0
million maturing on July 15, 2008. The variable rate is
based on the current six-month London Interbank Offered
Rates (“LIBOR”). This transaction resulted in a decrease
to interest expense of $1.2 million for the year ended
July 31, 2002.

Critical Accounting Policies

The company’s consolidated ﬁnancial statements are pre-
pared in conformity with accounting principles generally
accepted in the United States of America. The preparation
of these ﬁnancial statements requires the use of estimates,
judgments and assumptions that affect the reported

amounts of assets and liabilities at the date of the ﬁnancial
statements and the reported amounts of revenue and
expenses during the periods presented. Management bases
these estimates on historical experience and various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for mak-
ing judgments about the recorded values of certain assets
and liabilities. The company believes its use of estimates
and underlying accounting assumptions adhere to generally
accepted accounting principles and are consistently applied.
Valuations based on estimates and underlying accounting
assumptions are reviewed for reasonableness on a consis-
tent basis throughout the company. Management believes
the company’s critical accounting policies that require more
signiﬁcant judgments and estimates used in the preparation
of its consolidated ﬁnancial statements and are the most
important to aid in fully understanding its ﬁnancial results
are the following:

Allowance for doubtful accounts – Allowances for
doubtful accounts are estimated by management based on
evaluation of potential losses related to customer receivable
balances. Estimates are developed by using standard quan-
titative measures based on historical losses, adjusting for
current economic conditions and, in some cases, evaluating
speciﬁc customer accounts for risk of loss. The establish-
ment of this reserve requires the use of judgment and
assumptions regarding the potential for losses on receivable
balances. Though management considers these balances
adequate and proper, changes in economic conditions in
speciﬁc markets in which the company operates could have
an effect on reserve balances required.

Inventory – The company’s inventories are valued at the

lower of cost or market. Reserves for shrink and obsoles-
cence are estimated using standard quantitative measures
based on historical losses, including issues related to speciﬁc
inventory items. Though management considers these
balances adequate and proper, changes in economic condi-
tions in speciﬁc markets in which the company operates
could have an effect on reserve balances required.

Product warranty – The company estimates warranty

costs using standard quantitative measures based on
historical warranty claim experience and, in some cases,
evaluating speciﬁc customer warranty issues. The establish-
ment of reserves requires the use of judgment and assump-
tions regarding the potential for losses relating to warranty
issues. Though management considers these balances
adequate and proper, changes in the future could impact
these determinations.

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: risks associated with
currency ﬂuctuations, commodity prices, world economic
factors, political factors, the company’s substantial interna-
tional operations including key disk drive ﬁlter production
facilities in China, highly competitive markets, changes in
product demand and changes in the geographic and prod-
uct mix of sales, acquisition opportunities and integration
of recent acquisitions, including the acquisition of ultra-
ﬁlter, facility and product line rationalization, research and
development expenditures, including ongoing information
technology improvements, and governmental laws and
regulations, including diesel emissions controls. For a more
detailed explanation of the foregoing and other risks, see
exhibit 99, which is part of the company’s Form 10-K ﬁled
with the Securities and Exchange Commission. The com-
pany 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 combina-
tion of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Investors are further cautioned not to place undue

reliance on such forward-looking statements as they speak
only to the company’s views as of the date the statement is
made. The company undertakes no obligation to publicly
update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

Income taxes – As part of the process of preparing the
company’s consolidated ﬁnancial statements, management
is required to estimate income taxes in each of the jurisdic-
tions in which the company operates. This process involves
estimating actual current tax exposure together with assess-
ing temporary differences resulting from differing treatment
of items for tax and book accounting purposes. These dif-
ferences result in deferred tax assets and liabilities, which
are included within the company’s consolidated balance
sheet. These assets and liabilities are evaluated by using
estimates of future taxable income streams and the impact
of tax planning strategies. Management assesses the likeli-
hood that deferred tax assets will be recovered from future
taxable income and to the extent management believes that
recovery is not likely, a valuation allowance is established.
To the extent that a valuation allowance is established or
increased, an expense within the tax provision is included
in the statement of operations. Reserves are also estimated
for ongoing audits regarding federal, state and international
issues that are currently unresolved. The company routinely
monitors the potential impact of such situations and
believes that it is properly reserved. Valuations related to
tax accruals and assets can be impacted by changes to tax
codes, changes in statutory tax rates and the company’s
future taxable income levels.

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, Form 8-K, earnings releases or other press
releases of the company or any other written or oral state-
ments made by or on behalf of the company may include
forward-looking statements which reﬂect the company’s
current views with respect to future events and ﬁnancial
performance. The words “believe,” “expect,” “anticipate,”
“intends,” “estimate,” “forecast,” “plan,” “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 current information available to the company.

CONSOLIDATED STATEMENTS OF EARNINGS
Donaldson Company, Inc. and Subsidiaries

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

Net sales
Cost of sales

Gross Margin

Selling, general and administrative
Research and development

Operating Income

Interest expense
Other (income) expense, net

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.

2002

$1,126,005
776,513
349,492
197,492
28,150
123,850
6,531
(1,699)
119,018
32,135
$ 86,883

2001

$1,137,015
795,281
341,734
201,201
28,425
112,108
11,608
(4,428)
104,928
29,380
$ 75,548

2000

$1,092,294
764,773
327,521
194,623
27,304
105,594
9,880
(4,619)
100,333
30,100
$ 70,233

44,158,074

44,381,082

45,716,482

45,714,409

45,612,165

46,664,196

$ 1.97

$ 1.70

$ 1.54

$ 1.90

$ 1.66

$ 1.51

CONSOLIDATED BALANCE SHEETS
Donaldson Company, Inc. and Subsidiaries

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

2002

2001

ASSETS
Current Assets

Cash and cash equivalents
Accounts receivable, less allowance of $6,620 and $6,309
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

Intangible Assets
Other Assets

Total Assets

LIABILITIES & SHAREHOLDERS’ EQUITY
Current Liabilities

Short-term borrowings
Current maturities of long-term debt
Trade accounts payable
Accrued employee compensation and related taxes
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 2002 and 2001

Retained earnings
Accumulated other comprehensive loss
Treasury stock – 5,741,417 and 5,273,121 shares in 2002 and 2001, at cost

Total Shareholders’ Equity
Total Liabilities & Shareholders’ Equity

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

$ 45,586
251,417

$ 36,136
230,046

49,162
16,796
51,733
117,691
18,417
23,373
456,484

13,549
134,660
375,275
29,240
552,724
(311,811)
240,913
103,681
49,053
$ 850,131

$ 60,337
57
115,299
31,171
31,542
34,384
272,790
105,019
13,376
76,325

50,426
21,209
40,999
112,634
12,746
15,665
407,227

6,890
117,029
345,073
22,603
491,595
(283,937)
207,658
58,205
33,740
$ 706,830

$ 59,393
23
100,287
29,945
17,597
10,034
217,279
99,259
9,189
62,010

–

248,280
274,395
(14,296)
(125,758)
382,621
$ 850,131

248,280
203,499
(24,235)
(108,451)
319,093
$ 706,830

CONSOLIDATED STATEMENTS OF CASH FLOWS
Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars) Year ended July 31,

2002

2001

2000

OPERATING ACTIVITIES
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities

$ 86,883

$ 75,548

$ 70,233

Depreciation and amortization
Equity in (earnings) loss 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, plant and equipment
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
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.

31,751
82
(5,266)
(2,973)

8,053
13,608
(2,979)
25,153
154,312

(40,529)
(68,349)
(108,878)

1,590
(23)
2,961
(21,271)
(13,713)
(1,334)
(31,790)
(4,194)
9,450
36,136
$ 45,586

38,577
(635)
7,093
(12,949)

(35,220)
2,816
2,838
4,731
82,799

(38,924)
–
(38,924)

9,462
(1,136)
(24,417)
(10,297)
(13,092)
525
(38,955)
(801)
4,119
32,017
$ 36,136

34,326
74
(449)
3,121

(5,704)
(26,227)
(3,316)
16,437
88,495

(36,417)
(88,220)
(124,637)

5,752
(4,522)
66,328
(35,923)
(12,384)
326
19,577
(1,053)
(17,618)
49,635
$ 32,017

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Donaldson Company, Inc. and Subsidiaries

(Thousands of dollars, except per share amounts)

BALANCE JULY 31, 1999

Comprehensive income

Net earnings
Foreign currency translation
Comprehensive income

Treasury stock acquired
Stock options exercised
Tax reduction – employee plans
Cash dividends ($.27 per share)

BALANCE JULY 31, 2000

Comprehensive income

Net earnings
Foreign currency translation
Additional minimum pension liability
Net gain on cash ﬂow hedging derivatives
Comprehensive income

Treasury stock acquired
Stock options exercised
Performance awards
Tax reduction – employee plans
Cash dividends ($.295 per share)

BALANCE JULY 31, 2001

Comprehensive income

Net earnings
Foreign currency translation
Additional minimum pension liability
Net loss on cash ﬂow hedging derivatives
Comprehensive income

Treasury stock acquired
Stock options exercised
Performance awards
Tax reduction – employee plans
Cash dividends ($.31per share)

BALANCE JULY 31, 2002

Common
Stock

$248,280

Additional
Paid-in
Capital

$ 1,833

1,134

2,967

248,280

(6,196)

3,229

–

(3,023)

3,023

$248,280

$ –

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

$ (5,670)

$ (69,367)

$262,763

(4,853)

(35,923)
2,555

(10,523)

(102,735)

(13,717)
(341)
346

(10,297)
4,262
319

(24,235)

(108,451)

13,515
(3,256)
(320)

(21,271)
3,749
215

$(14,296)

$(125,758)

70,233
(4,853)
65,380
(35,923)
(805)
1,134
(12,384)
280,165

75,548
(13,717)
(341)
346
61,836
(10,297)
(3,058)
310
3,229
(13,092)
319,093

86,883
13,515
(3,256)
(320)
96,822
(21,271)
(1,603)
270
3,023
(13,713)
$382,621

Retained
Earnings

$ 87,687

70,233

(3,360)

(12,384)
142,176

75,548

(1,124)
(9)

(13,092)
203,499

86,883

(2,329)
55

(13,713)
$274,395

The accompanying notes are an integral part of these 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 prod-
ucts for mobile equipment; in-plant air cleaning systems;
compressed air puriﬁcation systems; air intake systems
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 four 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 inter-company accounts and transactions have
been eliminated. The company also has four joint ventures
that are not majority-owned, all accounted for on the
equity method. Certain amounts in prior periods have
been reclassiﬁed to conform to the current presentation.
The reclassiﬁcations had no impact on the company’s net
earnings or shareholders’ equity as previously reported.

Use of Estimates The preparation of ﬁnancial statements in
conformity with generally accepted accounting principles
in the United States 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 (loss) in shareholders’ equity. Foreign currency
transaction losses of $1.3 million in 2002 are included in
earnings before income taxes. There were no signiﬁcant
foreign currency transaction gains or losses in 2001. Foreign
currency transaction losses of $0.2 million in 2000 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 equiva-
lents are carried at cost which approximates market value.

Inventories Inventories are stated at the lower of cost or
market. Domestic inventories are valued using the last-in,
first-out (LIFO) method, while the international subsidiaries
use the ﬁrst-in, ﬁrst-out (FIFO) method. Inventories valued
at LIFO were approximately 41 percent and 53 percent of
total inventories at July 31, 2002 and 2001, respectively.

For inventories valued under the LIFO method, the FIFO

cost exceeded the LIFO carrying values by $20.8 million
and $22.5 million at July 31, 2002 and 2001, 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 facili-
ties 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.
Depreciation expense was $31.7 million in 2002 and 2001
and $32.1 million in 2000. The cost and related accumu-
lated depreciation of assets sold or disposed of are removed
from the accounts and the resulting gain or loss, if any, is
recognized.

The estimated useful lives of property, plant and equip-

ment are as follows:

Buildings

Machinery and equipment

10 to 40 years

3 to 10 years

Intangible Assets Goodwill represents the excess of the pur-
chase price of acquired companies over the fair value of
net assets acquired. As a result of adopting Statement of
Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Other Intangible Assets,” in the ﬁrst quar-
ter of ﬁscal 2002 the company no longer amortizes good-
will. See pro forma effects of adopting this standard under
“New Accounting Standards” later in Note A. Other
intangible assets are recorded at cost and are amortized
on a straight-line basis over their estimated useful lives.
There was no signiﬁcant amortization expense in 2002.
Amortization expense was $3.8 million and $2.7 million
in 2001 and 2000, respectively. Accumulated amortization
was $9.6 million as of July 31, 2002 and 2001.

Impairment of Long-Lived Assets The company reviews the
long-lived assets, including identiﬁable intangibles and
associated goodwill, for impairment when events or changes
in circumstances indicate that the carrying amount of an
asset may not be recoverable. If impairment indicators are
present and the estimated future undiscounted cash ﬂows
are less than the carrying value of the assets and any related
goodwill, the carrying value is reduced to the estimated
fair value as measured by the undiscounted cash ﬂows.

Income Taxes Deferred tax assets and liabilities are recog-
nized for the expected future tax consequences attributed
to differences between the ﬁnancial statement carrying
amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to reverse. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not
that a tax beneﬁt will not be realized.

Comprehensive Income Comprehensive income consists of
net income, foreign currency translation adjustments,
additional minimum pension liability and net gain or loss
on cash ﬂow hedging derivatives, and is presented in the
Consolidated Statements of Changes in Shareholders’ Equity.

Earnings Per Share The company’s basic net earnings per share
is computed by dividing net earnings by the weighted aver-
age number of outstanding common shares. The company’s
diluted net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding
common shares and dilutive shares relating to stock options.
The following table presents information necessary to

calculate basic and diluted earnings per share:

(In thousands, except per share amounts)

Weighted average shares – basic

Dilutive shares

Weighted average shares – diluted

Net earnings for basic and diluted

earnings per share computation

Net earnings per share – basic

Net earnings per share – diluted

2002

44,158

1,556

45,714

$86,883

$ 1.97

$ 1.90

2001

2000

44,381

1,231

45,612

45,716

948

46,664

$75,548

$70,233

$ 1.70

$ 1.54

$ 1.66

$ 1.51

Treasury Stock Repurchased common stock is stated at cost
and is presented as a separate reduction of shareholders’
equity. The company believes the share repurchase program
is an excellent means of returning value to the shareholders.

Research and Development All expenditures for research
and development are charged against earnings in the
year incurred.

Stock-Based Compensation SFAS No. 123, “Accounting for
Stock-Based Compensation,” encourages, but does not
require, companies to record compensation cost for stock-
based employee compensation plans at fair value. The com-
pany has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed
in Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related
Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted
market price of the company’s stock at the date of the grant
over the amount an employee must pay to acquire the
stock. Compensation cost for performance equity units is
recorded based on the quoted market price of the company’s
stock at the end of the period.

Revenue Recognition Revenue is recognized when product is
shipped and invoiced and title to the goods transfers to
customers. The company records estimated discounts and
rebates as a reduction of sales in the same period revenue
is recognized. Shipping and handling costs are classiﬁed as
a component of cost of sales.

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.

Derivative Instruments and Hedging Activities In ﬁscal 2001,
the company adopted 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.” With the adoption of SFAS
133, the company recognizes all derivatives on the balance
sheet at fair value. Derivatives that are not hedges are
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 derivatives are either offset against the
change in fair value of the hedged assets, liabilities or ﬁrm
commitments through earnings or recognized in sharehold-
ers’ equity through other comprehensive income until the
hedged item is recognized. Gains or losses related to the
ineffective portion of any hedge are recognized through
earnings in the current period. The impact of the adoption
of SFAS 133 was not considered material to the company.
The company uses derivative instruments, primarily for-

ward exchange contracts and interest rate swaps, to man-
age its exposure to ﬂuctuations in foreign exchange rates
and interest rates. It is the company’s policy to enter into
derivative transactions only to the extent true exposures
exist; the company does not enter into derivative transac-
tions for speculative purposes. The company enters into

derivative transactions only with highly rated counterpar-
ties. These transactions may expose the company to credit
risk to the extent that the instruments have a positive fair
value, but the company has not experienced any material
losses, nor does the company anticipate any losses.

Each derivative transaction the company enters into is

designated at inception as a hedge and is expected to be
highly effective as the critical terms of these instruments
are the same as those of the underlying risks being hedged.
The company evaluates hedge effectiveness at inception
and on an ongoing basis. When a derivative is no longer
expected to be highly effective, hedge accounting is discon-
tinued. Hedge ineffectiveness, if any, is recorded in earnings
on the same line as the underlying transaction risk.

The company is exposed to changes in the fair value of
its ﬁxed-rate debt resulting from interest rate ﬂuctuations.
To hedge this exposure, the company entered into a ﬁxed
to variable interest rate swap. This interest rate swap is
accounted for as a fair value hedge. The fair value of the
swap is recorded net of the underlying outstanding debt.
Changes in the payment of interest resulting from the
interest rate swap are recorded as an offset to interest
expense. Effectiveness is assessed based on changes in
the fair value of the underlying debt, using incremental
borrowing rates currently available on loans with similar
terms and maturities. See Note D for further discussion of
the interest rate swap.

The company enters into forward exchange contracts to
hedge forecasted transactions with its foreign subsidiaries,
to reduce potential exposure related to ﬂuctuations in
foreign exchange rates for anticipated intercompany trans-
actions such as purchases, sales and royalty payments
denominated in local currencies. Forward exchange
contracts designated as cash ﬂow hedges are designed to
hedge the variability of cash ﬂows associated with the
underlying anticipated transactions. Changes in the value
of derivatives designated as cash ﬂow hedges are recorded
in other comprehensive income in shareholders’ equity
until earnings are affected by the variability of the under-
lying cash ﬂows. At that time, the applicable amount of
gain or loss from the derivative instrument that is deferred
in shareholders’ equity is reclassiﬁed to earnings and is
included in other income or expense. Effectiveness is
assessed based on changes in forward rates. Ineffective
portions of the hedges are recorded in earnings through
the same line as the underlying transaction.

Unrealized gains from cash ﬂow hedges recorded in
Accumulated Other Comprehensive Income as of July 31,
2002 were not material. These unrealized gains will be
reclassiﬁed, as appropriate, into earnings during the next
12 months.

New Accounting Standards In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141,
“Business Combinations,” and SFAS No. 142, “Goodwill
and Other Intangible Assets.” Major provisions of these
statements are as follows: all business combinations must
now use the purchase method of accounting; intangible
assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged,
either individually or as a part of a related contract, asset
or liability; goodwill and intangible assets with indeﬁnite
lives are not amortized but tested for impairment annually
and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting. The company
adopted the provisions of these statements as of August 1,
2001. As required by SFAS No. 142, the company has per-
formed step one of the impairment testing of goodwill for
the balances as of August 1, 2001. The results of this test
show that the fair market value of the reporting units that
the goodwill is assigned to is higher than the book values
of those reporting units resulting in no goodwill impair-
ment. The company will perform impairment tests annu-
ally and whenever events or circumstances occur indicating
that goodwill or other intangible assets might be impaired.
As of August 1, 2001, the company is no longer amortiz-
ing goodwill. Goodwill amortization expense was $2.7
million and $1.9 million, net of income taxes, for the year
ended July 31, 2001 and 2000, respectively. The company
estimates that goodwill amortization expense would have
been approximately $2.6 million, net of income taxes, for
the year ended July 31, 2002.

The following table presents a reconciliation of net
income and earnings per share adjusted for the exclusion
of goodwill, net of income taxes:

(In thousands, except per share amounts)

2002

2001

2000

Reported net income

$86,883

$75,548

$70,233

Add goodwill amortization, net of tax

–

2,722

1,895

Adjusted net income

$86,883

$78,270

$72,128

Basic earnings per share:

Reported basic earnings per share

$ 1.97

$ 1.70

$ 1.54

Add goodwill amortization, net of tax

–

.06

.04

Adjusted basic earnings per share

$ 1.97

$ 1.76

$ 1.58

Diluted earnings per share:

Reported diluted earnings per share

$ 1.90

$ 1.66

$ 1.51

Add goodwill amortization, net of tax

–

.06

.04

Adjusted diluted earnings per share

$ 1.90

$ 1.72

$ 1.55

As of July 31, 2002 and 2001, goodwill was $86.4 million

and $57.5 million, respectively. In ﬁscal 2002, goodwill
increased $28.1 million for the acquisition of ultraﬁlter
and decreased $0.5 million for the reversal of restructuring
reserves that were unused from previous acquisitions.
The remaining increase of $1.3 million was due to foreign
exchange translation. For the Industrial Products and
Engine Products segments, goodwill as of July 31, 2002
totaled $62.6 million and $23.8 million, respectively, and
as of July 31, 2001 totaled $33.4 million and $24.1
million, respectively.

In June 2001, the FASB issued SFAS No. 143,
“Accounting for Asset Retirement Obligations.” This
statement addresses ﬁnancial accounting and reporting for
obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. SFAS
No. 143 is effective for the company in ﬁscal 2003. Manage-
ment does not expect this statement to have a material
impact on the company’s consolidated ﬁnancial statements.

In August 2001, the FASB issued SFAS No. 144,

“Accounting for the Impairment or Disposal of Long-Lived
Assets.” SFAS No. 144 establishes a single model for the
impairment of long-lived assets and broadens the
presentation of discontinued operations to include more
disposal transactions. SFAS No. 144 is effective for the
company in ﬁscal 2003. Management does not expect this
statement to have a material impact on the company’s
consolidated ﬁnancial statements.

In June 2002, the FASB issued SFAS No. 146,

> NOTE B

Acquisitions, Plant Closures
and Plant Openings

Acquisitions All acquisitions were accounted for as pur-
chases. The purchase price assigned to the net assets
acquired was based on the fair value of such assets and lia-
bilities at the respective acquisition dates. The operating
results of these acquired companies have been included in
the consolidated statement of earnings from the dates of
acquisition with the exception of the acquisition of ultraﬁl-
ter international AG, which took place immediately prior

to the end of ﬁscal 2002. Consolidated pro forma earnings
and earnings per share would not be materially different
from the reported amounts for all years presented.

The company completed the purchase of all of the out-
standing shares of ultraﬁlter international AG (“ultraﬁlter”)
for $68.3 million in cash on July 12, 2002. Ultraﬁlter is
headquartered in Haan, Germany with operations in
30 countries. Ultraﬁlter is a global leader in the design and
manufacture of components, replacement parts and com-
plete systems for the compressed air puriﬁcation industry.
Its products include compressed air ﬁlters and a wide
assortment of replacement ﬁlters, a complete offering of
refrigeration and desiccant dryers and condensate manage-
ment devices. The acquisition of ultraﬁlter satisﬁes the
company’s diversiﬁcation strategy by expanding the com-
pany’s presence in industrial markets, focuses on replace-
ment parts and expands revenues outside of the United
States. This acquisition in compressed air puriﬁcation
builds on the acquisition of AirMaze Corporation in ﬁscal
2000 which brought the company access to the ﬁltration
needs of the compressor itself and ultraﬁlter moves out of
the compressor room to all of the points of use in the fac-
tory. The company has completed a preliminary purchase
price allocation resulting in an excess of purchase price
over the fair values of the net assets acquired of $28.1 mil-
lion. The company has not yet ﬁnalized the allocation of
the purchase price to the assets acquired and liabilities
assumed and thus it is subject to change. Ultraﬁlter’s oper-
ations are a part of the company’s Industrial Products
segment. Restructuring liabilities recorded in conjunction
with the acquisition were approximately $1.2 million as
of July 31, 2002 for costs associated with the termination
and relocation of employees.

The company acquired the DCE dust control business

of Invensys, plc (“DCE”) for $56.4 million effective
February 1, 2000. DCE, which was 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 was recorded as goodwill. DCE operations are
part of the company’s Industrial Products segment. The inte-
gration of DCE resulted in a reduction in the work force of
approximately 140 employees during ﬁscal 2001. During
ﬁscal 2002, the unused balance of restructuring liabilities
recorded in conjunction with the acquisition of $0.5 million
of costs associated with the closure and sale of acquired
facilities as well as termination and relocation of employ-
ees was reversed against goodwill. Costs incurred and

charged to these reserves associated with the closure and
sale of acquired facilities amounted to $0.9 million for the
ﬁscal year ended July 31, 2002. Costs incurred and charged
to these reserves associated with the termination and relo-
cation of employees amounted to $0.7 million for the ﬁscal
year ended July 31, 2002. During the ﬁscal year ended
July 31, 2001, costs incurred and charged to these reserves
amounted to $0.8 million associated with the closure and
sale of acquired facilities and $0.8 million associated with
the termination and relocation of employees. Adjustments
to these reserves for the ﬁscal year ended July 31, 2001
amounted to an increase of $0.9 million.

The company completed the purchase of all of the
outstanding shares of AirMaze Corporation (“AirMaze”)
for $31.9 million in cash effective November 1, 1999.
AirMaze was merged into Donaldson Company, Inc. effec-
tive April 1, 2000. AirMaze products include heavy-duty
air and liquid ﬁlters, air/oil separators and high purity air
ﬁlter products. AirMaze manufacturing facilities are
located 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 was recorded as
goodwill. AirMaze operations are a part of the company’s
Engine Products segment. The integration of AirMaze
resulted in a reduction in the work force of approximately
15 employees during ﬁscal 2001. During ﬁscal 2002, the
unused balance of restructuring liabilities recorded in
conjunction with the acquisition of $0.2 million for costs
associated with the termination and relocation of employees
was reversed against goodwill. There were no costs incurred
and charged to this reserve for the ﬁscal year ended July
31, 2002. Costs incurred and charged to this reserve
amounted to $0.3 million and adjustments to this reserve
amounted to a decrease of $0.7 million for the ﬁscal year
ended July 31, 2001.

The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at
the date of acquisition.

(Thousands of dollars )

ultraﬁlter

DCE

AirMaze

Current assets

$ 42,153

$28,742

$ 9,389

Property, plant and equipment

Goodwill

Other non-current assets

Total assets acquired

Current liabilities

Long-term debt

Other long-term liabilities

Total liabilities assumed

21,189

28,082

20,189

111,613

27,941

3,546

11,777

43,264

14,346

31,458

874

75,420

16,758

–

2,301

19,059

5,975

27,193

–

42,557

4,640

3,991

2,067

10,698

Net assets acquired

$ 68,349

$56,361

$31,859

Other non-current assets include other intangible assets

such as patents and trademarks and deferred tax assets.
Other long-term liabilities include deferred tax liabilities
and other miscellaneous long-term liabilities.

Plant Closures During ﬁscal 2002, the company closed
its manufacturing facility located in Old Saybrook,
Connecticut. The closure of this facility was completed
by the end of the ﬁscal year. A pretax charge of $0.3 million
was recorded in ﬁscal 2002 in the company’s consolidated
statement of earnings. This charge was primarily related to
severance and other employee-related costs associated with
the elimination of approximately 30 positions. Additionally,
the company closed its manufacturing facility located in
Guilin, China. The closure of this facility was completed
by the end of the ﬁscal year. A pretax charge of $0.2 mil-
lion was recorded in ﬁscal 2002 in the company’s consoli-
dated statement of earnings. The charge was primarily
related to severance and other employee-related costs asso-
ciated with the elimination of approximately 44 positions.
During ﬁscal 2001, the company closed its manufactur-

ing facilities located in Mooresville, North Carolina, and
Louisville, Kentucky. The closures of these facilities were
completed by the end of the ﬁscal year. For the closure of
the Mooresville manufacturing facility, a pretax charge of
$0.7 million was recorded in ﬁscal 2001 in the company’s
consolidated statements of earnings. For the closure of
the Louisville manufacturing facility, costs were charged
against the purchase liabilities recorded in conjunction
with the acquisition of DCE. These charges were primarily
related to severance and other employee-related costs asso-
ciated with the elimination of approximately 130 positions
in Mooresville and 80 positions in Louisville.

During ﬁscal 2000, the company completed the closure

of its manufacturing facility located in Oelwein, Iowa. A
pretax charge of $2.8 million was recorded in ﬁscal 1999
in the company’s consolidated statements of earnings.
The charge was primarily related to severance and other
employee-related costs associated with the elimination of
approximately 125 positions.

Plant Openings During ﬁscal 2002, the company opened
new manufacturing facilities both domestically and inter-
nationally. Domestically, the company opened new head-
quarters and a new manufacturing facility for production
of its Tetratec™ PTFE technologies in Ginko Industrial Park
in Northampton Township, Pennsylvania. The new facility
combined and consolidated the operations from three
existing facilities while doubling manufacturing capacity.

Internationally, the company opened a new manufacturing
facility in Monterrey, Mexico. The facility was constructed
to produce gas turbine products and employs approximately
130 employees. Additionally, during the year the company
expanded its manufacturing facilities in Wuxi, China. The
expansion included a new clean room used in the production
of disk drive products and a new manufacturing facility for
the production of industrial air ﬁltration products. The expan-
sion of these facilities added approximately 430 employees.
During ﬁscal 2000, the company opened a new manu-

facturing facility in Auburn, Alabama. The facility was
constructed to produce mufﬂers for the truck manufactur-
ers located in the southwestern U.S. region and employs
approximately 100 employees.

> NOTE C

Credit Facilities

In December 1997, the company amended and renewed
a ﬁve-year multi-currency revolving facility with a group
of participating banks under which it may borrow up to
$100.0 million. The agreement provides that loans may
be made under a selection of currencies and rate formulas
including Base Rate Advance or Eurocurrency Rate
Advance. The interest rate on each advance is based on
certain adjusted leverage and debt-to-capitalization ratios.
Facility fees and other fees on the entire loan commitment
are payable for the duration of this facility. There was
$20.0 million and $50.0 million outstanding at July 31,
2002 and July 31, 2001, respectively, leaving $80.0 million
and $50.0 million available for further borrowing under
such facility at July 31, 2002 and July 31, 2001, respectively.
The weighted average interest rate on these short-term
borrowings outstanding at July 31, 2002 and 2001 was
2.00 percent and 3.99 percent, respectively.

The company also has three agreements under uncom-
mitted credit facilities, which provide unsecured borrowings
for general corporate purposes. At July 31, 2002 and
2001, there was $45.0 million and $35.0 million available
for use under these facilities, respectively. There was $15.5
million and $7.7 million outstanding under these facilities
at July 31, 2002 and 2001, respectively. The weighted aver-
age interest rate on these short-term borrowings outstand-
ing at July 31, 2002 and 2001 was 2.05 percent and 3.98
percent, respectively.

International subsidiaries may borrow under various
credit facilities. As of July 31, 2002 and 2001, borrowings
under these facilities were $24.8 million and $1.7 million,

respectively. This increase in short-term debt reﬂects bor-
rowings for the acquisition of ultraﬁlter at the end of ﬁscal
2002. The weighted average interest rate on these interna-
tional borrowings outstanding at July 31, 2002 and 2001
was 3.17 percent and 10.73 percent, respectively.

Also, at July 31, 2002, the company had outstanding
standby letters of credit totaling $14.8 million. Currently,
there are no amounts drawn upon these letters of credit.

> NOTE D

Long-Term Debt

Long-term debt consists of the following:

(Thousands of dollars)

2002

2001

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 $28.6 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

1.51% Guaranteed note due March 28, 2006,

interest payable quarterly, principal amount
of .8 billion yen is due March 28, 2006

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 1.6%
as of July 31, 2002

Capitalized lease obligations, with maturity dates

of March 31, 2009 and February 2, 2012 resulting
from the ultraﬁlter acquisition. Capital lease
obligations have principal amounts of $2.9 million
and $0.6 million with interest rates of 6.02% and
6.51%, respectively

Other

Total

Less current maturities

$ 23,000

$23,000

28,640

27,157

25,000

9,996

9,592

6,664

6,395

8,000

3,546

230

105,076

–

138

99,282

Total long-term debt

$105,019

$99,259

Annual maturities of long-term debt for 2003 and
2004 are not signiﬁcant and are $33.0 million in 2005,
$6.7 million in 2006 and $5.0 million in 2007. The
company estimates that the carrying value of long-term
debt approximates its fair market value.

On June 6, 2001, the company entered into an interest
rate swap agreement effectively converting a portion of the
company’s interest rate exposure from a ﬁxed rate to a vari-
able rate basis. The interest rate swap agreement has an

The funded status of the company’s pension plans as

of April 30, 2002 and April 30, 2001, is as follows:

(Thousands of dollars)

Change in beneﬁt obligation:

2002

2001

Beneﬁt obligation, beginning of year

$150,101

$137,056

Addition of non-U.S. plans

Service cost

Interest cost

Participant contributions

Plan amendments

Actuarial (gain)/loss

Currency exchange rates

Beneﬁts paid

16,786

10,351

11,850

580

1,433

2,553

(203)

(10,673)

16,589

6,936

11,626

125

174

(10,012)

(2,022)

(10,371)

Beneﬁt obligation, end of year

$182,778

$150,101

Change in plan assets:

Fair value of plan assets, beginning of year

$143,201

$146,210

Addition of non-U.S. plans

Actual return on plan assets

Company contributions

Participant contributions

Currency exchange rates

Beneﬁts paid

15,613

10,300

14,791

580

7,857

(10,978)

11,250

125

(892)

(10,673)

(10,371)

Fair value of plan assets, end of year

$173,853

$143,201

Reconciliation of funded status:

Funded (unfunded) status

$ (8,925)

$ (6,900)

Unrecognized actuarial (gain) loss

Unrecognized prior service cost

Unrecognized net transition obligation

Fourth quarter contributions

Net amount recognized in

consolidated balance sheet

Amounts recognized in consolidated balance

sheet consist of:

Prepaid beneﬁt cost

Accrued beneﬁt liability

Additional minimum liability

Intangible asset

Accumulated other comprehensive income

Net amount recognized in consolidated

10,342

3,802

3,527

416

2,322

2,527

3,792

1,891

$ 9,162

$ 3,632

$ 17,586

$ 9,853

(8,423)

(11,399)

7,801

3,597

(6,220)

(5,126)

4,784

341

balance sheet

$ 9,162

$ 3,632

aggregate notional amount of $27.0 million maturing on
July 15, 2008. The variable rate is based on the current
six-month London Interbank Offered Rates (“LIBOR”).
This transaction resulted in a decrease to interest expense
of $1.2 million for the year ended July 31, 2002. As of
July 31, 2002, the fair market value of the interest rate
swap was $1.6 million.

Total interest paid relating to all debt was $6.1 million,

$11.1 million and $9.1 million in 2002, 2001 and 2000,
respectively. In addition, total interest expense recorded in
2002, 2001 and 2000 was $6.5 million, $11.6 million and
$9.9 million, respectively. Certain note agreements contain
debt covenants related to working capital levels and limita-
tions on indebtedness. Further, the company is restricted
from paying dividends or repurchasing common stock if
its tangible net worth (as deﬁned) does not exceed certain
minimum levels. As of July 31, 2002, the company was in
compliance with all such covenants.

> NOTE E

Employee Beneﬁt Plans

Pension Plans Donaldson Company, Inc. and certain of its
subsidiaries have deﬁned beneﬁt pension plans for substan-
tially 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 interna-
tional plans generally provide pension beneﬁts based on
years of service and compensation level. The company’s
general funding policy is to make contributions as required
by applicable regulations. The assets are primarily invested
in diversiﬁed equity and debt portfolios. In 2000, the actu-
arial valuation date was changed from July 31 to April 30.
This change did not have a material impact on the actuar-
ial valuation.

Costs for the company’s pension plans include the

following components:

(Thousands of dollars)

Net periodic cost:

Service cost

Interest cost

Expected return on assets

Transition amount amortization

Prior service cost amortization

Actuarial (gain) loss amortization

2002

2001

2000

$ 10,351

$ 6,935

$ 6,084

11,850

(14,415)

11,626

9,852

(12,862)

(11,475)

158

(77)

173

119

(829)

(1,097)

Net periodic beneﬁt cost

$ 7,942

$ 5,162

$ 3,499

The projected beneﬁt obligation, accumulated beneﬁt
obligation and fair value of plan assets for pension plans
with accumulated beneﬁt obligations in excess of plan
assets were $47.3 million, $45.3 million and $31.7 million,
respectively, as of April 30, 2002 and $20.9 million, $17.1
million and $5.8 million, respectively, as of April 30, 2001.

Weighted average actuarial assumptions

April 30, 2002

April 30, 2001

July 31, 2000

All U.S. plans:

Discount rate

Expected return on plan assets

Rate of compensation increase

Non-U.S. plans:

Discount rate

Expected return on plan assets

Rate of compensation increase

7.25%

8.50%

5.00%

4.59%

6.63%

3.39%

7.50%

9.00%

5.50%

2.50%

4.00%

2.00%

8.00%

9.00%

6.00%

N/A

The expected return on plan assets is used in the devel-

opment of the net periodic beneﬁt cost for the ﬁscal year
ending in the year shown.

Pension expense related to international plans was
$4.1 million, $4.3 million and $2.5 million for 2002,
2001 and 2000, respectively.

401(k) Savings Plan The company provides a contributory
employee savings plan to domestic employees 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 discretionary
contribution based on performance of the company. Total
contribution expense was $6.8 million, $4.1 million and
$4.2 million for the years ended July 31, 2002, 2001 and
2000, respectively.

> 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 shareholder rights plan. Pursuant to the new Rights
Agreement, dated as of January 12, 1996, by and between
the company and Wells Fargo Bank Minnesota, N.A., as
Rights Agent, one right was issued on March 4, 1996 for
each outstanding share of common stock 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 per-
cent 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 cer-
tain conditions and exceptions more fully described in the
Rights Agreement), each right will entitle the holder (other
than the person who acquired 15 percent or more of the
outstanding common stock) to purchase common stock
of the company having a market value equal to twice the
exercise price of a right. The 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 2001, shareholders
approved the 2001 Master Stock Incentive Plan (the
“Plan”) which replaced the 1991 Plan that expired on
December 31, 2001 and provided for similar awards. The
Plan extends through December 2011 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 Plan allows for the granting
of performance awards to a limited number of key execu-
tives. 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 under the 1991 Plan totaled $2.6 million, $2.4
million and $1.7 million in 2002, 2001 and 2000, respec-
tively. Options under the Plan are granted to key employ-
ees at or above market price at the date of grant. Options
are exercisable for up to 10 years from the date of grant.

Stock Options Stock options issued after ﬁscal 1998 become
exercisable for non-executives in each of the following
three years, in an equal number of shares each year and
become exercisable for executives immediately upon the
date of grant. Stock options issued during ﬁscal 1997 and
1998 become exercisable in each of the following three
years, in an equal number of shares each year, for both
executives and non-executives. Stock options issued prior
to ﬁscal l997 for non-executives and during ﬁscal 1996 for
executives become exercisable in a four-year period in an
equal number of shares each year. Prior to ﬁscal 1996,
stock options vested immediately for executives.

In ﬁscal 1997, the company adopted the disclosure-only
provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation.” SFAS No. 123 encourages entities to
adopt a fair value-based method of accounting for

employee stock compensation plans, but allows companies
to continue to account for those plans using the account-
ing 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 plan. Had compensation
expense for the stock option plan been determined under
SFAS No. 123 in ﬁscal 2002, 2001 and 2000, the company’s
net income and diluted earnings per share would have been
approximately $83.0 million and $1.82, $71.0 million and
$1.56, and $67.7 million and $1.45, respectively.

For purposes of computing compensation cost of stock
options granted, the fair value of each stock option grant
was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions: risk free interest rate of 2.85 percent, 4.72
percent and 6.5 percent in 2002, 2001 and 2000, respec-
tively; two, three, six, or seven year lives in 2002, and two
or seven year lives in 2001 and 2000; expected volatility of
30.9 percent, 30.5 percent and 29.7 percent in 2002, 2001
and 2000, respectively; and 1.0 percent expected dividend
yield in 2002, 2001 and 2000. Black-Scholes is a widely
accepted stock option pricing model; however, the ultimate
value of stock options granted will be determined by the
actual lives of options granted and the actual future price
levels of the company’s common stock.

The weighted average fair value for options granted
during ﬁscal 2002, 2001 and 2000 is $9.56, $8.01 and
$7.49 per share, respectively.

The number and option price of options granted were

as follows:

Outstanding at July 31, 1999

Granted

Exercised

Canceled

Outstanding at July 31, 2000

Granted

Exercised

Canceled

Outstanding at July 31, 2001

Granted

Exercised

Canceled

Options

Weighted

Average

Outstanding

Exercise Price

3,382,322

$14.50

489,086

(204,004)

(14,468)

3,652,936

862,515

(1,025,995)

(25,297)

3,464,159

633,968

(603,551)

(23,661)

23.01

10.09

20.41

15.86

26.04

12.88

21.19

19.24

36.12

15.11

26.60

Outstanding at July 31, 2002

3,470,915

$22.99

At July 31, 2002, 2001 and 2000, there were

2,955,018, 2,954,542 and 3,109,926 options exercisable,
respectively. Shares reserved at July 31, 2002 for outstand-
ing options and future grants were 4,235,652. Shares
reserved consist of shares available for grant plus all out-
standing options. An amount is added to shares reserved
each year based on criteria set in the plan.

The following table summarizes information concerning

currently outstanding and exercisable options:

Weighted

Average

Remaining

Number

Contractual

Weighted

Average

Exercise

Number

Outstanding

Life (Years)

Price

Exercisable

Weighted

Average

Exercise

Price

Range of

Exercise

Prices

$5 to $15

713,622

$15 to $25

1,471,224

$25 to $35

695,169

$35 and above 590,900

3,470,915

1.82

5.87

7.34

8.99

5.86

$11.98

713,622

$11.98

21.05

26.81

36.60

1,392,809

516,887

331,700

20.94

27.11

36.77

$22.99

2,955,018

$21.63

> NOTE G
Income Taxes

The components of earnings before income taxes are
as follows:

(Thousands of dollars)

2002

2001

2000

Earnings before income taxes:

United States

Foreign

Total

$ 62,294

$ 48,705

$ 54,913

56,724

56,223

45,420

$119,018

$104,928

$100,333

The components of the provision for income taxes

are as follows:

(Thousands of dollars)

2002

2001

2000

Income taxes:

Current:

Federal

State

Foreign

Deferred:

Federal

State

Foreign

$21,146

$ 8,502

$18,192

1,900

14,355

37,401

(5,033)

(287)

(5,266)

622

13,163

22,287

7,304

417

(628)

7,093

2,361

9,996

30,549

(504)

(449)

Total

$32,135

$29,380

$30,100

The tax effects of temporary differences that give rise to

deferred tax assets and liabilities are as follows:

> NOTE H

Segment Reporting

(Thousands of dollars)

Deferred tax assets:

Compensation and
retirement plans

Accrued expenses

NOL carryforwards

Inventories

Investment in joint venture

Cumulative translation

adjustment

Other

Gross deferred tax assets

Valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Depreciation and amortization

Other

Gross deferred tax liabilities

2002

2001

2000

$ 9,226

$ 3,619

$ 12,839

7,658

6,346

1,967

777

–

6,094

32,068

(2,158)

29,910

(15,698)

(9,171)

(24,869)

6,938

6,092

1,938

636

–

3,215

22,438

(2,054)

20,384

7,818

8,174

1,526

754

4,574

3,162

38,847

(4,499)

34,348

(16,209)

(14,626)

(618)

(903)

(16,827)

(15,529)

Net deferred tax assets

$ 5,041

$ 3,557

$ 18,819

The following table reconciles the U.S. statutory income

tax rate with the effective income tax rate:

Statutory U.S. federal rate

State income taxes

Foreign taxes at lower rates

Other

2002

35.0%

1.0

(4.6)

(4.4)

2001

35.0%

0.4

(8.2)

0.8

2000

35.0%

1.5

(6.1)

(0.4)

27.0%

28.0%

30.0%

U.S. income taxes have not been provided on approx-
imately $187.0 million of undistributed earnings of non-U.S.
subsidiaries. The company plans to reinvest these undis-
tributed earnings. If any portion were to be distributed, the
related U.S. tax liability may be reduced by foreign income
taxes paid on those earnings plus any available foreign
tax credit carryovers. Determination of the unrecognized
deferred tax liability related to these undistributed earnings
is not practicable.

While non-U.S. operations have been proﬁtable overall,
cumulative tax losses of $20.0 million are carried as net oper-
ating losses in certain international subsidiaries. These losses
can be carried forward to offset future taxable income. The
majority of such carryforwards expire after 2003. Due to
the uncertainty of being able to realize certain of these
losses, a valuation allowance of $2.1 million has been
recorded at July 31, 2002.

The company made cash payments for income taxes of

$23.7 million, $16.2 million and $24.6 million in 2002,
2001 and 2000, respectively.

Consistent with SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” the
company has identiﬁed two reportable segments: Engine
Products and Industrial Products. Segment selection was
based on the internal organizational structure, management
of operations and performance evaluation by management
and the company’s Board of Directors.

The Engine Products segment sells to original equip-
ment 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 indus-

trial end-users, OEMs of gas-ﬁred turbines, OEMs and
end-users requiring highly puriﬁed air. Products include
dust, fume and mist collectors, compressed air puriﬁcation
systems, static and pulse-clean air ﬁlter systems and
specialized air ﬁltration systems for diverse applications
including computer disk drives.

Corporate and Unallocated include corporate expenses

determined to be non-allocable to the segments, interest
income and expense, non-operating income and expense,
and expenses not allocated to the business segments in the
same period. Assets included in Corporate and Unallocated
principally are cash and cash equivalents, inventory reserves,
certain prepaids, certain investments, other assets and assets
allocated to intercompany transactions.

The company has developed an internal measurement

system to evaluate performance and allocate resources
based on proﬁt or loss from operations before income
taxes. The company’s manufacturing facilities serve both
reporting segments. Therefore, the company uses a complex
allocation methodology to assign costs and assets to the
segments. A certain amount of costs and assets is assigned
to intercompany activity and is not assigned to either seg-
ment. Certain accounting policies applied to the reportable
segments differ from those described in the summary of
signiﬁcant accounting policies. The reportable segments
account for receivables on a gross basis and account for
inventory on a standard cost basis.

Segment allocated assets are primarily accounts receiv-

able, inventories, property, plant and equipment and
goodwill. Reconciling items included in Corporate and
Unallocated are created based on accounting differences
between segment reporting and the consolidated, external
reporting as well as internal allocation methodologies.

Segment detail is summarized as follows (in thousands):

Following are net sales by product within the Engine

2002

Net sales

Depreciation and

amortization

Equity earnings in

unconsolidated
afﬁliates

Earnings before
income taxes

Assets

Equity investments in
unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

2001

Net sales

Depreciation and

amortization

Equity earnings in

unconsolidated
afﬁliates

Earnings before
income taxes

Assets

Equity investments in
unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

2000

Net sales

Depreciation and

amortization

Equity earnings in

unconsolidated
afﬁliates

Earnings before
income taxes

Assets

Equity investments in
unconsolidated
afﬁliates

Capital expenditures,
net of acquired
businesses

Engine

Products

Industrial

Corporate &

Total

Products

Unallocated

Company

Products segment and Industrial Products segment:

(In thousands)

2002

2001

2000

$611,647

$514,358

$ –

$1,126,005

Off-road products

$ 185,607

$ 181,795

$ 193,229

Engine Products segment:

16,095

9,427

6,229

31,751

4,160

–

4,160

69,894

324,952

73,047

381,467

(23,923)

143,712

119,018

850,131

14,033

–

14,033

20,544

12,033

7,952

40,529

$606,810

$530,205

$ –

$1,137,015

23,100

11,268

4,209

38,577

3,017

–

3,017

49,539

315,706

72,891

228,505

(17,502)

162,619

104,928

706,830

14,115

–

14,115

23,308

11,370

4,246

38,924

$673,982

$418,312

$ –

$1,092,294

20,959

8,509

4,858

34,326

4,392

–

4,392

57,453

320,805

53,862

172,837

(10,982)

183,883

100,333

677,525

13,600

–

13,600

22,236

9,028

5,153

36,417

Transportation products

Aftermarket products

Total Engine Products

segment

Industrial Products segment:

91,244

334,796

79,670

345,345

151,950

328,803

611,647

606,810

673,982

Industrial air ﬁltration products

Gas turbine products

Special application products

Total Industrial Products

segment

175,663

230,897

107,798

217,343

195,042

117,820

193,119

117,038

108,155

514,358

530,205

418,312

Total company

$1,126,005

$1,137,015

$1,092,294

Geographic sales by origination and property, plant and

equipment (in thousands):

2002

United States

Europe

Asia-Paciﬁc

Other

Total

2001

United States

Europe

Asia-Paciﬁc

Other

Total

2000

United States

Europe

Asia-Paciﬁc

Other

Total

Property, Plant &

Net Sales Equipment – Net

$ 687,889

$139,975

225,669

184,269

28,178

40,013

21,652

39,273

$1,126,005

$240,913

$ 711,268

$138,631

211,397

185,395

28,955

36,801

19,609

12,617

$1,137,015

$207,658

$ 688,899

$135,480

206,429

166,221

30,745

37,698

22,304

9,063

$1,092,294

$204,545

Sales to one customer accounted for 13 percent and
12 percent of net sales in 2002 and 2001, respectively.
There were no sales over 10 percent of net sales to any
customer in 2000. One customer accounted for 18 percent
and 21 percent of gross accounts receivable in 2002 and
2001, respectively.

> NOTE I

> NOTE J

Quarterly Financial Information (Unaudited)

Commitments and Contingencies

The company is involved in litigation arising in the ordi-
nary 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.

(Thousands of dollars,

except per share amounts)

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

2002

Net sales

Gross margin

Net earnings

Diluted earnings
per share

Dividends declared
per share

2001

Net sales

Gross margin

Net earnings

Diluted earnings
per share

Dividends declared
per share

$288,429

$264,281

$269,423

$303,872

88,318

19,724

.43

.075

81,274

20,760

.45

.080

84,976

21,474

.47

.080

94,924

24,925

.55

.085

$289,869

$279,631

$269,721

$297,794

85,956

16,804

.37

.075

86,316

18,105

.40

.075

79,180

17,826

.39

.075

90,282

22,813

.50

.075

SIX-YEAR QUARTERLY HIGH-LOW STOCK PRICES (Unaudited)

High
Low

14.63 17.00 18.31 20.38
12.69 14.31 15.38 17.75

27.19 25.69 26.19 25.13
20.31 22.25 22.63 18.56

21.94 21.00 23.50 25.88
14.44 17.69 17.25 21.94

23.50
19.50

24.81 24.06 24.25
20.63 20.25 19.13

23.86 29.48 28.92 33.05
19.13 21.62 24.39 27.30

32.80 40.35 44.99 43.12
26.93 32.35 34.10 30.03

1997

1998

1999

2000

2001

2002

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Donaldson Company, Inc.

In our opinion, the accompanying consolidated balance
sheet and the related consolidated statements of earnings,
changes in shareholders’ equity and cash ﬂows present
fairly, in all material respects, the consolidated ﬁnancial
position of Donaldson Company Inc. as of July 31, 2002,
and the consolidated results of its operations and its cash
ﬂow for the period ended July 31, 2002, in conformity
with accounting principles generally accepted in the
United States of America. These ﬁnancial statements are
the responsibility of Donaldson Company Inc.’s manage-
ment; our responsibility is to express an opinion on these
ﬁnancial statements based on our audit. We conducted
our audit of these statements in accordance with auditing
standards generally accepted in the United States of
America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the
ﬁnancial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the ﬁnancial
statements, assessing the accounting principles used and
signiﬁcant estimates made by management, and evaluating
the overall ﬁnancial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
The ﬁnancial statements of Donaldson Company Inc. as
of July 31, 2001, and for the two years in the period then
ended, were audited by other independent accountants who
have ceased operations. Those independent accountants
expressed an unqualiﬁed opinion on those ﬁnancial state-
ments in their report dated August 27, 2001.

PricewaterhouseCoopers LLP
August 21, 2002

The following report is a copy of a report previously issued
by Arthur Andersen LLP. This report relates to prior years’
ﬁnancial statements. This report has not been reissued by
Arthur Andersen LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Donaldson Company, Inc.

We have audited the accompanying consolidated balance
sheets of Donaldson Company, Inc. (a Delaware corpora-
tion) and subsidiaries as of July 31, 2001 and 2000, and
the related consolidated statements of earnings, changes
in shareholders’ equity and cash ﬂows for the years 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 audits. The consolidated ﬁnancial statements of
Donaldson Company, Inc. and subsidiaries as of July 31,
1999, were audited by other auditors whose report dated
September 8, 1999, expressed an unqualiﬁed opinion on
those statements.

We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the ﬁnancial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures 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 presenta-
tion. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the ﬁnancial statements referred to
above present fairly, in all material respects, the ﬁnancial
position of Donaldson Company, Inc. and subsidiaries
as of July 31, 2001 and 2000, and the results of their oper-
ations and their cash ﬂows for the years then ended, in
conformity with accounting principles generally accepted
in the United States.

Minneapolis, Minnesota,
August 27, 2001

CORPORATE AND SHAREHOLDER INFORMATION

NYSE Listing

10-K Reports

Dividend Reinvestment Plan

The common shares of Donaldson
Company, Inc. are traded on the
New York Stock Exchange, under
the symbol DCI.

Shareholder Information

For any concerns relating to your
current or prospective shareholdings,
please contact Shareowner Services
at (800)468-9716 or (651)450-4064.

Annual Meeting

The annual meeting of shareholders
will be held at 10 a.m. on Friday,
November 15, 2002, at Donaldson
Company, Inc., 1400 West 94th Street,
Bloomington, Minnesota.
You are welcome to attend.

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.

Auditors

PricewaterhouseCoopers 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

As of September 20, 2002, 1,130 of
Donaldson Company’s approximately
1,871 shareholders of record were par-
ticipating 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 with-
out service charges or brokerage com-
missions. Shareholders may obtain a
brochure giving further details by writ-
ing Wells Fargo Bank Minnesota, N.A.,
Shareowner Services, P.O. Box 64854,
St. Paul, MN 55164-0854.

BOARD OF DIRECTORS

F. Guillaume Bastiaens, 59,
Vice Chairman,
Cargill, Inc., Minneapolis
(Agribusiness).
Director since 1995. (2) (3)

John F. Grundhofer, 63,
Chairman,
U.S. Bancorp, Minneapolis
(Financial Services).
Director since 1997. (1) (3)

Paul B. Burke, 46,
Retired Chairman, President
and Chief Executive Ofﬁcer,
BMC Industries, Inc., Minneapolis
(Manufacturing).
Director since 1996. (1) (3)

Janet M. Dolan, 53,
President and Chief Executive Ofﬁcer,
Tennant Company, Minneapolis
(Manufacturing).
Director since 1996. (2) (3)

Jack W. Eugster, 57,
Non-Executive Chairman,
ShopKo Stores, Inc., Green Bay, WI
(Specialty Discount Retailer).
Director since 1993. (1) (3)

Kendrick B. Melrose, 62,
Chairman and Chief Executive Ofﬁcer,
The Toro Company, Minneapolis
(Manufacturing).
Director since 1991. (1) (2)

Paul David Miller, 60,
Chairman and Chief Executive Ofﬁcer,
Alliant Techsystems Inc., Minneapolis
(Defense).
Director since 2001. (3)

Jeffrey Noddle, 56,
Chairman, President and
Chief Executive Ofﬁcer,
SUPERVALU INC., Minneapolis
(Food Retailer and Distributor).
Director since 2000. (1) (2)

S. Walter Richey, 66,
Retired Chairman, President
and Chief Executive Ofﬁcer,
Meritex, Inc., Minneapolis
(Distribution Services).
Director since 1991. (2) (3)

Stephen W. Sanger, 56,
Chairman and Chief Executive Ofﬁcer,
General Mills, Inc., Minneapolis
(Consumer Products).
Director since 1992. (1) (2)

William G. Van Dyke, 57,
Chairman, President
and Chief Executive Ofﬁcer,
Donaldson Company, Inc.
Director since 1994.

(1) Human Resources Committee

(2) Audit Committee

(3) Corporate Governance Committee

CORPORATE OFFICERS

William G. Van Dyke, 57,
Chairman, President
and Chief Executive Ofﬁcer.
30 years service.

William M. Cook, 49,
Senior Vice President, International
and Chief Financial Ofﬁcer.
22 years service.

James R. Giertz, 45,
Senior Vice President,
Commercial and Industrial.
9 years service.

Nickolas Priadka, 56,
Senior Vice President,
Engine Systems and Parts.
33 years service.

Lowell F. Schwab, 54,
Senior Vice President, Operations.
23 years service.

Dale M. Couch, 59,
Vice President and General Manager,
Asia Paciﬁc.
5 years service.

Norman C. Linnell, 43,
Vice President, General Counsel
and Secretary.
7 years service.

John E. Thames, 52,
Vice President, Human Resources.
14 years service.

Geert Henk Touw, 57,
Vice President and General Manager,
Europe/Africa/Middle East.
17 years service.

Thomas A. Windfeldt, 53,
Vice President, Controller.
22 years service.

W. Cook J. Giertz L. Schwab W. Van Dyke N. Priadka

T. Windfeldt G. Touw D. Couch J. Thames N. Linnell

WORLDWIDE OPERATIONS

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

U.S. Plants
Auburn, Alabama
Norcross, Georgia
Dixon, Illinois
Frankfort, Indiana
Cresco, Iowa
Grinnell, Iowa
Nicholasville, Kentucky
Port Huron, Michigan
Chillicothe, Missouri
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

PT Panata Jaya Mandiri
Jakarta, Indonesia

Rashed Al-Rashed & Sons –
Donaldson Company Limited
Dammam, Saudi Arabia

TM(cid:31)

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

(952) 887-3131
www.donaldson.com

Subsidiaries
Donaldson Australasia Pty. Limited
Wyong, Australia

Donaldson Filtration Industrial
S. de R.L. de C.V.
Monterrey, Mexico

Donaldson Sales, Inc.
Barbados

Donaldson Coordination Center, B.V.B.A.
Leuven, Belgium

Donaldson Europe, B.V.B.A.
Leuven, Belgium
Brugge, Belgium (plant)

Donaldson Czech Republic s.r.o.
Prague, Czech Republic

Donaldson Scandinavia APS
Horsholm, Denmark

Donaldson France, S.A.S.
Bron, France

Tecnov Donaldson, S.A.S.
Domjean, France

Donaldson Gesellschaft m.b.H.
Torit DCE G.m.b.H
Dülmen, Germany

ultraﬁlter international, AG and
subsidiaries
Haan, Germany

Donaldson India Filter Systems Pvt. Ltd.
New Delhi, India

PT Donaldson Systems Indonesia
Jakarta, Indonesia

Donaldson Italia s.r.l.
Ostiglia, Italy

Nippon Donaldson Limited
Tokyo, Japan

Donaldson Luxembourg S.a.r.l.
Luxembourg

Donaldson, S.A. de C.V.
Aguascalientes, Mexico

Diemo S.A. de C.V.
Guadalajara, Mexico

Donaldson Torit, B.V.
Donaldson Nederland 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 Polska Sp. z.o.o.
Warsaw, Poland

Donaldson Filtration (Asia Paciﬁc) Pte. Ltd.
Singapore

Donaldson Filtration Systems
(Proprietary) Ltd.
Cape Town, South Africa

Donaldson Korea Co., Ltd.
Seoul, South Korea

Donaldson Ibérica,
Soluciones en Filtracion, S.L.
Barcelona, Spain

Donaldson Filtros Iberica S.L.
Madrid, Spain

Donaldson Schweiz G.m.b.H.
Aarau, Switzerland

Donaldson Filter Components Limited
Hull, United Kingdom

DCE Donaldson Ltd.
Leicester, United Kingdom

Tetratec Europe Limited
Wigan, United Kingdom

Donaldson Capital, Inc.
Minneapolis, Minnesota