Innovation Through Innovation Through Applied Science Applied Science Fourteen Consecutive Record Years 2003 Annual Report 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 34 Donaldson plants around the world and through three joint ventures. Our financial objective is to build shareholder value through superior share price appreciation and consistent dividend payouts. We believe value is created by delivering consistent, double-digit growth in earnings per share. Growth will be achieved by aggressive- ly pursuing new opportunities in our existing and related markets. Consistency will be reinforced by maintaining a diversified portfo- lio 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 and opportunity for our employees. M 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 2003 2002 % change $1,218,252 $1,126,005 95,314 7.8% 23.0% 19.0% 86,883 7.7% 24.8% 21.5% $ 2.11 $ 1.90 $ .350 $ .310 $ 10.32 $ 8.72 45,235 9,195 45,714 8,166 8.2% 9.7% .1 pts. (1.8) pts. (2.5) pts. 11.1% 12.9% 18.4% (1.0)% 12.6% Six-Year Quarterly High-Low Stock Prices 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 24.81 24.06 24.25 19.50 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 38.12 37.80 40.57 49.18 29.91 32.40 32.17 39.73 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1998 1999 2000 2001 2002 2003 Innovation Through Applied Science Filtration technology is a science. In fact, at Donaldson, it’s five sciences. We focus on these key areas of research and discovery in our quest for pacesetting products: M Particulate Filtration M Chemical Filtration M Fluid Dynamics M Structural Analysis M Acoustics Years ago, filtration focused on removing large particles Equipment users must cope with higher productivity, Equipment users must cope with higher productivity, from air and liquid. Today, that focus has shifted to ever- stricter warranties, smaller maintenance staffs and tougher stricter warranties, smaller maintenance staffs and tougher finer particles – down to the molecular level. safety codes. safety codes. Donaldson has leveraged mastery of its five sciences to Our research begins with understanding these challenges. Our research begins with understanding these challenges. create the world’s best filtration products, and capture We analyze the information from our customers and develop We analyze the information from our customers and develop leading shares in applications where filtration is critical for new filter media and systems that meet the demands of new filter media and systems that meet the demands of protecting processes, equipment and people. We rely on different operating conditions. Supercomputer modeling different operating conditions. Supercomputer modeling continuous technology advancement and innovation to tools enable us to simulate real-world environments and tools enable us to simulate real-world environments and maintain our leadership position. As a result, our employees test our innovations early in the development process. Our test our innovations early in the development process. Our hold over 450 patents. 400 engineers around the world then use that knowledge 400 engineers around the world then use that knowledge It’s important for us to have the best technology and to develop proprietary products. to develop proprietary products. the best scientists and engineers because our customers By better understanding the sciences of filtration, we By better understanding the sciences of filtration, we are looking for better value and better protection – for deliver better quality of life for people and longer running deliver better quality of life for people and longer running people and equipment. Equipment manufacturers must lives for machines. lives for machines. meet the demands of tougher environmental codes, longer warranties, more delicate equipment and less space. On the cover: Photo of PowerCore™ air element for a Freightliner medium-duty truck. 1 Dear Shareholders, Fourteen consecutive years of double-digit earnings growth – that’s the reality behind all of our talk about delivering shareholder value. We can find only three other public companies with comparable records – none of them an “industrial.” Our record is a remarkable testament to the depth, breadth, quality and commitment of the Donaldson people who made it happen. We set out almost 20 years ago to define Donaldson as synony- mous with “consistent, above-average earnings,” believing that this would yield superior returns to patient, long-term investors. The idea seems to have had some merit. Anyone who held Donaldson stock for any decade out of the last 20 years has enjoyed roughly a 20 percent annual return. That’s using annual average share prices – including a value of $37 for fiscal 2003. This last year presented our stiffest challenge, with a $100 million drop in gas turbine sales and soggy North American industrial spending. Winning in this environment required extraordinary effort and personal sacrifice from our people. We ran short- handed for periods of time in many locations and did without in order to control spending. Tough choices became routine, often meaning extra work in the short term. Once again, the Donaldson people stayed focused, they performed, and they added “Year 14” to the record – now we’re on to “Year 15.” This was not a story of brilliant management by a handful of executives; it was largely a collection of small stories, written by hundreds and hundreds of people, all around the world, at all levels of the organization, who brought the commitment, skills and persistence to do what needed to be done to keep this company strong. The stories were written in Hull, Klasterec and Leuven, Wyong, Singapore, Hong Kong and Wuxi, Monterrey, Capetown, Gunma and Aguascalientes and all across the United States, including Baldwin, Cresco, Auburn, Nicholasville, Grinnell and, surely, Bloomington. Too many stories to tell individually, yet they are eloquently told in the performance of the company. Mixed in with all of the small stories are four “big” stories that deserve comment. First, our North American truck business turned in a stellar performance. In an overall down market, our unit volume remained flat through increased market share. Revenues grew from increasing dollar content per vehicle, led by our emission control devices and new programs for our innovative PowerCore™ filters. 2 M Donaldson 2003 Overseas operations contributed 50 percent of our sales and the second “big story.” In a truly lousy Japanese economy, local currency sales were up 17 percent and operating profit up 22 percent. Local currency operating profit rose 16 percent for European Engine operations and 70 percent in Australia. South Africa turned a 20 percent sales increase into a 50 percent oper- ating profit improvement. Some of these operations are larger than others, but the profit numbers themselves – up 22 percent, 16 percent, 70 percent, 50 percent – boldly underline how important our overseas operations are to Donaldson’s story, and why we are able to post such solid results despite the weak U.S. economy. The third factor is the very successful integration of Ultrafilter. We acquired German-based Ultrafilter in July 2002, and we’ve seen it blend smoothly into the Donaldson portfolio. We acquired outstanding leadership in Ultrafilter’s management, who deliv- ered solid sales growth in a very difficult environment, while reducing product cost and slashing overhead. There is more to do; the integration is not complete, but we have to score this as a significant success. We are increasingly excited about our in-plant filtration potential over the long-term from merging Ultrafilter’s capabilities with our industrial hydraulics and dust collection businesses. Ironically and somewhat unexpectedly, the contraction in the North American gas turbine market provided the backdrop for the fourth “big story.” We came into this year projecting a big drop in sales, as the North American power generation bubble burst. Indeed, gas turbines dropped 44 percent – just more than $100 million. But that’s not the news. The news is that our gas turbine organization did a remarkable job of managing down both manufacturing capacity and operating expenses. They maintained gross margin and finished the year in the black. It is not supposed to happen that an industrial manufacturing business drops sales 44 percent and remains profitable. These people did it and played a key role in our success. Looking to fiscal 2004, what we call “Year 15,” we are optimistic about our ability to keep this record going. We began the year on positive trends, unlike what we have experienced the last two years. Worldwide, our Engine business shows strong order and backlog trends, buoyed by PowerCore program wins and a recovery in North American heavy truck builds. In addition, we foresee an incremental $10 million, or perhaps more, in retrofit diesel emission sales having already booked the first significant orders for our unique, EPA-certified, emission control system. Our disk drive filter business should rebound. Industry sources project a 10 percent unit volume increase in the PC and server markets for the coming year, as sales turned up in the summer of 2003. Adding to that is a lift from the first major disk drive technology innovation in the last couple of years. These new drives have very high access speed and high areal density and that means demanding filtration. That’s Donaldson’s business, both figuratively and literally. The end result is that we entered fiscal 2004 with disk drive filter orders and backlog at record levels. We expect continued revenue growth from Ultrafilter, leveraged by the full year impact of profitability gains made last year and the effect of the continuing process improvements still underway. Our gas turbine business will have another difficult revenue year. As the power generation industry continues its march back to pre-bubble levels, we project another 30 to 35 percent revenue drop from fiscal 2003. However, we expect this business to con- tinue to stay ahead of the contraction and remain profitable. Finally, the payoff from our ongoing program in manufacturing rationalization will be more dramatically apparent. We have made tremendous progress in manufacturing efficiency for sev- eral years by consolidating capacity. But it is expensive work – 17 cents per share in 2001, 5 cents in 2002 and 10 cents in 2003. As always, the costs were absorbed into operating income; our record operating performance included clearing those hurdles. Another step in that process is the consolidation from two Japanese plants to one. The new plant is complete and the move – and its costs – behind us. The old facility is sold and will bring a gain of 8 to 10 cents a share sometime in the first half of the year. Looking back, our success reflects both the capability and commitment of the Donaldson people, and the soundness and enduring strength of our diversified filtration portfolio. Those two factors have produced 14 consecutive years of double-digit earnings growth. Looking forward, despite all of the uncertain- ties and unknowns, those same factors insure that we’re in the race to deliver again. Strength will come from a growing engine business, driven by some great new products that are gaining traction every day, a resurgent disk drive market, the continuing flowering of Ultrafilter, and as always, the power of a first-rate operations group delivering an ever more efficient manufactur- ing platform. We are committed to celebrating Year 15. Sincerely, William G. Van Dyke Chairman, President and Chief Executive Officer Long-Term Performance Consistent Double-Digit EPS Growth Year ended July 31 (cumulative total return) = DCI = S&P 400 1,633 (annual EPS % change) 35 1,115 1,015 796 687 729 623 580 709 630 642 590 461 492 10% Goal 0 24 19 15 16 10 10 15 15 15 15 14 11 10 373 412 384 280 225 172 148 142 173 203 228 236 294 317 100 133 100 82 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 90 91 92 93 94 95 96 97 98 99 00 01 02 03 3 Particulate Filtration Particulate filtration science involves under- standing the relationship between particle size and structure and media geometry. Intimate and detailed knowledge of these relationships allows for optimization of par- ticle collection and storage, while keeping pressure loss to a minimum. Proprietary computer models and 3D imaging help us understand what will happen as spe- cific contaminant particles flow into the fibers of filter media. Our scientists use this type of modeling to simulate new filter designs and speed the development process. 4 M Donaldson 2003 Cross Section of PowerCore™ Filtration Technology M Donaldson’s research into particulate filtration led to the development of PowerCore™ filtration. Its unique media and configuration filters more contami- nant in half the space. Engine designers for today’s vehicles are faced with demands for increased horsepower, tightened emissions regulations and increased streamlining. Donaldson has introduced an innovative combination of high-density filtration and nano-fiber media, known as PowerCore™ filtration technology. This proprietary advancement places twice the filter media area in a given space, specifically designed in this case to collect and store submicron soot particles. The result is substantially improved particle collec- tion efficiency, longer life and higher air flow – all in a package half the size of competing technologies. Ford Super Duty Power Stroke is a registered trademark of Ford Motor Company. 5 Ford® Super Duty Power Stroke® Diesel Pickup Delivering more in less space M During the design phase of its Super Duty Power Stroke diesel pickup trucks, Ford increased the horsepower to an industry-leading 325 horse- power but simultaneously reduced the space for the air intake system. M The compact design and high efficiency of our PowerCore M The compact design and high filtration allowed Ford to inte- efficiency of PowerCore filtra- grate an air intake system that tion allowed Ford to integrate handled higher airflows, held an air intake system that han- more contaminant and lasted dled higher airflows, held longer without compromising more contaminant and lasted their design objectives. longer without compromising their design objectives. Chemical Filtration Today’s advanced industrial processes require the removal of molecular, airborne contaminants to parts per billion levels to pro- tect equipment and improve process yields. Chemical filtration removes contaminants through a chemical reaction between the particles and the filter media. This science combines materials that adsorb, bond with or catalyze unwanted gas molecules. Physical Absorption M Contaminants go into filter media and are captured there, like a sponge absorbs water. Absorption Filter surface Catalytic Abatement M Contaminants react with the filter media and change from harmful to harmless gases. Contaminant Chemisorption or Chemical Bonding M Contaminants bond to the surface of the filter media through physical or chemical attraction, much like magnetism. Contaminant Contaminant Chemisorbed Reaction Products Adsorbent/Filter Surface H2O CO2 6 M Donaldson 2003 Catalyst Surface Clean room standards are ever increasing in the manufacture of highly complex semiconductor chips. Sometimes, however, even a clean room environment is not clean enough. Deep UV Photolithography Tool for Manufacturing Semiconductor Wafers Making clean environments cleaner M Our customers apply M LITHOGUARD removes M LITHOGUARD removes LITHOGUARD and Ultrafilter products at critical “points of use” in their semiconductor manufacturing systems to pro- vide ultra-clean zones exactly where they are needed. submicron contaminants and submicron contaminants and delivers ultra-pure air where delivers a puff of ultra-pure the laser meets the silicon air immediately where the wafer to help deliver the most laser meets the silicon wafer precise image possible onto to help deliver the most pre- the chip’s surface. cise image possible onto the chip’s surface. Filtration inside a clean room calls for a delicate balance. Filter out too much of one substance (such as water vapor) and the wafer surface won’t develop properly. To provide the necessary critically clean environment – plus maximum control – Donaldson offers a broad range of filter solutions for a wide variety of molecular contaminants and desired air flow. Our LITHOGUARD™ and Ultrafilter™ products utilize high efficiency materials to eliminate contaminant molecules. These materials are configured into a filter that best balances structural strength, size, life, efficiency and cleanliness. 7 Fluid Dynamics Fluid dynamics is the study of liquids and gases in motion or at rest and their effects when they come into contact with other materials. Donaldson’s engineers study how particles flow through a filter, such as mist through a membrane or hot exhaust gas through a muffler housing. M Using special software, Donaldson engineers identified “hot spots,” or air turbulence, in round filter designs used in industrial dust collectors. 8 M Donaldson 2003 M Oval filters reduced “hot spots,” creating a more efficient filter design and a 25 percent performance improvement. When dust is a big problem, floor space is at a premium and downtime to change filters means lost revenue, customers count on Donaldson’s DownFlo® Oval dust collection system. Fluid dynamics has played a vital role in positioning Donaldson’s Torit® DownFlo® Oval dust collector product as the pace- setter for its industry. The proprietary oval design, introduced in 2000, delivers longer life and better performance. More than 1.4 million pounds of dust and 16,000 hours of laboratory and job testing went into developing the DownFlo Oval. The DFO won the 2002 “Product of the Year” recognition from Filtration and Separation magazine, the leading trade publication for the industry. 9 Keeping dusty operations flowing M Donaldson’s DownFlo® dust collectors are used in applications from metal cutting to woodworking to processing food, plastics and pharmaceuticals. M DownFlo Oval dust M DownFlo Oval dust collectors have 25 percent collectors have 25 percent more filtration capacity than more filtration capacity than conventional dust collectors. conventional dust collectors. M Manufacturers can save M Manufacturers can save factory floor space and factory floor space and 10-15 percent of the cost. 10-15 percent of the cost. Donaldson Oil Filter Housing M Computer modeling identifies the area in red as potential stress points on a filter housing. Structural Analysis Donaldson filters perform in highly demand- ing environments. Our scientists use the most advanced structural analysis tools available to design tough yet cost effective filters and housings. Using a method called finite element analysis, we are able to ana- lyze the structural integrity of new designs. In this way we maximize reliability while delivering lowest possible cost. 10 M Donaldson 2003 Donaldson offers a full line of industrial hydraulic filters to protect machinery and components in hundreds of applications – in the factory and on heavy-duty mobile equipment. Oil Storage Facility M Duramax filters pre-clean the hydraulic and transmission fluids in the storage tanks to meet the demanding quality specs of the vehicle manufacturer’s warranties. Minimizing hydraulic pressures M Leading manufacturers of construction and farm equipment use Donaldson Duramax filters for the best possible mix of serviceability, cost and performance. M Duramax filters keep M Duramax filters keep hydraulic fluids clean and hydraulic fluids clean and protect equipment in highly protect equipment in highly demanding conditions to keep demanding conditions to keep warranty repair costs down. warranty repair costs down. M The Duramax spin-on casing M The Duramax spin-on casing saves maintenance time and saves maintenance time and helps avoid spills. helps avoid spills. Today’s demanding tolerances on moving mechanical parts require finer filtration to prevent particle wear and eventual fail- ure. At the same time, higher pressures and flow rates require robust and reliable filters. Our Donaldson engineers factored in the intense pressures of hydraulic cir- cuits and transmissions when designing Duramax® filters. We also recognized the economic pressures on manufacturers and equipment owners to extend their maintenance cycles. With the optimum balance of perfor- mance and cost, the Duramax brand offers the highest-rated, medium pressure spin-on filter in its category. 11 Acoustics Engines and equipment generate noise Sound Pressure Level Map of Muffler that can be both distracting and harmful. Government authorities and our customers have demanded ever-quieter equipment operation. Donaldson has forged ahead with the technology to protect equipment opera- tors and the public from this “noise pollution.” Donaldson engineers use computer analysis tools to predict and to better understand the complexities of acoustics. Such analyses have delivered quiet – for intake and exhaust systems on trucks, for gas turbines in electric power generation and for industrial air filtra- tion systems inside manufacturing facilities. M Sound pressure level maps are used to predict noise levels when designing new products, like the muffler pictured above. 12 M Donaldson 2003 Air Intake System for Hummer H2 High performance vehicles like the General Motors Hummer® H2 require significant air intake system noise reduction to meet vehicle noise requirements. Offered in a wide range of styles and in sizes for engines from 20 to 3000 hp, Donaldson air intake systems are installed as original equipment by the majority of truck and off-road equipment manufacturers. Donaldson incorporates acoustic features into the system design to meet the manufacturer’s specification for air intake noise. Reducing engine noise to a Hum M Using cutting edge plastic M Using cutting edge plastic molding techniques and molding techniques and computer-aided design, noise computer-aided design, noise control was accomplished control was accomplished within the air intake system within the air intake system duct work. duct work. M Donaldson engineers used sophisticated computer analysis tools to determine the optimum noise reduction solution for the H2. M Due to the large engine size and low profile hood design, the H2 did not allow enough space to package traditional noise reduction products. Hummer H2 is a trademark of General Motors Corporation. 13 Industrial Products Operating Segment M 2003 Revenue $535 Million Engine Products Operating Segment M 2003 Revenue $683 Million Industrial Air Filtration Gas Turbine Systems Ultrafilter Special Applications Off-Road Equipment Trucks Aftermarket Donaldson provides a wide range of high efficiency media, filters and filtration systems for various commercial, industrial and product applications. Under the trade names Donaldson Torit®and Donaldson Torit DCE®, Donaldson provides equipment to control and capture 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. Product is applied in a wide variety of industrial settings including metal working plants, paint operations, welding stations, woodworking shops and food processing plants. Donaldson provides complete systems to deliver clean air to gas-fired 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. Under the name Ultrafilter™, Donaldson provides a complete line of compressed air filters and a wide assortment of replacement filters, a complete offering of refrigeration and desiccant dryers, condensate management devices and after-sale services. 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. Product is applied in a wide variety of industrial processes where compressed air purifi- cation is required, including paint operations, conveying systems, pneumatic tools and controls. Key end-market segments include food and beverage, painting, industrial gas, textiles, chemicals, elec- tronics and packaging. 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. $174 Million $130 Million $121 Million $110 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 and Siemens Westinghouse). Replacement parts are sold direct to end-users. Dedicated field sales force uses multiple selling channels to end-users including: direct selling, distribution, installers and OEM accounts. 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. Products are sold through an extensive network of industrial distributors. s t c u d o r P s n o i t a c i l p p A e u n e v e R 3 0 0 2 t e k r a M o t s e t u o R Products sold to industrial equipment and defense contractor OEMs for agricul- ture, construction, mining and military applications. Products sold to manufacturers of light-, 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, Mitsubishi, Ford and General Motors Original equipment dealers (such as Freightliner dealers or Caterpillar dealers), independent distributors and private label accounts $195 Million $116 Million $372 Million Engine Intake Air Filtration Systems Exhaust Systems Hydraulic Filtration Systems Lube, Fuel and Coolant Filtration Systems Cabin Air Filters s t e k r a M - d n E s r e m o t s u C e v i t a t n e s e r p e R e u n e v e R 3 0 0 2 s e i l i m a F t c u d o r P 14 M Donaldson 2003 15 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ M Eleven-Year Comparison of Results Donaldson Company, Inc. and Subsidiaries (Thousands of dollars, except per share amounts) 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 Operating Results Net sales Gross margin $1,218,252 $1,126,005 $1,137,015 $1,092,294 $944,139 $940,351 $833,348 $758,646 $703,959 $593,503 $533,327 $ 391,151 349,492 341,734 327,521 275,681 263,262 250,273 222,874 197,979 166,599 152,236 Gross margin percentage 32.1% 31.0% 30.1% 30.0% Operating income $ 131,765 123,850 112,108 105,594 29.2% 88,390 9.4% 6,993 89,210 26,763 30.0% 62,447 6.6% 24.1% 19.0% 28.0% 86,799 9.2% 4,671 86,441 29,390 34.0% 57,051 6.1% 22.8% 20.5% 30.0% 82,715 9.9% 2,358 79,094 28,474 36.0% 50,620 6.1% 21.4% 20.8% 29.4% 75,642 10.0% 2,905 71,120 27,684 38.9% 43,436 5.7% 19.3% 18.5% 28.1% 65,531 9.3% 3,089 63,172 24,636 39.0% 38,536 5.5% 18.8% 17.6% 28.1% 52,079 8.8% 3,362 50,193 18,244 36.3% 28.5% 45,246 8.5% 2,723 44,682 16,468 36.9% 31,949 (1) 28,214 5.4% 5.3% 17.6% 16.0% 16.9% 15.0% Effective income tax rate 27.0% Operating income percentage Interest expense Earnings before income taxes Income taxes 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 10.8% $ 5,889 11.0% 6,531 9.9% 11,608 9.7% 9,880 $ 130,567 119,018 104,928 100,333 32,135 27.0% 86,883 7.7% 24.8% 19.2% 29,380 28.0% 75,548 6.6% 25.2% 19.1% 30,100 30.0% 70,233 6.4% 25.9% 19.4% $ 35,253 $ 95,314 7.8% 23.0% 18.3% $ 881,997 $ 454,705 $ 214,076 $ 240,629 850,131 706,830 677,525 542,246 512,987 467,501 402,850 381,042 337,360 300,217 456,484 407,227 383,347 326,388 300,817 283,367 250,751 247,904 220,308 196,014 273,253 217,279 243,590 142,055 165,068 177,346 138,578 123,747 115,757 93,666 183,231 189,948 139,757 184,333 135,749 106,021 112,173 124,157 104,551 102,348 Long-term debt $ 105,156 104,556 2.1 1.7 $ 14,798 60,857 1.9 59,416 99,259 1.6 85,313 92,645 2.3 20,696 86,691 Total debt $ 119,954 165,413 158,675 177,958 107,387 1.8 45,896 51,553 97,449 1.6 42,674 4,201 46,875 1.8 13,145 10,041 23,186 2.0 20,800 10,167 30,967 1.9 16,956 16,028 32,984 2.1 7,595 18,920 26,515 Shareholders’ equity $ 447,393 382,621 319,093 280,165 262,763 255,671 243,865 228,880 221,173 189,697 174,008 Long-term capitalization ratio 19.0% 21.5% 23.7% 24.9% 24.8% 16.8% 1.7% 4.2% 4.4% 7.8% 9.8% Property, plant and equipment, net Net expenditures on property, plant and equipment Depreciation and amortization $ 255,436 240,913 207,658 204,545 182,180 178,867 154,595 124,913 110,640 99,559 90,515 $ 33,293 40,529 38,924 36,417 29,539 54,705 47,327 39,297 25,334 24,642 15,005 $ 37,557 31,751 38,577 34,326 27,686 25,272 21,494 21,674 20,529 16,365 14,752 Shareholder Information Net earnings per share – assuming dilution $ 2.11 Dividends paid per share $ .35 Shareholders’ equity per share $ 10.32 1.90 .31 8.72 1.66 .295 7.19 1.51 .27 6.27 1.31 .23 5.69 1.14 .19 5.28 .99 .17 .84 .15 .73 .14 .59 (1) .12 .51 .10 4.93 4.52 4.23 3.58 3.19 Shares outstanding (000s) 43,339 43,885 44,383 44,658 46,197 48,382 49,452 50,650 52,370 53,020 54,564 Common stock price range, per share High Low $ 49.18 $ 29.91 44.99 26.93 33.05 19.13 24.81 19.13 25.88 14.44 27.19 18.56 20.38 12.69 14.00 11.94 14.00 10.94 13.06 9.13 10.06 7.00 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 Long-term capitalization ratio is long-term debt divided by long-term debt plus shareholders’ equity. shareholders’ equity. (1) Excludes the cumulative effect of an accounting change of $2,206, or $.08 per share, in 1994. (1) Excludes the cumulative effect of an accounting change of $2,206, or $.08 per share, in 1994. Net Sales Revenue has grown 9 percent per year, on average, over the last 14 years. Earnings Per Share Earnings per share were up 11.1 percent in 2003, the 14th consecutive year of double-digit increases in EPS. (millions of dollars) (dollars) $1,218 1,137 1,126 1,092 940 944 833 759 704 594 533 1.31 1.14 .99 .84 .73 .59 .51 $2.11 1.90 1.66 1.51 93 94 95 96 97 98 99 00 01 02 03 93 94 95 96 97 98 99 00 01 02 03 Return on Equity Donaldson Company is delivering shareholder value through consistently high returns on shareholders’ equity. Dividends Per Share Dividends per share increased 13 percent in 2003. The company distributes about 20 percent of the prior three years’ average net income to shareholders through regular quarterly dividends. (% per annum) (dollars) 24.1 22.8 21.4 25.9 25.2 24.8 23.0% 18.8 19.3 17.6 16.9 $.35 .31 .295 .27 .23 .19 .17 .15 .14 .12 .10 93 94 95 96 97 98 99 00 01 02 03 93 94 95 96 97 98 99 00 01 02 03 17 Corporate Officers William G. Van Dyke, 58 Chairman, President and Chief Executive Officer 31 years service William M. Cook, 50 Senior Vice President, International and Chief Financial Officer 23 years service James R. Giertz, 46 Senior Vice President, Commercial and Industrial 10 years service Nickolas Priadka, 57 Senior Vice President, Engine Systems and Parts 34 years service Lowell F. Schwab, 55 Senior Vice President, Operations 24 years service Dale M. Couch, 60 Vice President and General Manager, Asia Pacific 6 years service Norman C. Linnell, 44 Vice President, General Counsel and Secretary 8 years service Charles J. McMurray, 49 Vice President, Human Resources 23 years service Geert Henk Touw, 58 Vice President and General Manager, Europe/Africa/Middle East 18 years service Thomas A. Windfeldt, 54 Vice President, Controller 23 years service Board of Directors F. Guillaume Bastiaens, 60 Vice Chairman, Cargill, Inc., Minneapolis (Agribusiness) Director since 1995 (1) (3) Kendrick B. Melrose, 63 Chairman and Chief Executive Officer, The Toro Company, Minneapolis (Manufacturing) Director since 1991 (1) (2) William G. Van Dyke, 58 Chairman, President and Chief Executive Officer, Donaldson Company, Inc. Director since 1994 John P. Wiehoff, 42 Chief Executive Officer and President, C.H. Robinson Worldwide, Inc., Minneapolis (Transportation and Logistics) Director since 2003 (2) (3) (1) Human Resources Committee (2) Audit Committee (3) Corporate Governance Committee Janet M. Dolan, 53 President and Chief Executive Officer, Tennant Company, Minneapolis (Manufacturing) Director since 1996 (2) (3) Paul David Miller, 61 Chairman, Alliant Techsystems Inc., Minneapolis (Defense) Director since 2001 (3) Jack W. Eugster, 58 Non-Executive Chairman, ShopKo Stores, Inc., Green Bay, WI (Consumer Products) Director since 1993 (1) (2) John F. Grundhofer, 64 Chairman Emeritus, U.S. Bancorp, Minneapolis (Financial Services) Director since 1997 (1) (3) 18 M Donaldson 2003 Jeffrey Noddle, 57 Chairman, President and Chief Executive Officer, SUPERVALU INC., Minneapolis (Food Retailer and Distributor) Director since 2000 (1) (2) Stephen W. Sanger, 57 Chairman and Chief Executive Officer, General Mills, Inc., Minneapolis (Consumer Products) Director since 1992 (2) Corporate and Shareholder Information NYSE Listing Annual Meeting The common shares of Donaldson Company, Inc. are traded on the New York Stock Exchange, under the symbol DCI. Shareholder Information For any concerns relating to your current or prospective shareholdings, please contact Shareowner Services at (800)468-9716 or (651)450-4064. Dividend Reinvestment Plan As of September 26, 2003, 1,116 of Donaldson Company’s approximately 1,870 shareholders of record were participating in the Dividend Reinvestment Plan. Under the plan, shareholders can invest Donaldson Company dividends in additional shares of company stock. They may also make periodic voluntary cash investments for the purchase of company stock. Both alternatives are provided without service charges or brokerage commissions. Shareholders may obtain a brochure giving further details by writing Wells Fargo Bank Minnesota, N.A., Shareowner Services, P.O. Box 64854, St. Paul, MN 55164-0854. The annual meeting of shareholders will be held at 10 a.m. on Friday, November 21, 2003, at Donaldson Company, Inc., 1400 West 94th Street, Bloomington, Minnesota. Shareholders are welcome to attend. Investor Relations You can access investor relations infor- mation, including our SEC filings, on our website at www.donaldson.com. For investor inquiries, contact Rich Sheffer, Director of Investor Relations at (952) 887-3753 or rsheffer@mail.donaldson.com. 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 Safe Harbor Statement 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. Some of the information provided in this annual report constitutes forward-looking statements which reflect the Company’s current views with respect to future events and financial performance, but involve uncertain- ties that could significantly impact results. All forecasts and projections are “forward-looking” statements and are based on management’s current expectations of the Company’s near-term results. There can be no assurance that actual results will not differ materially from its expectations. For a more detailed explanation of the safe harbor statement and the risks, see Exhibit 99, which is part of the Company’s Form 10-K filed with the SEC. TM Mailing Address: P.O. Box 1299 Minneapolis, Minnesota 55440 U.S.A (952) 887-3131 www.donaldson.com