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DONALDSON COMPANY ANNOUNCES RECORD FULL-YEAR RESULTS

14 September, 2005

FOR IMMEDIATE RELEASE:
Wednesday, September 14, 2005

FOR FURTHER INFORMATION:
Rich Sheffer(952) 887-3753

DONALDSON COMPANY ANNOUNCES RECORD FULL-YEAR RESULTS
Delivers 16th consecutive year of record earnings


MINNEAPOLIS, Sept. 14-- Donaldson Company, Inc. (NYSE: DCI) announced fourth quarter diluted earnings per share ("EPS") of $.29, even with last year. Net income was $25.1 million compared to $26.2 million last year. Sales were a record $422.7 million, up from $384.0 million in fiscal 2004.

 

For the year, EPS was a record $1.27, up from $1.18 last year. Net income was a record $110.6 million, versus $106.3 million last year. Record sales of $1.6 billion were up from $1.4 billion in the prior year.

During the fourth quarter, we recognized a $4.0 million tax charge, or $.05 per share, for the previously announced $80.0 million foreign repatriation plan pursuant to the American Jobs Creation Act of 2004. We also increased our reserve related to the previously disclosed patent litigation between Donaldson and Engineered Products Company, Inc. ("EPC") by $6.4 million, or $.05 per share.

"We are very pleased to announce our 16th consecutive record year, posting all-time highs for sales, earnings and EPS despite these fourth quarter charges," said Bill Cook, Chairman, President and Chief Executive Officer. "Demand continues to be strong in most of our end markets. Although we have seen rising oil prices affect our raw material costs for petroleum-based commodities and freight, we are working with our customers to offset these increases through a variety of efforts. We enter fiscal 2006 with continued strong orders and backlogs, giving us confidence of delivering another strong year of results."

Income Statement Discussion

Stronger foreign currencies contributed to the increase in fourth quarter and full year sales. Translated at constant exchange rates, sales increased 9.2 percent during the quarter and 10.4 percent for the year. The impact of foreign currency translation increased net earnings by $0.2 million in the fourth quarter and $2.0 million for the year.

Gross margin of 31.8 percent for the fourth quarter and 31.7 percent for the year compares to prior year margins of 31.2 percent and 31.6 percent, respectively. This year's fourth quarter gross margin was affected by higher costs for petroleum-based raw materials and freight, and a slower than expected ramp up of our new Thailand plant. Last year's fourth quarter gross margin was negatively impacted by $2.3 million from the unusual expenses discussed in last year's release.

This year's fourth quarter operating expenses were 22.3 percent of sales, down from 22.5 percent in the prior year. For the year, operating expenses were 21.9 percent of sales, down from 22.1 percent last year. Included in this year's fourth quarter operating expenses is the $6.4 million increase to our reserve for the EPC patent infringement judgment. Last year's fourth quarter operating expenses included $9.3 million of unusual expenses discussed in last year's release.

Fourth quarter interest expense was $2.7 million, up from $1.3 million last year. The increase was driven by additional debt and higher short-term interest rates. For the year, interest expense was $9.4 million, up from $5.0 million last year. Other income was $1.4 million in the quarter versus $2.5 million last year on lower joint venture income. For the year, other income was $7.7 million, up from $5.2 million last year.

The effective tax rate of 35.7 percent for the fourth quarter and 28.6 percent for the year compares to prior year rates of 24.2 percent and 25.0 percent, respectively. Excluding the $4.0 million tax charge related to the $80.0 million dividend reinvestment plan pursuant to the American Jobs Creation Act of 2004, the effective tax rate was 25.4 percent for the fourth quarter and 26.0 percent for the year.

No shares were repurchased during the fourth quarter. For the year, we repurchased 3,763,700 shares, or 4.4 percent of outstanding shares, for $116.3 million.

Backlog

Total backlog is strong, setting a new fourth quarter record at $412 million, up 11 percent relative to last year.

Engine Products Segment

Engine Products sales were a record $243.6 million in the quarter, an increase of 10 percent from last year. For the year, Engine Products sales were a record $923.8 million, an increase of 14 percent from last year.

Truck product sales in the quarter totaled $45.2 million, up 15 percent from last year. NAFTA truck product sales increased 15 percent due to growing new truck build rates. European truck product sales increased 9 percent on stronger build rates and increased market share. Truck product sales in Asia increased 22 percent from strong sales in Japan. For the year, worldwide truck product sales totaled $175.0 million, an increase of 12 percent from last year.

Worldwide sales of off-road products in the quarter were $74.4 million, up 14 percent from last year. NAFTA sales increased 11 percent on continued strength in new construction, agriculture and mining equipment demand. European off-road product sales increased 12 percent while Asian sales increased 26 percent. Worldwide sales totaled $286.2 million for the year, up 17 percent from last year.

Engine aftermarket or replacement part sales in the quarter were $124.0 million, an increase of 7 percent from last year. NAFTA aftermarket sales increased 10 percent as equipment utilization rates remained strong and sales of diesel emission retrofit equipment continued ramping up. European sales increased 7 percent and Asian sales were down 6 percent. For the year, worldwide aftermarket sales were $462.6 million, up 13 percent from the prior year.

Industrial Products Segment

Industrial Products sales in the quarter were a record $179.1 million, an increase of 10 percent from last year. For the year, Industrial Products sales were a record $671.9 million, an increase of 11 percent from last year.

Industrial Filtration Solutions ("IFS") sales in the quarter were a record $113.5 million, an increase of 10 percent from last year. IFS sales were strong in NAFTA and Asia as sales increased 18 and 12 percent, respectively. European sales increased 3 percent over last year. For the year, worldwide IFS sales totaled a record $424.7 million, up 15 percent from last year.

Gas turbine product sales in the quarter were $31.2 million, up 5 percent from last year. Worldwide sales totaled $112.9 million in fiscal 2005, down 4 percent from last year.

Sales of special application products in the quarter were a record $34.4 million, an increase of 16 percent from last year. For the year, worldwide special application sales were a record $134.3 million, up 16 percent from last year.

Outlook

Engine Products: We expect sales growth to be approximately 10 percent in fiscal 2006.

  • NAFTA heavy-duty new truck build rates should remain at their current high levels as truck manufacturers are near capacity. Market share gains should continue to fuel international sales growth.
  • Off-road sales are expected to remain strong worldwide with robust conditions continuing in the production of new construction and mining equipment.
  • Both NAFTA and international aftermarket sales are expected to continue growing as continued strong equipment utilization drives replacement filter sales.

Industrial Products: We expect high single-digit sales growth in fiscal 2006.

  • IFS sales growth is expected to moderate following two consecutive years of strong growth. Our American and Asian markets remain healthy and our European market remains stable.
  • Globally, we expect full-year gas turbine sales to improve modestly. Strength is seen in the Middle East and in the oil and gas markets.
  • Market conditions for special applications products are expected to remain strong.

Other: We will begin expensing stock options in our first quarter of fiscal 2006, and expect the full year EPS impact to be $.03 to $.06 per share.

About Donaldson Company, Inc.

Donaldson is a leading worldwide provider of filtration systems and replacement parts. Donaldson is a technology-driven company committed to satisfying customer needs for filtration solutions through innovative research and development. Donaldson serves customers in the diesel engine and industrial markets including in-plant air cleaning, compressed air and gas purification, power generation, disk drive filtration, off-road equipment and trucks. Our 11,000 employees contribute to the company's success at over 30 manufacturing locations around the world. Donaldson is a member of the S&P MidCap 400 Index and Donaldson shares are traded on the NYSE under the symbol DCI. Additional company information is available at http://www.donaldson.com .

SAFE HARBOR STATEMENT UNDER THE SECURITIES REFORM ACT OF 1995

The company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and is making this cautionary statement in connection with such safe harbor legislation. This earnings release, the Annual Report to Shareholders, any Form 10-K, 10-Q or Form 8-K of the company or any other written or oral statements made by or on behalf of the company may include forward-looking statements, forecasts and projections which reflect the company's current views with respect to future events and financial performance but involve uncertainties that could significantly impact results. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "outlook," "plan," "promises," "project," "should," "will be" and similar expressions are intended to identify "forward- looking statements" within the meaning of the Act.

The company wishes to caution investors that any forward-looking statements are subject to uncertainties and other risk factors that could cause actual results to differ materially from such statements, including but not limited to risks associated with: currency fluctuations, commodity prices, world economic factors, political factors, the company's international operations, including production facilities in China, highly competitive markets, changes in capital spending levels by customers, changes in product demand, cancellations of orders, litigation, including the EPC litigation disclosed in the Company's SEC filings, integration of acquisitions, 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, see the company's 2004 Form 10-K filed with the Securities and Exchange Commission. The company wishes to caution investors that new factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward- looking statements. Investors are further cautioned not to place undue reliance on such forward-looking statements as they speak only to the company's views as of the date the statement is made. The company undertakes no obligation to publicly update or revise any forward-looking statements.

                   DONALDSON COMPANY, INC. AND SUBSIDIARIES
                CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS
          (Thousands of dollars, except share and per share amounts)
                                 (Unaudited)

                             Three Months Ended          Year Ended
                                  July 31                 July 31
                             2005         2004        2005         2004
    Net sales             $422,739     $383,962   $1,595,733   $1,414,980
    Cost of sales          288,157      264,346    1,090,158      967,254
    Gross margin           134,582      119,616      505,575      447,726
    Operating expenses      94,248       86,289      349,085      311,754
    Gain on sale of Ome
     land and building           -            -            -       (5,616)
    Operating income        40,334       33,327      156,490      141,588
    Other income, net       (1,376)      (2,505)      (7,657)      (5,202)
    Interest expense         2,680        1,288        9,414        4,954
    Earnings before income
     taxes                  39,030       34,544      154,733      141,836
    Income taxes            13,919        8,353       44,179       35,519
    Net earnings           $25,111      $26,191     $110,554     $106,317
    Weighted average
     shares
     outstanding        84,565,352   87,621,312   84,990,739   87,960,423
    Diluted shares
     outstanding        86,626,761   90,053,066   86,883,408   90,429,956
    Net earnings
     per share                $.30         $.30        $1.30        $1.21
    Net earnings
     per share
     assuming dilution        $.29         $.29        $1.27        $1.18
    Dividends paid
     per share               $.060        $.055        $.235        $.205

                   DONALDSON COMPANY, INC. AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                            (Thousands of dollars)
                                 (Unaudited)
                                                       July 31       July 31
                                                         2005          2004
    ASSETS
      Cash and cash equivalents                       $134,066        $99,504
      Accounts receivable - net                        294,016        274,120
      Inventories - net                                151,599        143,418
      Prepaid expenses and other current assets         39,141         40,338
         Total current assets                          618,822        557,380
      Other assets and deferred taxes                  217,458        182,700
      Property, plant and equipment - net              275,493        261,529
         Total assets                               $1,111,773     $1,001,609

     LIABILITIES AND SHAREHOLDERS' EQUITY
      Trade accounts payable                          $134,063       $124,401
      Employee compensation and other liabilities       98,083         87,385
      Notes payable                                    102,004         19,736
      Income taxes payable                              12,280          9,656
      Current maturity long-term debt                    7,772         34,346
         Total current liabilities                     354,202        275,524
      Long-term debt                                   103,302         70,856
      Other long-term liabilities                      129,653        105,936
         Total liabilities                             587,157        452,316
      Equity                                           524,616        549,293
         Total liabilities and equity               $1,111,773     $1,001,609

                   DONALDSON COMPANY, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Thousands of dollars)
                                 (Unaudited)
                                                           Year Ended
                                                            July 31
                                                       2005          2004
    OPERATING ACTIVITIES
    Net earnings                                      $110,554       $106,317
    Adjustments to reconcile net earnings to
     net cash provided by operating activities:
      Gain on sale of Ome land and building                  -         (5,616)
      Depreciation and amortization                     44,284         41,555
      Changes in operating assets and liabilities      (14,050)       (31,812)
      Other, net                                         1,800          7,608
         Net cash provided by operating activities     142,588        118,052

    INVESTING ACTIVITIES
      Net expenditures on property and equipment       (50,198)       (43,030)
      Acquisitions and investments in unconsolidated
       affiliates, net of cash acquired                (13,362)        (4,397)
         Net cash used in investing activities         (63,560)       (47,427)

    FINANCING ACTIVITIES
      Purchase of treasury stock                      (116,268)       (29,765)
      Net change in debt                                87,973          3,322
      Dividends paid                                   (19,757)       (17,779)
      Other, net                                         2,703          3,298
         Net cash used in financing activities         (45,349)       (40,924)

    Effect of exchange rate changes on cash                883          2,733
    Increase in cash and cash equivalents               34,562         32,434
    Cash and cash equivalents - beginning of year       99,504         67,070
    Cash and cash equivalents - end of year           $134,066        $99,504

                                SEGMENT DETAIL
                            (Thousands of dollars)
                                 (Unaudited)
                            Engine    Industrial    Corporate &     Total
                          Products     Products     Unallocated    Company
    3 Months Ended
     July 31, 2005:
    Net sales             $243,611     $179,128          ---     $422,739
    Earnings before
     income taxes           29,528       15,715       (6,213)      39,030
    3 Months Ended
     July 31, 2004:
    Net sales             $221,089     $162,873          ---     $383,962
    Earnings before
     income taxes           33,039       11,311       (9,806)      34,544
    Year Ended
     July 31, 2005:
    Net sales             $923,840     $671,893          ---   $1,595,733
    Earnings before
     income taxes          125,454       53,709      (24,430)     154,733
    Year Ended
     July, 2004:
    Net sales             $811,543     $603,437          ---   $1,414,980
    Earnings before
     income taxes          114,662       42,985      (15,811)     141,836

                             NET SALES BY PRODUCT
                            (Thousands of dollars)
                                 (Unaudited)
                             Three Months Ended            Year Ended
                                  July 31                   July 31
                              2005        2004         2005         2004
    Engine Products
     segment:
    Off-road products      $74,381      $65,559     $286,230     $244,749
    Transportation products 45,201       39,164      175,048      156,373
    Aftermarket products   124,029      116,366      462,562      410,421
      Total Engine
       Products Segment   $243,611     $221,089     $923,840     $811,543
    Industrial Products
     segment:
    Industrial filtration
     solutions products   $113,469     $103,361     $424,727     $370,095
    Gas turbine products    31,249       29,858      112,872      117,705
    Special applications
     products               34,410       29,654      134,294      115,637
      Total Industrial
       Products segment   $179,128     $162,873     $671,893     $603,437
    Total Company         $422,739     $383,962   $1,595,733   $1,414,980

                RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
                            (Thousands of dollars)
                                 (Unaudited)
                             Three Months Ended            Year Ended
                                   July 31                  July 31
                             2005         2004         2005         2004
    Free cash flow         $30,899      $39,023      $92,390      $75,022
    Net capital
     expenditures           15,763        6,470       50,198       43,030
    Net cash provided
     by operating
     activities            $46,662      $45,493     $142,588     $118,052
    EBITDA                 $51,647      $45,376     $205,765     $186,486
    Income taxes           (13,919)      (8,353)     (44,179)     (35,519)
    Interest expense (net)  (1,827)        (221)      (6,748)      (3,095)
    Depreciation and
     amortization          (10,790)     (10,611)     (44,284)     (41,555)
        Net earnings       $25,111      $26,191     $110,554     $106,317
    Net sales, excluding
     foreign currency
     translation          $419,373     $374,528   $1,561,626   $1,345,020
    Foreign currency
     translation             3,366        9,434       34,107       69,960
        Net sales         $422,739     $383,962   $1,595,733   $1,414,980
    Net earnings, excluding
     foreign currency
     translation           $24,945      $25,528     $108,516     $101,603
    Foreign currency
     translation               166          663        2,038        4,714
        Net earnings       $25,111      $26,191     $110,554     $106,317

    Although free cash flow, EBITDA, net sales excluding foreign currency
    translation and net earnings excluding foreign currency translation are
    not measures of financial performance under GAAP, the company believes
    they are useful in understanding its financial results.  Free cash flow is
    a commonly used measure of a company's ability to generate cash in excess
    of its operating needs.  EBITDA is a commonly used measure of operating
    earnings less non-cash expenses.  Both net sales and net earnings
    excluding foreign currency translation provide a comparable measure for
    understanding the operating results of the company's foreign entities
    excluding the impact of foreign exchange.  A shortcoming of these
    financial measures is that they do not reflect the company's actual
    results under GAAP.  Management does not intend these items to be
    considered in isolation or as a substitute for the related GAAP measures.
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