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29 November, 2005

Tuesday, November 29, 2005

Rich Sheffer (952) 887-3753 


MINNEAPOLIS, Nov. 29-- Donaldson Company, Inc. (NYSE: DCI) announced record first quarter diluted earnings per share ("EPS") of $.37, up from $.31 last year. Net income increased 18 percent to a record $32.2 million compared to $27.4 million last year. Sales were a record $403.4 million, up 8 percent from $372.9 million in fiscal 2005.

"We are off to a very good start in fiscal 2006, posting all-time highs for EPS, net earnings and EBITDA," said Bill Cook, Chairman, President and CEO. "Demand remains at high levels in most of our end markets. Our focus on cost reduction efforts helped offset higher raw material costs and resulted in an operating margin of 10.8 percent in the first quarter -- the highest it's been in two years. We believe that our operating margin will remain strong, and, coupled with our solid sales outlook, we remain confident of delivering another year of record earnings."

Income Statement Discussion

Foreign currencies had a minimal impact on first quarter results. Adjusted for foreign currency translation, sales increased 8.2 percent. The impact of foreign currency translation increased net earnings by $0.2 million.

Gross margin was 32.6 percent versus 31.2 percent last year. Higher costs for petroleum-based raw materials and freight were offset by cost reduction efforts with our customers and selective price increases in some markets. First quarter operating expenses were 21.8 percent of sales, comparable to 21.5 percent in the prior year.

First quarter interest expense was $2.4 million, up from $2.0 million last year due to higher short-term interest rates. Other income was $2.9 million in the quarter versus $3.4 million last year.

The effective tax rate of 26.7 percent for the first quarter compares to 27.0 percent last year. During the quarter we filed an amended tax return related to a prior year, which resulted in additional R&D tax credits, thus lowering the tax rate for the quarter. We expect our effective tax rate to be approximately 28 percent for the balance of the year.

Consistent with our longstanding share repurchase strategy, we repurchased 1,602,300 shares in the quarter, or 1.9 percent of our outstanding shares, for $48.1 million.

Total order backlog is $432 million, up 6 percent relative to last year.

Engine Products Segment

Engine Products sales were a record $238.4 million in the quarter, an increase of 10 percent from last year.

Truck product sales totaled $46.2 million, up 5 percent from last year. NAFTA truck product sales increased 12 percent due to growing new truck build rates. European truck product sales increased 3 percent and Asian sales decreased 21 percent on lower diesel emission product sales in Japan.

Worldwide sales of off-road products were $70.2 million, up 11 percent from last year. NAFTA sales increased 8 percent on continued strength in new construction and mining equipment demand. European off-road product sales increased 11 percent while Asian sales increased 24 percent.

Engine aftermarket or replacement part sales were $122.0 million, an increase of 11 percent from last year. NAFTA aftermarket sales increased 11 percent as equipment utilization rates remained strong and our sales of diesel emission retrofit equipment continued ramping up. European sales increased 8 percent and Asian sales were up 17 percent.

Industrial Products Segment

Industrial Products sales in the quarter were a record $165.0 million, an increase of 6 percent from last year.

Industrial Filtration Solutions ("IFS") sales were a record $105.9 million, an increase of 6 percent from last year, driven primarily by strong industrial dust collection sales in NAFTA.

Gas turbine product sales were $24.4 million, up 2 percent from last year. NAFTA sales decreased slightly by 1 percent while international sales were up 4 percent.

Sales of special application products were a record $34.7 million, an increase of 9 percent from last year, supported by continued strong disk drive filter sales.


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.
  • Off-road sales are expected to remain strong worldwide with robust conditions continuing in the production of new construction and mining equipment.
  • Both our NAFTA and international aftermarket sales are expected to continue growing with continued strong equipment utilization, continued growth by our OEM customers of their replacement parts business, and the growing amount of equipment with our PowerCore(TM) filtration systems.

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 NAFTA market is healthy and our European market remains stable.
  • Globally, we expect full-year gas turbine sales to improve modestly. Strength is seen in both the international and the oil and gas markets.
  • Market conditions for special applications products are expected to remain strong.

Other: We began expensing stock options in our first quarter of fiscal 2006 and expect the full year EPS impact to be $.02 to $.03 per share, with 70 percent of the full-year impact expected in the second quarter due to the timing of our annual option grants. For the year, we expect EPS to be in the range of $1.47 to $1.57 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 .


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, highly competitive markets, changes in product demand, and governmental laws and regulations. For a more detailed explanation, see the Company's 2005 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.

          (Thousands of dollars, except share and per share amounts)

                                                         Three Months Ended
                                                             October 31
                                                         2005         2004

    Net sales                                          $403,396     $372,906

    Cost of sales                                       271,864      256,667

    Gross margin                                        131,532      116,239

    Operating expenses                                   88,138       80,108

    Operating income                                     43,394       36,131

    Other income, net                                    (2,929)      (3,419)

    Interest expense                                      2,425        2,024

    Earnings before income taxes                         43,898       37,526

    Income taxes                                         11,700       10,132

    Net earnings                                        $32,198      $27,394

    Weighted average shares outstanding              84,024,553   85,721,197

    Diluted shares outstanding                       86,122,289   88,038,004

    Net earnings per share                                 $.38         $.32

    Net earnings per share
     assuming dilution                                     $.37         $.31

    Dividends paid per share                              $.080        $.055

                            (Thousands of dollars)

                                                     October 31      July 31
                                                        2005           2005

    Cash and cash equivalents                         $93,331       $134,066
    Accounts receivable - net                         271,367        294,016
    Inventories - net                                 148,349        151,599
    Prepaid expenses and other current assets          44,614         39,141

        Total current assets                          557,661        618,822

    Other assets and deferred taxes                   217,838        217,458
    Property, plant and equipment - net               277,483        275,493

        Total assets                               $1,052,982     $1,111,773


    Trade accounts payable                           $128,969       $134,063
    Employee compensation and other liabilities        98,780         98,083
    Notes payable                                      86,528        102,004
    Income taxes payable                               12,604         12,280
    Current maturity long-term debt                    12,538          7,772

        Total current liabilities                     339,419        354,202

   Long-term debt                                      97,710        103,302
   Other long-term liabilities                        113,731        129,653

        Total liabilities                             550,860        587,157

    Equity                                            502,122        524,616

        Total liabilities and equity               $1,052,982     $1,111,773

                            (Thousands of dollars)

                                                           Three Months Ended
                                                               October 31
                                                           2005         2004

    Net earnings                                         $32,198      $27,394
    Adjustments to reconcile net earnings to net cash
     provided by operating activities:
        Depreciation and amortization                     11,442       11,041
        Changes in operating assets and liabilities        1,796        2,951
        Payment of litigation judgment                   (14,170)          --
        Other, net                                          (513)         (87)
            Net cash provided by operating activities     30,753       41,299


    Net expenditures on property and equipment           (13,343)      (7,050)
        Net cash used in investing activities            (13,343)      (7,050)


      Purchase of treasury stock                         (48,126)     (86,542)
      Net change in debt                                 (15,630)      72,528
      Dividends paid                                      (6,706)      (4,746)
      Tax benefit of equity plans                         11,549           --
      Other, net                                             592          145
            Net cash used in financing activities        (58,321)     (18,615)

    Effect of exchange rate changes on cash                  176        3,603

    Increase/(decrease) in cash and cash equivalents     (40,735)      19,237

    Cash and cash equivalents -- beginning of year        134,066      99,504

    Cash and cash equivalents -- end of year              $93,331    $118,741

                                SEGMENT DETAIL
                            (Thousands of dollars)

                                 Engine    Industrial    Corporate &    Total
                                Products    Products     Unallocated   Company
    3 Months Ended
     October 31, 2005:
    Net sales                   $238,424     $164,972           --    $403,396
    Earnings before income
     taxes                        31,174       15,084       (2,360)     43,898

    3 Months Ended
     October 31, 2004:
    Net sales                   $217,585     $155,321           --    $372,906
    Earnings before income
     taxes                        30,873       12,694       (6,041)     37,526

                             NET SALES BY PRODUCT
                            (Thousands of dollars)

                                                         Three Months Ended
                                                             October 31
                                                         2005          2004
    Engine Products segment:
    Off-road products                                  $70,166       $63,272
    Transportation products                             46,210        43,906
    Aftermarket products                               122,048       110,407
      Total Engine Products Segment                   $238,424      $217,585

    Industrial Products segment:
    Industrial filtration solutions products          $105,888       $99,630
    Gas turbine products                                24,363        23,876
    Special applications products                       34,721        31,815
      Total Industrial Products segment               $164,972      $155,321

    Total Company                                     $403,396      $372,906

                            (Thousands of dollars)

                                                        Three Months Ended
                                                            October 31
                                                        2005          2004

    Free cash flow                                     $17,410       $34,249
    Net capital expenditures                            13,343         7,050
    Net cash provided by
     operating activities                              $30,753       $41,299

    EBITDA                                             $57,083       $50,172
    Income taxes                                       (11,700)      (10,132)
    Interest expense (net)                              (1,743)       (1,605)
    Depreciation and amortization                      (11,442)      (11,041)

            Net earnings                               $32,198       $27,394

    Net sales, excluding foreign
     currency translation                             $403,479      $362,349
    Foreign currency translation                           (83)       10,557

            Net sales                                 $403,396      $372,906

    Net earnings, excluding
     foreign currency translation                      $32,005       $26,305
    Foreign currency translation                           193         1,089

            Net earnings                               $32,198      $27,394

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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