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24 November, 2008
EPS up 13 percent on 9 percent sales increase
MINNEAPOLIS (Nov. 24, 2008) — Donaldson Company, Inc. (NYSE: DCI) announced first quarter FY09 diluted earnings per share ("EPS") of $0.60, up 13 percent from $0.53 last year.  Net income was $48.0 million, up 11 percent from $43.3 million last year.  Sales were $573.3 million, up 9 percent from $525.6 million in the first quarter of FY08.
"We are very pleased to start our new fiscal year with another record performance," said Bill Cook, Chairman, President and CEO. "Continued strength in our aerospace and defense, industrial filtration, and gas turbine businesses helped to offset weakness in our other end markets. Our sales grew 14 percent in Asia, 11 percent in the Americas, and 4 percent in Europe."

"Our operating margin performance was very good at 12.2 percent, equal to the same period last year and well above our minimum target of 11 percent. We did experience higher raw material costs early in our first quarter, which we have worked to offset through a combination of pricing actions with our Customers and our internal cost reduction efforts. These efforts continue."

"While we had a solid start to our new fiscal year, we also foresee a challenging global economic environment in front of us. As a result, we have been proactively managing our business and working aggressively to reduce our expense levels. Our progress to date is evident as our operating expenses decreased to 20.4 percent of sales this quarter compared to 22.0 percent in the fourth quarter of FY08. We expect that the combination of our continued focus on operating expense controls, product and process cost reductions, and the strength of our diversified portfolio of filtration businesses will allow us to achieve our 20th consecutive year of record earnings."

"We recognize that it is critical that we successfully manage through the current difficult economic climate. However, it is important to note that we also remain focused on our longer-term strategic objectives. Our recent acquisition of Western Filter was part of these plans."

Financial Statement Discussion
The impact of foreign currency translation increased reported sales by $3.6 million, or 0.7 percent, and had minimal impact on net earnings in the quarter.

Gross margin of 32.6 percent compares to a prior year margin of 32.9 percent. We experienced a delay from several major Customers in the recovery of our material cost increases, which was partially offset by higher sales in our Industrial businesses (which had a higher gross margin) and our cost reduction efforts.

Operating expenses were 20.4 percent of sales, down from 20.8 percent in the first quarter of last year.  The decrease was driven by our focus on cost containment efforts, including a global hiring freeze, a reduction of contract and temporary workers in the U.S., targeted restructuring within some of our businesses, and other discretionary spending cuts.

The effective tax rate of 30.0 percent for the quarter compares to a prior year rate of 27.1 percent.  The higher rate this quarter was due to a $2.1 million decrease in tax benefits recognized this quarter compared to $3.9 million of tax benefits recognized in last year's first quarter. The current year tax rate includes a benefit of $1.8 million primarily from the reinstatement of the R&D Tax Credit and a positive development regarding a foreign tax contingency.

As part of our ongoing share repurchase program, during the quarter we repurchased 802,000 shares for $32.8 million.

FY09 Outlook
For the past several years we have enjoyed a positive impact from foreign exchange – most specifically the weaker U.S. Dollar versus the Euro. However, during the past weeks, that has changed dramatically with a resurgence in the strength of the U.S. Dollar. At current exchange rate levels, we now anticipate that this will decrease our FY09 full year sales by approximately $133 million, or 6 percent, from FY08.  Including this foreign currency translation assumption, we expect full year sales in both the Engine and Industrial Products' segments to be flat or slightly down. In local currency, we expect low single-digit sales growth in both segments and for the total company.

Engine Products:  
  • In our NAFTA Transportation Products, we are not expecting a prebuy in advance of the 2010 diesel emission regulations and expect that build rates for trucks will be slightly down from last year. Build rates are also expected to be down modestly in Europe and Japan.
  • We expect the NAFTA and Western European residential construction markets to remain weak. However, demand for coal and farm commodities, along with global infrastructure projects, are expected to generate year-over-year sales growth in our mining, heavy construction, and agriculture equipment end markets. We expect demand in our aerospace and defense end markets to remain strong and also to benefit from our recent acquisition of Western Filter.
  • Our Aftermarket sales are expected to continue growing due to our ongoing expansion into new geographies and solid off-road equipment utilization. We also expect to continue benefiting from the increasing amount of equipment in the field with our PowerCore™ technology as well as our other new proprietary filtration systems.
 Industrial Products:  
  • Our Industrial Filtration Solutions' sales are now projected to decrease due to the impact of foreign currency translation. We expect growing demand for our new products to offset softening global manufacturing investment conditions.
  • While we still anticipate volume growth in our gas turbine business from the demand for new power generation projects, we expect our overall gas turbine filter sales to decrease due to the impact of foreign currency translation.
  • Special Applications Products' sales are also expected to decrease due to the impact of foreign currency translation. Excluding this impact, we expect flat sales with lower disk drive filter sales being offset by growth in our membrane products' sales.
  • We expect our operating margin will exceed our long-range target of 11 percent for the full year. We expect operating income to increase between 3 to 8 percent.
  • We have several tax contingencies that may be concluded this fiscal year and could reduce our full year tax rate if resolved favorably. Due to the wide range of outcomes, our full year tax rate is now expected to be between 25 and 31 percent.
  • Despite the reduction in our sales outlook due to the combination of exchange rates and weaker Customer demand, we continue to have our sights set on achieving our 20th consecutive EPS record with our full year EPS now expected to be between $2.16 and $2.36.
 To read the entire release, including financial tables, view the attached PDF file.
About Donaldson Company

Donaldson is a leading worldwide provider of filtration systems that improve people's lives, enhance our Customers' equipment performance, and protect our environment. We are a technology-driven company committed to satisfying our Customers' needs for filtration solutions through innovative research and development, application expertise, and global presence. Our 13,000 employees contribute to the Company's success by supporting our Customers at our more than 100 sales, manufacturing, and distribution locations around the world.
Donaldson is a member of the S&P MidCap 400 and Russell 1000 indices, and our shares trade on the NYSE under the symbol DCI. Additional 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 announcement contains forward-looking statements, including forecasts, plans, and projections relating to our business and financial performance, which involve uncertainties that could materially impact results.
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: world economic factors, currency fluctuations, commodity prices, political factors, the company's international operations, highly competitive markets, governmental laws and regulations, the implementation of our new information systems, and other factors included in our Annual and Quarterly Reports. We undertake no obligation to publicly update or revise any forward-looking statements.
FOR IMMEDIATE RELEASE:                           
Monday, November 24, 2008                                    
Rich Sheffer    (952) 887-3753




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