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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING April 30, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
Commission File Number 1-7891
------
DONALDSON COMPANY, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-0222640
--------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 West 94th Street
Minneapolis, Minnesota 55431
----------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (952) 887-3131
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 1 2b-2 of the Exchange Act).
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $5 Par Value - 43,381,280 shares as of May 31, 2003
- -----------------------------------------------------------------
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of dollars, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
April 30 April 30
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 302,457 $ 269,423 $ 887,958 $ 822,133
Cost of sales 204,226 184,447 604,081 567,565
------------ ------------ ------------ ------------
Gross margin 98,231 84,976 283,877 254,568
Operating expenses 63,454 54,953 189,212 167,199
------------ ------------ ------------ ------------
Operating income 34,777 30,023 94,665 87,369
Other income, net (1,033) (810) (3,348) (2,496)
Interest expense 1,109 1,417 4,628 4,991
------------ ------------ ------------ ------------
Earnings before income taxes 34,701 29,416 93,385 84,874
Income taxes 9,369 7,942 25,214 22,916
------------ ------------ ------------ ------------
Net earnings $ 25,332 $ 21,474 $ 68,171 $ 61,958
============ ============ ============ ============
Weighted average shares
outstanding 43,385,902 44,196,624 43,540,242 44,190,547
Diluted shares outstanding 44,793,118 45,728,376 45,001,848 45,768,766
Basic earnings per share $ .59 $ .48 $ 1.57 $ 1.40
Diluted earnings per share $ .56 $ .47 $ 1.51 $ 1.35
Dividends paid per share $ .090 $ .080 $ .260 $ .230
See Notes to Condensed Consolidated Financial Statements.
2
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except per share amounts)
(Unaudited)
April 30, July 31,
2003 2002
--------- ---------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 49,760 $ 45,586
Accounts receivable 224,395 251,417
Inventories
Materials 46,860 49,162
Work in process 16,009 16,796
Finished products 49,316 51,733
--------- ---------
Total inventories 112,185 117,691
Prepaid and other current assets 40,417 41,790
--------- ---------
TOTAL CURRENT ASSETS 426,757 456,484
Property, plant and equipment, at cost 589,946 552,724
Less accumulated depreciation (333,722) (311,811)
--------- ---------
Property, plant and equipment, net 256,224 240,913
Goodwill and other intangible assets 109,027 103,681
Other assets 67,870 49,053
--------- ---------
TOTAL ASSETS $ 859,878 $ 850,131
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-term debt $ 30,189 $ 60,337
Current maturities of long-term debt 44 57
Trade accounts payable 101,815 115,299
Accrued employee compensation and related taxes 33,117 31,171
Warranty and accrued liabilities 26,840 31,542
Other current liabilities 27,652 34,384
--------- ---------
TOTAL CURRENT LIABILITIES 219,657 272,790
Long-term debt 107,637 105,019
Deferred income taxes 14,887 13,376
Other long-term liabilities 78,040 76,325
--------- ---------
TOTAL LIABILITIES 420,221 467,510
--------- ---------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $1 par value,
1,000,000 shares authorized, no shares issued -- --
Common stock, $5 par value, 80,000,000 shares authorized,
49,655,954 issued 248,280 248,280
Retained earnings 328,932 274,395
Accumulated other comprehensive income (loss) 5,322 (14,296)
Treasury stock, at cost - 6,198,020 and 5,741,417 shares at
April 30, 2003 and July 31, 2002, respectively (142,877) (125,758)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 439,657 382,621
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 859,878 $ 850,131
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Nine Months Ended
April 30
----------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net earnings $ 68,171 $ 61,958
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 27,584 23,862
Changes in operating assets and liabilities 19,150 25,491
Other (11,643) (4,860)
--------- ---------
Net cash provided by operating activities 103,262 106,451
--------- ---------
INVESTING ACTIVITIES
Net expenditures on property and equipment (35,265) (35,774)
Acquisitions and investments in unconsolidated
affiliates, net of cash acquired (1,259) --
--------- ---------
Net cash used in investing activities (36,524) (35,774)
--------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock (20,837) (9,882)
Increase in long-term debt 702 106
Decrease in long-term debt (39) (21)
Decrease in short-term debt (38,091) (17,238)
Dividends paid (11,350) (10,178)
Other 629 1,484
--------- ---------
Net cash used in financing activities (68,986) (35,729)
--------- ---------
Effect of exchange rate changes on cash 6,422 (313)
--------- ---------
Increase in cash and cash equivalents 4,174 34,635
Cash and cash equivalents-beginning of year 45,586 36,136
--------- ---------
Cash and cash equivalents-end of period $ 49,760 $ 70,771
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Donaldson Company, Inc. (the company) have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included and are of a normal recurring nature.
Operating results for the three and nine month periods ended April 30, 2003 are
not necessarily indicative of the results that may be expected for future
periods. For further information, refer to the consolidated financial statements
and footnotes thereto included in Donaldson Company, Inc. and Subsidiaries'
Annual Report on Form 10-K for the year ended July 31, 2002. Certain amounts in
prior periods have been reclassified to conform to the current presentation. The
reclassifications had no impact on the net earnings as previously reported.
Note B - Accounting for Stock-Based Compensation
The company has elected to continue to account for stock-based compensation
using the intrinsic value method. Accordingly, no compensation expense has been
recorded for the stock option plan. Had the company used the fair value-based
method of accounting to measure compensation expense for its stock option plan
and charged compensation cost against income over the vesting periods, net
income and the related basic and diluted per common share amounts would have
been reduced to the following pro forma amounts (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
April 30 April 30
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net earnings, as reported $ 25,332 $ 21,474 $ 68,171 $ 61,958
Less total stock-based employee
compensation expense under the fair
value-based method, net of tax (679) (618) (3,136) (3,274)
---------- ---------- ---------- ----------
Pro forma net earnings $ 24,653 $ 20,856 $ 65,035 $ 58,684
========== ========== ========== ==========
Basic net earnings per share
As reported $ 0.59 $ 0.48 $ 1.57 $ 1.40
Pro forma $ 0.57 $ 0.47 $ 1.49 $ 1.33
Diluted net earnings per share
As reported $ 0.56 $ 0.47 $ 1.51 $ 1.35
Pro forma $ 0.55 $ 0.45 $ 1.45 $ 1.28
Note C - Net Earnings Per Share
The company's basic net earnings per share is computed by dividing net earnings
by the weighted average 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 and unvested restricted stock.
5
The following table presents information necessary to calculate basic and
diluted net earnings per common share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
April 30 April 30
----------------- ------------------
2003 2002 2003 2002
------- ------- ------- -------
Weighted average shares outstanding - basic 43,386 44,197 43,540 44,191
Diluted share equivalents 1,407 1,531 1,462 1,578
------- ------- ------- -------
Weighted average shares outstanding - diluted 44,793 45,728 45,002 45,769
======= ======= ======= =======
Net earnings for basic and diluted
earnings per share computation $25,332 $21,474 $68,171 $61,958
Net earnings per share - basic $ .59 $ .48 $ 1.57 $ 1.40
Net earnings per share - diluted $ .56 $ .47 $ 1.51 $ 1.35
Note D - Comprehensive Income
The company reports accumulated other comprehensive income as a separate item in
the shareholders' equity section of the balance sheet. Other comprehensive
income consists of foreign currency translation adjustments and net gains or
losses on cash flow hedging derivatives.
Total comprehensive income and its components are as follows (in thousands):
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings $ 25,332 $ 21,474 $ 68,171 $ 61,958
Foreign currency translation adjustment 2,705 5,218 20,496 1,456
Net gain (loss) on cash flow hedging derivatives (153) (599) (878) (163)
-------- -------- -------- --------
Total other comprehensive income $ 27,884 $ 26,093 $ 87,789 $ 63,251
======== ======== ======== ========
Total accumulated other comprehensive gain (loss) and its components at April
30, 2003 and July 31, 2002 are as follows (in thousands):
April 30, July 31,
2003 2002
-----------------------------
Foreign currency translation adjustment $9,771 $(10,725)
Net gain (loss) on cash flow hedging derivatives (852) 26
Additional minimum pension liability (3,597) (3,597)
-----------------------------
Total accumulated other comprehensive gain (loss) $5,322 $(14,296)
=============================
6
Note E - Segment Reporting
The company has two reportable segments, Engine Products and Industrial
Products, that have been identified based on the internal organization
structure, management of operations and performance evaluation. Segment detail
is summarized as follows (in thousands):
Engine Industrial Corporate & Total
Products Products Unallocated Company
-------- -------- ----------- -------
Three Months Ended
April 30, 2003:
Net sales $174,892 $127,565 -- $302,457
Earnings before income taxes 24,738 8,616 $ 1,347 34,701
April 30, 2002:
Net sales $152,010 $117,413 -- $269,423
Earnings before income taxes 17,345 15,114 $ (3,043) 29,416
Nine Months Ended
April 30, 2003:
Net sales $494,998 $392,960 -- $887,958
Earnings before income taxes 66,087 30,777 $ (3,479) 93,385
April 30, 2002:
Net sales $448,208 $373,925 -- $822,133
Earnings before income taxes 49,257 51,325 $(15,708) 84,874
Note F - Derivative Instruments and Hedging Activities
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
has entered into fixed to variable interest rate swaps on June 6, 2001 and on
March 18, 2003. These interest rate swaps are accounted for as fair value hedges
and are recorded net of the underlying outstanding debt. Changes in the payment
of interest resulting from the interest rate swaps are recorded as an offset to
interest expense. As of April 30, 2003, the interest rate swaps had a fair value
of $3.5 million.
Note G - Goodwill and Other Intangible Assets
The company performed its annual impairment test of goodwill during the third
quarter of fiscal 2003. 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 impairment. As of
April 30, 2003, goodwill was $91.5 million, a $5.1 million increase from the
balance of $86.4 million at July 31, 2002. This increase is due to foreign
currency translation impact of $5.8 million partially offset by $0.7 million
decrease due to purchase accounting adjustments for the acquisition of
ultrafilter.
Note H - Acquisition
During the first quarter of fiscal 2003, the company acquired the remaining 50
percent of the company's joint venture, MSCA, LCC located in Monticello, Indiana
for $1.7 million in cash, which includes $0.4 million of cash acquired. The
financial results for MSCA are included in the
7
company's consolidated results from the date the additional interest was
acquired. Pro forma information is not presented due to the immateriality of the
operating results of MSCA.
Note I - Acquisition and Plant Restructurings
Restructuring liabilities recorded in conjunction with the July 2002 ultrafilter
acquisition were approximately $1.2 million as of July 31, 2002 related
primarily to costs associated with the termination and relocation of employees
and the cancellation of lease contracts. Costs incurred and charged to the
restructuring liability were $0.2 million and $0.9 million for the three and
nine months ended April 30, 2003, resulting in an ending balance in this reserve
of $0.3 million as of April 30, 2003. The integration of ultrafilter has
resulted in a reduction in the work force of approximately 140 employees during
the nine months ended April 30, 2003. Remaining costs associated with these
restructuring plans are expected to be paid in fiscal 2004.
The company currently has plant rationalization plans involving three of the
company's facilities which will result in the reduction in the work force of
approximately 156 employees. As of July 31, 2002, the company had a
restructuring liability of $0.7 million recorded in conjunction with these
plans. There were no additions to this reserve for the three months ended April
30, 2003. Additions to this reserve for the nine months ended April 30, 2003
were $0.8 million for costs associated with the termination of employees. For
the three and nine months ended April 30, 2003, costs incurred and charged to
this reserve amounted to $0.3 million and $0.7 million, respectively. As of
April 30, 2003, the balance of this restructuring liability for current plant
rationalization plans was $0.8 million. Remaining costs associated with the
company's current restructuring plans are expected to be paid in the first half
of fiscal 2004.
Note J - Credit Facilities
In September 2002, the company entered into a new three-year multi-currency
revolving facility with a group of banks under which the company may borrow up
to $150.0 million. The agreement provides that loans may be made under a
selection of currencies and rate formulas including Base Rate Advances or Off
Shore Rate Advances. The interest rate on each advance is based on certain
market interest rates and leverage ratios. Facility fees and other fees on the
entire loan commitment are payable over the duration of this facility.
Note K - Guarantees
The company and its partner of an unconsolidated joint venture, Advanced
Filtration Systems Inc., guarantees certain debt of the joint venture. As of
April 30, 2003, the outstanding guaranteed debt of the joint venture was $5.0
million.
The company estimates warranty costs using standard quantitative measures based
on historical warranty claim experience and, in some cases, evaluating specific
customer warranty issues. Following is a reconciliation of warranty reserves as
of April 30, 2003 (in thousands):
Balance at August 1, 2002 $9,628
Accruals for warranties issued during the period 880
Accruals related to pre-existing warranties
(including changes in estimates) (525)
Less settlements made during the period (1,233)
----------
Balance at April 30, 2003 $8,750
==========
8
At April 30, 2003, the company had a contingent liability for standby letters of
credit totaling $16.3 million that have been issued and are outstanding. The
letters of credit guarantee payment to beneficial third parties in the event the
company is in breach of specified contract terms as detailed in each letter of
credit. At April 30, 2003, there are no amounts drawn upon these letters of
credit.
Note L - Commitments and Contingencies
The company is a defendant in a lawsuit filed in November 1998 in the United
States District Court for the Northern District of Iowa (Eastern Division) by
Engineered Products Company ("EPC"). EPC claims patent infringement by Donaldson
arising out of its sales of graduated air restriction indicators in the period
from 1996 through the expiration of the EPC patent in May 2001 and seeks
monetary damages. EPC is also seeking damages for some period of time beyond the
expiration of the patent. A trial date recently has been scheduled for September
15, 2003. The company denies any liability and believes the patent is
unenforceable and invalid. The company is vigorously defending the suit. The
amount of loss, if any, to the company currently cannot be estimated.
The company is currently not otherwise subject to any pending litigation other
than routine litigation arising in the ordinary course of business, none of
which is expected to have a material adverse effect on the business, results of
operations, financial condition or liquidity of the company.
Note M - Assets Held for Sale
Included in property, plant and equipment are $3.9 million of land and buildings
held for sale in Ome City, Japan. The company signed a sales agreement for these
assets on May 2, 2003 for a purchase price of $10.8 million. On May 2, 2003 the
company received $5.4 million of the purchase price, which has been deferred
until the sale has been completed. The sale is expected to close on July 15,
2003 with the gain on the sale being recognized in the first half of fiscal
2004.
Note N - New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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. The company adopted SFAS No.
143 effective August 1, 2002. The adoption of SFAS No. 143 has not had 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 recognition,
measurement and reporting of costs associated with exit and disposal activities
including restructuring. The company adopted this standard for exit and disposal
activities initiated after August 1, 2002. The adoption of SFAS No. 146 has not
had a material impact on the company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS 123, "Accounting
for Stock-Based Compensation." SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more
frequent
9
disclosures in financial statements of the effects of stock-based compensation
under the fair value-based method. SFAS No. 148 is effective for fiscal years
ending after December 15, 2002, with interim disclosure provisions being
effective for interim periods beginning after December 15, 2002. The company has
adopted the interim disclosure provisions effective for the interim period
ending January 31, 2003 (see Note B).
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual financial statements about
the obligations associated with guarantees issued. The recognition provisions of
FIN 45 are effective for any guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for the company's quarter ended
January 31, 2003. The company has previously established reserves for product
warranties, which are disclosed in Note K, along with a summary of standby
letters of credit and a description of a guarantee of joint venture debt. The
letters of credit guarantee payment to beneficial third parties in the event the
company is in breach of specified contract terms as detailed in each letter of
credit.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities - an Interpretation of ARB No. 51." FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The transitional disclosure provisions of FIN 46 are
effective for all financial statements issued after January 31, 2003. The
company does not have any variable interests in variable interest entities as of
April 30, 2003. The measurement provisions of FIN 46 are to be applied
immediately to any variable interest in variable interest entities created after
January 31, 2003.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that three types of freestanding financial instruments be classified as
liabilities: mandatorily redeemable shares; instruments that do or may require
the issuer to buy back some of its shares in exchange for cash or assets; and
obligations that can be settled with shares, the value of which is fixed, tied
to a variable or varies inversely with the share price. The Statement is
effective for all financial instruments modified or entered into after May 31,
2003 and otherwise effective for interim periods beginning after June 15, 2003.
The company will adopt the Statement as required during fiscal 2004, with no
impact on the consolidated financial statements expected.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
The company generated $103.3 million of cash and cash equivalents from
operations during the first nine months of fiscal 2003. Operating cash flows
decreased by $3.2 million from the same period in the prior year, resulting
primarily from a smaller improvement in working capital compared to the prior
year, partially offset by an increase in net earnings. These cash flows, plus
borrowings from the company's credit facility, were used
10
during the first nine months of fiscal 2003 to support $35.3 million in capital
additions, repurchase $20.8 million of treasury stock at an average price of
$33.54 per share and for the payment of $11.4 million in dividends. The company
repurchased 95,000 shares and 621,300 shares of treasury stock for the three and
nine months ended April 30, 2003, respectively. At the end of the third quarter,
the company had remaining authority to purchase 3.9 million shares of common
stock under the share repurchase program authorized by the Board of Directors in
January 2003.
At the end of the third quarter, the company held $49.8 million in cash and cash
equivalents, up from $45.6 million at July 31, 2002. Short-term debt totaled
$30.2 million, down from $60.3 million at July 31, 2002. The amount of unused
lines of credit as of April 30, 2003 was approximately $169.6 million. Long-term
debt of $107.6 million at April 30, 2003 was up from $105.0 million at July 31,
2002 and represented 19.7 percent of total long-term capital, compared to 21.5
percent at July 31, 2002. The increase in long-term debt is primarily due to an
adjustment of $1.8 million for the fair market value of the interest rate swaps
and an addition of debt of $0.7 million.
The following table summarizes the company's fixed cash obligations as of April
30, 2003 (in thousands):
Payments Due by Period
Contractual Cash Less than 1 1 - 3 4 - 5 After 5
Obligations Total year year years years
--------------------------------------------------------------------------
Long term debt $107,681 $ 44 $ 44,739 $ 40,388 $ 22,510
Short term debt 30,189 30,189 - - -
--------------------------------------------------------------------------
Total contractual cash
obligations $137,870 $ 30,233 $ 44,739 $ 40,388 $ 22,510
==========================================================================
The company and its partner of an unconsolidated joint venture, Advanced
Filtration Systems Inc., guarantees certain debt of the joint venture. As of
April 30, 2003, the outstanding guaranteed debt of the joint venture was $5.0
million.
At April 30, 2003, the company had a contingent liability for standby letters of
credit totaling $16.3 million that have been issued and are outstanding. The
letters of credit guarantee payment to beneficial third parties in the event the
company is in breach of specified contract terms as detailed in each letter of
credit. At April 30, 2003, there are no amounts drawn upon these letters of
credit.
In September 2002, the company entered into a new three-year multi-currency
revolving facility with a group of banks under which the company may borrow up
to $150.0 million. The agreement provides that loans may be made under a
selection of currencies and rate formulas including Base Rate Advances or Off
Shore Rate Advances. The interest rate on each advance is based on certain
market interest rates and leverage ratios. Facility fees and other fees on the
entire loan commitment are payable over the duration of this facility.
International subsidiaries may borrow under various credit facilities. As of
April 30, 2003, borrowings under these facilities were $6.3 million.
The company is required to meet various debt covenant tests for its debt
agreements. As of April 30, 2003, the company is in compliance with these debt
covenants.
The company believes that the combination of present capital resources,
internally generated funds and unused financing sources are adequate to meet
cash requirements for the next twelve-month period.
11
Results of Operations
The company 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 semi-conductor
processing. Products are manufactured at more than three dozen plants around the
world and through three joint ventures.
The company has two reporting segments engaged in the design, manufacture and
sale of systems to filter air and liquid and other complementary products. The
two segments are Engine Products and Industrial Products. Products in the Engine
Products segment consist of air intake systems, exhaust systems, liquid
filtration systems and replacement filters. The Engine Products segment sells to
original equipment 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 in
the Industrial Products segment consist of 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. The Industrial Products segment sells to various
industrial end-users, OEMs of gas-fired turbines and OEMs and end-users
requiring highly purified air.
The company reported record net earnings for the third quarter ended April 30,
2003 of $25.3 million, up 18.0 percent from $21.5 million recorded in the prior
year. Total net sales for the three months ended April 30, 2003 were a record
$302.5 million up 12.3 percent from prior year net sales of $269.4 million.
Diluted net earnings per share for the third quarter were 56 cents, up 19.1
percent from 47 cents in the third quarter of the prior year. For the nine
months ended April 30, 2003, net earnings were a record $68.2 million, up 10.0
percent from $62.0 million in the prior year. Total net sales for the nine
months ended April 30, 2003 were $888.0 million, up 8.0 percent from $822.1 in
the prior year. The company's diversification was apparent in the results with
strong improvement in the Engine Products segment offsetting the severe
contraction in the sale of gas turbine products within the Industrial Products
segment. Other improvements that contributed to the record quarter included the
first year over year revenue increase in the company's industrial air filtration
products in over two years. The company also saw continued strength in the
Engine Products segment in Asia, particularly Japan, which was driven by a
sustained strong market for off-road equipment and a spike in demand for
emission products. Additionally, the integration of ultrafilter has been better
than expected as ultrafilter has continued to generate revenue growth while
improving product cost and operating efficiency.
For the third quarter of fiscal 2003, total international sales in U.S. dollars
increased 46.8 percent from the prior year. Year-to-date, sales in Europe
increased by 55.2 percent from the prior year mainly due to the addition of
ultrafilter as well as the effects of foreign currency translation, while sales
in Asia-Pacific and South Africa also increased by 18.8 percent and 36.0
percent, respectively, from the prior year. Sales in Mexico posted a decrease of
5.6 percent from the prior year.
The impact of foreign currency translation during the third quarter, led by the
strengthening of the Euro to the U.S. Dollar, increased sales by $20.5 million
and net earnings by $1.0 million. On a year-to-date basis, foreign currency
translation increased sales by $38.8 million and net earnings by $2.5 million.
Worldwide revenues, excluding the impact of foreign currency translation,
increased 4.7 percent during the third quarter and 3.3 percent year-to-date.
Excluding the impact of foreign
12
currency translation, third quarter revenues outside the U.S. increased 27.2
percent, primarily reflecting the impact of ultrafilter. Year-to-date, revenues
outside the U.S. increased 25.2 percent, or 4.2 percent not including
ultrafilter.
Gross margin for the third quarter of fiscal 2003 was 32.5 percent, up from 31.5
percent in the prior year, driven by the higher gross margin ultrafilter
business. Year-to-date, gross margin improved to 32.0 percent versus 31.0
percent last year due again to the higher gross margin ultrafilter business.
Costs incurred for continuing plant rationalization came to $.03 per share in
the quarter compared to none a year ago. Year-to-date, plant rationalization
costs were $.05 per share versus $.03 per share in the prior year.
Operating expenses during the third quarter of fiscal 2003 were $63.5 million,
or 21.0 percent of sales, compared to $55.0 million, or 20.4 percent of sales in
the prior year. The increase over last year is attributable to the addition of
ultrafilter, which has a higher run-rate for operating expenses than the
company's other businesses. For the year, operating expenses were $189.2
million, or 21.3 percent, up from $167.2 million, or 20.3 percent in the prior
year.
Other income for the third quarter of fiscal 2003 totaled $1.0 million, up
slightly from $0.8 million in the prior year. Other income for the third quarter
of fiscal 2003 consisted primarily of income from unconsolidated affiliates of
$0.8 million and interest income of $0.1 million. For the quarter, interest
expense was $1.1 million, down 21.7 percent from $1.4 million in the prior year,
reflecting lower interest rates and debt levels from last year. Year-to-date,
other income was $3.3 million, up from $2.5 million in the prior year.
Year-to-date, interest expense was $4.6 million, down from $5.0 million in the
prior year.
The income tax rate as of April 30, 2003 remained at 27.0 percent, the same as
the prior year and consistent with the income tax rate as of July 31, 2002.
Total backlog of $316 million at April 30, 2003 was down 6 percent, or $20
million, relative to the prior year, reflecting the decrease in the North
American gas turbine market. Total backlog was up 1 percent from the prior
quarter end. In the Engine Products segment, total backlog increased 10 percent
from the prior year and increased 4 percent from the prior quarter end. In the
Industrial Products segment, total backlog decreased 23 percent from the prior
year and decreased 4 percent from the prior quarter end, again reflecting the
North American gas turbine downturn. Excluding ultrafilter and North American
gas turbine, total backlog increased 7 percent from last year, continuing the
slow improvement in business levels seen for several quarters.
Hard order backlog - goods scheduled for delivery in 90 days - was $180 million,
down 8 percent or $15 million from the prior year. Hard order backlog increased
7 percent from the prior quarter end. In the Engine Products segment, hard order
backlog increased 15 percent from the prior year and increased 9 percent from
the prior quarter end. In the Industrial Products segment, hard order backlog
decreased 29 percent from the prior year and increased 5 percent from the prior
quarter end.
ENGINE PRODUCTS SEGMENT For the third quarter of fiscal 2003, net sales in the
Engine Products segment of $174.9 million increased 15.1 percent from $152.0
million in the prior year. Year-to-date, net sales were $495.0 million, an
increase of 10.4 percent from $448.2 million in the prior year. Net sales for
both the quarter and year-to-date increased from the prior year in all three
product groups within the Engine Products segment.
13
Worldwide sales in truck products in the third quarter of fiscal 2003 were $30.7
million, an increase of 29.5 percent from $23.7 million in the prior year, in
contrast to general industry conditions. North American truck sales increased
14.9 percent from the prior year as light-duty diesel sales more than tripled
over last year, reflecting additional revenues from new PowerCoreTM programs.
International truck sales increased 73.7 percent, which included a spike in
demand for emissions products in Japan. Year-to-date, worldwide truck product
sales totaled $80.9 million, an increase of 26.3 percent from $64.1 million in
the prior year.
Worldwide sales of off-road products in the third quarter of fiscal 2003 were
$54.4 million, an increase of 20.2 percent from $45.3 million in the prior year.
North American sales were up 10.6 percent on stronger sales in defense products.
Asia-Pacific and Europe sales were up 36.4 percent and 40.8 percent,
respectively. Off-road sales in Europe were up $4.4 million mainly due to the
effects of foreign currency translation. Sales in Japan were strong on the
continued export demand for off-road equipment in China. Year-to-date, worldwide
off-road product sales were $145.3 million, an increase of 10.7 percent from
$131.3 million in the prior year.
Worldwide sales of aftermarket products in the third quarter of fiscal 2003 were
$89.8 million, an increase of 8.1 percent from $83.0 million in the prior year.
International sales in aftermarket products posted an increase of 17.9 percent
from the prior year with sales increasing in Europe and Asia by 10.1 percent and
21.0 percent, respectively. The increase in Europe was largely due to the
effects of foreign currency translation while the increase in Asia reflected a
gain in market share through new programs in Australia. Aftermarket sales
comprised 51.3 percent of total Engine Product sales in the quarter.
Year-to-date, worldwide aftermarket product sales were $268.8 million, an
increase of 6.3 percent from $252.8 million in the prior year.
Total third quarter international Engine Product sales were up 30.0 percent
compared to the same period of the prior year. International sales for all three
product groups within this segment increased over the same period from the prior
year. International sales of truck products led these increases with an increase
of 73.7 percent for the quarter, while sales in off-road and aftermarket
products increased from the prior year by 38.9 percent and 17.9 percent,
respectively. Year-to-date, total international Engine Product sales were up
20.1 percent from prior year.
Certain fiscal 2002 product sales amounts have been reclassified within the
Engine Products segment to conform to the current presentation. There is no
impact to the total Engine Products segment for fiscal 2002.
INDUSTRIAL PRODUCTS SEGMENT For the third quarter of fiscal 2003, net sales in
the Industrial Products segment of $127.6 million increased 8.6 percent from
$117.4 million in the prior year. Third quarter sales from recently acquired
ultrafilter were $28.9 million. Excluding these ultrafilter revenues, sales in
the Industrial Products segment decreased 15.9 percent to $98.7 million.
Year-to-date, net sales were $393.0 million, an increase of 5.1 percent from
$373.9 million in the prior year. Excluding ultrafilter sales of $82.3 million
for the year, year-to-date sales decreased 16.9 percent to $310.7 million from
the prior year.
Worldwide sales of gas turbine products in the third quarter of fiscal 2003 were
$30.5 million, a decrease of 42.0 percent from a record $52.6 million in the
prior year reflecting the decline in that market. Sales in North America
declined by 63.9 percent. International sales in gas turbine products for the
quarter increased by 23.5 percent over the prior year to $16.2 million and
replacement part sales were up 35.8 percent, softening the impact of the North
American downturn. Year-to-date, worldwide gas turbine product sales were $103.3
million, a decrease of 36.4 percent from a record $162.3 million in the prior
year.
Worldwide sales of industrial air filtration products in the third quarter of
fiscal 2003 were $41.4 million, an increase of 10.2 percent from $37.6 million
in the prior year. North American revenue increased 5.1 percent, although market
conditions continued to be weak with no reported
14
improvement in industrial production or capacity utilization. International
sales were up 15.9 percent due to translation gains, as business conditions
remain weak throughout Europe. Year-to-date, worldwide sales in industrial air
filtration products were $127.6 million, a decrease of 1.8 percent from $129.9
million in the prior year.
Worldwide sales of special application products in the third quarter of fiscal
2003 were $26.8 million, a decrease of 1.6 percent from $27.2 million in the
prior year. Within special application products, disk drive filter sales were
down from the prior year, as the improving conditions forecasted by customers
continue to be elusive. Year-to-date, worldwide special application product
sales were $79.8 million, a decrease of 2.3 percent from $81.7 million in the
prior year.
Worldwide sales of ultrafilter products were $28.9 million in the third quarter
of fiscal 2003 and $82.3 million year-to-date. Comparative sales from the
pre-acquisition period, not included in the company's prior year results, were
$26.1 million in the third quarter of the prior year and $71.8 million
year-to-date, representing revenue growth of 10.7 percent for the quarter and
14.5 percent year-to-date.
Total international Industrial Product sales for the third quarter were up 64.6
percent from the same period of prior year and excluding ultrafilter, were up
12.1 percent. Within this segment, international sales for the third quarter for
industrial air filtration products posted an increase of 15.9 percent from the
same period of the prior year, while international sales in gas turbine products
increased 23.5 percent. Sales in special application products in the third
quarter were flat compared to the prior year. Year-to-date, total international
Industrial Product sales were up 55.4 percent over the prior year.
Critical Accounting Policies
The company's consolidated financial statements are prepared 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 making judgments about the recorded values of certain assets and
liabilities. The company believes its use of estimates and underlying accounting
assumptions adhere to accounting principles generally accepted in the United
States of America and are consistently applied. Valuations based on estimates
and underlying accounting assumptions are reviewed for reasonableness on a
consistent basis throughout the company. Management believes the company's
critical accounting policies that require more significant judgments and
estimates in the preparation of its consolidated financial statements are the
following:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE - The allowance for doubtful accounts
is estimated by management based on evaluation of potential losses related to
customer receivable balances. Estimates are developed by using standard
quantitative measures based on historical losses, adjusting for current economic
conditions and, in some cases, evaluating specific customer accounts for risk of
loss. The establishment of this reserve requires the use of judgment and
assumptions regarding the potential for losses on receivable balances. Though
management considers these balances adequate
15
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 obsolescence 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 conditions 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 establishment of
reserves requires the use of judgment and assumptions 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.
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 jurisdictions in which the company operates. This process involves
estimating actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and book
accounting purposes. These differences 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 likelihood 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.
Outlook
Overall, the company expects low double-digit revenue growth for the Engine
Products segment this fiscal year. The company expects North American heavy-duty
build rates to begin improving in the fourth quarter, and should accelerate in
fiscal 2004. Order trends and ending backlogs indicate continued strength in
Europe and Asia. New PowerCoreTM systems for light-duty diesel truck programs
have ramped up quickly and will also help to lift total truck results in coming
quarters. Off-road sales are expected to remain strong in Asia but steady in
North America as the weak construction outlook continues to dampen expectations.
North American aftermarket sales are expected to grow from an anticipated
increase in economic activity that will improve equipment utilization and spur
replacement filter sales. Both North American and international aftermarket
order rates have continued to improve.
The company expects its Industrial Products segment to be flat in the fourth
quarter. The company expects industrial air filtration markets to remain stable
near-term as ending backlogs and order trends are comparable to last year's
levels. Additional project delays have caused gas turbine revenues to shift out
of this year's forecast. The company expects full-year revenues to decrease by
16
40 to 45 percent from last year's record $231 million. The gas turbine downturn
is expected to continue through fiscal 2004. In special applications products,
order trends and backlogs continue to indicate stable conditions in the various
end markets. Ultrafilter products are expecting continued revenue growth, driven
by additional market penetration.
The company remains committed to delivering its 14th consecutive year of
double-digit earnings growth in 2003. Though the company is currently running
somewhat ahead of its forecasted pace on the strength of the third quarter, the
sharper decline expected in gas turbine sales will yield somewhat lower fourth
quarter earnings than previous consensus estimates. However, a stronger Engine
business, other Industrial businesses either stable or slowly improving, and
continued focus on cost controls should provide sufficient fourth quarter
strength to deliver another full year of 10 percent earnings per share growth.
Forward-Looking Statements
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 Form
10-Q, earnings releases or other press releases, the company's 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," "plan,"
"promises," "project," "should" 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 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 international operations including
key disk drive filter production facilities in China, highly competitive
markets, changes in capital spending levels by customers, changes in product
demand and changes in the geographic and product mix of sales, acquisition
opportunities and integration of recent acquisitions, including the acquisition
of ultrafilter, 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 for the year ended July 31, 2002 filed
with the Securities and Exchange Commission. The company 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 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
17
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
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 April 30, 2003,
the fair value of the company's long-term debt approximates
market. Market risk for the company's debt is estimated as the
potential decrease in fair value resulting from a hypothetical
one-half percent increase in interest rates and amounts to
approximately $2.8 million.
The company has entered into two interest rate swap
agreements, 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 contracts for speculative or
trading purposes. 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 entered into on June 6, 2001
has an aggregate notional amount of $27.0 million maturing on
July 15, 2008. The interest rate swap agreement entered into
on March 18, 2003 has an aggregate notional amount of $25.0
million maturing on August 15, 2010. The variable rate on both
of the swaps is based on the current six-month London
Interbank Offered Rates ("LIBOR"). As of April 30, 2003, the
interest rate swaps had a fair value of $3.5 million, which is
recorded net of the underlying debt in the liabilities section
of the balance sheet.
The company does not enter into market risk-sensitive
instruments for trading purposes to generate revenues. There
have been no material changes in the reported market risk of
the company since July 31, 2002. See further discussion of
these market risks in the Donaldson Company, Inc. Annual
Report on Form 10-K for the year ended July 31, 2002.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures: Within 90 days
prior to the date of this report (the "Evaluation
Date"), we carried out an evaluation, under the
supervision and with the participation of management,
including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures
(as defined in Rule 13a-14 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")). Based
upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures
were adequately designed to ensure that
18
information required to be disclosed by the Company in
the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules
and forms.
(b) Internal Controls: No significant changes in the
Company's internal controls or in other factors that
could significantly affect those controls subsequent to
the Evaluation Date, including any corrective actions
taken with regard to significant deficiencies and
material weaknesses, were made as a result of the
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is a defendant in a lawsuit filed in November 1998
in the United States District Court for the Northern District
of Iowa (Eastern Division) by Engineered Products Company
("EPC"). EPC claims patent infringement by Donaldson arising
out of its sales of graduated air restriction indicators in
the period from 1996 through the expiration of the EPC patent
in May 2001 and seeks monetary damages. EPC is also seeking
damages for some period of time beyond the expiration of the
patent. A trial date recently has been scheduled for September
15, 2003. The company denies any liability and believes the
patent is unenforceable and invalid. The company is vigorously
defending the suit. The amount of loss, if any, to the company
currently cannot be estimated.
The company is currently not otherwise subject to any pending
litigation other than routine litigation arising in the
ordinary course of business, none of which is expected to have
a material adverse effect on the business, results of
operation, financial condition or liquidity of the company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 99A & B - Certifications pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
During the three months ended April 30, 2003, and
through the date of this report, the company filed
the following Current Reports on Form 8-K:
Form 8-K dated February 21, 2003, relating to the
company's second quarter, 2003 financial results.
Form 8-K dated May 28, 2003, relating to the
company's third quarter, 2003 financial results.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DONALDSON COMPANY, INC.
-----------------------
(Registrant)
Date June 16, 2003 By /s/ William G. Van Dyke
-------------------------- --------------------------------
William G. Van Dyke
Chairman, President and
Chief Executive Officer
Date June 16, 2003 By /s/ William M. Cook
-------------------------- --------------------------------
William M. Cook
Senior Vice President,
International and
Chief Financial Officer
20
CERTIFICATIONS
I, William G. Van Dyke, Chief Executive Officer of Donaldson Company, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Donaldson
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 16, 2003 /s/ William G. Van Dyke
----------------------------------- --------------------------
William G. Van Dyke
Chief Executive Officer
21
I, William M. Cook, Chief Financial Officer of Donaldson Company, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Donaldson
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 16, 2003 /s/ William M. Cook
----------------------------------- -------------------------
William M. Cook
Chief Financial Officer