10-K 1 donaldson025091_10k.txt DONALDSON COMPANY, INC. FORM 10-K [LOGO] DONALDSON(R) ANNUAL REPORT ON FORM 10-K DONALDSON COMPANY, INC. JULY 31, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE Act of 1934 for the fiscal year ended July 31, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES Exchange Act of 1934 (No Fee Required) 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 No.) 1400 WEST 94TH STREET, MINNEAPOLIS, MINNESOTA 55431 --------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (952) 887-3131 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH ON WHICH REGISTERED ------------- ------------------- Common Stock, $5 Par Value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of September 20, 2002 was $1,530,617,091. The shares of common stock outstanding as of September 20, 2002 were 43,897,537. Documents Incorporated by Reference ----------------------------------- Portions of the 2002 Annual Report to Shareholders of the registrant are incorporated by reference in Parts I and II, as specifically set forth in Parts I and II. Portions of the Proxy Statement for the 2002 annual shareholders meeting are incorporated by reference in Part III, as specifically set forth in Part III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL Donaldson Company, Inc. ("Donaldson" or the "Company") was founded in 1915 and organized in its present corporate form under the laws of the State of Delaware in 1936. 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 semiconductor processing. Products are manufactured at more than three dozen plants around the world and through four 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 parts. 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 for industrial gas turbines, computer disk drive filter products and other specialized air filtration systems. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly purified air. The table below shows the percentage of total net sales contributed by the principal classes of similar products for each of the last three fiscal years: YEAR ENDED JULY 31 ----------------------- 2002 2001 2000 ------ ------ ----- Engine Products Segment Off-Road Equipment Products (including Defense Products) 16% 16% 18% Truck Products 8% 7% 14% Aftermarket Products 30% 31% 30% Industrial Products Segment Industrial Air Filtration Products 16% 19% 17% Gas Turbine Systems Products 20% 17% 11% Special Applications Products 10% 10% 10% The segment detail information in Note H in the Notes to Consolidated Financial Statements on page 36 of the 2002 Annual Report to Shareholders is incorporated herein by reference. COMPETITION The Company's business is not considered to be seasonal. Principal methods of competition in both the Engine Products and Industrial Products segments are price, geographic coverage, service and product performance. The Company competes in a number of filtration markets in both the Engine Products and Industrial segments and both segments operate in a highly competitive environment. The Company estimates that it is a market leader in its primary product lines within the Industrial Products segment. Its principal competitors vary from country to country and include several large regional or global competitors and a significant number of small competitors who compete in a limited geographical region or in a limited number of product applications. The Company estimates that within the Engine 2 Products segment it is a market leader in its off-road equipment and truck product lines and is a significant participant in the aftermarket for replacement filters and hard parts in its engine-related businesses. The Engine Products segment principal competitors vary from country to country and include several large regional or global competitors, and small local and regional competitors, especially in the engine aftermarket businesses. RAW MATERIALS The Company experienced no significant or unusual problems in the purchase of raw materials or commodities. Donaldson has more than one source of raw materials essential to its business. The Company is not required to carry significant amounts of inventory to meet rapid delivery demands or secure supplier allotments. PATENTS AND TRADEMARKS The Company owns various patents and trademarks which it considers in the aggregate to constitute a valuable asset. However, it does not regard the validity of any one patent or trademark as being of material importance. MAJOR CUSTOMERS Sales to General Electric Company and subsidiaries ("GE") accounted for 13 and 12 percent of net sales in 2002 and 2001, respectively. There were no sales over 10 percent of net sales to one customer in 2000. GE has been a customer of the Company for many years and it purchases several models and types of products from the Industrial Products segment for a variety of applications, the majority of which are for use on their gas turbine systems. Sales to the U.S. Government do not constitute a material portion of the Company's business. BACKLOG At September 30, 2002, the backlog of orders expected to be delivered within 90 days was $172,668,000. The 90 day backlog at September 30, 2001 was $182,591,000. RESEARCH AND DEVELOPMENT During 2002, the Company spent $28,150,000 on research and development activities relating to the development of new products or improvements of existing products or manufacturing processes. The Company spent $28,425,000 in 2001 and $27,304,000 in 2000 on research and development activities. Essentially all commercial research and development is Company-sponsored. ENVIRONMENTAL MATTERS The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters. EMPLOYEES The Company employed 8,898 persons in worldwide operations as of September 30, 2002. GEOGRAPHIC AREAS Note H of the Notes to Consolidated Financial Statements on page 37 in the 2002 Annual Report to Shareholders contains information regarding the Company's geographic areas and is incorporated herein by reference. 3 ITEM 2. PROPERTIES The Company's principal office and research facilities are located in Bloomington, a suburb of Minneapolis, Minnesota. European administrative and engineering offices are located in Leuven, Belgium. Manufacturing activities are carried on in fifteen plants in the United States and twenty-one plants internationally. The back cover of the 2002 Annual Report to Shareholders lists fourteen of the U.S. plant locations and is incorporated herein by reference. In addition to these U.S. plant locations the company has a manufacturing facility in Norcross, GA which was acquired in the acquisition of ultrafilter. Internationally, the company's manufacturing facilities are in the following locations: Wyong, Australia; Brugge, Belgium; Hong Kong, China; Wuxi, China; Domjean, France, Dulmen, Germany; Haan, Germany; Flensburg, Germany; Ostiglia, Italy; Tokyo, Japan; Gunma, Japan; New Delhi, India; Aguascalientes, Mexico; Guadalajara, Mexico; Monterrey, Mexico; Cape Town, South Africa; Johannesburg, South Africa; Barcelona, Spain; Hull, United Kingdom; Leicester, United Kingdom; Wigan, United Kingdom. Note H on page 37 of the 2002 Annual Report to Shareholders presents identifiable assets by geographic area and is incorporated herein by reference. The Company is a lessee under several long-term leases. These leases provide for options to purchase the facilities at the end of the lease term and have been capitalized. The Company's properties are considered to be suitable for their present purposes, well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS The Company has been party to various legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company's results of operations, financial condition or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE. Current information regarding executive officers is presented below. All terms of office are for one year. There are no arrangements or understandings between individual officers and any other person pursuant to which he was selected as an officer.
FIRST YEAR ELECTED OR APPOINTED AS AN NAME AGE POSITIONS AND OFFICES HELD OFFICER ---- --- ------------------------------------ --------------------- William G. Van Dyke 57 Chairman, President and 1979 Chief Executive Officer William M. Cook 49 Senior Vice President, International 1994 and Chief Financial Officer James R. Giertz 45 Senior Vice President, 1994 Commercial and Industrial Norman C. Linnell 43 Vice President, General 1996 Counsel and Secretary Nickolas Priadka 56 Senior Vice President, 1989 Engine Systems and Parts Lowell F. Schwab 54 Senior Vice President, Operations 1994 Thomas A. Windfeldt 53 Vice President, Controller 1985
All of the above-named executive officers have held executive management positions with Registrant during the past five years. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information in the sections "Quarterly Financial Information (Unaudited)" and "NYSE Listing," on pages 38 and 40, and restrictions on payment of dividends in Note D, page 33 of the 2002 Annual Report to Shareholders is incorporated herein by reference. As of September 20, 2002, there were approximately 1,871 shareholders of record of Common Stock. The high and low sales prices for registrant's common stock for each full quarterly period during 2002 and 2001, are as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------- -------------- -------------- -------------- 2001 $19.13 - 23.86 $21.62 - 29.48 $24.39 - 28.92 $27.30 - 33.05 2002 $26.93 - 32.80 $32.35 - 40.35 $34.10 - 44.99 $30.03 - 43.12
The following table sets forth information as of July 31, 2002, regarding the Company's equity compensation plans:
NUMBER OF SECURITIES REMAINING FOR FUTURE NUMBER OF SECURITIES WEIGHTED-AVERAGE ISSUANCE UNDER EQUITY TO BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) ---------------------------------------------------------------------------- (a) (b) (c) EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS 1980 Master Stock Compensation Plan: Stock Options 204,867 $ 12.6957 -- 1991 Master Stock Compensation Plan: Stock Options 2,994,718 $ 23.9052 -- Deferred Stock Option Gain Plan 440,495 $ 30.6128 -- Long Term Compensation 139,916 $ 31.9000 -- Deferred LTC/Restricted Stock 111,745 $ 25.2350 -- 2001 Master Stock Incentive Plan: Stock Options 3,000 $ 32.2400 See Note 1 ---------- --------- ---------- SUBTOTAL FOR PLANS APPROVED BY SECURITY HOLDERS: 3,894,741 $ 24.4060 ========== ========= ========== EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS Nonqualified Stock Option Program for Non-Employee Directors: 268,330 $ 20.4733 See Note 2 ESOP Restoration 58,489 $ 20.8804 See Note 3 SUBTOTAL FOR PLANS NOT APPROVED BY SECURITY HOLDERS: 326,819 $ 20.5462 ========== ========= ========== TOTAL: 4,221,560 $ 24.1072 ========== ========= ==========
Note 1: Shares authorized for issuance during the ten year term are limited in each plan year to 1.5% of the Company's "outstanding shares" (as defined in the 2001 Master Stock Incentive Plan). Note 2: The stock option program for non-employee directors (filed as exhibit 10-N to 1998 Form 10-K report) provides for each non-employee director to receive annual option grants of 3,600 shares. The 2001 Master Stock Incentive Plan, which was approved by the Company's stockholders on November 16, 2001, provides for the issuance of stock options to non- employee directors. Note 3: The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990 (filed as exhibit 10-E to Form 10-Q for the Quarter ended January 31, 1998), to supplement the benefits for executive employees under the Company's Employee Stock Ownership Plan that would otherwise be reduced because of the compensation limitations under the Internal Revenue Code. The ESOP's ten-year term was completed on July 31, 1997, and the only ongoing benefits under the ESOP Restoration Plan are the accrual of dividend equivalent rights to the participants in the Plan. 5 ITEM 6. SELECTED FINANCIAL DATA The information for the years 1992 through 2002 on pages 12 and 13 of the 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in the section "Management's Discussion and Analysis" on pages 14 through 22 of the 2002 Annual Report to Shareholders is incorporated herein by reference. A. MARKET RISK Market Risk disclosure as discussed under "Market Risk" and "Foreign Currency" on page 20 of the 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 23 through 38, including the Quarterly Financial Information (Unaudited) on page 38 of the 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 18, 2002, the board of directors (the "Board") of Donaldson Company, Inc. (the "Company"), at the recommendation of its audit committee, dismissed Arthur Andersen LLP ("Andersen") as the Company's independent public accountants and engaged PricewaterhouseCoopers LLP ("PWC") to serve as the Company's independent public accountants for fiscal year 2002. Andersen's reports on the Company's consolidated financial statements for each of the years ended July 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended July 31, 2001 and 2000 and through April 18, 2002, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter of the disagreements in connection with their report on the Company's consolidated financial statements for such years; and there were no "reportable events," as such term is defined in Item 304(a)(1)(v) of Regulation S-K. The Company reported the change in accountants on Form 8-K filed on April 24, 2002. The Form 8-K contained a letter from Arthur Andersen, addressed to the Securities and Exchange Commission, stating that it agreed with the disclosures set forth in the preceding three paragraphs. During the years ended July 31, 2001 and 2000 and through the date of the Board's decision to engage PWC, the Company did not consult PWC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. 6 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the captions "Nominees For Election" and "Directors Continuing In Office" on page 7 and under the heading "Compliance With Section 16(a) of the Securities Exchange Act of 1934" on page 18 of the Company's definitive proxy statement dated October 8, 2002 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under "Director Compensation" on page 8 and in the section "Executive Compensation" on pages 12 through 14, the "Pension Benefits" on page 17 and under the caption "Change-in-Control Arrangements" on page 18 of the Company's definitive proxy statement dated October 8, 2002, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section "Security Ownership" on page 4 of the Company's definitive proxy statement dated October 8, 2002, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - NOT APPLICABLE. ITEM 14. CONTROLS AND PROCEDURES There were no significant changes in the Company's internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company's most recent evaluation of internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed with this report: (1) Financial Statements Consolidated Balance Sheets -- July 31, 2002 and 2001 (incorporated by reference from page 24 of the 2002 Annual Report to Shareholders) Consolidated Statements of Earnings -- years ended July 31, 2002, 2001 and 2000 (incorporated by reference from page 23 of the 2002 Annual Report to Shareholders) Consolidated Statements of Cash Flows -- years ended July 31, 2002, 2001 and 2000 (incorporated by reference from page 25 of the 2002 Annual Report to Shareholders) Consolidated Statements of Changes in Shareholders' Equity -- years ended July 31, 2002, 2001 and 2000 (incorporated by reference from page 26 of the 2002 Annual Report to Shareholders) Notes to Consolidated Financial Statements (incorporated by reference from pages 27 through 38 of the 2002 Annual Report to Shareholders) Reports of Independent Accountants (filed as part of this report) 7 (2) Financial Statement Schedules -- Reports of Independent Accountants (filed as part of this report) Schedule II Valuation and qualifying accounts All other schedules (Schedules I, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted. (3) Exhibits The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein. (b) Reports on Form 8-K A report on Form 8-K was filed on June 14, 2002. On June 13, 2002, the Company issued a press release in the form attached as Exhibit 99.1 to its Form 8-K announcing that it had signed a definitive agreement to acquire ultrafilter international AG. 8 Pursuant to the requirements of Section 13 or 15(d) 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: October 29, 2002 By: /s/ William G. Van Dyke ---------------- ------------------------------------ Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ William G. Van Dyke Chairman, President and ------------------------------------- Chief Executive Officer William G. Van Dyke /s/ William M. Cook Senior Vice President, ------------------------------------- International and William M. Cook Chief Financial Officer /s/ Thomas A. Windfeldt Vice President, Controller ------------------------------------- Thomas A. Windfeldt *F. Guillaume Bastiaens Director ------------------------------------- F. Guillaume Bastiaens *Paul B. Burke Director ------------------------------------- Paul B. Burke *Janet M. Dolan Director ------------------------------------- Janet M. Dolan *Jack W. Eugster Director ------------------------------------- Jack W. Eugster *John F. Grundhofer Director ------------------------------------- John F. Grundhofer *Kendrick B. Melrose Director ------------------------------------- Kendrick B. Melrose *Jeffrey Noddle Director ------------------------------------- Jeffrey Noddle *S. Walter Richey Director ------------------------------------- S. Walter Richey *Stephen W. Sanger Director ------------------------------------- Stephen W. Sanger *By /s/ Norman C. Linnell Date: October 29, 2002 ------------------------------------- Norman C. Linnell *As attorney-in-fact 9 CERTIFICATIONS I, William G. Van Dyke, Chief Executive Officer of Donaldson Company, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Donaldson Company, Inc.; 2. Based on my knowledge, this annual 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; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: October 29, 2002 /s/ William G. Van Dyke ------------------------------------- Chief Executive Officer I, William M. Cook, Chief Financial Officer of Donaldson Company, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Donaldson Company, Inc.; 2. Based on my knowledge, this annual 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; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: October 29, 2002 /s/ William M. Cook ------------------------------------- Chief Financial Officer 10 DONALDSON COMPANY, INC. AND SUBSIDIARIES FORM 10-K Item 15 (a) (1) Index of Independent Accountants' Reports Report of PricewaterhouseCoopers LLP .................................. 12 & 13 Report of Arthur Andersen LLP ......................................... 14 & 15 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Donaldson Company, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 7 present fairly, in all material respects, the consolidated financial position of Donaldson Company Inc. as of July 31, 2002, and the consolidated results of its operations and its cash flows for the period ended July 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Donaldson Company Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of Donaldson Company Inc. as of July 31, 2001, and for the two years in the period then ended, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated August 27, 2001. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota August 21, 2002 12 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Donaldson Company, Inc.: Our audits of the consolidated financial statements referred to in our report dated August 21, 2002 appearing in the 2002 Annual Report to Shareholders of Donaldson Company, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota August 21, 2002 13 THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Shareholders and Board of Directors of Donaldson Company, Inc.: We have audited the accompanying consolidated balance sheets of Donaldson Company, Inc. (a Delaware corporation) and subsidiaries as of July 31, 2001 and 2000, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Donaldson Company, Inc. and subsidiaries as of July 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Minneapolis, Minnesota, August 27, 2001 14 THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Donaldson Company, Inc. We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Donaldson Company Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated August 27, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed as part of item 14 in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Minneapolis, Minnesota, August 27, 2001 15 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars)
------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E ------------------------------------------------------------------------------------------------------------- ADDITIONS --------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (A) & (B) (C) & (D) PERIOD ----------- ---------- ---------- -------------- ---------- ---------- Year ended July 31, 2002: Allowance for doubtful accounts deducted from accounts receivable $6,309 $1,820 $ 198 $(1,707) $6,620 ====== ====== ====== ======= ====== Restructuring Reserves -- AirMaze Acquisition $ 166 $ (166) $ 0 ====== ======= ====== Restructuring Reserves -- DCE Acquisition $2,125 $(2,125) $ 0 ====== ======= ====== Restructuring Reserves -- ultrafilter $ 0 $1,219 $1,219 ====== ====== ====== Year ended July 31, 2001: Allowance for doubtful accounts deducted from accounts receivable $4,380 $2,512 $ (154) $ (429) $6,309 ====== ====== ====== ======= ====== Restructuring Reserves -- AirMaze Acquisition $1,183 $(1,017) $ 166 ====== ======= ====== Restructuring Reserves -- DCE Acquisition $2,775 $1,555 $(2,205) $2,125 ====== ====== ======= ====== Year ended July 31, 2000: Allowance for doubtful accounts deducted from accounts receivable $4,341 $1,077 $ (156) $ (882) $4,380 ====== ====== ====== ======= ====== Restructuring Reserves -- AirMaze Acquisition $ 0 $1,488 $ (305) $1,183 ====== ====== ======= ====== Restructuring Reserves -- DCE Acquisition $ 0 $2,775 $2,775 ====== ====== ======
------------------ Note A -- Allowance for doubtful accounts foreign currency translation losses (gains) recorded directly to equity. Note B -- Acquisition related restructuring reserves recorded to goodwill. Note C -- Bad debts charged to allowance, net of recoveries. Note D -- Acquisition related restructuring reserves utilized and/or reversed against goodwill. 16 EXHIBIT INDEX ANNUAL REPORT ON FORM 10-K * 3-A -- Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q for the Second Quarter ended January 31, 1998) * 3-B -- By-laws of Registrant as currently in effect (Filed as Exhibit 3-B to Form 10-Q for the Second Quarter ended January 31, 1999) * 4 -- ** * 4-A -- Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 4.1 to Form 8-K Report Dated January 12, 1996) *10-A -- Annual Cash Bonus Plan (Filed as Exhibit 10-A to 1995 Form 10-K Report)*** *10-B -- Supplementary Retirement Agreement with William A. Hodder (Filed as Exhibit 10-B to 1993 Form 10-K Report)*** *10-C -- 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-C to 1993 Form 10-K Report)*** *10-D -- Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-D to 1995 Form 10-K Report)*** *10-E -- Copy of ESOP Restoration Plan as Amended and Restated (Filed as Exhibit 10-E to Form 10-Q for the Second Quarter ended January 31, 1998)*** *10-F -- Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit 10-F to 1990 Form 10-K Report)*** *10-G -- Form of "Change in Control" Agreement with key employees as amended (Filed as Exhibit 10-G to Form 10-Q for the Second Quarter ended January 31, 1999)*** *10-H -- Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-H to 1995 Form 10-K Report)*** *10-I -- Excess Pension Plan (1999 Restatement)*** *10-J -- Supplementary Executive Retirement Plan (1999 Restatement)*** *10-K -- 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-K to 1998 Form 10-K Report)*** *10-L -- Form of Restricted Stock Award under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-L to 1992 Form 10-K Report)*** *10-M -- Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit 10-M to 1993 Form 10-K Report)*** *10-N -- Stock Option Program for Nonemployee Directors (Filed as Exhibit 10-N to 1998 Form 10-K Report)*** 17 *10-O -- Salaried Employees' Pension Plan -- 1997 Restatement (Filed as Exhibit l0-0 to 1997 10-K Report)*** *10-P -- Eighth Amendment of Employee Stock Ownership Plan Trust Agreement 1987 Restatement (Filed as Exhibit 10-P to 1997 10-K Report)*** *10-Q -- Deferred Compensation and 401(K) Excess Plan (1999 Restatement)*** *10-R -- Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of July 15, 1998 (Filed as Exhibit 10-R to 1998 Form 10-K Report) *10-S -- First Supplement to Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of August 1, 1998 (Filed as Exhibit 10-S to 1998 Form 10-K Report) *10-T -- Deferred Stock Option Gain Plan (1999 Restatement)*** *10-U -- 2001 Master Stock Incentive Plan (Filed as Exhibit 4.1 to Form S-8 (SEC File No. 333-97771)) 11 -- Computation of net earnings per share ("Earnings Per Share" in "Summary of Significant Accounting Policies" in Note A, page 20 of the 2001 Annual Report to Shareholders is incorporated herein by reference) 13 -- Portions of Registrant's Annual Report to Shareholders for the year ended July 31, 2002 21 -- Subsidiaries 23 -- Consent of PricewaterhouseCoopers LLP 23(A) -- Notice Regarding Consent of Arthur Andersen LLP 24 -- Powers of Attorney 99-A -- Litigation Reform Act of 1995 -- Cautionary Statement 99-B -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99-C -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Exhibit has heretofore been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit. ** Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of Registrant and its subsidiaries are not filed and in lieu thereof Registrant agrees to furnish a copy thereof to the Securities and Exchange Commission upon request. *** Denotes compensatory plan or management contract. Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $20 representing Registrant's reasonable expense in furnishing such exhibits. 18