$1.2 billion $1.4 billion $1.6 billion $1.7 billion $1.9 billion $2.2 billion 19 Consecutive Record Years Donaldson Company, Inc. Annual Report 2008 2008 HIGHLIGHTS Revenue up 16% to $2.2 billion • Operating Margin of 11% • Earnings per share up 16% to $ 2.12 • 19th consecutive EPS record • 53rd consecutive year of quarterly dividends • 19th consecutive year shares outstanding have been reduced 19 Consecutive Record Years On the cover: PowerCore® filter elements used in our new Torit® PowerCore dust collectors. INDUstriaL PRODUCTS SEGMENT 2008 SALES: $1.0 BILLION INDUstriaL FILtratioN Gas TUrbiNE SysteMS SpeciaL AppLicatioNS SOLUtioNS 2008 Sales: $213 million 2008 Sales: $190 million 2008 Sales: $600 million We design and provide complete air We produce a wide variety of high Our filtration products are used to intake systems for gas turbines and efficiency air filters for the hard disk clean and filter in a variety of industrial industrial compressors. We also drive and semiconductor industries. processes and environments. We provide aftermarket replacement We protect disk drives from dust, produce original equipment and filters, parts, and service. chemical contamination, and humidity. replacement parts for the following Our semiconductor process filters Our products are used in our applications: help our Customers optimize the Customers’ gas turbines, which provide production yields of their products. • Industrial Air Filtration Systems base electricity, peaking capacity, and Our vent filters protect and increase to capture the dust, fumes, or remote power. These turbines require the effectiveness of a variety of mist generated by manufacturing inlet air filtration systems to protect consumer electronic devices ranging operations. We market these the turbine from damage and help it ® from hearing aids to automotive products under the Torit and Torit/ run at peak efficiency. DCE™ brand names. sensors. • Compressed Air and Gas • Industrial Liquid Filters clean We manufacture expanded PTFE Systems that include air intake hydraulic fluids to keep manufacturing (polytetrafluoroethylene) membranes and oil filters to deliver clean, dry equipment running reliably. Our under the brand name Tetratex®. compressed air and gas throughout process filters purify steam, liquids, This advanced material (shown our Customers’ manufacturing gases, and air used in the food, below magnified 1000x) is used in facilities. We market these products dairy, beverage, paint, and other filtration products and other industrial under the Donaldson Ultra-Filter™ industries. applications. brand. For more information on our products, visit www.donaldson.com. ENgiNE PRODUCTS SEGMENT 2008 SALES: $1.2 BILLION AboUT THE coMpaNY OrigiNAL EQUipMENT ENgiNE AfterMarKet Donaldson is a leading 2008 Sales: $572 million 2008 Sales: $657 million worldwide provider of air and liquid filtration systems We provide filtration and exhaust systems Our engine aftermarket product line and replacement parts that: to construction, transportation, includes a broad line of replacement agriculture, defense, aerospace, and oil, fuel, air, coolant, transmission, • improve people’s lives, mining equipment manufacturers. Our and hydraulic filters, accessories • enhance our Customers’ filtration products protect heavy-duty and exhaust and emission control equipment per formance, engines in a variety of dirty on- and components. and off-road environments. Simply put, We sell our aftermarket parts to our we protect our Customers’ engines • protect our environment. Customers’ OEM parts and service by cleaning the air going into the organizations, independent distributors, engine, all of the fluids around the We are a technology-driven and private label marketers. We market engine, and the exhaust gases company committed to our replacement filters and parts coming out of the engine. under both our OEM Customers’ satisfying our Customers’ brands and the Donaldson brand. needs for solutions through innovative research and development, application expertise, and global presence. Our 13,000 employees contribute to the Company’s success by supporting our Customers at more than 100 sales, manufacturing, and distribution locations around the world. For over two decades, our financial objective has been and continues to be to build value for our shareholders through superior share price appreciation and consistent dividend payouts. We believe superior shareholder value is created by delivering consistent financial performance and growth in earnings per share. Our business growth will Our products incorporate proprietary Applications include all types of and patented designs including diesel-powered equipment from be achieved by pursuing PowerCore® and Spiracle™, as well pick-up trucks to off-road haul trucks, new opportunities in our as proprietary filter media such to on-road heavy-duty trucks and existing and related markets. as Ultra-Web® and Synteq™. We buses, to military and civilian Consistency will be reinforced typically brand products for our OEM helicopters and airplanes. We have Customers. distribution centers strategically by continuing to expand our located around the world to support diversified portfolio of related the needs of our Customers. businesses around the world. For more information on our products, visit www.donaldson.com. DEAR SHAREHOLDERS: Milestones tell us where we are at a given moment, where we have been, and how far we have come. We achieved several milestones this year. Among the most Highlights from the year included: significant was the achievement of our first $2 billion sales • Sales totaled $2.2+ billion, up 16%. year. This is a great example of the continued successful execution of the plans set forth by my predecessors, • Our operating margins again hit our 11% target. Frank Donaldson, Jr., Bill Hodder, and Bill Van Dyke. The • Nearly all business units in our Engine and Industrial foundation of their vision was to leverage our technology segments reported strong operating results, with and geographic investments to more broadly diversify our Engine sales up 13% and Industrial up 20%. Company. The objective of our diversification focus continues to be building a more stable platform which • Extraordinary efforts by hundreds of my fellow employees we can use to deliver consistent financial results for you, across our Company helped us restore Customer service our Shareholders. levels despite a significant operational challenge at our main U.S. distribution center. We take great pride that our technology investments allow • Our EPS of $2.12 represented an increase of 16% from us to supply filtration solutions to our Customers around the $1.83 last year. globe for applications as varied as the filters in disk drives used in laptop computers, to giant filtration systems FOCUS ON DIVERSIFICATION installed at power plants that protect large gas turbine engines. Our filtration systems now span the entire While there were some challenges in the global economy, spectrum of commerce—from dust collectors used in our continued focus on diversification allowed us to offset almond nut processing, to air and liquid filters protecting the weakness in any one specific business. When we think massive construction vehicles used in the world’s mines. about our diversification objectives, we measure ourselves Bottom line—anywhere there is a critical need for air on three dimensions: or liquid filtration, you are likely to find our filters. • our Engine and Industrial segments; While the foundation of our strategy is growth through • our first-fit solutions and replacement filters; and diversification, this foundation has really been a “means” • our Americas-based businesses (North and South) and our to a new “end.” Since the 1980s, with our growth International businesses (Europe, Middle East, Africa, and through diversification approach, we have used this Asia Pacific). to deliver a different “end”—i.e., consistent financial performance. For us, “consistent” is defined by three Our goal has been to achieve a 50/50 balance on each objectives: of these dimensions. We believe that achieving this • sales growth of 10–12% per year; balance will further insulate our financial performance from the dramatic impact of any single end market or • a new Earnings per Share (EPS) record each year; and geographic cycle. • a minimum Return on Investment (ROI) of 15%. The execution of our growth through diversification strategy allowed us to achieve our second critical milestone this year —our 19th consecutive year of record EPS. PORTFOLIO DIVERSIFICATION 1980 2008 First Fit Replacement Replacement Parts Parts Repalcement 22% 43% First Fit First Fit As78% you can see in the accompanying57% pie charts, we have INVESTMENTS FOR OUR FUTURE come a long way since our start of supplying air filters for PORTFOLIO DIVERSIFICATION We continue to make many investments in new technologies, farm tractors, sold primarily just in the U.S. Today, 45% new products, and geographic expansions. We believe that of our sales 1980come from our Industrial Products,2008 43% are First Fit Replacement Replacement these investments position us to extend our track record replacement filters, and 57% are from our International Parts Parts into the future. There are tooRepalcement many accomplishments to be businesses. 22% 43% able to cover all of them in this letter, so the following are First Fit First Fit 78% 57% some highlights. BUSINESS DIVERSIFICATION • We invested $72 million in capital expenditures, much 1980