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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, 2004 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 - 86,363,818 shares as of April 30, 2004

1


1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of dollars, except share amounts)
(Unaudited)

Three Months Ended Nine Months Ended
April 30 April 30
2004 2003 2004 2003
 
Net sales     $ 370,588   $ 302,457   $ 1,031,018   $ 887,958  
 
Cost of sales    250,353    204,226    700,770    604,081  
 
Gross margin    120,235    98,231    330,248    283,877  
 
Operating expenses    82,210    63,454    227,603    189,212  
 
Gain on sale of Ome land and building    —    —    (5,616 )  —  
 
Operating income    38,025    34,777    108,261    94,665  
 
Other income, net    (1,285 )  (1,033 )  (2,697 )  (3,348 )
 
Interest expense    1,272    1,109    3,666    4,628  
 
Earnings before income taxes    38,038    34,701    107,292    93,385  
 
Income taxes    8,467    9,369    27,166    25,214  
 
Net earnings   $ 29,571   $ 25,332   $ 80,126   $ 68,171  
 
Weighted average shares  
 outstanding    87,975,804    86,771,804    88,073,242    87,080,484  
 
Diluted shares outstanding    90,317,143    89,586,236    90,479,908    90,003,696  
 
Basic earnings per share   $ .34   $ .29   $ .91   $ .78  
 
Diluted earnings per share   $ .33   $ .28   $ .89   $ .76  
 
Dividends paid per share   $ .055   $ .045   $ .150   $ .130  

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,
2004
 July 31,
2003
ASSETS            
CURRENT ASSETS  
     Cash and cash equivalents   $ 94,435   $ 67,070  
     Accounts receivable    251,109    226,815  
     Inventories  
          Materials    53,201    45,088  
          Work in process    14,600    12,374  
          Finished products    67,760    57,428  
               Total inventories    135,561    114,890  
     Prepaid and other current assets    39,288    45,930  
               TOTAL CURRENT ASSETS    520,393    454,705  
 
Property, plant and equipment, at cost    625,294    580,371  
Less accumulated depreciation    (359,015 )  (324,935 )
     Property, plant and equipment, net    266,279    255,436  
Goodwill    98,119    92,143  
Intangible assets    20,059    17,188  
Other assets    74,122    62,525  
               TOTAL ASSETS   $ 978,972   $ 881,997  
 
LIABILITIES AND SHAREHOLDERS' EQUITY   
CURRENT LIABILITIES  
     Short-term debt   $ 41,388   $ 14,152  
     Current maturities of long-term debt    11,570    646  
     Trade accounts payable    107,448    122,759  
     Accrued employee compensation and related taxes    40,378    33,013  
     Warranty and accrued liabilities    26,107    23,597  
     Other current liabilities    17,298    19,909  
               TOTAL CURRENT LIABILITIES    244,189    214,076  
 
Long-term debt    95,233    105,156  
Deferred income taxes    28,548    21,316  
Other long-term liabilities    89,324    94,056  
               TOTAL LIABILITIES    457,294    434,604  
 
SHAREHOLDERS' EQUITY   
Preferred stock, $1 par value,  
  1,000,000 shares authorized, no shares issued    —    —  
Common stock, $5 par value, 120,000,000 shares authorized,  
  88,643,194 issued    443,216    248,280  
Retained earnings    93,653    337,245  
Deferred stock compensation    22,018    14,524  
Accumulated other comprehensive income (loss)    15,333    (6,888 )
Treasury stock, at cost - 2,112,022 and 6,237,469 shares at  
  April 30, 2004 and July 31, 2003, respectively    (52,542 )  (145,768 )
               TOTAL SHAREHOLDERS' EQUITY    521,678    447,393  
               TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 978,972   $ 881,997  

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
2004
 2003
OPERATING ACTIVITIES            
     Net earnings   $ 80,126   $ 68,171  
     Adjustments to reconcile net earnings to  
       net cash provided by operating activities:  
          Gain on sale of Ome land and building    (5,616 )  —  
          Depreciation and amortization    30,944    27,584  
          Changes in operating assets and liabilities    (25,745 )  19,150  
          Other    (7,150 )  (11,643 )
             Net cash provided by operating activities    72,559    103,262  
 
INVESTING ACTIVITIES  
     Net expenditures on property and equipment    (36,560 )  (35,265 )
        Acquisitions, net of cash acquired and investments  
          in unconsolidated affiliates    (4,397 )  (1,259 )
             Net cash used in investing activities    (40,957 )  (36,524 )
 
FINANCING ACTIVITIES  
     Purchase of treasury stock    (22,160 )  (20,837 )
     Proceeds from long-term debt    —    702  
     Repayments of long-term debt    (953 )  (39 )
     Change in short-term borrowings    26,709    (38,091 )
     Dividends paid    (13,027 )  (11,350 )
     Exercise of stock options    3,078    629  
           Net cash used in financing activities    (6,353 )  (68,986 )
 
Effect of exchange rate changes on cash    2,116    6,422  
 
Increase in cash and cash equivalents    27,365    4,174  
 
Cash and cash equivalents-beginning of year    67,070    45,586  
 
Cash and cash equivalents-end of period   $ 94,435   $ 49,760  

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 notes 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 nine-month period ended April 30, 2004 are not necessarily indicative of the results that may be expected for future periods. For further information, refer to the consolidated financial statements and notes thereto included in Donaldson Company, Inc. and Subsidiaries’ Annual Report on Form 10-K for the year ended July 31, 2003. 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.

On January 16, 2004, the Company announced that its Board of Directors declared a two-for-one stock split effected in the form of a 100 percent dividend. The stock split was distributed March 19, 2004, to shareholders of record as of March 5, 2004. All prior period amounts in the financial statements and related notes have been restated and are presented after the effect of this stock dividend.

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 as all options have exercise prices equal to the fair value of the stock on the date of grant. 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
April 30
 Nine Months Ended
April 30
2004
 2003
 2004
 2003
Net earnings, as reported     $ 29,571   $ 25,332   $ 80,126   $ 68,171  
Less total stock-based employee  
    compensation expense under the fair  
    value-based method, net of tax    (771 )  (679 )  (5,762 )  (3,136 )
Pro forma net earnings   $ 28,800   $ 24,653   $ 74,364   $ 65,035  
Basic net earnings per share  
    As reported   $ .34   $ .29   $ .91   $ .78  
    Pro forma   $ .33   $ .29   $ .84   $ .75  
Diluted net earnings per share  
     As reported   $ .33   $ .28   $ .89   $ .76  
     Pro forma   $ .32   $ .27   $ .82   $ .72  


5


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. Certain outstanding options were excluded from the diluted net income per share calculations because their exercise prices were greater than the average market price of the Company’s common stock during those periods. For 2004 and 2003, 1,048,726 and 1,281,800 options, respectively, were excluded from the diluted net income per share calculation.

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
April 30		 Nine Months Ended
April 30
2004 2003 2004 2003
Weighted average shares outstanding - basic      87,976    86,772    88,073    87,080  
   Diluted share equivalents    2,341    2,814    2,407    2,924  
Weighted average shares outstanding - diluted    90,317    89,586    90,480    90,004  
Net earnings for basic and diluted  
  earnings per share computation   $ 29,571   $ 25,332   $ 80,126   $ 68,171  
Net earnings per share - basic   $ .34   $ .29   $ .91   $ .78  
Net earnings per share - diluted   $ .33   $ .28   $ .89   $ .76  

Note D – Changes in Shareholders’ Equity

In December 2003, the Company established a rabbi trust for its obligations under its deferred compensation plans and contributed 1,409,730 shares of treasury stock to the rabbi trust. As a result, obligations totaling $5.5 million were reclassified from other long-term liabilities to retained earnings.

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
April 30		 Nine Months Ended
April 30
2004 2003 2004 2003
Net earnings     $ 29,571   $ 25,332   $ 80,126   $ 68,171  
Foreign currency translation gain (loss)    (8,475 )  2,705    22,270    20,496  
Net gain (loss) on cash flow hedging derivatives    (567 )  (153 )  (49 )  (878 )
Total comprehensive income   $ 20,529   $ 27,884   $ 102,347   $ 87,789  


6


Total accumulated other comprehensive gain (loss) and its components at April 30, 2004 and July 31, 2003 are as follows (in thousands):

April 30,
2004		 July 31,
2003
Foreign currency translation adjustment