Mail Stop 0510
April 19, 2005
via U.S. mail and facsimile
Mr. Thomas R. VerHage
Vice President and Chief Financial Officer
Donaldson Company, Inc.
1400 West 94th Street
Minneapolis, Minnesota 55431
RE: Donaldson Company, Inc.
Form 10-K for the fiscal year ended July 31, 2004
Filed October 7, 2004
Forms 10-Q for the quarters ended October 31, 2004 and
January 31, 2005
File No. 1-07891
Dear Mr. VerHage:
We have reviewed your response letter dated April 1, 2005, and
have
the following additional comments. If you disagree, we will
consider
your explanation as to why our comment is inapplicable. In some
of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not raise additional
comments.
Form 10-K for the year ended July 31, 2004
MD&A, Results of Operations
1. If you had properly recorded the inter-company dividend in June
of
2003, the quarterly net earnings would have been lower by 7.4%.
This
would also have eliminated an upward trend in earnings by showing
less net earnings than the previous quarter instead of the
reported
increase of 7%. APB 20 requires that the correction of an error be
recorded on a retroactive basis to the prior periods affected.
However because you did not consider the amount of the errors to
be
material, you recorded the correction in the fourth quarter of
2004.
This caused the net earnings of
that quarter to be understated by 8.4%. We also note that the
error
represented 8.8% of segment earnings in 2004.
Because you did not record the error in June 2003, you altered the
trends in quarterly earnings. You also note in your response, that
if
recorded, the lower earnings would have caused you to not meet
earnings expectations. Considering the magnitude of these
misstatements on quarterly earnings, please provide for us an
expanded analysis of how you and your auditors consider the
materiality of this accounting error, specifically addressing the
impact on quarterly and segment earnings.
In addition, it appears that the disclosures surrounding this
accounting error could have been more transparent. In order for
the
disclosures in Notes K and M to be meaningful, you will need to
provide explanatory footnotes describing that the fourth quarter
of
2004 and the Industrial Products segment were understated due to
correcting the error in that period rather than retroactively.
Regardless of the disposition of this issue, please explain to us
how
you intend to discuss the comparative fourth quarter and segment
earnings in future filings.
Note L Commitments and Contingencies
2. We note that on August 12, 2004 the Court ruled in favor of EPC
and that they were entitled to enhanced damages, interest and
attorney fees and expenses totaling $19 million. Statement of
Accounting Standard No. 5 Accounting for Contingencies, requires
that
when a contingent liability is both probable and estimable, the
loss
be accrued by a charge to income. In 2004 you disclosed that you
increased your reserve by $5 million. We assume that in accordance
with GAAP, the entire reserve represents your best estimate of the
ultimate amount of the loss.
Paragraph 9 of SFAS 5 notes that disclosure of the nature of an
accrual, and in some circumstances the amount accrued, may be
necessary. In the past you have determined that such disclosures
were not necessary.
Paragraph 10 of SFAS 5 requires that you disclose an estimate of
the
additional possible loss or range of loss or state that such an
estimate cannot be made. You did not include such disclosures in
your Form 10-K for the year ended July 31, 2004, or in subsequent
interim reports. You have told us that you will now include these
disclosures in future filings, as required by GAAP.
Disclosure of an adverse ruling, and an increase in the related
reserve, without disclosure of the total amounts accrued or the
range
of possible additional loss, could imply to a reader that the
increase provided fully for the higher range of possible loss.
Considering the nature of the contingency, we urge you to consider
the guidance in paragraph 9 of SFAS 5 which indicates that it may
be
appropriate to disclose the amount of the total accrual.
We assume that your objective is to provide a clear, easy to
understand, transparent discussion concerning this substantial
contingent liability. Therefore, in future filings, include an
appropriate discussion that addresses the related underlying
uncertainties such that a reader can gain an understanding as to
why
you believe that the losses may not be as high as the entire
amount
of the ruling. Please avoid legal generalities, and provide
specific
meaningful analysis to support the amount of the reserve.
Please provide us with your proposed disclosures addressing the
above
concerns. We may have further comment.
Item 9A. Controls and Procedures
3. We note your response to prior comment 3. Your revised
disclosure
only addresses whether your disclosure controls and procedures
were
effective at "alerting them on a timely basis of material
information
required to be disclosed by the Company in the reports that it
files
or submits under the Exchange Act." This is an incomplete
definition
of disclosure controls and procedures per Rules 13a-15(e) and 15d-
15(e) of the Exchange Act. As previously requested, please revise
your disclosure in future filings to clarify, if true, that your
officers concluded that your disclosure controls and procedures
are
effective to ensure that information required to be disclosed by
you
in the reports that you file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods
specified in the Commission`s rules and forms and to ensure that
information required to be disclosed by an issuer in the reports
that
it files or submits under the Exchange Act is accumulated and
communicated to your management, including its principal executive
and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure.
* * * *
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a letter that keys your responses to our comments
and
provides any requested supplemental information. Detailed
response
letters greatly facilitate our review. Please file your response
letter on EDGAR. Please understand that we may have additional
comments after reviewing your responses to our comments.
You may contact Tracey Houser, Staff Accountant, at (202)
942-
1989, or me at (202) 942-1798 if you have questions regarding
comments on the financial statements and related matters.
Sincerely,
John Hartz
Senior Assistant Chief
Accountant
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Mr. VerHage
Donaldson Company, Inc.
April 19, 2005
Page 1 of 4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0510
DIVISION OF
CORPORATION FINANCE