Donaldson Company

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange

Act of 1934 for the fiscal year ended July 31, 2013 or

(cid:2)

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
(State or other jurisdiction of
incorporation or organization)

1400 West 94th Street, Minneapolis, Minnesota
(Address of principal executive offices)

41-0222640
(I.R.S. Employer
Identification No.)

55431
(Zip Code)

Registrant’s telephone number, including area code: (952) 887-3131

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, $5 Par Value
Preferred Stock Purchase Rights

Name of each exchange
on which registered

New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

⌧ Yes (cid:2) No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

(cid:2) Yes ⌧ No

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 (cid:2) No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such short period that the registrant was required to submit and post such files) ⌧ Yes (cid:2) 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. ⌧

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ⌧
Non-accelerated filer (cid:2) (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:2) Yes ⌧ No
As of January 31, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate
market value of voting and non-voting common stock held by non-affiliates of the registrant was $5,466,451,890 (based on the
closing price of $37.61 as reported on the New York Stock Exchange as of that date).

Accelerated filer (cid:2)
Smaller reporting company (cid:2)

As of August 31, 2013, there were approximately 146,109,145 shares of the registrant’s common stock outstanding.

Portions of the registrant’s Proxy Statement for its 2013 annual meeting of stockholders (the “2013 Proxy Statement”) are

incorporated by reference in Part III, as specifically set forth in Part III.

Documents Incorporated by Reference

DONALDSON COMPANY, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

Page

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant

1
1
1
2
2
2
2
2
2
3
3
3
3
6
6
7
7
7

PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management’s Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Safe Harbor Statement under the Securities Reform Act of 1995 . . . . . . . . . . . . . . . . . 26
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . 26
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

PART III

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . 57
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Certain Relationships and Related Transactions, and Director Independence . . . . . . . 59
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

PART IV

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Item 1.

Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

Item 15.

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 worldwide manufacturer of filtration systems and replacement parts.The Company’s
product mix includes air and liquid filtration systems and exhaust and emission control products. Products
are manufactured at 39 plants around the world and through 3 joint ventures. The Company has two
reporting segments: Engine Products and Industrial Products. Products in the Engine Products segment
consist of air filtration systems, exhaust and emissions systems, liquid filtration systems, and replacement
filters.The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction,
mining, agriculture, aerospace, defense, and truck markets and to OEM dealer networks, independent
distributors, private label accounts, and large equipment fleets. Products in the Industrial Products segment
consist of dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas
turbines, PTFE membrane-based products, and specialized air filtration systems for applications including
computer hard disk drives and semi-conductor manufacturing. The Industrial Products segment sells to
various industrial dealers, distributors, and end-users, OEMs of gas-fired turbines, and OEMs and end-users
requiring clean 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:

Engine Products segment
Off-Road Products
On-Road Products
Aftermarket Products*
Retrofit Emissions Products
Aerospace and Defense Products
*includes replacement part sales to the
Company’s OEM Customers

Industrial Products segment

Industrial Filtration Solutions Products
Gas Turbine Products
Special Applications Products

Year Ended July 31
______________________________

2013
____

15%
5%
37%
1%
4%

22%
9%
7%

2012
____

15%
7%
36%
1%
4%

22%
7%
8%

2011
_____

14%
5%
38%
1%
5%

22%
7%
8%

Total net sales contributed by the principal classes of similar products and financial information about

segment operations appear in Note L in the Notes to Consolidated Financial Statements on page 53.

The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current
reports on Form 8-K, and amendments to those reports, available free of charge through its website at
www.donaldson.com, as soon as reasonably practicable after it electronically files such material with (or
furnishes such material to) the Securities and Exchange Commission. Also available on the Company’s
website are corporate governance documents, including the Company’s code of business conduct and ethics,
corporate governance guidelines, Audit Committee charter, Human Resources Committee charter, and
Corporate Governance Committee charter. These documents are also available in print, free of charge to
any shareholder who requests them. The information contained on the Company’s website is not
incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part
of this Form 10-K.

Seasonality

A number of the Company’s end markets are dependent on the construction, agricultural, and power
generation industries, which are generally stronger in the second half of the Company’s fiscal year. The first
two quarters of the fiscal year also contain the traditional summer and winter holiday periods, which are
characterized by more Customer plant closures.

1

Competition

Principal methods of competition in both the Engine and Industrial Products segments are technology
and innovation, price, geographic coverage, service, and product performance. The Company competes in a
number of highly competitive filtration markets in both segments. The Company believes it is a market
leader within many of its product lines, specifically within its Off-Road Equipment and On-Road Products
lines for OEMs and is a significant participant in the aftermarket for replacement filters. The Engine
Products segment’s principal competitors include several large global competitors and many regional
competitors, especially in the Engine Aftermarket Products business. The Industrial Products segment’s
principal competitors vary from country to country and include several large regional and global competitors
and a significant number of smaller competitors who compete in a specific geographical region or in a
limited number of product applications.

Raw Materials

The principal raw materials that the Company uses are steel, filter media, and petroleum-based products.
Purchased raw materials represent approximately 60 to 65 percent of the Company’s cost of goods sold. Of
that amount, steel, including fabricated parts, represents approximately 25 percent. Filter media represents
approximately 15 to 20 percent and the remainder is primarily made up of petroleum-based products and
other components. The Company typically has multiple sources of supply for the raw materials essential to
its business, but does rely primarily on two media suppliers.The Company is not required to carry significant
amounts of raw material inventory to secure supplier allotments. However, the Company does stock finished
goods inventory at its regional distribution centers in order to meet anticipated Customer demand. The
Company has not experienced significant supply problems in the purchase of its major raw materials.

Patents and Trademarks

The Company owns various patents and trademarks, which it considers in the aggregate to constitute
a valuable asset, including patents and trademarks for products sold under the Ultra-Web®, PowerCore®, and
Donaldson® trademarks. However, it does not regard the validity of any one patent or trademark as being
of material importance.

Major Customers

There were no Customers that accounted for over 10 percent of net sales in Fiscal 2013, 2012, or 2011.
There were no Customers that accounted for over 10 percent of gross accounts receivable in Fiscal 2013 and
one Customer over 10 percent of gross accounts receivable in Fiscal 2012.

Backlog

At August 31, 2013, the backlog of orders expected to be delivered within 90 days was $351.7 million.
This entire backlog is expected to be shipped during Fiscal 2014. The 90-day backlog at August 31, 2012, was
$403.7 million. Backlog is one of many indicators of business conditions in the Company’s markets. However,
it is not always indicative of future results for a number of reasons, including short lead times in the
Company’s replacement parts businesses and the timing of orders in many of the Company’s Engine OEM
and Industrial markets.

Research and Development

During Fiscal 2013, the Company spent $62.6 million on research and development activities. Research
and development expenses include basic scientific research and the application of scientific advances to the
development of new and improved products and their uses. The Company spent $59.6 million and
$55.3 million in Fiscal 2012 and Fiscal 2011, respectively, on research and development activities.
Substantially all commercial research and development is performed in-house.

2

Environmental Matters

The Company does not anticipate any material effect on its capital expenditures, earnings, or
competitive position during Fiscal 2014 due to compliance with government regulations regulating the
discharge of materials into the environment or otherwise relating to the protection of the environment.

Employees

The Company employed over 12,400 persons in worldwide operations as of August 31, 2013.

Geographic Areas

Financial information about geographic areas appears in Note L of the Notes to Consolidated Financial

Statements on page 53.

Item 1A. Risk Factors

There are inherent risks and uncertainties associated with our global operations that involve the
manufacturing and sale of products for highly demanding Customer applications throughout the world.
These risks and uncertainties could adversely affect our operating performance and financial condition.
The following discussion, along with discussions elsewhere in this report, outlines the risks and uncertainties
that we believe are the most material to our business at this time. We want to further highlight the risks and
uncertainties associated with: world economic factors and conditions, the ongoing global economic
uncertainty, the reduced demand for hard disk drive products with the increased use of flash memory, the
potential for some Customers to increase their reliance on their own filtration capabilities, currency
fluctuations, commodity prices, political factors, our international operations, highly competitive markets,
inability to hire and retain key employees, governmental laws and regulations, including the impact of the
various economic stimulus and financial reform measures, the implementation of our new information
technology systems, failure or breach of information technology and trade secret security, potential global
events resulting in market instability, including financial bailouts and defaults of sovereign nations, military
and terrorist activities including political unrest in the Middle East, other political changes, health outbreaks,
natural disasters, and other factors discussed below.We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.

Operating internationally carries risks which could negatively affect our financial performance.

We have sales and manufacturing operations throughout the world, with the heaviest concentrations in
the Americas, Europe, and Asia. Our stability, growth, and profitability are subject to a number of risks of
doing business internationally that could harm our business, including:

•

•

•

•

•

•

•

•

•

political and military events,

legal and regulatory requirements, including import, export, defense regulations, anti-corruption
laws, and foreign exchange controls,

tariffs and trade barriers,

potential difficulties in staffing and managing local operations,

credit risk of local Customers and distributors,

difficulties in protecting intellectual property,

local economic, political, and social conditions, specifically in the Middle East, China,Thailand, and
other emerging markets where we do business,

potential global health outbreaks, and

natural disasters.

3

Due to the international scope of our operations, we are subject to a complex system of import- and
export-related laws and regulations. Any alleged or actual violations may subject us to government scrutiny,
investigation, and civil and criminal penalties, and may limit our ability to import or export our products or
to provide services outside the United States (U.S.). In addition, the U.S. Foreign Corrupt Practices Act and
similar foreign anti-corruption laws generally prohibit companies and their intermediaries from making
improper payments or providing anything of value to improperly influence foreign government officials for
the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a
substantial increase in the global enforcement of anti-corruption laws. Violations of these laws may result
in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our
reputation, business, and results of operations or financial condition.

Maintaining a competitive advantage requires continuing investment with uncertain returns.

We operate in highly competitive markets and have numerous competitors who may already be well-
established in those markets.We expect our competitors to continue improving the design and performance
of their products and to introduce new products that could be competitive in both price and performance.
We believe that we have certain technological advantages over our competitors, but maintaining these
advantages requires us to continually invest in research and development, sales and marketing, and
Customer service and support. There is no guarantee that we will be successful in maintaining these
advantages. We make investments in new technologies that address increased performance and regulatory
requirements around the globe. There is no guarantee that we will be successful in completing development
or achieving sales of these products or that the margins on such products will be acceptable. Our financial
performance may be negatively impacted if a competitor’s successful product innovation reaches the market
before ours or gains broader market acceptance.

A few of our major OEM Customers also manufacture filtration systems. Although these OEM
Customers rely on us and other suppliers for some of their filtration systems, they sometimes choose to
manufacture additional filtration systems for their own use.There is also a risk that a Customer could acquire
one or more of our competitors.

We may be adversely impacted by changes in technology that could reduce or eliminate the demand for

our products. These risks include:

•

•

breakthroughs in technology which provide a viable alternative to diesel engines

reduced demand for disk drive products by flash memory or a similar technology, which would
reduce the use of disk drives and therefore eliminate the need for our filtration solutions in disk
drives

•

other breakthroughs in filtration technologies that could displace our products

Difficulties with our information technology systems and security could adversely affect our results.

We have many information technology systems that are important to the operation of its businesses,
some of which are managed by third parties.These systems are used to process, transmit, and store electronic
information, and to manage or support a variety of business processes and activities. We could encounter
difficulties in developing new systems, maintaining and upgrading existing systems, and preventing
information security breaches. There may be other challenges and risks as we upgrade and standardize our
Enterprise Resource Planning (ERP) system on a worldwide basis. Such difficulties could lead to significant
additional expenses and/or disruption in business operations that could adversely affect our results.
Additionally, information technology security threats are increasing in frequency and sophistication. These
threats pose a risk to the security of our systems and networks and the confidentiality, availability, and
integrity of our data. Should such an attack succeed, it could lead to the compromising of confidential
information, manipulation and destruction of data, defective products, production downtimes, and
operations disruptions. The occurrence of any of these events could adversely affect our reputation, and
could result in litigation, regulatory action, potential liability, and increased costs and operational
consequences of implementing further data protection matters.

4

Demand for our products relies on economic and industrial conditions worldwide.

Changes in economic or industrial conditions could impact our results of operations or financial
condition in any particular period as our business can be sensitive to varying conditions by region across
the globe.

While sales to Caterpillar accounted for slightly less than 10 percent of our net sales in Fiscal 2013,
2012, and 2011, an adverse change in Caterpillar’s financial performance or a material reduction in our
sales to Caterpillar could negatively impact our operating results.

We participate in highly competitive markets with pricing pressure. If we are not able to compete
effectively our margins and results of operations could be adversely affected.

The businesses and product lines in which we participate are very competitive and we risk losing
business based on a wide range of factors including technology, price, geographic coverage, product
performance, and Customer service. Large Customers continue to seek productivity gains and lower prices
from us and their other suppliers. We may lose business or negatively impact our margins if we are unable
to deliver the best value to our Customers.

Changes in our product mix impacts our financial performance.

We sell products that have varying profit margins. Our financial performance can be impacted
depending on the mix of products we sell during a given period. Our outlook assumes a certain geographic
mix of sales as well as a product mix of sales. If actual results vary from this projected geographic and product
mix of sales, our results could be negatively impacted.

Unavailable or higher cost materials could impact our financial performance.

We obtain raw materials including steel, filter media, petroleum-based products, and other components
from third-party suppliers and tend to carry limited raw material inventories. An unanticipated delay in
delivery by our suppliers could result in the inability to deliver on-time and meet the expectations of our
Customers. This could negatively affect our financial performance. An increase in commodity prices could
also result in lower operating margins.

Unfavorable fluctuations in foreign currency exchange rates could negatively impact our results and
financial position.

We have operations in many countries. Each of our subsidiaries reports its results of operations and
financial position in its relevant functional currency, which is then translated into U.S. dollars.This translated
financial information is included in our consolidated financial statements. The strengthening of the U.S.
dollar in comparison to the foreign currencies of our subsidiaries could have a negative impact on our results
and financial position.

Acquisitions may have an impact on our results.

We have made and continue to pursue acquisitions. We cannot guarantee that these acquisitions will
have a positive impact on our results. These acquisitions could negatively impact our profitability due to
operating and integration inefficiencies, the incurrence of debt, contingent liabilities, and amortization
expenses related to intangible assets. There are also a number of other risks involved in acquisitions. We
could lose key existing Customers, have difficulties in assimilating the acquired operations, assume
unanticipated legal liabilities, or lose key employees.

Costs associated with lawsuits or investigations may have an adverse effect on our results of operations.

We are subject to many laws and regulations in the jurisdictions in which we operate.We routinely incur
costs in order to comply with these laws and regulations.We may be adversely impacted by new or changing
laws and regulations that affect both our operations and our ability to develop and sell products that meet
our Customers’ requirements. We are involved in various product liability, product warranty, intellectual
property, environmental claims, and other legal proceedings that arise in and outside of the ordinary course
of our business. It is not possible to predict the outcome of investigations and lawsuits, and we could incur
judgments, fines, or penalties or enter into settlements of lawsuits and claims that could have an adverse
effect on our business, results of operations, and financial condition in any particular period.

5

Additional tax expense or tax exposure could impact our financial performance.

We are subject to income taxes in various jurisdictions in which we operate. Our tax liabilities are
dependent upon the location of earnings among these different jurisdictions. Our provision for income taxes
and cash tax liability could be adversely affected by numerous factors, including income before taxes being
lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries
with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in
tax laws and regulations. We are also subject to the continuous examination of our income tax returns tax
authorities. The results of audit and examination of previously filed tax returns and continuing assessments
of our tax exposures may have an adverse effect on the Company’s provision for income taxes and cash
tax liability.

Compliance with environmental and product laws and regulations can be costly.

We are subject to many environmental and product laws and regulations in the jurisdiction we operate.
We routinely incur costs in order to comply with these laws and regulations. We may be adversely impacted
by new or changing laws and regulations that affect both our operations and our ability to develop and sell
products that meet our Customers’ requirements.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company’s principal administrative office and research facilities are located in Bloomington, a
suburb of Minneapolis, Minnesota.The Company’s principal European administrative and engineering offices
are located in Leuven, Belgium. The Company also has extensive operations in the Asia-Pacific region.

The Company’s principal manufacturing and distribution activities are located throughout the world.
The following is a summary of the principal plants and other materially important physical properties owned
or leased by the Company.

Americas
Auburn, Alabama (E)
Riverbank, California (I)*
Valencia, California (E)*
Dixon, Illinois
Frankfort, Indiana
Cresco, Iowa
Grinnell, Iowa (E)
Nicholasville, Kentucky
Bloomington, Minnesota
Chesterfield, Missouri (E)*
Chillicothe, Missouri (E)
Philadelphia, Pennsylvania (I)
Greeneville, Tennessee
Baldwin, Wisconsin
Stevens Point, Wisconsin
Sao Paulo, Brazil (E)*
Brockville, Canada (E)*
Aguascalientes, Mexico
Monterrey, Mexico (I)

Joint Venture Facilities
Champaign, Illinois (E)
Jakarta, Indonesia
Dammam, Saudi Arabia (I)

Distribution Centers
Wyong, Australia
Brugge, Belgium
Sao Paulo, Brazil*
Rensselaer, Indiana
Jakarta, Indonesia
Aguascalientes, Mexico

6

Europe / Middle East / Africa
Kadan, Czech Republic (I)
Klasterec, Czech Republic
Domjean, France (E)
Paris, France (E)*
Dulmen, Germany (E)
Haan, Germany (I)
Ostiglia, Italy (E)
Cape Town, South Africa
Johannesburg, South Africa*
Hull, United Kingdom
Leicester, United Kingdom (I)

Australia
Wyong, Australia

Asia
Wuxi, China
New Delhi, India
Gunma, Japan
Rayong, Thailand (I)
Third-Party Logistics Providers
Santiago, Chile
Wuxi, China
Mumbai, India
Chennai, India
Plainfield, Indiana (I)
Gunma, Japan
Singapore
Greeneville, Tennessee (I)

The Company’s properties are utilized for both the Engine and Industrial Products segments except as
indicated with an (E) for Engine or (I) for Industrial. The Company leases certain of its facilities, primarily
under long-term leases. The facilities denoted with an asterisk (*) are leased facilities. In Wuxi, China, and
Bloomington, Minnesota a portion of the activities are conducted in leased facilities. The Company uses
third-party logistics providers for some of its product distribution and neither leases nor owns the facilities.
The Company considers its properties to be suitable for their present purposes, well-maintained, and in
good operating condition.

Item 3. Legal Proceedings

The Company records provisions with respect to identified claims or lawsuits when it is probable that
a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits
are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The
Company believes the recorded reserves in its consolidated financial statements are adequate in light of the
probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial
position, results of operations or liquidity, and the Company does not believe that any of the currently
identified claims or litigation will materially affect its financial position, results of operations or liquidity.

Item 4. Mine Safety Disclosures

Not applicable.

Executive Officers of the Registrant

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 the officer was selected as an executive officer.

Name
_____
Tod E. Carpenter
William M. Cook
Sandra N. Joppa
Norman C. Linnell
Charles J. McMurray
Mary Lynne Perushek
James F. Shaw
Wim Vermeersch
Jay L. Ward
Eugene X. Wu

Age
____
54
60
48
54
59
55
44
47
49
45

Positions and Offices Held
______________________________________________________
Senior Vice President, Engine Products
Chairman, President and Chief Executive Officer
Vice President, Human Resources
Vice President, General Counsel and Secretary
Senior Vice President, Chief Administrative Officer
Vice President and Chief Information Officer
Vice President and Chief Financial Officer
Vice President, Europe and Middle East
Senior Vice President, Industrial Products
Vice President, Asia Pacific

First Fiscal Year
Appointed as an
Executive Officer
_________________
2008
1994
2006
1996
2003
2007
2012
2012
2006
2012

Mr. Carpenter joined the Company in 1996 and has held various positions, including Gas Turbine
Systems General Manager from 2002 to 2004; General Manager, Industrial Filtration Systems (IFS) Sales
from 2004 to 2006; General Manager, IFS Americas in 2006; Vice President, Global IFS from 2006 to 2008;
and Vice President, Europe and Middle East from 2008 to 2011. In October 2011, Mr. Carpenter was
appointed Senior Vice President, Engine Products.

Mr. Cook joined the Company in 1980 and has held various positions, including CFO and Senior Vice
President, International from 2001 to 2004 and President and CEO from 2004 to 2005. Mr. Cook was
appointed Chairman, President and CEO in July 2005.

Ms. Joppa was appointed Vice President, Human Resources in November 2005. Prior to that time,
Ms. Joppa held various positions at General Mills, a consumer food products company, from 1989 to 2005,
including service as Director of Human Resources for several different operating divisions from 1999
to 2005.

Mr. Linnell joined the Company in 1996 as General Counsel and Secretary and was appointed Vice

President, General Counsel and Secretary in 2000.

7

Mr. McMurray joined the Company in 1980 and has held various positions, including Director, Global
Information Technology from 2001 to 2003; Vice President, Human Resources from 2004 to 2005; Vice
President, Information Technology, Europe, South Africa, and Mexico from 2005 to 2006; and Senior Vice
President Industrial Products from 2006 to 2011. In 2011, Mr. McMurray was appointed Senior Vice
President and Chief Administrative Officer.

Ms. Perushek was appointed Vice President and Chief Information Officer in November 2006. Prior to
that time, Ms. Perushek was Vice President of Global Information Technology at H.B. Fuller Company, a
worldwide manufacturer of adhesive products, from 2005 to 2006 and Chief Information Officer for Young
America Corporation, a marketing company, from 1999 to 2004.

Mr. Shaw joined the Company in 2004 and has held various positions, including Director, Corporate
Compliance/Internal Audit, and Corporate Controller and Principal Accounting Officer from 2004 to 2011.
Mr. Shaw was appointed Vice President and Chief Financial Officer effective November 2011. Prior to
joining Donaldson, Mr. Shaw held various positions at Deloitte & Touche, LLP and Arthur Andersen, LLP.

Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, Gas
Turbine Systems, Asia Pacific from 2000 to 2005; Manager, Aftermarket and Service IFS, Belgium from
2005 to 2006; Manager, IFS, Belgium from 2006 to 2007; Director, Gas Turbine Systems, Europe, Middle East
and North Africa, from 2007 to 2010; and Director, Engine, Europe, Middle East and North Africa from 2010
to 2011. Mr. Vermeersch was appointed Vice President, Europe and Middle East in January 2012.

Mr. Ward joined the Company in 1998 and has held various positions, including Director, Operations
from 2001 to 2003; Director, Product and Business Development, IFS Group from 2003 to 2004; Managing
Director, Europe from 2004 to 2006; and Vice President, Europe and Middle East from 2006 to 2008.
Mr. Ward was appointed Senior Vice President, Engine Products in August 2008 and was appointed Senior
Vice President, Industrial Products, in October 2011.

Mr. Wu was appointed Vice President, Asia Pacific in January 2012. Prior to that time, Mr. Wu was the
Global Vice President and President of Asia Pacific at Greif, Inc., a global leader in industrial packaging
products and services, from 2005 to 2010; and Chief Advisor to Chairman of the Board of Wanhua Industrial
Group, a global chemical industry leader, from 2010 to 2011.

8

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

The common shares of the Company are traded on the New York Stock Exchange under the symbol
DCI. The amount and frequency of all cash dividends declared on the Company’s common stock for Fiscal
2013 and 2012 appear in Note Q of the Notes to Consolidated Financial Statements on page 56. The
Company’s dividend payout ratio target is approximately 30 percent to 40 percent of the average earnings
per share of the last three years. This is a change from the previous target of 25 percent to 30 percent of the
average earnings per share of the last three years. This guidance is expected to be used for future dividend
payouts. As of September 25, 2013, there were 1,862 shareholders of record of common stock.

The low and high sales prices for the Company’s common stock for each full quarterly period during

Fiscal 2013 and 2012 were as follows:

Fiscal 2013
Fiscal 2012

First Quarter
________________
$30.90 – 38.18
$23.19 – 33.33

Second Quarter
________________
$31.83 – 38.30
$30.48 – 36.52

Third Quarter
________________
$34.26 – 38.08
$34.02 – 38.89

Fourth Quarter
________________
$34.35 – 39.36
$30.51 – 36.82

The following table sets forth information in connection with purchases made by, or on behalf of, the
Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the
quarterly period ended July 31, 2013.

Period
______
May 1 – May 31, 2013 . .
June 1 – June 30, 2013 . .
July 1 – July 31, 2013 . . .
Total. . . . . . . . . . . . . . . . .

Total Number of
Shares Purchased (1)
__________________

—
1,037,194
152,067
__________________
1,189,261
__________________
__________________

Average Price
Paid per Share
_____________
$ —
$35.69
$35.53
$35.67

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
________________

—
1,031,318
135,034
________________
1,166,352
________________
________________

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
________________
3,737,155
2,705,837
2,570,803
2,570,803

(1) On March 26, 2010, the Company announced that the Board of Directors authorized the repurchase of up to
16.0 million shares of common stock. This repurchase authorization is effective until terminated by the Board of
Directors. There were no repurchases of common stock made outside of the Company’s current repurchase
authorization during the quarter ended July 31, 2013. However, the “Total Number of Shares Purchased” column
of the table above includes 22,909 previously owned shares tendered by option holders in payment of the exercise
price of options during the quarter. While not considered repurchases of shares, the Company does at times
withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as
a result of exercising stock options or payment of equity-based awards.

On January 27, 2012, the Company announced that its Board of Directors declared a two-for-one stock
split effected in the form of a 100 percent stock dividend. The stock split was distributed March 23, 2012, to
stockholders of record as of March 2, 2012. Earnings and dividends per share and weighted average shares
outstanding are presented in this Form 10-K after the effect of the 100 percent stock dividend. The two-for-
one stock split is reflected in the share amounts in all periods presented in the table above and elsewhere
in this annual Form 10-K.

9

The graph below compares the cumulative total stockholder return on the Company’s common stock
for the last five fiscal years with the cumulative total return of the Standard & Poor’s 500 Stock Index and
the Standard & Poor’s Industrial Machinery Index. The graph and table assume the investment of $100 in
each of the Company’s common stock and the specified indexes at the beginning of the applicable period,
and assume the reinvestment of all dividends.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Donaldson Company, Inc., the S&P 500 Index, and the S&P Industrial Machinery Index

l DONALDSON
m S&P 500
n S&P Industrial Machinery

l

n
m

nl
m

l
n
m

ml
n

n
l
m

S
R
A
L
L
O
D

200

150

100

l
n

50

7/08

7/00

7/10

7/11

7/12

7/13

Donaldson Company, Inc. . . . . . .
S&P500 . . . . . . . . . . . . . . . . . . . . .
S&P Industrial Machinery . . . . . .

Item 6. Selected Financial Data

__________________________________________________________________________
2008
2013
________
_________
$100.00
$170.03
100.00
148.71
100.00
179.57

Year ended July 31,
2010
2011
_________
_________
$107.86
$127.12
91.11
109.02
100.84
121.59

2012
_________
$158.25
118.97
127.98

2009
_________
$85.39
80.04
76.83

The following table sets forth selected financial data for each of the fiscal years in the five-year period

ended July 31, 2013 (in millions, except per share data):

Net sales . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . .
Cash dividends declared per share . . .
Cash dividends paid per share . . . . . . .

Year ended July 31,
__________________________________________________________________
2011
2013
2009
_________
_________
_________
$1,868.6
$2,294.0
$2,436.9
131.9
225.3
247.4
0.83
1.64
1.43
1,334.0
1,726.1
1,743.6
253.7
205.7
102.8
0.230
0.280
0.450
0.228
0.268
0.410

2012
_________
$2,493.2
264.3
1.73
1,730.1
203.5
0.335
0.320

2010
_________
$1,877.1
166.2
1.05
1,499.5
256.2
0.240
0.235

10

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following discussion of the Company’s financial condition and results of operations should be read
in conjunction with the Consolidated Financial Statements and Notes thereto and other financial
information included elsewhere in this report.

Overview

The Company is a worldwide manufacturer of filtration systems and replacement parts.The Company’s
core strengths are leading filtration technology, strong Customer relationships, and its global presence. The
Company operates through two reporting segments, Engine Products and Industrial Products, and has a
product mix including air and liquid filtration systems and exhaust and emission control products. As a
worldwide business, the Company’s results of operations are affected by conditions in the global economic
environment. Under most economic conditions, the Company’s market diversification between its OEM and
replacement parts Customers, its diesel engine and industrial end markets, and its North American and
international end markets has helped to limit the impact of weakness in any one product line, market, or
geography on the consolidated results of the Company.

The Company reported sales in Fiscal 2013 of $2,436.9 million, down 2.3 percent from $2,493.2 million
in the prior year. The Company’s results were negatively impacted by foreign currency translation, which
decreased sales by $32.2 million. Excluding the current year impact of foreign currency translation,
worldwide sales decreased 1.0 percent.

Although net sales excluding foreign currency translation is not a measure of financial performance
under generally accepted accounting principles in the United States of America (U.S.) (U.S. GAAP), the
Company believes it is useful in understanding its financial results and provides a comparable measure for
understanding the operating results of the Company between different fiscal periods excluding the impact
of foreign currency translation.The following is a reconciliation to the most comparable U.S. GAAP financial
measure of this non-GAAP financial measure (in millions):

Year ended July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net sales change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Sales
_________
$2,294.0

237.9
(38.7)
_________
$2,493.2
_________
_________

(24.1)
(32.2)
_________
$2,436.9
_________
_________

Percent
Change in
Net Sales
_________
NA

10.4%
(1.7)%
_________
8.7%
_________
_________

(1.0)%
(1.3)%
_________
(2.3)%
_________
_________

The Company also reported net earnings in Fiscal 2013 of $247.4 million, a decrease of 6.4 percent from
$264.3 million in the prior year. The Company’s net earnings were negatively impacted by foreign currency
translation, which decreased net earnings by $2.1 million. Excluding the current year impact of foreign
currency translation, net earnings decreased 5.6 percent.

11

Although net earnings excluding foreign currency translation is not a measure of financial performance
under U.S. GAAP, the Company believes it is useful in understanding its financial results and provides a
comparable measure for understanding the operating results of the Company between different fiscal
periods excluding the impact of foreign currency translation. The following is a reconciliation to the most
comparable U.S. GAAP financial measure of this non-U.S. GAAP financial measure (in millions):

Year ended July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net earnings change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Earnings
_________
$225.3

43.0
(4.0)
_________
$264.3
_________
_________

(14.8)
(2.1)
_________
$247.4
_________
_________

Percent
Change in
Net Earnings
_________
NA

19.1%
(1.8)%
_________
17.3%
_________
_________

(5.6)%
(0.8)%
_________
(6.4)%
_________
_________

The Company reported diluted earnings per share of $1.64, a 5.2 percent decrease from $1.73 in the

prior year.

Following are net sales by product within the Company’s Engine and Industrial Products segments and
a comparison of earnings before income taxes. Corporate and Unallocated includes corporate expenses
determined to be non-allocable to the segments and interest income and expense. See further discussion of
segment information in Note L of the Company’s Notes to Consolidated Financial Statements.

Engine Products segment:

Off-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aftermarket Products* . . . . . . . . . . . . . . . . . . . . . . . . . .
Retrofit Emissions Products . . . . . . . . . . . . . . . . . . . . . .
Aerospace and Defense Products . . . . . . . . . . . . . . . . .
Total Engine Products segment . . . . . . . . . . . . . . . . .

Industrial Products segment:

Industrial Filtration Solutions Products . . . . . . . . . . . .
Gas Turbine Products. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Applications Products . . . . . . . . . . . . . . . . . . . .
Total Industrial Products segment. . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
_________

2012
_________
(thousands of dollars)

2011
_________

$ 358,834
128,446
900,419
12,298
104,191
_________
1,504,188
_________
_________

529,751
232,922
170,087
_________
932,760
_________
$2,436,948
_________
_________

$ 376,870
163,934
907,306
15,354
106,676
_________
1,570,140
_________
_________

553,453
180,669
188,986
_________
923,108
_________
$2,493,248
_________
_________

$ 327,557
127,107
861,393
19,555
104,883
_________
1,440,495
_________
_________

507,646
154,726
191,162
_________
853,534
_________
$2,294,029
_________
_________

*

Includes replacement part sales to the Company’s OEM Customers

2013
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .
2012
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .
2011
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .

Engine
Products
____________

Industrial
Products
____________

Corporate &
Unallocated
___________

Total
Company
________

(thousands of dollars)

$1,504,188
220,892

$932,760
139,108

$

— $2,436,948
348,181

(11,819)

$1,570,140
227,941

$923,108
149,249

$

— $2,493,248
370,780

(6,410)

$1,440,495
211,255

$853,534
123,871

$

— $2,294,029
312,263

(22,863)

12

Many factors contributed to the Company’s results for each of the Company’s reportable segments for
Fiscal 2013, including a weakening in economic conditions in many of the Company’s end markets, partially
offset by the Company’s program of Continuous Improvement initiatives and emerging market growth.

In the Engine Products segment, the Company experienced decreased sales in most end-markets.
Earnings before income taxes as a percentage of Engine Products segment sales of 14.7 percent increased
slightly from 14.5 percent in the prior year. The percentage earnings increase for the twelve months ended
July 31, 2013, was driven by benefits from the Company’s ongoing Continuous Improvement initiatives and
a higher percentage of sales coming from replacement filters, partially offset by increased incremental
expenses related to the Company’s Strategic Business Systems project (which is the Company’s multi-year
implementation of a global enterprise resource planning system), higher pension and insurance costs, and
lower fixed cost absorption as a result of lower production volumes (primarily in the first half of the year).
In addition, the Engine Products segment incurred $1.7 million in restructuring expenses compared to none
in the prior year. These expenses related to employee severance costs associated with a reduction in
workforce. Off-Road Product sales decreased by 4.8 percent driven by a decline in the mining equipment
markets and weakness in the construction equipment markets, which were partially offset by strength in the
agriculture equipment markets across the globe. On-Road Products sales decreased by 21.6 percent as a
result of reduced truck builds by the Company’s OEM Customers in the U.S., Europe, and Japan.
Aftermarket Products sales decreases were driven by lower equipment utilization rates in the mining,
construction, and transportation industries.

In the Industrial Products segment, where many product lines are later economic cycle businesses, sales
increased primarily due to strong global demand for Gas Turbine Systems products. Earnings before income
taxes as a percentage of Industrial Products segment sales of 14.9 percent decreased from 16.2 percent in
the prior year. The decline in earnings as a percentage of sales over the prior year was driven by a shift in
product mix to large first fit Gas Turbine projects which generally utilize outside subcontractors, less
absorption of fixed manufacturing costs in businesses other than Gas Turbine Systems, increased incremental
expenses related to the Company’s Strategic Business Systems project, and higher pension and insurance
costs, partially offset by benefits from the Company’s ongoing Continuous Improvement initiatives. In
addition, the Industrial Products segment incurred $2.3 million in restructuring expenses compared to none
in the prior year. These expenses related to employee severance costs associated with a reduction in
workforce. Gas Turbine Products sales increased by 28.9 percent due to strong Customer demand for large
gas turbine power generation projects as a result of increased global electricity requirements. In Industrial
Filtration Solutions Products, sales declined due to reduced capital investment by manufacturers. Sales in
Special Applications Products decreased by 10.0 percent due to reduced demand for filtration products
serving the electronics industries and weakness in industrial end markets resulting in lower sales of the
Company’s membrane products.

Outlook

• The Company forecasts its total Fiscal 2014 sales to be between $2.45 and $2.55 billion, or an
increase of 1 to 5 percent from Fiscal 2013. Foreign currency translation is based on the Company’s
forecasted rates for the Euro at US$1.32 and 97 Yen to the US$.

• The Company’s full year Fiscal 2014 operating margin is forecasted to be 14.1 to 14.9 percent.
Included in this forecast is approximately $30 million in expense increases for our Strategic Business
Systems project and incentive compensation.

• The Company’s full year Fiscal 2014 tax rate is projected to be between 28 and 31 percent.

• The Company forecasts its full year Fiscal 2014 EPS to be between $1.65 and $1.85.

• The Company projects that cash generated by operating activities will be between $275 and
$305 million. Capital spending is estimated to be approximately $90 million. The Company
anticipates repurchasing between 2 and 4 percent of its diluted outstanding shares in FY14.

13

Fiscal 2013 Compared to Fiscal 2012

Engine Products Segment The Engine Products segment sells to OEMs in the construction, mining,
agriculture, aerospace, defense, and truck markets and to independent distributors, OEM dealer networks,
private label accounts, and large equipment fleets. Products include air filtration systems, exhaust and
emissions systems, liquid filtration systems including hydraulics, fuel, lube, and replacement filters.

Sales for the Engine Products segment were $1,504.2 million, a decrease of 4.2 percent from
$1,570.1 million in the prior year with decreases across all businesses. Fiscal 2013 Engine Products sales
decreased by 11.3 percent in Asia, 3.6 percent in the Americas, and were flat in Europe compared to
Fiscal 2012. The impact of foreign currency decreased total sales by $23.8 million, or 1.6 percent.

Worldwide sales of Off-Road Products were $358.8 million, a decrease of 4.8 percent from $376.9 million
in the prior year. Sales declined 18.5 percent in Asia and 7.7 percent in the Americas, partially offset by
growth of 3.0 percent in Europe. The sales decreases were driven by a decline in the mining equipment
markets as commodity prices moderated and reductions in mining investments kept production of new
mining equipment below prior year levels. Reductions in large non-residential construction and non-building
infrastructure projects lead to lower demand for larger construction equipment. These decreases were
partially offset by strength in the agriculture equipment market globally.

Worldwide sales of On-Road Products were $128.4 million, a decrease of 21.6 percent from
$163.9 million in the prior year. Sales decreased 31.4 percent in the Americas, 19.7 percent in Asia, and
6.7 percent in Europe. Sales decreases were a result of a decrease in global truck builds, especially in the U.S,
as well as OEM Customer initiatives to reduce inventory. According to published industry data, North
American Class 8 truck build rates decreased 19.0 percent and medium-duty truck build rates increased
4.9 percent over the prior year.

Worldwide sales of Aftermarket Products were $900.4 million, a decrease of 0.8 percent from
$907.3 million in the prior year. Sales in Asia and Europe decreased 4.4 percent and 1.8 percent, respectively,
while sales in the Americas grew 4.1 percent. The overall sales decreases were primarily driven by lower
utilization rates of equipment across the on-road and off-road equipment markets along with the negative
impacts of foreign currency translation.

Worldwide sales of Retrofit Emissions Products were $12.3 million, a decrease of 19.9 percent from
$15.4 million in the prior year. The Company’s Retrofit Emissions Products sales are solely in the U.S. The
sales of these products are highly dependent on government regulations. Sales were impacted by a lack of
government funding availability and delayed government verification of new products throughout
Fiscal 2013.

Worldwide sales of Aerospace and Defense Products were $104.2 million, a decrease of 2.3 percent
from $106.7 million in the prior year. Sales of Aerospace and Defense Products were relatively flat over the
prior year in Europe, while sales decreased 2.2 percent in the Americas. The sales decrease was due to a
continued slowdown in U.S. military spending, which is forecasted to continue in Fiscal 2014.

Industrial Products Segment The Industrial Products segment sells to various industrial distributors,
dealers, and end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring clean air. Products
include dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas
turbines, PTFE membrane-based products, and specialized air and gas filtration systems for various
applications including computer hard disk drives and other electronic equipment.

Sales for the Industrial Products segment were $932.8 million, an increase of 1.0 percent from
$923.1 million in the prior year driven by 28.9 percent sales growth in Gas Turbine Products, partially offset
by sales decreases in Special Applications Products and Industrial Filtration Solutions Products of
10.0 percent and 4.3 percent, respectively. Fiscal 2013 Industrial Products sales increased by 2.9 percent in
Asia, 0.9 percent in the Americas, and were flat in Europe compared to Fiscal 2012. The impact of foreign
currency decreased sales by $8.4 million, or 0.9 percent.

14

Worldwide sales of Industrial Filtration Solutions Products were $529.8 million, a 4.3 percent decrease
from $553.5 million in the prior year. Sales decreased 13.5 percent and 6.4 percent in Asia and Europe,
respectively, partially offset by a sales increase in the Americas of 3.4 percent, compared to the prior year.
Demand for new filtration equipment was weak due to lower capital investment by manufacturers in most
of the Company’s major regions. This was partially offset by increased sales of replacement filters for
equipment installed previously. Sales were also negatively impacted by foreign currency translation. The
externally published durable goods index in the U.S. increased 2.7 percent during Fiscal 2013 as compared
to last year.

Worldwide sales of Gas Turbine Products were $232.9 million, an increase of 28.9 percent from
$180.7 million in the prior year. Gas Turbine Products sales are typically large systems and, as a result, the
Company’s shipments and revenues fluctuate from period to period. Sales of large Gas Turbine Products
were strong due to high demand for the large systems used in power generation primarily in the Middle East
and Asia. The Company also experienced moderate demand for its smaller systems used in oil and gas
applications and increased sales of replacement filters for systems previously installed. The Company
anticipates its Gas Turbine Products’ sales will decrease 18 to 24 percent from record sales of in Fiscal 2013
due to the forecasted slowdown in large turbine power generation projects by its Customers in Fiscal 2014.

Worldwide sales of Special Applications Products were $170.1 million, a 10.0 percent decrease from
$189.0 million in the prior year. Sales decreased 13.0 percent and 11.7 percent in Europe and Asia,
respectively, from the prior year, partially offset by a sales increase in the Americas of 1.0 percent. The sales
decline was primarily due to a global decline in computer sales which resulted in lower demand for the
Company’s hard disk drive filters. This lower demand for hard disk drive filters is forecasted to continue in
Fiscal 2014. According to the International Data Corporation, the number of disk drives produced in Fiscal
2013 declined 9.2 percent from the prior year period. In addition, weakness in industrial end markets
resulted in lower sales of the Company’s membrane products. Capital spending trends have been weak due
to the recession in Europe, declines in Asia, and a slowdown in the U.S.

Consolidated Results The Company reported net earnings for Fiscal 2013 of $247.4 million compared
to $264.3 million in Fiscal 2012, a decrease of 6.4 percent. Diluted net earnings per share were $1.64, down
5.2 percent from $1.73 in the prior year. The Company’s operating income of $343.3 million decreased from
prior year operating income of $363.0 million by 5.4 percent.

The table below shows the percentage of total operating income contributed by each segment for each
of the last three fiscal years. Corporate and Unallocated includes corporate expenses determined to be non-
allocable to the segments, interest income, and interest expense:

Engine Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Unallocated . . . . . . . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012
2013
2011
______
______
______
59.1%
60.8%
64.1%
38.7%
40.3%
39.7%
0.6%
(0.5)%
(2.8)%
______
______
______
100.0% 100.0% 100.0%
______
______
______

International operating income, prior to corporate expense allocations, totaled 74.0 percent of
consolidated operating income in Fiscal 2013 as compared to 69.7 percent in Fiscal 2012.Total international
operating income increased 4.3 percent from the prior year. The table below shows the percentage of total
operating income contributed by each major geographic region for each of the last three fiscal years:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012
2013
2011
______
______
______
30.3%
26.0%
19.8%
29.9%
31.6%
31.0%
39.6%
31.1%
30.3%
8.7%
12.1%
9.6%
______
______
______
100.0% 100.0% 100.0%
______
______
______

For more information regarding the Company’s net sales by geographic region, see Note L to the

Consolidated Financial Statements.

15

Gross margin for Fiscal 2013 was 34.8 percent, or a 0.2 percent decrease from 35.0 percent in the prior
year. The decrease in gross margin is primarily attributable to the mix impact of large Gas Turbine project
shipments and the impact of lower absorption of fixed costs due to the lower production volumes in the
Company’s plants. These decreases were partially offset by the benefits from the Company’s ongoing
Continuous Improvement initiatives, which include Lean, Kaizen, Six Sigma, and cost reduction efforts.
Within gross profit, the Company incurred $1.6 million in restructuring charges compared to minimal
restructuring charges during Fiscal 2012. The Fiscal 2013 expenses were employee severance costs related
to a reduction in workforce.

The principal raw materials that the Company uses are steel, filter media, and petroleum-based products.
Purchased raw materials represents approximately 60 to 65 percent of the Company’s cost of goods sold. Of
that amount, steel, including fabricated parts, represents approximately 25 percent. Filter media represents
approximately 15 to 20 percent and the remainder is primarily made up of petroleum-based products and
other components.The cost the Company paid for steel during Fiscal 2013, varied by grade, but in aggregate,
it slightly decreased during the fiscal year.The Company’s cost of filter media also varies by type and slightly
increased at the end of the fiscal year.The cost of petroleum-based products (plastics, rubber, and adhesives)
was generally flat. Commodity prices in aggregate generally decreased throughout Fiscal 2013 as compared
to Fiscal 2012. The Company anticipates a moderately unfavorable impact from commodity prices in Fiscal
2014, as compared to Fiscal 2013, specifically for steel, petroleum-based products, and media based on recent
market information for purchased commodities. The Company strives to recover or offset material cost
through selective price increases to its Customers and through the Company’s Continuous Improvement
initiatives, which include material substitutions, process improvements, and product redesigns.

Operating expenses for Fiscal 2013 were $503.8 million or 20.7 percent of sales, as compared to
$510.7 million or 20.5 percent in the prior year. Restructuring expenses included in operating expenses were
$2.4 million for the year, which were employee severance costs related to a reduction in workforce. The
Company’s ongoing cost containment actions and lower incentive compensation helped to offset the
restructuring expenses, higher pension expenses, and the incremental expenses related to its Strategic
Business Systems project.

Interest expense of $10.9 million decreased $0.6 million from $11.5 million in the prior year. Other
income, net totaled $15.8 million in Fiscal 2013, down from $19.3 million in the prior year. The decrease of
$3.5 million in other income was driven by a $1.7 million decrease in interest income, a $1.6 million decrease
in foreign exchange gains, and a $1.0 million decrease in royalty income.

The effective tax rate for Fiscal 2013 was 29.0 percent compared to 28.7 percent in Fiscal 2012. The
increase in effective tax rate is primarily due to the incremental benefits derived in Fiscal 2012 from the
favorable settlement of tax audits. This was partially offset by an increase in tax benefits from international
operations and the retroactive reinstatement of the Research and Experimentation Credit in the U.S. in the
current year.

Total backlog at July 31, 2013, was $715.8 million, down 10.4 percent from the same period in the prior
year. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not
always indicative of future results for a number of reasons, including short lead times in the Company’s
replacement parts businesses and the timing of the receipt of orders in many of the Company’s Engine
OEM and Industrial markets. In the Engine Products segment, total open order backlog decreased
6.7 percent from the prior year. In the Industrial Products segment, total open order backlog decreased
18.4 percent from the prior year. Because some of the change in backlog can be attributed to a change in
the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates,
it may not necessarily correspond to future sales.

Fiscal 2012 Compared to Fiscal 2011

Engine Products Segment The Engine Products segment sells to OEMs in the construction, mining,
agriculture, aerospace, defense, and truck markets and to independent distributors, OEM dealer networks,
private label accounts, and large equipment fleets. Products include air filtration systems, exhaust and
emissions systems, liquid filtration systems including hydraulics, fuel, lube, and replacement filters.

16

Sales for the Engine Products segment were $1,570.1 million, an increase of 9.0 percent from
$1,440.5 million in the prior year. Engine Products sales in the U.S. increased by 11.3 percent in Fiscal 2012
compared to Fiscal 2011. International Engine Products sales increased 6.9 percent from the prior year. The
impact of foreign currency decreased total sales by $24.3 million, or 1.7 percent. Earnings before income
taxes as a percentage of Engine Products segment sales of 14.5 percent decreased from 14.7 percent in the
prior year.The percentage earnings decrease for the twelve months ended July 31, 2012, was driven by a shift
in product mix from replacement parts to first fit products, which carry a lower margin, partially offset by
ongoing Continuous Improvement initiatives.

Worldwide sales of Off-Road Products were $376.9 million, an increase of 15.1 percent from
$327.6 million in the prior year. Sales in the U.S. increased 17.4 percent over the prior fiscal year.
Internationally, sales of Off-Road Products were up 13.5 percent from the prior year, with sales increasing
in Europe and Asia by 12.9 percent and 12.3 percent, respectively. The sales increases were driven by higher
demand for agriculture and mining equipment, and improved sales of heavy construction equipment.

Worldwide sales of On-Road Products were $163.9 million, an increase of 29.0 percent from
$127.1 million in the prior year. On-Road Products sales in the U.S. increased 39.3 percent from the prior
year. International On-Road Products sales increased 15.3 percent from the prior year, driven by increased
sales in Asia of 20.8 percent, as a result of the tsunami recovery in Japan.The sales increase in North America
was the combined result of an increase in Customer truck build rates and higher filter content per truck.
According to published industry data, North American Class 8 truck build rates increased 48.5 percent and
medium-duty truck build rates increased 24.0 percent over the prior year.

Worldwide Engine Aftermarket Products sales of $907.3 million increased 5.3 percent from
$861.4 million in the prior year. Sales in the U.S increased 7.7 percent over the prior year. International sales
increased 3.5 percent primarily driven by sales increases in Latin America, Europe, and Asia of 15.7 percent,
2.7 percent, and 1.2 percent, respectively. The sales increases in the U.S., Latin America, and Europe were
attributable to improved On-Road and Off-Road equipment utilization rates, the Company’s increased
distribution capabilities, dealer-distributor network growth, improved market position, and the continued
increase in the percentage of equipment in the field that uses the Company’s proprietary filtration systems.
The Company began to see moderation beginning in the second quarter of Fiscal 2012 in the Chinese
economy, which negatively impacted Aftermarket Products sales in China as well as other regions of Asia.

Worldwide sales of Retrofit Emissions Products were $15.4 million, a decrease of 21.5 percent from
$19.6 million in the prior year. The Company’s Retrofit Emissions Products sales are solely in the U.S. The
sales of these products are highly dependent on government regulations and a lack of funding availability
throughout Fiscal 2012.

Worldwide sales of Aerospace and Defense Products were $106.7 million, a 1.7 percent increase from
$104.9 million in the prior year. Sales in the U.S. increased 1.4 percent and international sales increased
2.7 percent over the prior year. The sales increase was due to improvements in Aerospace Products demand
which was mostly offset by a continued slowdown in U.S. military activity.

Industrial Products Segment The Industrial Products segment sells to various industrial dealers,
distributors, and end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring clean air.
Products include dust, fume, and mist collectors, compressed air purification systems, air filtration systems
for gas turbines, PTFE membrane-based products, and specialized air and gas filtration systems for various
applications including computer hard disk drives and semi-conductor manufacturing.

Sales for the Industrial Products segment were $923.1 million, an increase of 8.2 percent from
$853.5 million in the prior year. International Industrial Products sales increased 3.9 percent and sales in the
U.S. increased 17.8 percent from the prior year. The impact of foreign currency decreased sales by
$14.4 million, or 1.8 percent. Earnings before income taxes as a percentage of Industrial Products segment
sales of 16.2 percent increased from 14.5 percent in the prior year. The improvement in earnings as a
percentage of sales over the prior year was driven by better leverage of fixed operating costs and the
continued successful execution on larger projects, both of which were partially offset by the impact of the
flood in Thailand. In addition, the Industrial Products segment did not incur any restructuring expenses as
compared to $0.7 million in the prior year.

17

Worldwide sales of Industrial Filtration Solutions Products of $553.5 million increased 9.0 percent from
$507.6 million in the prior year. Sales in the U.S., Asia and Europe increased 16.8 percent, 7.8 percent, and
2.4 percent, respectively. The Company continued to experience strong market conditions, especially in the
U.S., for its Industrial Filtration Solutions resulting in continued strong demand for the Company’s industrial
dust collectors and replacement parts. The externally published durable goods index in the U.S. increased
8.4 percent during Fiscal 2012 as compared to last year.

Worldwide sales of Gas Turbine Products were $180.7 million, an increase of 16.8 percent from
$154.7 million in the prior year. Gas Turbine Products sales are typically large systems and, as a result, the
Company’s shipments and revenues fluctuate from period to period. Sales of large Gas Turbine Products for
power generation were stable for the first six months of Fiscal 2012 before increasing in the second half of
the fiscal year. The Company also experienced additional demand for its smaller systems used in oil and gas
applications and for replacement filters.

Worldwide sales of Special Applications Products were $189.0 million, a 1.1 percent decrease from
$191.2 million in the prior year. Domestic Special Application Products sales increased 9.6 percent.
International sales of Special Application Products decreased 2.8 percent over the prior year, primarily in
Asia which decreased 3.6 percent. The sales decline was due to a decrease in demand for the Company’s
products serving the electronics industry which was affected by the flooding in Thailand in the second half
of calendar 2011.

Consolidated Results The Company reported net earnings for Fiscal 2012 of $264.3 million compared
to $225.3 million in Fiscal 2011, an increase of 17.3 percent. Diluted net earnings per share were $1.73, up
21.0 percent from $1.43 in the prior year. The Company’s operating income of $363.0 million increased from
prior year operating income of $315.3 million by 15.1 percent.

The table below shows the percentage of total operating income contributed by each segment for each
of the last three fiscal years. Corporate and Unallocated includes corporate expenses determined to be non-
allocable to the segments, interest income, and interest expense:

Engine Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial Products . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Unallocated . . . . . . . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012
2010
2011
______
______
______
59.1%
63.1%
64.1%
40.3%
38.7%
37.8%
0.6%
(2.8)% (0.9)%
______
______
______
100.0% 100.0% 100.0%
______
______
______

International operating income, prior to corporate expense allocations, totaled 69.7 percent of consolidated op-
erating income in Fiscal 2012 as compared to 80.2 percent in Fiscal 2011. Total international operating income in-
creased 0.1 percent from the prior year. The table below shows the percentage of total operating income contributed
by each major geographic region for each of the last three fiscal years:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2010
2012
2011
______
______
______
19.7%
30.3%
19.8%
24.6%
29.9%
31.0%
45.3%
31.1%
39.6%
10.4%
8.7%
9.6%
______
______
______
100.0% 100.0% 100.0%
______
______
______

Gross margin for Fiscal 2012 was 35.0 percent, a decrease from 35.5 percent in the prior year. The
decrease in gross margin is attributable to the combination of the higher level of first fit and project sales
which generally carry a lower margin, the Company’s planned ramp-up for its newest plant in Mexico, lower
fixed cost absorption in Asia, and increased purchased commodity costs from higher prices during the first
half of the year and unfavorable foreign exchange rates in the second half of the year. These decreases were
partially offset by the benefits from the Company’s ongoing Continuous Improvement initiatives. Within
gross profit, the Company incurred minimal restructuring and asset impairment charges during Fiscal 2011.

18

The principal raw materials that the Company uses are steel, filter media, and petroleum-based products.
Purchased raw materials represents approximately 60 to 65 percent of the Company’s cost of goods sold. Of
that amount, steel, including fabricated parts, represents approximately 25 percent. Filter media represents
approximately 15 to 20 percent and the remainder is primarily made up of petroleum-based products and
other components.The cost the Company paid for steel during Fiscal 2012, varied by grade, but in aggregate,
it slightly decreased in the second half of Fiscal 2012. The Company’s cost of filter media also varies by type
but it moderated slightly during the fiscal year since reaching a historical high at the end of Fiscal 2011.
Petroleum-based products were generally flat. Commodity prices in aggregate generally decreased
throughout Fiscal 2012 after strong increases in the last half of Fiscal 2011. The impact was moderated by
certain long term supply arrangements. However, the full year impact of commodity prices was still
unfavorable to Fiscal 2011. The Company strives to recover or offset material cost through selective price
increases to its Customers and through the Company’s Continuous Improvement initiatives, which include
material substitution, process improvement, and product redesigns.

Operating expenses for Fiscal 2012 were $510.7 million or 20.5 percent of sales, as compared to
$498.5 million or 21.7 percent in the prior year. The decrease in operating expenses as a percentage of sales
is driven by the higher volume of sales. In addition, the current year had reduced distribution and warranty
costs as a percent of sales.The prior year included $0.7 million in restructuring and asset impairment charges.

Interest expense of $11.5 million decreased $1.0 million from $12.5 million in the prior year. Net other
income totaled $19.3 million in Fiscal 2012, up from $9.5 million in the prior year.The increase of $9.8 million
in other income was driven by an increase in foreign exchange gains of $6.3 million, an increase of
$1.2 million in interest income, an increase of $0.6 million in income from unconsolidated affiliates, an
increase of $0.4 million in royalty income, and an insurance recovery of $1.3 million.

The effective tax rate for Fiscal 2012 was 28.7 percent compared to 27.9 percent in Fiscal 2011. The
increase in effective tax rate is primarily due to an unfavorable shift in the mix of earnings between tax
jurisdictions, which increased the underlying average tax rate over the prior year to 30.8 percent from
29.7 percent. The increase in the underlying average tax rate was partially offset by incremental discrete
benefits. Fiscal 2012 contained $7.7 million of discrete tax benefits from the favorable settlements of tax
audits, the expiration of statutes in various jurisdictions, and other discrete items. Fiscal 2011 contained
$5.8 million of discrete tax benefits, primarily from the release of reserves after the favorable conclusions
of foreign tax audits, the expiration of statutes in various jurisdictions, and the positive impact of dividends
from some foreign subsidiaries.

Total backlog at July 31, 2012, was $798.6 million, down 0.5 percent from the same period in the prior
year. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not
always indicative of future results for a number of reasons, including short lead times in the Company’s
replacement parts businesses and the timing of the receipt of orders in many of the Company’s Engine
OEM and Industrial markets. In the Engine Products segment, total open order backlog decreased
5.9 percent from the prior year. In the Industrial Products segment, total open order backlog increased
13.9 percent from the prior year. Because some of the change in backlog can be attributed to a change in
the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates,
it may not necessarily correspond to future sales.

Liquidity and Capital Resources

Financial Condition At July 31, 2013, the Company’s capital structure was comprised of $107.9 million
of current debt, $102.8 million of long-term debt, and $1,085.2 million of shareholders’ equity.The Company
had cash and cash equivalents of $224.1 million and short-term investments of $99.8 million at July 31, 2013.
The ratio of long-term debt to total capital was 8.7 percent and 18.3 percent at July 31, 2013 and
2012, respectively.

Total debt outstanding decreased $90.4 million during the year to $210.6 million outstanding at July 31,
2013 as a result of reductions in short-term borrowings. Short-term borrowings outstanding at the end of the
year decreased $86.0 million as the Company used cash on hand to pay off its short-term borrowings.

19

The following table summarizes the Company’s cash obligations as of July 31, 2013, for the years

indicated (thousands of dollars):

Contractual Obligations
_________________
Long-term debt obligations. . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . .
Interest on long-term debt obligations . . . . . . .
Operating lease obligations. . . . . . . . . . . . . . . . .
Purchase obligations (1) . . . . . . . . . . . . . . . . . . .
Pension and deferred compensation (2) . . . . . .
Total (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Payments Due by Period
___________________________________________________________
More than
3 – 5
1 – 3
5 years
years
years
________ ________ ________
$ —
$ — $100,000
—
146
—
6,851
125
2,872
—
1,138
71,445
14,239
________ ________ ________
$71,570
$125,246
________ ________ ________
________ ________ ________

Less than
1 year
________
$96,848
981
8,449
11,431
178,649
15,415
________
$311,773
________
________

Total
________
$196,848
2,520
26,309
26,698
195,976
115,517
________
$563,868
________
________

1,393
11,009
12,270
16,189
14,418
$55,279

(1)

(2)

(3)

Purchase obligations consist primarily of inventory, tooling, contract employment services and capital
expenditures. The Company’s purchase orders for inventory are based on expected Customer demand, and
quantities and dollar volumes are subject to change.

Pension and deferred compensation consists of long-term pension liabilities and salary and bonus deferrals elected
by certain executives under the Company’s deferred compensation plan. Deferred compensation balances earn
interest based on a treasury bond rate as defined by the plan (10-year treasury bond STRIP rate plus two percent
for deferrals prior to January 1, 2011 and 10-year treasury bond rates for deferrals after December 31, 2010)
and approved by the Human Resources Committee of the Board of Directors, and are payable at the election
of the participants.

In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of
$19.5 million for potential tax obligations, including accrued interest and penalties.The payment and timing of any
such payments are affected by the ultimate resolution of the tax years that are under audit or remain subject to
examination by the relevant taxing authorities. Therefore, quantification of an estimated range and timing of
future payments cannot be made at this time.

On December 7, 2012, the Company entered into a new five-year, multi-currency revolving credit facility
with a group of banks under which the Company may borrow up to $250.0 million.The agreement provides
that loans may be made under a selection of currencies and rate formulas including Base Rate Loans or
LIBOR Rate Loans.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.This new facility replaced the previous five-year, $250.0 million multicurrency revolving credit facility
that was terminated upon entering the new facility. There were no outstanding amounts at July 31, 2013
and $80.0 million was outstanding at July 31, 2012 under these facilities. At July 31, 2013 and 2012,
$237.8 million and $159.1 million, respectively, were available for further borrowing under such facilities.
The amount available for further borrowing reflects a reduction for issued standby letters of credit, as
discussed below. The Company’s multi-currency revolving facility contains debt covenants specifically
related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other covenants
that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make
investments and other restricted payments, create liens, and sell assets.As of July 31, 2013, the Company was
in compliance with all such covenants.

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings
for general corporate purposes.At July 31, 2013 and 2012, there was $50.0 million and $41.3 million available
for use, respectively, under these two facilities. There were no amounts outstanding at July 31, 2013 and
$8.7 million was outstanding at July 31, 2012.

The Company has a €100 million program for issuing treasury notes for raising short, medium, and
long-term financing for its European operations. There were no outstanding amounts on this program at
July 31, 2013 or 2012.Additionally, the Company’s European operations have lines of credit with an available
limit of €44.9 million or $59.8 million. There were no amounts outstanding on these lines of credit as of
July 31, 2013 or 2012.

Other international subsidiaries may borrow under various credit facilities. There was $9.2 million
outstanding under these credit facilities as of July 31, 2013 and $6.4 million outstanding as of July 31, 2012.

20

Also, at July 31, 2013 and 2012, the Company had outstanding standby letters of credit totaling
$12.2 million and $10.9 million, respectively, upon which no amounts had been drawn. The letters of credit
guarantee payment to third parties in the event the Company is in breach of insurance contract terms as
detailed in each letter of credit.

During Fiscal 2013, credit in the global credit markets was accessible and market interest rates
remained low. The Company believes that its current financial resources, together with cash generated
by operations, are sufficient to continue financing its operations for the next twelve months. There can be
no assurance, however, that the cost or availability of future borrowings will not be impacted by future
capital market disruptions.

Certain note agreements contain debt covenants related to working capital levels and limitations on

indebtedness. As of July 31, 2013, the Company was in compliance with all such covenants.

Shareholders’ equity increased by $175.2 million from $910.0 million at July 31, 2012 to $1,085.2 million
at July 31, 2013. The increase was primarily due to current year earnings of $247.4 million, $46.9 million (net
of tax) of favorable adjustments related to the pension liability, favorable foreign currency translation of
$17.4 million, $13.5 million in tax reductions related to employee plans, $12.4 million of stock options
exercised, and $8.3 million of the equity impact of stock option expense. These increases were partially
offset by the repurchase of treasury stock for $102.6 million and $66.0 million of dividends declared.

The Company’s inventory balance was $234.8 million as of July 31, 2013, compared to $256.1 million as
of July 31, 2012. Excluding the impact of foreign exchange fluctuations, inventories decreased $20.2 million.
The Company decreased inventory levels to match the decrease in Customer demand experienced during
the year.Additionally, as of July 31, 2012 several large gas turbine projects were being constructed that were
not ready for shipment. Those units have since shipped resulting in decreases in our inventory balances. The
Company’s accounts receivable balance was $430.8 million as of July 31, 2013, compared to $438.8 million
as of July 31, 2012. Excluding the impact of foreign exchange fluctuations, accounts receivable decreased
$3.4 million.

Cash Flows During Fiscal 2013, $315.9 million of cash was generated from operating activities,
compared with $259.7 million in Fiscal 2012. The increase in cash generated from operating activities of
$56.2 million was primarily attributable to changes in working capital needs resulting in lower accounts
receivable and inventory levels versus the prior year, partially offset by a decrease in accounts payable due
to a reduction in purchasing activity. Operating cash flows and cash on hand were used to support
$94.3 million of net capital expenditures, $102.6 million of stock repurchases, $60.3 million of dividend
payments, and $87.0 million of short-term debt repayments. Cash and cash equivalents decreased $1.7 million
during Fiscal 2013.

The majority of the Company’s cash and cash equivalents are held by its foreign subsidiaries as over half
of the Company’s earnings occur outside the U.S. Most of these funds are considered permanently reinvested
outside the U.S., and will only be repatriated when it is tax effective to do so, as the cash generated from U.S.
operations is anticipated to be sufficient for the U.S cash needs. If additional cash were required for the
Company’s operations in the U.S., it may be subject to additional U.S. taxes if funds were repatriated from
certain foreign subsidiaries.

Net capital expenditures for property, plant, and equipment totaled $94.3 million in Fiscal 2013 and
$77.2 million in Fiscal 2012. Net capital expenditures is comprised of purchases of property, plant, and
equipment of $94.9 million and $78.1 million in Fiscal 2013 and 2012, respectively, partially offset by
proceeds from the sale of property, plant, and equipment of $0.6 million in Fiscal 2013 and $1.0 million in
Fiscal 2012. Fiscal 2013 capital expenditures primarily related to plant capacity additions, information and
lab technology, productivity-enhancing investments at manufacturing sites, and tooling to manufacture new
products.

Capital spending in Fiscal 2014 is estimated to be approximately $90.0 million. The Company’s capital
spending in Fiscal 2014 will be approximately 20 percent related to capacity expansion, 30 percent for
technology initiatives, including the Strategic Business Systems project, 30 percent for tooling for new
products, and 20 percent will be in the form of automation or cost reduction projects related to the
Company’s ongoing Continuous Improvement initiatives. It is anticipated that Fiscal 2014 capital
expenditures will be financed primarily by cash on hand, cash generated from operations, and lines of credit.

21

The Company expects that cash generated by operating activities will be between $275 and $305 million
in Fiscal 2014.At July 31, 2013, the Company had cash and cash equivalents of $224.1 million and short-term
investments of $99.8 million. The Company also had $287.8 million available under existing credit facilities
in the U.S., €144.9 million or $192.8 million, available under existing credit facilities in Europe, and
$50.4 million available under various credit facilities and currencies in Asia and the rest of the world. The
Company believes that the combination of existing cash, available credit under existing credit facilities, and
the expected cash generated by operating activities will be adequate to meet cash requirements for Fiscal
2014, including debt repayment, issuance of anticipated dividends, possible share repurchase activity, and
capital expenditures.

Shares and Stock Split At the Company’s Annual Meeting of Stockholders on November 18, 2011,
the shareholders approved an increase in the number of authorized shares of common stock, par value
$5.00, from 120,000,000 to 240,000,000 and the total number of shares of stock which the Company has the
authority to issue from 121,000,000 to 241,000,000.

On January 27, 2012, the Company announced that its Board of Directors declared a two-for-one stock
split effected in the form of a 100 percent stock dividend. The stock split was distributed March 23, 2012, to
stockholders of record as of March 2, 2012. Earnings and dividends per share and weighted average shares
outstanding are presented in this Form 10-K after the effect of the 100 percent stock dividend. The two-for-
one stock split is reflected in the share amounts in all periods presented in this Form 10-K.

Dividends The Company’s dividend policy is to maintain a payout ratio, which allows dividends to
increase with the long-term growth of earnings per share. The Company’s dividend payout ratio target is
approximately 30 percent to 40 percent of the prior three years average earnings per share. Including the
Company’s declaration on July 26, 2013, of a $0.13 per share dividend to be paid, the dividend payout ratio
was 33.7 percent of the prior three years average diluted earnings per share on July 31, 2013.

Share Repurchase Plan The Board of Directors authorized the repurchase of 16.0 million shares of
common stock under the stock repurchase plan dated March 26, 2010. In Fiscal 2013, the Company
repurchased 3.0 million shares of common stock for $102.6 million, or 2.0 percent of its diluted outstanding
shares, at an average price of $34.34 per share. The Company repurchased 4.5 million shares for
$130.2 million in Fiscal 2012. The Company repurchased 3.9 million shares for $108.9 million in Fiscal 2011.
As of July 31, 2013, the Company had remaining authorization to repurchase 2.6 million shares pursuant to
the current authorization. Subsequently, on September 27, 2013, the Board of Directors authorized the
repurchase of 15.0 million shares of common stock under the stock repurchase plan dated September 27,
2013 and cancelled the remaining shares from the previously approved authorization.

Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements,
with the exception of the guarantee of 50 percent of certain debt of its joint venture, Advanced Filtration
Systems Inc. (AFSI), as further discussed in Note M of the Company’s Notes to Consolidated Financial
Statements. As of July 31, 2013, the joint venture had $29.1 million of outstanding debt. The Company does
not believe that this guarantee will have a current or future effect on its financial condition, results of
operations, liquidity, or capital resources.

New Accounting Standards

In February 2013, the Financial Accounting Standards Board (FASB)
updated the disclosure requirements for accumulated other comprehensive income. The updated guidance
requires companies to disclose amounts reclassified out of accumulated other comprehensive income by
component. The updated guidance does not affect how net income or other comprehensive income are
calculated or presented. The updated guidance is effective for the Company beginning in the first quarter
of fiscal year 2014.The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements.

In February 2013, the FASB issued guidance related to obligations resulting from joint and several
liability arrangements for which the total amount of the obligation is fixed at the reporting date. This
guidance is effective for the Company beginning the first quarter of Fiscal 2015. The adoption of this
standard is not expected to have a material impact on the Company’s consolidated financial statements.

22

Market Risk

The Company’s market risk includes the potential loss arising from adverse changes in foreign currency
exchange rates and interest rates. The Company manages foreign currency market risk from time to time
through the use of a variety of financial and derivative instruments. The Company does not enter into any
of these instruments for trading purposes to generate revenue. Rather, the Company’s objective in managing
these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency
exchange rates.The Company uses forward exchange contracts and other hedging activities to hedge the U.S.
dollar value resulting from existing recognized foreign currency denominated asset and liability balances and
also for anticipated foreign currency transactions. The Company also naturally hedges foreign currency
through its production in the countries in which it sells its products. The Company’s market risk on interest
rates is the potential decrease in fair value of long-term debt resulting from a potential increase in interest
rates. See further discussion of these market risks below and in Note F of the Notes to Consolidated
Financial Statements.

Foreign Currency During Fiscal 2013, the U.S. dollar was generally stronger than in Fiscal 2012
compared to many of the currencies of the foreign countries in which the Company operates. The overall
strength of the dollar had a negative impact on the Company’s international net sales results because the
foreign denominated revenues translated into fewer U.S. dollars.

It is not possible to determine the true impact of foreign currency translation changes. However, the
direct effect on reported net sales and net earnings can be estimated. For the year ended July 31, 2013, the
impact of foreign currency translation resulted in an overall decrease in reported net sales of $32.2 million,
an increase in operating expenses of $8.0 million, and a decrease in reported net earnings of $2.1 million.
Foreign currency translation had a negative impact in many regions around the world. The stronger U.S.
dollar relative to the yen resulted in a total decrease of $17.9 million in reported net sales. In Europe, the
stronger U.S. dollar relative to the euro and British pound resulted in a total decrease of $9.3 million in
reported net sales. The stronger U.S. dollar relative to the South African rand, the Brazilian real, and the
Indian rupee had a negative impact on foreign currency translation with a decrease in reported net sales of
$8.1 million, $2.6 million, and $1.6 million, respectively. The weaker U.S. dollar relative to the Mexican peso
and Chinese renminbi had a positive impact on foreign currency translation, with an increase in reported
net sales of $4.3 million and $3.1 million, respectively.

The Company maintains significant assets and operations in Europe, Asia-Pacific, South Africa, and
Mexico, resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign
currency exposure is naturally hedged by incurring liabilities, including bank debt, denominated in the local
currency in which the Company’s foreign subsidiaries are located.

The foreign subsidiaries of the Company generally purchase the majority of their input costs and then

sell to many of their Customers in the same local currency.

The Company may be exposed to cost increases relative to local currencies in the markets to which it
sells. To mitigate such adverse trends, the Company, from time to time, enters into forward exchange
contracts and other hedging activities. Additionally, foreign currency positions are partially offsetting and
are netted against one another to reduce exposure.

Some products made in the U.S. are sold abroad. As a result, sales of such products are affected by the
value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could
depress these sales. Also, competitive conditions in the Company’s markets may limit its ability to increase
product pricing in the face of adverse currency movements.

Interest The Company’s exposure to market risks for changes in interest rates relates primarily to its
short-term investments, short-term borrowings, and interest rate swap agreements, as well as the potential
increase in fair value of long-term debt resulting from a potential decrease in interest rates. The Company
has no earnings or cash flow exposure due to market risks on its 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. As of July 31, 2013, the estimated fair value of long-term debt with fixed interest rates was
$112.3 million compared to its carrying value of $100.0 million. The fair value is estimated by discounting
the projected cash flows using the rate of which similar amounts of debt could currently be borrowed. As
of July 31, 2013, the Company’s financial liabilities with exposure to changes in interest rates consisted
mainly of $9.2 million of short-term debt outstanding.Assuming a hypothetical increase of one-half percent
in short-term interest rates, with all other variables remaining constant, interest expense would have
increased $0.3 million and interest income would have increased $1.5 million in Fiscal 2013.

23

Pensions The Company is exposed to market return fluctuations on its qualified defined benefit
pension plans. In Fiscal 2013, we maintained our long–term rate of return at 7.50 percent on our U.S. plans,
and from a weighted average of 5.20 percent to 5.48 percent on our non-U.S. plans, to reflect our future
expectation for returns. In addition, we adjusted our discount rate used to value our pension obligation for
our U.S. plans from 3.59 percent to 4.58 percent and from 4.13 percent to 4.04 percent for the non-U.S plans.
Our plans were overfunded by $7.8 million at July 31, 2013, since the fair value of the plan assets exceeded
the projected benefit obligation.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in conformity with U.S. GAAP. 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
adheres to U.S. GAAP and is 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
used in the preparation of its consolidated financial statements and that are the most important to aid in fully
understanding its financial results are the following:

Revenue recognition, warranty, and allowance for doubtful accounts Revenue is recognized when both
product ownership and the risk of loss have transferred to the Customer and the Company has no remaining
obligations.The Company records estimated discounts and rebates as a reduction of sales in the same period
revenue is recognized. For the Company’s Gas Turbine Systems sales, it must carefully monitor the shipment
of each part that comprises the entirety of the GTS project and may only recognize revenue when the last
element of the entire GTS project is shipped or according to particular Incoterms terms. Accruals for
warranties on products sold are recorded based on historical return percentages and specific product
campaigns.Allowances for doubtful accounts are estimated by management based on evaluation of potential
losses related to Customer receivable balances. The Company determines the allowance based on historical
write-off experience in the industry, regional economic data, and evaluation of specific Customer accounts
for risk of loss. The Company reviews its allowance for doubtful accounts monthly. Account balances are
charged off against the allowance when the Company feels it is probable the receivable will not be recovered.
The Company does not have any off-balance sheet credit exposure related to its Customers. 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 and proper, changes
in economic conditions in specific markets in which the Company operates could have an effect on reserve
balances required.

Goodwill and other intangible assets Goodwill is assessed for impairment annually, or more frequently
if events or changes in circumstances indicate that the asset might be impaired. The Company performs
impairment assessments for its reporting units and uses a discounted cash flow model based on
management’s judgments and assumptions to determine the estimated fair value. An impairment loss
generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the
estimated fair value of the reporting unit. The Company performed an impairment assessment during the
third quarter of Fiscal 2013 to satisfy its annual impairment requirement. The impairment assessment in
the third quarter indicated that the estimated fair values of the reporting units to which goodwill is assigned
continued to significantly exceed the corresponding carrying values of the respective reporting units,
including recorded goodwill and, as such, no impairment existed at that time. Other intangible assets with
definite lives continue to be amortized over their estimated useful lives. Definite lived intangible assets are
also subject to impairment assessments. A considerable amount of management judgment and assumptions
are required in performing the impairment assessments, principally in determining the fair value of each
reporting unit. The important assumptions utilized in these assessments include the (i) discount rate; (ii)
projected revenue, gross margin, operating income; and (iii) terminal value. While the Company believes its
judgments and assumptions are reasonable, different assumptions could change the estimated fair values
and, therefore, impairment charges could be required.

24

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 uncertain tax positions that are currently unresolved. The Company routinely monitors the
potential impact of such situations and believes that it was properly reserved at July 31, 2013. 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. As of July 31, 2013, the liability for unrecognized tax
benefits, accrued interest, and penalties was $19.5 million.

Employee Benefit Plans The Company incurs expenses relating to employee benefits such as non-
contributory defined benefit pension plans and postretirement health care benefits. In accounting for these
employment costs, management must make a variety of assumptions and estimates including mortality rates,
discount rates, overall Company compensation increases, expected return on plan assets, and health care cost
trend rates. The Company considers historical data as well as current facts and circumstances and uses a
third-party specialist to assist management in determining these estimates.

To develop the assumption regarding the expected long-term rate of return on assets for its U.S. pension
plans, the Company considered the historical returns and the future expectations for returns for each asset
class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 7.50
percent long-term rate of return on assets assumption as of July 31, 2013, for developing the Fiscal 2014
expense for the Company’s U.S. pension plans. In addition, the Company increased the discount rate used
to value the pension obligation for its U.S. plans from 3.59 percent to 4.58 percent. The Company also
selected the long-term rate of return on assets for its non-U.S. plans of 4.13 percent and adjusted the discount
rate used to 4.04 percent for developing the Fiscal 2014 expense. The expected long-term rate of return on
assets assumption for the plans outside the U.S. reflects the investment allocation and expected total
portfolio returns specific to each plan and country.

Reflecting the relatively long-term nature of the plans’ obligations, approximately 60 percent of the
plans assets are invested in equity securities, 25 percent in fixed income, and 15 percent in real assets
(investments into funds containing commodities and real estate).

A one percent change in the expected long-term rate of return on U.S. plan assets, from 7.50 percent,
would have changed the Fiscal 2013 annual pension expense by approximately $4.1 million. The expected
long-term rate of return on assets assumption for the plans outside the U.S. follows the same methodology
as described above, but reflects the investment allocation and expected total portfolio returns specific to
each plan and country.

The Company’s objective in selecting a discount rate for its pension plans is to select the best estimate
of the rate at which the benefit obligations could be effectively settled on the measurement date, taking
into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the
Company looks at rates of return on high-quality fixed-income investments currently available and expected
to be available during the period to maturity of the benefits. This process includes assessing the universe of
bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate
benchmarks are used to determine the discount rate for the non-U.S. plans. As of the measurement date of
July 31, 2013, the Company increased its discount rate for the U.S. pension plans to 4.58 percent from
3.59 percent as of July 31, 2011.The increase of 99 basis points is consistent with published bond indices.The
change decreased the Company’s U.S. projected benefit obligation as of July 31, 2013, by approximately
$36.5 million and is expected to decrease pension expense in fiscal year 2014 by approximately $3.3 million.
The rates discussed above are weighted average rates as the Company has multiple plans both in the U.S.
and internationally.

25

The Company expects that global pension expenses will decrease approximately $3.7 million in Fiscal
2014 as compared to Fiscal 2013, which is driven primarily by the changes in assumptions. In July 2013, the
Company announced that effective August 1, 2013, the plan will be frozen to any Employees hired on or
after August 1, 2013.Then effective,August 1, 2016, Employees hired prior to August 1, 2013 would no longer
continue to accrue Company contribution credits under the plan. Additionally, in July 2013, the Company
announced that Employees hired on or after August 1, 2013 will be eligible for a 3 percent annual Company
retirement contribution in addition to the Company’s 401(k) match. Effective August 1, 2016, Employees
hired prior to August 1, 2013 will be eligible for the 3 percent annual Company retirement contribution.

Safe Harbor Statement under the Securities Reform Act of 1995

The Company, through its management, may make forward-looking statements reflecting the
Company’s current views with respect to future events and financial performance. These forward-looking
statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended
(the Exchange Act), in press releases and in other documents and materials as well as in written or oral
statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including
those discussed in Item 1A of this Form 10-K, which could cause actual results to differ materially from
historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will
continue,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” and similar expressions are
intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and
Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation
Reform Act of 1995 (PSLRA). In particular the Company desires to take advantage of the protections of
the PSLRA in connection with the forward-looking statements made in this Annual Report on Form 10-K,
including those contained in the “Outlook” section of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations. All statements other than statements of historical fact are
forward-looking statements. These statements do not guarantee future performance.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date such statements are made. In addition, the Company wishes to advise readers that the
factors listed in Item 1A of this Form 10-K, as well as other factors, could affect the Company’s performance
and could cause the Company’s actual results for future periods to differ materially from any opinions or
statements expressed. These factors include, but are not limited to risks associated with: world economic
factors and the ongoing economic uncertainty, the reduced demand for hard disk drive products with the
increased use of flash memory, the potential for some Customers to increase their reliance on their own
filtration capabilities, currency fluctuations, commodity prices, political factors, the Company’s international
operations, highly competitive markets, governmental laws and regulations, including the impact of the
various economic stimulus and financial reform measures, the implementation of our new information
technology systems, failure or breach of information technology and trade secret security, potential global
events resulting in market instability including financial bailouts and defaults of sovereign nations, military
and terrorist activities, health outbreaks, natural disasters, and other factors included in Item 1A of this
Report on Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk disclosure appears in Management’s Discussion and Analysis on page 23 under

“Market Risk.”

26

Item 8. Financial Statements and Supplementary Data

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Management conducted an evaluation of the effectiveness of internal control
over financial reporting based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of
July 31, 2013.The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP,
has audited the effectiveness of the Company’s internal control over financial reporting as of July 31, 2013,
as stated in this report which follows in Item 8 of this Form 10-K.

William M. Cook
Chief Executive Officer
September 27, 2013

James F. Shaw
Chief Financial Officer
September 27, 2013

27

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Donaldson Company, Inc.

In our opinion, the accompanying consolidated balance sheets and the related statements of earnings,
comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the
financial position of Donaldson Company, Inc. and its subsidiaries at July 31, 2013 and July 31, 2012, and the
results of their operations and their cash flows for each of the three years in the period ended July 31, 2013
in conformity with accounting principles generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of July 31, 2013, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule and on the Company’s internal
control over financial reporting based on our integrated audits.We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 27, 2013

28

Consolidated Statements of Earnings
Donaldson Company, Inc. and Subsidiaries

Year ended July 31,
________________________________________
2012
2013
____________ ____________
____________

2011

(thousands of dollars, except share
and per share amounts)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes. . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted average shares – basic . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares – diluted . . . . . . . . . . . . . . . . . . . .
Net earnings per share – basic . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – diluted . . . . . . . . . . . . . . . . . . . . . .

$
2,436,948
1,589,821
___________
847,127
441,168
62,630
___________
343,329
(15,762)
10,910
___________
348,181
100,804
___________
$
247,377
___________
___________
148,273,904
150,455,193
1.67
$
1.64
$

$
2,493,248 $
1,619,485
____________
873,763
451,158
59,589
____________
363,016
(19,253)
11,489
____________
370,780
106,479
____________
$
264,301 $
____________
____________
150,286,403
152,940,605
1.76
$
1.73
$

2,294,029
1,480,233
____________
813,796
443,227
55,286
____________
315,283
(9,505)
12,525
____________
312,263
86,972
____________
225,291
____________
____________
154,392,740
157,196,918
1.46
1.43

$
$

The accompanying notes are an integral part of these Consolidated Financial Statements.

29

Consolidated Statements of Comprehensive Income
Donaldson Company, Inc. and Subsidiaries

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation gain (loss) . . . . . . . . . . . . . . . .
Gain (loss) on hedging derivatives, net of deferred
taxes of ($196), $117, and ($280), respectively . . . . . . . . . .
Pension and postretirement liability adjustment,
net of deferred taxes of ($25,656), $23,527, and
($4,021), respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .

At July 31,
____________________________________
2013
2011
2012
________
________
________
(thousands of dollars, except share amounts)
$264,301
(98,723)

$225,291
72,505

$ 247,377
17,435

120

(672)

842

46,860
________
$311,792
________
________

(42,520)
________
$122,386
________
________

7,166
________
$305,804
________
________

The accompanying notes are an integral part of these Consolidated Financial Statements.

30

Consolidated Balance Sheets
Donaldson Company, Inc. and Subsidiaries

Assets
Current assets

Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowance of $7,040 and $6,418 . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities and shareholders’ equity
Current liabilities

Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued employee compensation and related taxes . . . . . . . . . . . . . .
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies (Note M and Note O)
Shareholders’ equity

Preferred stock, $1.00 par value, 1,000,000 shares
authorized, none issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $5.00 par value, 240,000,000 shares
authorized, 151,643,194 shares issued in both 2013 and 2012 . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . .
Treasury stock, 5,490,725 and 3,980,832 shares
in 2013 and 2012, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

At July 31,
_______________________
_________
_________
2013
2012
(thousands of dollars,
except share amounts)

$ 224,138
99,750
430,766
234,820
26,464
39,724
_________
$1,055,662
_________
_________
419,280
165,568
41,307
61,739
_________
$1,743,556
_________
_________

$

9,190
98,664
186,460
68,954
38,527
74,640
_________
476,435
102,774
23,604
55,556
_________
658,369

$ 225,789
92,362
438,796
256,116
25,158
47,441
_________
$1,085,662
_________
_________
384,909
162,949
46,200
50,362
_________
$1,730,082
_________
_________

$

95,147
2,346
199,182
80,550
49,242
72,056
_________
498,523
203,483
4,611
113,451
_________
820,068

—

—

758,216
532,307
21,745
(37,473)

758,216
366,788
24,948
(101,888)

(189,608)
_________
1,085,187
_________
$1,743,556
_________
_________

(138,050)
_________
910,014
_________
$1,730,082
_________
_________

The accompanying notes are an integral part of these Consolidated Financial Statements.

31

Consolidated Statements of Cash Flows
Donaldson Company, Inc. and Subsidiaries

Operating Activities
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net earnings to net cash provided
by operating activities

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses (earnings) of affiliates, net of distributions .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of equity plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation plan expense . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities, net of acquired
businesses

Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . .
Trade accounts payable and other accrued expenses . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . .

Investing Activities
Purchases of property, plant, and equipment. . . . . . . . . . . . . . . . .
Proceeds from sale of property, plant, and equipment . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of short-term investments . . . . . . . . . . . . . . .
Acquisitions and divestitures of affiliates . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . .

Financing Activities
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of equity plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . .

Supplemental Cash Flow Information
Cash paid during the year for:

Year ended July 31,
_______________________________
2012
2011
2013
________
________
________
(thousands of dollars)

$247,377

$264,301

$225,291

64,290
1,637
8,347
(11,191)
9,148
(6,175)

61,165
(2,380)
6,344
(10,316)
10,553
(24,346)

60,491
(2,585)
1,957
(9,873)
9,234
(11,991)

3,705
20,142
13,495
(34,852)
________
315,923
________

(94,895)
558
(99,339)
97,365
—
________
(96,311)
________

—
(1,353)
(86,957)
(102,572)
(60,320)
11,191
16,043
________
(223,968)
________
2,705
________
(1,651)
225,789
________
$224,138
________
________

(17,877)
(4,149)
(17,378)
(6,205)
________
259,712
________

(78,139)
969
(187,575)
88,277
—
________
(176,468)
________

—
(46,205)
96,715
(130,233)
(47,684)
10,316
13,691
________
(103,400)
________
(27,549)
________
(47,705)
273,494
________
$225,789
________
________

(62,274)
(52,999)
7,233
81,571
________
246,055
________

(60,633)
782
(64,482)
64,482
3,493
________
(56,358)
________

6,774
(13,353)
(36,603)
(108,929)
(41,013)
9,873
15,899
________
(167,352)
________
19,149
________
41,494
232,000
________
$273,494
________
________

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 84,898
13,531

$ 91,915
13,410

$ 57,688
12,852

The accompanying notes are an integral part of these Consolidated Financial Statements.

32

Consolidated Statements of Changes in Shareholders’ Equity
Donaldson Company, Inc. and Subsidiaries

Common
_______
Stock

Additional
Paid-in
Retained Compensation
_______ _______ __________
Capital
Earnings

Stock

Plans

Accumulated
Other
Comprehensive
__________
Income (Loss)

Treasury
_______
Stock

______
Total

(thousands of dollars, except per share amounts)

Balance July 31, 2010 . . . . . . . . . . . . . . . . .
Comprehensive income

Net earnings . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . .
Pension liability adjustment,
net of deferred taxes. . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .

Treasury stock acquired . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . .
Deferred stock and other activity . . . . . . .
Performance awards . . . . . . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . . . . . . .
Tax reduction - employee plans . . . . . . . .
Dividends ($0.280 per share). . . . . . . . . . .
Balance July 31, 2011 . . . . . . . . . . . . . . . . .

Comprehensive income
Net earnings . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . .
Pension liability adjustment,
net of deferred taxes. . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .

Treasury stock acquired . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . .
Deferred stock and other activity . . . . . . .
Performance awards . . . . . . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . . . . . . .
Tax reduction – employee plans . . . . . . . .
Two-for-one Stock split . . . . . . . . . . . . . . .
Dividends ($0.335 per share). . . . . . . . . . .
Balance July 31, 2012 . . . . . . . . . . . . . . . . .

Comprehensive income
Net earnings . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . .
Pension liability adjustment,
net of deferred taxes. . . . . . . . . . . . . .
Net gain on cash flow hedging
derivatives . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . .
Treasury stock acquired . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . .
Deferred stock and other activity . . . . . . .
Performance awards . . . . . . . . . . . . . . . . . .
Stock option expense . . . . . . . . . . . . . . . . .
Tax reduction - employee plans . . . . . . . .
Dividends ($0.450 per share). . . . . . . . . . .
Balance July 31, 2013 . . . . . . . . . . . . . . . . .

$443,216

—

744,247

22,326

(40,486)

(422,670)

746,633

_______
443,216
_______

315,000
_______
758,216
_______

225,291

(10,792)
(1,418)
(7)

12,217

(7,854)
174
7
6,462

1,862
548

(42,785)
_______ _______ __________
_______ _______ __________

925,542

24,736

—

264,301

(9,834)
(2,158)

11,992

(5,116)
312
(9)
7,800

213
(1)

(776,369)
(49,673)
_______ _______ __________
_______ _______ __________

366,788

24,948

—

247,377

(10,836)
(2,125)
(573)

13,534

(21,256)
(1,677)
(1,161)
8,300

(1,586)
(1,617)

72,505

7,166

842

(108,929)
30,604
2,185

__________
__________

40,027

_______
(498,810)
_______

(98,723)

(42,520)

(672)

(130,233)
27,698
1,926

__________
(101,888)
__________

461,369
_______
(138,050)
_______

17,435

46,860

120

(102,572)
44,463
4,496
2,055

_______
$758,216
_______

(66,064)
_______ _______ __________
— $532,307
$
_______ _______ __________

$21,745

__________
$(37,473)
__________

_______
$(189,608)
_______

225,291
72,505

7,166

842
______
305,804
______
(108,929)
13,820
1,489
—
6,462
12,217
(42,785)
______
934,711
______

264,301
(98,723)

(42,520)

(672)
______
122,386
______
(130,233)
12,748
293
(10)
7,800
11,992
—
(49,673)
______
910,014
______

247,377
17,435

46,860

120
______
311,792
______
(102,572)
12,371
(892)
(1,296)
8,300
13,534
(66,064)
______
$1,085,187
______

The accompanying notes are an integral part of these Consolidated Financial Statements.

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Donaldson Company, Inc. and Subsidiaries

NOTE A Summary of Significant Accounting Policies

Description of Business Donaldson Company, Inc. (Donaldson or the Company), is a worldwide
manufacturer of filtration systems and replacement parts. The Company’s product mix includes air and
liquid filtration systems and exhaust and emission control products. Products are manufactured at 39 plants
around the world and through 3 joint ventures. Products are sold to original equipment manufacturers
(OEMs), distributors, dealers, and directly to end-users.

Principles of Consolidation The Consolidated Financial Statements include the accounts of Donaldson
Company, Inc. and all majority-owned subsidiaries. All intercompany accounts and transactions have been
eliminated. The Company’s three joint ventures that are not majority-owned are accounted for under
the equity method. The Company does not have any variable interests in variable interest entities as of
July 31, 2013.

Use of Estimates The preparation of Financial Statements in conformity with generally accepted
accounting principles in the United States of America (U.S.) (U.S. GAAP) requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Foreign Currency Translation For foreign operations, local currencies are considered the functional
currency.Assets and liabilities are translated to U.S. dollars at year-end exchange rates and the resulting gains
and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative
translation adjustment, a component of Accumulated other comprehensive income (loss) (AOCI) in the
Consolidated Balance Sheets. Elements of the Consolidated Statements of Earnings are translated at
average exchange rates in effect during the year. Realized and unrealized foreign currency transaction gains
and losses are included in Other income, net in the Consolidated Statements of Earnings. Foreign currency
translation gains of $0.2 million and $1.8 million, and a loss of $4.5 million are included in Other income, net
in the Consolidated Statements of Earnings in Fiscal 2013, 2012, and 2011, respectively.

Cash Equivalents The Company considers all highly liquid temporary investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost that
approximates market value.

Short-Term Investments Classification of the Company’s investments as current or non-current is
dependent upon management’s intended holding period, the investment’s maturity date, and liquidity
considerations based on market conditions. If management intends to hold the investments for longer than
one year as of the balance sheet date, they are classified as non-current. See Note B for disclosures related
to the Company’s short-term investments.

Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s
best estimate of the amount of credit losses in its existing accounts receivable. The Company determines the
allowance based on historical write-off experience in the industry, regional economic data, and evaluation
of specific Customer accounts for risk of loss. The Company reviews its allowance for doubtful accounts
monthly. Past due balances over 90 days and over a specified amount are reviewed individually for
collectability. All other balances are reviewed on a pooled basis by type of receivable.Account balances are
charged off against the allowance when the Company feels it is probable the receivable will not be recovered.
The Company does not have any off-balance-sheet credit exposure related to its Customers.

34

Inventories

Inventories are stated at the lower of cost or market. U.S. inventories are valued using the
last-in, first-out (LIFO) method, while the non-U.S. inventories are valued using the first-in, first-out (FIFO)
method. Inventories valued at LIFO were approximately 33 percent and 30 percent of total inventories at
July 31, 2013 and 2012, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded
the LIFO carrying values by $37.8 million and $37.4 million at July 31, 2013 and 2012, respectively. Results
of operations for all periods presented were not materially affected by the liquidation of LIFO inventory.
The components of inventory are as follows (thousands of dollars):

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At July 31,
____________________
2012
2013
________
________
$111,808
$ 99,814
30,767
29,097
113,541
105,909
________
________
$256,116
$234,820
________
________
________
________

Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Additions,
improvements, or major renewals are capitalized, while expenditures that do not enhance or extend the
asset’s useful life are charged to expense as incurred. Depreciation is computed under the straight-line
method. Depreciation expense was $58.8 million in Fiscal 2013, $55.3 million in Fiscal 2012, and $54.5 million
in Fiscal 2011. The estimated useful lives of property, plant, and equipment are 10 to 40 years for buildings,
including building improvements, and 3 to 10 years for machinery and equipment. The components of
property, plant, and equipment are as follows (thousands of dollars):

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total property, plant, and equipment, net. . . . . . . . . . . . . . . . . . . . .

At July 31,
____________________
2012
2013
________
________
$ 21,062
$ 21,116
258,082
270,022
643,199
687,797
27,276
46,078
(564,710)
(605,733)
________
________
$384,909
$419,280
________
________
________
________

Internal-Use Software The Company capitalizes direct costs of materials and services used in the
development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line
basis over a period of five years and are reported as a component of machinery and equipment within
property, plant, and equipment.

Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the
fair value of net assets acquired in business combinations under the purchase method of accounting. Other
intangible assets, consisting primarily of patents, trademarks, and Customer relationships and lists, are
recorded at cost and are amortized on a straight-line basis over their estimated useful lives of 3 to 20 years.
Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would
indicate the carrying amount may be impaired. The impairment assessment for goodwill is done at a
reporting unit level. Reporting units are one level below the business segment level, but can be combined
when reporting units within the same segment have similar economic characteristics. An impairment loss
generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the
estimated fair value of the reporting unit.The Company completed its annual impairment assessment in the
third quarters of Fiscal 2013 and 2012, which indicated no impairment.

Recoverability of Long-Lived Assets The Company reviews its long-lived assets, including identifiable
intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted
cash flows are less than the carrying value of the assets, the carrying value is reduced. There were no
significant impairment charges recorded in Fiscal 2013 or Fiscal 2012.

35

Income Taxes The provision for income taxes is computed based on the pre-tax income included in the
Consolidated Statements of Earnings. Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributed to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when
it is more-likely-than-not that a tax benefit will not be realized.

Comprehensive Income (Loss) Comprehensive income (loss) consists of net income, foreign currency
translation adjustments, net changes in the funded status of pension retirement obligations, and net gain or
loss on cash flow hedging derivatives, and is presented in the Consolidated Statements of Changes in
Shareholders’ Equity.The components of the ending balances of AOCI are as follows (thousands of dollars):

Foreign currency translation adjustment . . . . . . . . . . . . .
Net gain (loss) on cash flow hedging derivatives,
net of deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement liability adjustment,
net of deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated other comprehensive

income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At July 31,
_________________________________
2012
2013
2011
________
_________
_________
$131,699
$ 32,976
$ 50,411

(172)

(292)

380

(87,712)
_________

(134,572)
_________

(92,052)
________

$(37,473)
_________

$(101,888)
_________

$ 40,027
________

Cumulative foreign currency translation is not adjusted for income taxes.

Earnings Per Share The Company’s basic net earnings per share are 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 common equivalent shares relating to stock options and stock incentive plans. Certain outstanding
options were excluded from the diluted net earnings per share calculations because their exercise prices were
greater than the average market price of the Company’s common stock during those periods. There were
22,619 options, 1,063,135 options, and 988,698 options excluded from the diluted net earnings per share
calculation for the fiscal year ended July 31, 2013, 2012, and 2011, respectively.

The following table presents information necessary to calculate basic and diluted earnings per share:

Weighted average shares – basic . . . . . . . . . . . . . . . . . . . .
Diluted share equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares – diluted . . . . . . . . . . . . . . . . . .

Net earnings for basic and diluted earnings
per share computation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – basic. . . . . . . . . . . . . . . . . . . . . .
Net earnings per share – diluted . . . . . . . . . . . . . . . . . . . .

2013
2011
2012
_______
________
_______
(thousands, except per share amounts)
150,286
148,274
2,655
2,181
________
_______
152,941
150,455
________
_______
________
_______

154,393
2,804
_______
157,197
_______
_______

$247,377
1.67
$
1.64
$

$264,301
1.76
$
1.73
$

$225,291
1.46
$
1.43
$

On January 27, 2012, the Company announced that its Board of Directors declared a two-for-one stock
split effected in the form of a 100 percent stock dividend. The stock split was distributed March 23, 2012, to
stockholders of record as of March 2, 2012. Earnings and dividends per share and weighted average shares
outstanding are presented in this Form 10-K after the effect of the 100 percent stock dividend. The two-for-
one stock split is reflected in the share amounts in all periods presented in the table above and elsewhere
in this annual Form 10-K.

Treasury Stock Repurchased common stock is stated at cost and is presented as a reduction of

shareholders’ equity.

Research and Development Research and development costs are charged against earnings in the year
incurred. Research and development expenses include basic scientific research and the application of
scientific advances to the development of new and improved products and their uses.

36

Stock-Based Compensation The Company offers stock-based employee compensation plans, which
are more fully described in Note J. Stock-based employee compensation cost is recognized using the fair-
value based method.

Revenue Recognition Revenue is recognized when all the following criteria are satisfied: (a) persuasive
evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably
assured; and (d) delivery has occurred. At that time, product ownership and the risk of loss have transferred
to the Customer and the Company has no remaining obligations.The Company records estimated discounts
and rebates as a reduction of sales in the same period revenue is recognized. Shipping and handling costs
for Fiscal 2013, 2012, and 2011 totaling $66.2 million, $67.0 million, and $61.9 million, respectively, are
classified as a component of selling, general, and administrative expenses.

Product Warranties The Company provides for estimated warranty costs at the time of sale and accrues
for specific items at the time their existence is known and the amounts are determinable. The Company
estimates warranty costs using standard quantitative measures based on historical warranty claim experience
and evaluation of specific Customer warranty issues. For a warranty reserve reconciliation see Note N.

Derivative Instruments and Hedging Activities The Company recognizes all derivatives on the balance
sheet at fair value. Derivatives that are not designated as hedges are adjusted to fair value through income.
If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in shareholders’ equity through other comprehensive income
until the hedged item is recognized. Gains or losses related to the ineffective portion of any hedge are
recognized through earnings in the current period.

Exit or Disposal Activities The Company accounts for costs relating to exit or disposal activities based
on the Financial Accounting Standards Board (FASB) guidance related to exit or disposal cost obligations.
This guidance addresses recognition, measurement, and reporting of costs associated with exit and disposal
activities including restructuring.

Guarantees Upon issuance of a guarantee, the Company recognizes a liability for the fair value of an

obligation assumed under a guarantee. See Note M for disclosures related to guarantees.

New Accounting Standards

In February 2013, the FASB updated the disclosure requirements for
AOCI. The updated guidance requires companies to disclose amounts reclassified out of AOCI by
component. The updated guidance does not affect how net income or other comprehensive income are
calculated or presented. The updated guidance is effective for the Company beginning in the first quarter
of Fiscal 2014. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements.

In February 2013, the FASB issued guidance related to obligations resulting from joint and several
liability arrangements for which the total amount of the obligation is fixed at the reporting date. This
guidance is effective for the Company beginning the first quarter of Fiscal 2015. The adoption of this
standard is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE B Short-Term Investments

All short-term investments are time deposits and have original maturities in excess of three months
but not more than twelve months. The Company had $99.8 million in short-term investments as of July 31,
2013 and $92.4 million as of July 31, 2012.

NOTE C Goodwill and Other Intangible Assets

The Company has allocated goodwill to its Industrial Products and Engine Products segments. There
was no acquisition or disposition activity during Fiscal 2013 or 2012. The Company completed its annual
impairment assessments in the third quarters of Fiscal 2013 and 2012. The results of this assessment showed
that the fair values of the reporting units to which goodwill is assigned continue to exceed the book values
of the respective reporting units, resulting in no goodwill impairment.

37

Following is a reconciliation of goodwill for the years ended July 31, 2013 and 2012:

Balance as of July 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . .

Engine
Products
_______

$72,966
(1,219)
_______
$71,747
574
_______
$72,321
_______
_______

Industrial
Products
________
(thousands of dollars)
$98,775
(7,573)
_______
$91,202
2,045
_______
$93,247
_______
_______

Total
Goodwill
________

$171,741
(8,792)
________
$162,949
2,619
________
$165,568
________
________

Intangible assets are comprised of patents, trademarks, and Customer relationships and lists. Following

is a reconciliation of intangible assets for the years ended July 31, 2013 and 2012:

Balance as of July 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount
_______

$85,439
—
(1,530)
(3,834)
_______
$80,075
—
1,807
_______
$81,882
_______
_______

Accumulated
Amortization
__________
(thousands of dollars)
$(31,943)
(5,778)
1,530
2,316
________
$(33,875)
(5,503)
(1,197)
________
$(40,575)
________
________

Net
Intangible
Assets
________

$53,496
(5,778)
—
(1,518)
________
$46,200
(5,503)
610
________
$41,307
________
________

Net intangible assets consist of patents, trademarks, and trade names of $13.3 million and $16.1 million
as of July 31, 2013 and 2012, respectively, and Customer related intangibles of $28.0 million and $30.1 million
as of July 31, 2013 and 2012, respectively. As of July 31, 2013, patents, trademarks, and trade names had a
weighted average remaining life of 9.33 years and Customer related intangibles had a weighted average
remaining life of 11.78 years. Expected amortization expense relating to existing intangible assets is as
follows (in thousands):

Fiscal Year
________
2014 . . . . . . . . . . . . . . . . . . . $5,167
2015 . . . . . . . . . . . . . . . . . . . $5,072
2016 . . . . . . . . . . . . . . . . . . . $5,070
2017 . . . . . . . . . . . . . . . . . . . $4,924
2018 . . . . . . . . . . . . . . . . . . . $3,555

NOTE D Credit Facilities

On December 7, 2012, the Company entered into a new five-year, multi-currency revolving credit
facility with a group of banks under which the Company may borrow up to $250.0 million. The agreement
provides that loans may be made under a selection of currencies and rate formulas including Base Rate
Loans or LIBOR Rate Loans. 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.This new facility replaced the previous five-year, $250.0 million multicurrency revolving credit
facility that was terminated upon entering the new facility. There were no amounts outstanding at July 31,
2013 and $80.0 million outstanding at July 31, 2012 under these facilities. At July 31, 2013 and 2012,
$237.8 million and $159.1 million, respectively, were available for further borrowing under such facilities.
The amount available for further borrowing reflects a reduction for issued standby letters of credit, as
discussed below. The Company’s multi-currency revolving facility contains financial covenants specifically
related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other covenants
that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make
investments and other restricted payments, create liens, and sell assets.As of July 31, 2013, the Company was
in compliance with all such covenants.The Company expects to remain in compliance with these covenants.

38

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings
for general corporate purposes.At July 31, 2013 and 2012, there was $50.0 million and $41.3 million available
for use, respectively. There were no amounts outstanding at July 31, 2013 and $8.7 million outstanding at
July 31, 2012. The weighted average interest rate on the short-term borrowings outstanding at July 31, 2012
was 1.0 percent.

The Company has a €100.0 million, or $133.0 million, program for issuing treasury notes for raising
short-, medium-, and long-term financing for its European operations. There were no amounts outstanding
on this program at July 31, 2013 or 2012. Additionally, the Company’s European operations have lines of
credit with an available limit of €44.9 million or $59.8 million. There was nothing outstanding on these lines
of credit as of July 31, 2013 or 2012.

Other international subsidiaries may borrow under various credit facilities. There was $9.2 million
outstanding under these credit facilities as of July 31, 2013, and $6.4 million as of July 31, 2012.The weighted
average interest rate on these short-term borrowings outstanding at July 31, 2013 and July 31, 2012, was
0.4 percent and 0.5 percent, respectively.

NOTE E Long-Term Debt

Long-term debt consists of the following:

6.59% Unsecured senior notes, interest payable semi-annually,
principal payment of $80.0 million due November 14, 2013. . . . . . . . . . . .
5.48% Unsecured senior notes, interest payable semi-annually,
principal payment of $50.0 million due June 1, 2017 . . . . . . . . . . . . . . . . . .
5.48% Unsecured senior notes, interest payable semi-annually,
principal payment of $25.0 million due September 28, 2017 . . . . . . . . . . .
5.48% Unsecured senior notes, interest payable semi-annually,
principal payment of $25.0 million due November 30, 2017. . . . . . . . . . . .
2.019% Guaranteed senior note, interest payable semi-annually,
principal payment of ¥1.65 billion due May 18, 2014 . . . . . . . . . . . . . . . . . .
Capitalized lease obligations and other, with various maturity

dates and interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Terminated interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
2012
________
________
(thousands of dollars)

$ 80,000

$ 80,000

50,000

50,000

25,000

25,000

25,000

25,000

16,848

21,117

2,520
2,070
________
201,438
98,664
________
$102,774
________
________

774
3,938
________
205,829
2,346
________
$203,483
________
________

Annual maturities of long-term debt are $98.7 million in 2014, $1.1 million in 2015, $1.1 million in 2016,
$50.5 million in 2017, and $50.0 million thereafter. Certain note agreements contain debt covenants related
to working capital levels and limitations on indebtedness. As of July 31, 2013, the Company was in
compliance with all such covenants.

NOTE F Financial Instruments

Derivatives The Company uses forward exchange contracts to manage its exposure to fluctuations in
foreign exchange rates. The Company also uses interest rate swaps to manage its exposure to changes in the
fair value of its fixed-rate debt resulting from interest rate fluctuations. It is the Company’s policy to enter
into derivative transactions only to the extent true exposures exist; the Company does not enter into
derivative transactions for speculative or trading purposes.The Company enters into derivative transactions
only with counterparties with high credit ratings.

39

The Company enters into forward exchange contracts of generally less than one year to hedge
forecasted foreign currency transactions between its subsidiaries and to reduce potential exposure related
to fluctuations in foreign exchange rates for existing recognized assets and liabilities. It also utilizes forward
exchange contracts for anticipated intercompany and third-party transactions such as purchases, sales, and
dividend payments denominated in local currencies. Forward exchange contracts are designated as cash
flow hedges as they are designed to hedge the variability of cash flows associated with the underlying
existing recognized or anticipated transactions. Changes in the value of derivatives designated as cash flow
hedges are recorded in other comprehensive income (loss) in shareholders’ equity until earnings are affected
by the variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the
derivative instrument that is deferred in shareholders’ equity is reclassified to earnings. The Company
expects to record $0.2 million of net deferred losses from these forward exchange contracts during the next
twelve months. Effectiveness is measured using spot rates to value both the hedge contract and the hedged
item. The excluded forward points, as well as any ineffective portions of hedges, are recorded in earnings
through the same line as the underlying transaction. During Fiscal 2013, 2012, and 2011, $0.4 million,
$0.4 million, and $1.1 million of losses, respectively, were recorded due to the exclusion of forward points
from the assessment of hedge effectiveness.

The impact on OCI and earnings from foreign exchange contracts that qualified as cash flow hedges for

the twelve months ended July 31, 2013 and 2012, was as follows (thousands of dollars):

Net carrying amount at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges deferred in OCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges reclassified to income (effective portion) . . . . . . . . . . . .
Change in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net carrying amount at July 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

July 31,
_______________________
2013
2012
_______
______
241
$(373)
$
2,229
672
(2,960)
81
117
(196)
_______
______
$ (373)
$(184)
_______
______
_______
______

Credit Risk The Company is exposed to credit loss in the event of nonperformance by counterparties
in interest rate swaps and foreign exchange forward contracts. Collateral is generally not required of the
counterparties or of the Company. In the unlikely event a counterparty fails to meet the contractual terms
of an interest rate swap or foreign exchange forward contract, the Company’s risk is limited to the fair value
of the instrument. The Company had no interest rate swaps outstanding at July 31, 2013 or 2012. The
Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits,
and by selecting major international banks and financial institutions as counterparties. The Company has
not had any historical instances of non-performance by any counterparties, nor does it anticipate any future
instances of non-performance.

NOTE G Fair Value

Fair Value of Financial Instruments At July 31, 2013 and 2012, the Company’s financial instruments
included cash and cash equivalents, accounts receivable, accounts payable, short-term investments, short-
term borrowings, long-term debt, and derivative contracts. The fair values of cash and cash equivalents,
accounts receivable, accounts payable, and short-term borrowings approximated carrying values because of
the short-term nature of these instruments. Derivative contracts are reported at their fair values based on
third-party quotes. As of July 31, 2013, the estimated fair value of long-term debt with fixed interest rates
was $112.3 million compared to its carrying value of $100.0 million and the estimated fair value of short-
term debt with fixed interest rates was $98.2 million compared to the carrying value of $96.8 million. The
fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt
could currently be borrowed, which is classified as Level 2 in the fair value hierarchy.

Derivative contracts are reported at their fair values based on third-party quotes. The fair values of the
Company’s financial assets and liabilities listed below reflect the amounts that would be received to sell
the assets or paid to transfer the liabilities in an orderly transaction between market participants at the
measurement date (exit price). The fair values are based on inputs other than quoted prices that are
observable for the asset or liability. These inputs include foreign currency exchange rates and interest rates.
The financial assets and liabilities are primarily valued using standard calculations and models that use as
their basis readily observable market parameters. Industry standard data providers are the primary source
for forward and spot rate information for both interest rates and currency rates.

40

The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2013, and 2012, on

the Consolidated Balance Sheets:

Significant Other Observable Inputs
(Level 2)*
_________________________
At July 31,

2013
_______

2012
_______

(thousands of dollars)

Asset derivatives recorded under the caption
Prepaids and other current assets

Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 734

$ 526

Liability derivatives recorded under the caption
Other current liabilities

Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward exchange contracts - net liablity position. . . . . . . . . . . . .

(845)
_____
$(111)
_____
_____

(1,424)
_______
$ (898)
_______
_______

*

Inputs to the valuation methodology of level 2 assets include quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted
prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated
by observable market data by correlation or other means.

The Company holds equity method investments which are classified in other assets in the consolidated
balance sheets and held at cost. The aggregate carrying amount of these investments was $18.8 million and
$20.1 million as of July 31, 2013 and 2012, respectively. These equity method investments are measured at
fair value on a nonrecurring basis. The fair value of the Company’s equity method investments has not been
estimated as there have been no identified events or changes in circumstance that would have had an
adverse impact on the value of these investments. In the event that these investments were required to be
measured, these investments would fall within Level 3 of the fair value hierarchy, due to the use of significant
unobservable inputs to determine fair value, as the investments are privately-held entities or divisions of
public companies without quoted market prices.

Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. As there have been no events or circumstances that have had an
adverse impact on the value of these assets, the Company has not been required to record an impairment
and therefore these assets are not recorded at fair value. In the event that an impairment was recognized,
the fair value would be classified within Level 3 of the fair value hierarchy. Refer to Note C for further
discussion of the annual goodwill impairment analysis and carrying values of goodwill and other intangible
assets.

The Company assesses the impairment of intangible assets and property, plant, and equipment
whenever events or changes in circumstances indicate that the carrying amount of intangible assets or
property, plant, and equipment assets may not be recoverable.There were no significant impairment charges
recorded in Fiscal 2013 or Fiscal 2012. Refer to Note C for further discussion of the annual goodwill
impairment analysis and carrying values of intangible assets.

NOTE H Employee Benefit Plans

Pension Plans The Company and certain of its international subsidiaries have defined benefit pension
plans for many of their hourly and salaried employees. There are two types of U.S. plans. The first type of
U.S. plan is a traditional defined benefit pension plan primarily for production employees. The second is a
plan for salaried workers that provides defined benefits pursuant to a cash balance feature whereby a
participant accumulates a benefit comprised of a percentage of current salary that varies with years of
service, interest credits and transition credits. The international plans generally provide pension benefits
based on years of service and compensation level.

On July 31, 2013, the Company adopted a sunset freeze on its U.S. salaried pension plan. Effective
August 1, 2013, there will be no new entrants into the plan. Then effective, August 1, 2016, employees hired
prior to August 1, 2013 would no longer continue to accrue Company contribution credits under the plan.
The accounting for this amendment is reflected in the current year balance sheet and resulted in decreased
pension liabilities of $11.7 million with an offset to AOCI as of July 31, 2013 due to a freeze in previously
assumed salary increases.

41

Net periodic pension costs for the Company’s pension plans include the following components:

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost amortization . . . . . . . . . . . . . . . . . . . . .
Actuarial loss amortization . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
_______

$19,439
16,953
(28,111)
591
10,362
_______
$19,234
_______
_______

2012
_______
(thousands of dollars)
$15,464
19,436
(28,114)
725
5,696
_______
$13,207
_______
_______

2011
_______

$16,148
19,440
(27,538)
674
3,962
_______
$12,686
_______
_______

The obligations and funded status of the Company’s pension plans as of 2013 and 2012, is as follows:

Change in benefit obligation:
Benefit obligation, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in plan assets:

Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Funded status:
Funded/(Underfunded) status at July 31, 2013 and 2012 . . . . . . . . . . . . .

2013
________
(thousands of dollars)

2012
________

$461,492
19,439
16,953
(9)
1,207
(27,176)
1,225
(11,692)
(16,496)
________
$444,943
________
________

$387,576
51,524
28,186
1,207
727
(16,496)
________
$452,724
________
________

$404,012
15,464
19,436
(781)
1,130
51,914
(9,689)
—
(19,994)
________
$461,492
________
________

$373,555
4,442
37,915
1,130
(9,472)
(19,994)
________
$387,576
________
________

$
7,781
________
________

$(73,916)
________
________

The net overfunded status of $7.8 million at July 31, 2013 is recognized in the accompanying
Consolidated Balance Sheet. AOCI at July 31, 2013 consists primarily of unrecognized actuarial losses, net
of tax. The loss expected to be recognized in net periodic pension expense during Fiscal 2014 is $8.1 million.
The accumulated benefit obligation for all defined benefit pension plans was $427.8 million and
$423.6 million at July 31, 2013 and 2012, respectively.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets were $20.5 million, $19.7 million,
and $8.4 million, respectively, as of July 31, 2013, and $347.5 million, $335.1 million, and $277.5 million,
respectively, as of July 31, 2012.

For the years ended July 31, 2013 and 2012 the U.S. pension plans represented approximately 70 percent
and 71 percent, respectively, of the Company’s total plan assets, approximately 71 percent and 74 percent,
respectively, of the Company’s total projected benefit obligation, and approximately 75 percent and
71 percent, respectively, of the Company’s total pension expense.

42

The weighted-average discount rate and rates of increase in future compensation levels used in

determining the actuarial present value of the projected benefit obligation are as follows:

____________________________
Weighted average actuarial assumptions
All U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

______
2013

______
2012

4.58%
2.61%

4.04%
2.92%

3.59%
2.61%

4.13%
2.86%

The weighted-average discount rates, expected returns on plan assets and rates of increase in future compen-

sation levels used to determine the net periodic benefit cost are as follows:

____________________________
Weighted average actuarial assumptions
All U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . .
Non - U.S. plans:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . .

______
2013

______
2012

______
2011

3.59%
7.50%
2.61%

4.13%
5.20%
2.86%

4.91%
7.75%
4.50%

5.36%
6.03%
3.57%

5.25%
8.00%
5.00%

5.17%
6.17%
3.69%

Expected Long-Term Rate of Return To develop the expected long-term rate of return on assets
assumption, the Company considered the historical returns and the future expectations for returns for each
asset class, as well as the target asset allocation of the pension portfolio. As of our measurement date of
July 31, 2013, the Company maintained its long-term rate of return for the U.S. pension plans at 7.50 percent.
The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects the
investment allocation and expected total portfolio returns specific to each plan and country. The expected
long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based
weighted average of all non-U.S. plans.

Discount Rate The Company’s objective in selecting a discount rate is to select the best estimate of
the rate at which the benefit obligations could be effectively settled on the measurement date, taking into
account the nature and duration of the benefit obligations of the plan. In making this best estimate, the
Company looks at rates of return on high-quality fixed-income investments currently available, and expected
to be available, during the period to maturity of the benefits. This process includes looking at the universe
of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate
benchmarks are used to determine the discount rate for the non-U.S. plans. The discount rate disclosed in
the assumptions used to determine net periodic benefit cost and to determine benefit obligations is based
upon a weighted average, using year-end projected benefit obligations.

Plan Assets The Company used the following definitions to classify pension assets into either Level

1, Level 2, or Level 3:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has

the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices available in Level 1 that are observable either directly or

indirectly.

Level 3 – Unobservable inputs for the asset or liability.

43

The fair values of the assets held by the U.S. pension plans by asset category are as follows (in millions):

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
________

Asset Category
_______________
2013
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets at July 31, 2013. . . . . . . . . . . . . . . .

2012
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets at July 31, 2012. . . . . . . . . . . . . . . .

2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets at July 31, 2011. . . . . . . . . . . . . . . .

$ 18.5
82.5
42.9
—
________
$143.9
________
________

$

0.9
61.5
29.2
—
________
$91.6
________
________

$

0.3
64.8
36.6
—
________
$101.7
________
________

Significant
Observable Unobservable

Significant

Inputs
(Level 2)
________

Inputs
(Level 3)
________

$ —
50.2
20.8
—
________
$71.0
________
________

$ —
57.3
19.5
—
________
$76.8
________
________

$ —
56.2
20.1
—
________
$76.3
________
________

$ —
19.4
60.8
22.1
________
$102.3
________
________

$ —
19.4
55.0
31.4
________
$105.8
________
________

$ —
17.9
31.4
38.0
________
$ 87.3
________
________

Total
________

$ 18.5
152.1
124.5
22.1
________
$ 317.2
________
________

$ 0.9
138.2
103.7
31.4
________
$274.2
________
________

$ 0.3
138.9
88.1
38.0
________
$265.3
________
________

Global Equity consists primarily of publicly traded U.S. and non-U.S. equities, Europe, Australasia,
Far East (EAFE) index funds, equity private placement funds, private equity investments, and some cash and
cash equivalents. Publicly traded equities are valued at the closing price reported in the active market in
which the individual securities are traded. Index funds are valued at the net asset value (NAV) as determined
by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned by
the fund, minus its liabilities then divided by the number of units outstanding. Private equity consists of
interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a
diversified mix of partnership interests including buyouts, restructured/distressed debt, growth equity,
mezzanine/subordinated debt, real estate, special situation partnerships, and venture capital investments.
Partnership interest are valued using the most recent general partner statement of fair value, updated for
any subsequent partnership interests’ cash flow.

The target allocation for Global Equity investments is 60 percent. The underlying global equity
investment managers within the Plan will invest primarily in equity securities spanning across market
capitalization, geography, style (value, growth), and other diversifying characteristics. Managers may invest
in common stocks or American Depository Receipts (ADRs), mutual funds, bank or trust company pooled
funds, international stocks, stock options for hedging purposes, stock index futures, financial futures for
purposes of replicating a major market index, and private equity partnerships. The Long/Short Equity
managers within Global Equity may take long or short positions in equity securities and have the ability to
shift exposure from net long to net short. Long/Short Equity managers made up about 15 percent of the
global equity portfolio at year-end, and are considered less liquid, as the funds can be partially liquidated
on a quarterly basis. Long-only managers are considered liquid. The long-only investment managers are
typically valued daily, while long/short equity is valued on a monthly basis. Private equity is considered
illiquid and performance is typically valued on a quarterly basis. The underlying assets, however, may be
valued less frequently, such as annually, or if and when a potential buyer is identified and has submitted a
bid to similar types of investments.

44

Fixed income consists primarily of investment and non-investment grade debt securities and alternative
fixed income-like investments. Corporate and other bonds and notes are valued at either the yields currently
available on comparable securities of issuers with similar credit ratings or valued under a discounted cash
flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes
adjustments for certain risks that may not be observable such as credit and liquidity risks. Alternative fixed
income-like investments consist primarily of private partnership interests in hedge funds of funds.
Partnership interests are valued using the NAV as determined by the administrator or custodian of the fund.

The target allocation for Fixed Income is 25 percent. The Fixed Income class may invest in Debt
securities issued or guaranteed by the U.S., its agencies or instrumentalities (including U.S. Government
Agency mortgage backed securities), or other investment grade rated debt issued by foreign governments;
corporate bonds, debentures and other forms of corporate debt obligations, including equipment trust
certificates; Indexed notes, floaters and other variable rate obligations; bank collective funds; mutual funds;
insurance company pooled funds and guaranteed investments; futures and options for the purpose of yield
curve management; and private debt investments. Fixed Income risk is driven by various factors including,
but not limited to, interest rate levels and changes, credit risk, and duration. The current fixed income
investment is considered liquid, with daily pricing and liquidity. The Fixed Income class may also invest in
a variety of alternative investments. Alternatives cover an enormous variety of traditional and non-
traditional investments and investment strategies, spanning various levels of risk and return. These
investments can be made in a broad array of non-traditional investment strategies (including, but not limited
to, commodities and futures, distressed securities, short/long—or both—fixed income, international
opportunities, relative value) with multiple hedge fund managers. This class is considered less liquid to
illiquid. The liquidity ranges from quarterly to semi-annually and illiquid. Alternative investments are
typically valued on a quarterly basis.

Real assets consist of commodity funds, Real Estate Investment Trusts (REITS), and interests in
partnerships that invest in private real estate, commodity, and timber investments. Private investments are
valued using the most recent partnership statement of fair value, updated for any subsequent partnership
interests’ cash flows. Commodity funds and REITS are valued at the closing price reported in the active
market in which it is traded.

The target allocation for Real Assets is 15 percent.The Fund will invest in real assets to provide a hedge
against unexpected inflation, to capture unique sources of returns, and to provide diversification benefits.
The Fund will pursue a real asset strategy through a fund of funds, private investments, and/or a direct
investment program that may invest long, short, or both in assets including, but not limited to, domestic and
international properties, buildings and developments, timber, and/or commodities. Real assets range from
less liquid to illiquid, with about two-thirds of the real asset allocation having monthly liquidity and one-
third illiquid. Real asset manager performance is typically reported quarterly, though underlying assets may
be valued less frequently.

The following table sets forth a summary of changes in the fair values of the U.S. pension plans’ Level

3 assets for the years ended July 31, 2013, 2012, and 2011 (in millions):

Beginning balance at August 1, 2010 . .
Unrealized gains. . . . . . . . . . . . . . . . . . .
Realized gains. . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2011 . . . . . .
Unrealized gains. . . . . . . . . . . . . . . . . . .
Realized gains. . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers into (out of) level 3. . . . .
Ending balance at July 31, 2012 . . . . . .
Unrealized gains. . . . . . . . . . . . . . . . . . .
Realized gains. . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2013 . . . . . .

Fixed Income
___________
$33.1
2.1
—
—
(3.8)
___________
$31.4
0.6
0.4
17.0
(1.7)
7.3
___________
$55.0
6.4
0.7
—
(1.3)
___________
$60.8
___________
___________

Real Assets
_________
$16.2
3.4
—
30.4
(12.0)
_________
$38.0
(2.1)
—
2.8
—
(7.3)
_________
$31.4
1.1
—
1.0
(11.4)
_________
$22.1
_________
_________

Total
________
$ 66.6
7.0
1.0
32.7
(20.0)
________
$87.3
(1.4)
1.9
20.8
(2.8)
—
________
$105.8
6.7
2.4
3.1
(15.7)
________
$102.3
________
________

Global Equity
___________
$17.3
1.5
1.0
2.3
(4.2)
___________
$17.9
0.1
1.5
1.0
(1.1)
—
___________
$19.4
(0.8)
1.7
2.1
(3.0)
___________
$19.4
___________
___________

45

The following table sets forth a summary of the U.S. pension plans’ assets valued at NAV for the year

ended July 31, 2013 (in millions):

Global Equity . . . . . .
Fixed Income . . . . . .
Real Assets . . . . . . . .
Total . . . . . . . . . . . . . .

Fair Value
__________
$100.4
124.5
22.1
__________
$247.0
__________
__________

Unfunded
Commitments
______________
$ 7.3
—
9.4
______________
$16.7
______________
______________

Redemption Frequency
(If Currently Eligible)
_____________________________________
Daily, Quarterly, Annually
Daily, Quarterly, Semi-Annually
Monthly, Quarterly

Redemption
Notice Period
________________
10 - 100 days
65 - 120 days
30 - 95 days

Fair values of the assets held by the international pension plans by asset category are as follows (in

millions):

Asset Category
_______________
2013

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
________

Significant
Observable Unobservable

Significant

Inputs
(Level 2)
________

Inputs
(Level 3)
________

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities. . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . .
Total International Assets at July 31, 2013. . . . . . . .

2012

Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities. . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total International Assets at July 31, 2012. . . . . . . .

2011

Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities. . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total International Assets at July 31, 2011. . . . . . . .

$ 0.6
63.8
6.9
16.9
________
$88.2
________
________

$37.1
5.9
13.3
—
________
$56.3
________
________

$33.5
—
15.4
—
________
$48.9
________
________

$ —
—
21.0
—
________
$21.0
________
________

$ —
28.4
—
6.8
________
$35.2
________
________

$ —
26.5
—
6.5
________
$33.0
________
________

$ —
—
—
26.3
________
$26.3
________
________

$ —
—
21.8
—
________
$21.8
________
________

$ —
—
26.3
—
________
$26.3
________
________

Total
________

$

0.6
63.8
27.9
43.2
________
$135.5
________
________

$ 37.1
34.3
35.1
6.8
________
$113.3
________
________

$ 33.5
26.5
41.7
6.5
________
$108.2
________
________

Global equity consists of diversified growth funds invested across a broad range of traditional and
alternative asset classes which may include but are not limited to equities, investment grade and high yield
bonds, property, private equity, infrastructure, commodities and currencies. They may invest directly or
hold up to 100 percent of the fund in other collective investment vehicles and may use exchange traded
and over the counter financial derivatives, such as currency forwards or futures, for both investment as well
as hedging purposes.

Fixed income consists primarily of investment grade debt securities. Corporate bonds and notes are
valued at either the yields currently available on comparable securities of issuers with similar credit ratings
or valued under a discounted cash flows approach that maximizes observable inputs, such as current yields
of similar instruments, but includes adjustments for certain risks that may not be observable such as credit
and liquidity risks. These funds may also aim to provide liability hedging by offering interest rate and
inflation protections which replicates the liability profile of a typical defined benefit pension scheme.

46

Equity/Fixed Income consists of Level 1 assets that are part of a unit linked fund with a strategic asset
allocation of 40 percent fixed income products and 60 percent equity type products. Assets are valued at
either the closing price reported if traded on an active market or at yields currently available on comparable
securities of issuers with similar credit ratings. Index funds are valued at the net asset value as determined
by the custodian of the fund. The Level 3 assets are composed of mathematical reserves on individual
contracts and the Company does not have any influence on the investment decisions as made by the insurer
due to the specific minimum guaranteed return characteristics of this type of contract. European insurers
in general, broadly have a strategic asset allocation with 80 percent to 90 percent fixed income products
and 20 percent to 10 percent equity type products (including real estate).

Real Assets consists of property funds. Property funds are valued using the most recent partnership

statement of fair value, updated for any subsequent partnership interests’ cash flows.

The following table sets forth a summary of changes in the fair values of the International pension

plans’ Level 3 assets for the years ended July 31, 2013, 2012, and 2011 (in millions):

Beginning balance at August 1, 2010 . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers into (out of) Level 3 . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transfers into (out of) Level 3 . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .

Equity/Fixed
Income
_______
$21.7
0.9
2.5
6.2
(5.0)
_______
$26.3
1.4
(3.8)
2.6
(4.6)
(0.1)
_______
$21.8
1.1
1.7
2.6
(0.9)
—_______
$26.3
_______
_______

The following table sets forth a summary of the International pension plans’ assets valued at NAV for

the year ended July 31, 2013 (in millions):

Fixed Income . . . . . .
Equity/Fixed Income
Total . . . . . . . . . . . . . .

Fair Value
__________
$ 13.8
32.6
__________
$ 46.4
__________
__________

Unfunded
Commitments
______________
$ —
—
______________
$ —
______________
______________

Commitments Redemption Frequency
(If Currently Eligible)
_____________________________________
Weekly
Daily, Yearly

Redemption
Notice Period
________________
N/A
90 days

Investment Policies and Strategies. For the Company’s U.S. plans, the Company uses a total return
investment approach to achieve a long-term return on plan assets, with what the Company believes to be a
prudent level of risk for the purpose of meeting its retirement income commitments to employees. The
plans’ investments are diversified to assist in managing risk. The Company’s asset allocation guidelines
target an allocation of 60 percent global equity securities, 25 percent fixed income and 15 percent real assets
(investments into funds containing commodities and real estate). These target allocation guidelines are
determined in consultation with the Company’s investment consultant, and through the use of modeling the
risk/return trade-offs among asset classes utilizing assumptions about expected annual return, expected
volatility/standard deviation of returns, and expected correlations with other asset classes.

47

For the Company’s non-U.S. plans, the general investment objectives are to maintain a suitably
diversified portfolio of secure assets of appropriate liquidity which will generate income and capital growth
to meet, together with any new contributions from members and the Company, the cost of current and
future benefits. Investment policy and performance is measured and monitored on an ongoing basis by the
Company’s investment committee through its use of an investment consultant and through quarterly
investment portfolio reviews.

Estimated Contributions and Future Payments The Company’s general funding policy for its pension
plans is to make at least the minimum contributions as required by applicable regulations. The Company
may elect to make additional contributions up to the maximum tax deductible contribution. As such, the
Company made contributions of $21.5 million to its U.S. pension plans in Fiscal 2013. The minimum funding
requirement for the Company’s U.S. pension plans for Fiscal 2014 is $7.9 million. Per the Pension Protection
Act of 2006, this obligation could be met with existing credit balances that resulted from payments above
the minimum obligation in prior years. As such, the Company does not anticipate making a contribution in
Fiscal 2014 to its U.S. pension plans.The Company made contributions of $6.7 million to its non-U.S. pension
plans in Fiscal 2013 and estimates that it will contribute approximately $5.6 million in Fiscal 2014 based
upon the local government prescribed funding requirements. Future estimates of the Company’s pension
plan contributions may change significantly depending on the actual rate of return on plan assets, discount
rates, and regulatory requirements.

Estimated future benefit payments for the Company’s U.S. and non-U.S. plans are as follows (thousands

of dollars):

Fiscal Year
________
2014 . . . . . . . . . . . . . . . . . . . $ 23,305
2015 . . . . . . . . . . . . . . . . . . . $ 20,622
2016 . . . . . . . . . . . . . . . . . . . $ 23,447
2017 . . . . . . . . . . . . . . . . . . . $ 28,181
2018 . . . . . . . . . . . . . . . . . . . $ 25,624
2019-2023 . . . . . . . . . . . . . . $137,068

Postemployment and Postretirement Benefit Plans The Company provides certain postemployment
and postretirement health care benefits for certain U.S. employees for a limited time after termination of
employment. The Company has recorded a liability for its postretirement benefit plan in the amount of
$1.3 million and $1.5 million as of July 31, 2013 and July 31, 2012, respectively. The annual cost resulting
from these benefits is not material. For measurement purposes, a 7.2 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for Fiscal 2013. The Company has assumed that
the long-term rate of increase will decrease gradually to an ultimate annual rate of 4.5 percent. A one-
percentage point increase in the health care cost trend rate would increase the Fiscal 2013 and 2012 liability
by $0.1 million.

Retirement Savings and Employee Stock Ownership Plan The Company provides a contributory
employee savings plan to U.S. employees that permits participants to make contributions by salary reduction
pursuant to section 401(k) of the Internal Revenue Code. Employee contributions of up to 25 percent of
compensation are matched at a rate equaling 100 percent of the first 3 percent contributed and 50 percent
of the next 2 percent contributed. The Company’s contributions under this plan are based on the level of
employee contributions. Total contribution expense for these plans was $7.3 million, $5.5 million, and
$9.1 million for the years ended July 31, 2013, 2012, and 2011, respectively.This plan also includes shares from
an Employee Stock Ownership Plan (ESOP).As of July 31, 2013, all shares of the ESOP have been allocated
to participants. Total ESOP shares are considered to be shares outstanding for earnings per share
calculations. In July 2013, the Company announced that Employees hired on or after August 1, 2013 will be
eligible for a 3 percent annual Company retirement contribution in addition to the Company’s 401(k) match.
Effective August 1, 2016, Employees hired prior to August 1, 2013 will be eligible for the 3 percent annual
Company retirement contribution.

Deferred Compensation and Other Benefit Plans The Company provides various deferred
compensation and other benefit plans to certain executives. The deferred compensation plan allows these
employees to defer the receipt of all of their bonus and other stock related compensation and up to
75 percent of their salary to future periods. Other benefit plans are provided to supplement the benefits for
a select group of highly compensated individuals which are reduced because of compensation limitations
set by the Internal Revenue Code. The Company has recorded a liability in the amount of $9.5 million for
both of the years ended July 31, 2013 and July 31, 2012, related primarily to its deferred compensation plans.

48

NOTE I Shareholders’ Equity

Stock Rights On January 27, 2006, the Board of Directors of the Company approved the extension of
the benefits afforded by the Company’s existing rights plan by adopting a new shareholder rights plan.
Pursuant to the Rights Agreement, dated as of January 27, 2006 by and between the Company and Wells
Fargo Bank, N.A., as Rights Agent, one right was issued on March 3, 2006 for each outstanding share of
common stock of the Company upon the expiration of the Company’s existing rights. Each of the new rights
entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A
Junior Participating Preferred Stock, without par value, at a price of $143.00 per one one-thousandth of a
share. The rights, however, will not become exercisable unless and until, among other things, any person
acquires 15 percent or more of the outstanding common stock of the Company. If a person acquires 15
percent or more of the outstanding common stock of the Company (subject to certain conditions and
exceptions more fully described in the Rights Agreement), each right will entitle the holder (other than the
person who acquired 15 percent or more of the outstanding common stock) to purchase common stock of
the Company having a market value equal to twice the exercise price of a right. The rights are redeemable
under certain circumstances at $.001 per right and will expire, unless earlier redeemed, on March 2, 2016.

Stock Compensation Plans The Stock Compensation Plans in the Consolidated Statements of Changes
in Shareholders’ Equity consist of the balance of amounts payable to eligible participants for stock
compensation that was deferred to a Rabbi Trust pursuant to the provisions of the 2010 Master Stock
Incentive Plan, as well as performance awards payable in common stock discussed further in Note J.

Treasury Stock The Company believes that the share repurchase program is a way of providing return
to its shareholders. The Board of Directors authorized the repurchase, at the Company’s discretion, of up
to 16.0 million shares of common stock under the stock repurchase plan dated March 26, 2010.As of July 31,
2013, the Company had remaining authorization to repurchase 2.6 million shares under this plan. Following
is a summary of treasury stock share activity for Fiscal 2013 and 2012:

Beginning balance at August 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance upon exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Issuance under compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock split and other activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012
_________
3,980,832
2,986,794
(1,288,560)
(174,408)
(13,933)
_________
5,490,725
_________
_________

2011
_________
13,245,864
4,503,587
(1,270,526)
(89,528)
(12,408,565)
_________
3,980,832
_________
_________

NOTE J Stock Option Plans

Employee Incentive Plans

In November 2010 shareholders approved the 2010 Master Stock Incentive
Plan (the Plan) that replaced the 2001 Plan that was scheduled to expire on December 31, 2010 and provided
for similar awards. The Plan extends through September 2020 and allows for the granting of nonqualified
stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights (SAR),
dividend equivalents, and other stock-based awards. Options under the Plan are granted to key employees
at market price at the date of grant. Options are generally exercisable for up to 10 years from the date of
grant. The Plan also allows for the granting of performance awards to a limited number of key executives.
As administered by the Human Resources Committee of the Company’s Board of Directors to date, these
performance awards are payable in common stock and are based on a formula which measures performance
of the Company over a three-year period. Performance award expense under these plans totaled $0.1 million
in Fiscal 2013, $1.9 million in Fiscal 2012, and $1.8 million in Fiscal 2011.

Stock options issued after Fiscal 2002 become exercisable for non-executives in equal increments over
three years. Stock options issued after Fiscal 2010 become exercisable for executives in equal increments
over three years. Stock options issued from Fiscal 2003 to Fiscal 2010 became exercisable for most executives
immediately upon the date of grant. Certain other stock options issued to executives during Fiscal 2004,
2006, and 2007 became exercisable in equal increments over three years. For Fiscal 2013, the Company
recorded pre-tax compensation expense associated with stock options of $8.3 million and recorded
$2.7 million of related tax benefit. For Fiscal 2012 and 2011, the Company recorded pre-tax compensation
expense associated with stock options of $7.8 million and $6.5 million, respectively, and $2.5 million and
$2.1 million, respectively, of related tax benefit.

49

Stock-based employee compensation cost is recognized using the fair-value based method. The
Company determined the fair value of these awards using the Black-Scholes option pricing model, with the
following weighted average assumptions:

Risk - free interest rate. . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . .
Expected life

Director original grants without reloads . . . . . . .
Non - officer original grants . . . . . . . . . . . . . . . . .
Reload grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Officer original grants without reloads . . . . . . . .

2011
2013
2012
___________
___________
___________
<0.03 - 1.7% <0.11 - 1.8% <0.12 - 3.1%
22.5 - 29.7% 25.8 - 31.9% 25.5 - 34.7%
1.0%

1.0 - 1.4%

1.0%

8 years
7 years
<5 years
8 years

8 years
7 years
<8 years
8 years

8 years
8 years
<8 years
8 years

Black-Scholes is a widely accepted stock option pricing model. The weighted average fair value for
options granted during Fiscal 2013, 2012, and 2011 is $8.18, $9.37, and $8.63 per share, respectively, using the
Black-Scholes pricing model.

Reload grants are grants made to officers or directors who exercised a reloadable option during the
fiscal year and made payment of the purchase price using shares of previously owned Company stock. The
reload grant is for the number of shares equal to the shares used in payment of the purchase price and/or
withheld for minimum tax withholding. Beginning in Fiscal 2011, options no longer have a reload provision
for Officers and Directors.

The following table summarizes stock option activity:

Outstanding at July 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options
Outstanding
_________
9,543,624
1,103,202
(2,243,502)
(15,330)
_________
8,387,994
1,082,979
(1,379,827)
(34,819)
_________
8,056,327
965,050
(1,607,081)
(84,476)
_________
7,329,820
_________
_________

Weighted
Average
Exercise Price
__________
$15.02
28.61
11.55
23.60
17.72
34.76
11.90
27.45
20.97
33.91
14.79
33.94
23.88

The total intrinsic value of options exercised during Fiscal 2013, 2012, and 2011 was $33.7 million, $29.5

million, and $34.2 million, respectively.

Shares reserved at July 31, 2013 for outstanding options and future grants were 13,656,154. Shares

reserved consist of shares available for grant plus all outstanding options.

The following table summarizes information concerning outstanding and exercisable options as of July

31, 2013:

Range of Exercise Prices
__________________
$0.00 to $15.89 . . . . . . . . . . . . . . . . . . . .
$15.90 to $20.89 . . . . . . . . . . . . . . . . . . .
$20.90 to $25.89 . . . . . . . . . . . . . . . . . . .
$25.90 to $30.89 . . . . . . . . . . . . . . . . . . .
$30.90 and above . . . . . . . . . . . . . . . . . .

Weighted
Average
Remaining
Contractual
Life (Years)
________
1.26
3.79
5.73
7.36
8.36
5.42

Weighted
Average
Exercise
Price
______
$15.29
17.44
21.79
29.15
34.35
23.88

Weighted
Average
Exercise
Price
______
$15.29
17.44
21.79
29.16
34.88
20.79

Number
Exercisable
________
1,156,373
1,935,678
1,375,689
599,727
456,550
________
5,524,017
________

Number
Outstanding
_________
1,156,373
1,935,678
1,375,689
909,199
1,952,881
_________
7,329,820
_________

50

At July 31, 2013, the aggregate intrinsic value of shares outstanding and exercisable was $90.7 million

and $85.4 million, respectively.

The following table summarizes the status of options which contain vesting provisions:

Non - vested at July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - vested at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average Grant
Date Fair
_________
Value
$9.22
8.80
8.90
8.98
9.18

________
Options
1,805,397
850,500
(822,350)
(27,744)
________
1,805,803
________
________

The total fair value of shares vested during Fiscal 2013, 2012, and 2011 was $29.8 million, $19.5 million,

and $10.5 million, respectively.

As of July 31, 2013, there was $7.5 million of total unrecognized compensation cost related to non-vested
stock options granted under the Plan. This unvested cost is expected to be recognized during Fiscal 2014,
Fiscal 2015, and Fiscal 2016.

NOTE K Income Taxes

The components of earnings before income taxes are as follows:

2013
________

2012
________
(thousands of dollars)

2011
________

Earnings before income taxes:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$147,317
200,864
________
$348,181
________
________

$171,101
199,679
________
$370,780
________
________

$ 117,562
194,701
________
$312,263
________
________

The components of the provision for income taxes are as follows:

2013
________

2012
________
(thousands of dollars)

2011
________

Income taxes:
Current

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 35,820
4,337
52,300
________
92,457
________

7,071
312
964
________
8,347
________
$100,804
________
________

$ 45,468
4,012
50,655
________
100,351
________

7,391
722
(1,769)
________
6,344
________
$106,479
________
________

$26,675
3,555
54,785
________
85,015
________

8,556
191
(6,790)
________
1,957
________
$86,972
________
________

The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:

2013
________

2012
________
(thousands of dollars)

2011
________

Statutory U.S. federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes at lower rates . . . . . . . . . . . . . . . . . . . . . . . . . .
Export, manufacturing, and research credits . . . . . . . . . . . .
U.S. tax impact on repatriation of earnings . . . . . . . . . . . . .
Change in unrecognized tax benefits . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35.0%
1.2%
(6.1)%
(1.5)%
(0.2)%
0.5%
0.1%
________
29.0%
________
________

35.0%
1.2%
(6.0)%
(1.0)%
0.8%
(1.0)%
(0.3)%
________
28.7%
________
________

35.0%
1.0%
(6.6)%
(1.6)%
(0.3)%
0.1%
0.3%
________
27.9%
________
________

51

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:

Deferred tax assets:

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and retirement plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOL carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO and inventory reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2012
2013
_______
_______
(thousands of dollars)

$11,580
23,578
3,279
5,037
3,890
_______
47,364
(3,228)
_______
44,136
_______

(45,737)
(663)
_______
(46,400)
_______
4,015
_______
$ 1,751
_______
_______

$10,666
52,986
3,146
2,796
3,697
_______
73,291
(2,945)
_______
70,346
_______

(38,796)
(394)
_______
(39,190)
_______
4,251
_______
$35,407
_______
_______

Deferred income tax assets on the face of the balance sheet include $4.0 million and $4.3 million of
prepaid tax assets related to intercompany transfers of inventory as of July 31, 2013 and July 31, 2012,
respectively.

The effective tax rate for Fiscal 2013 was 29.0 percent compared to 28.7 percent in Fiscal 2012. The
increase in the effective tax rate is primarily due to the incremental benefits derived in Fiscal 2012 from the
favorable settlement of tax audits. This was partially offset by an increase in tax benefits from international
operations and the retroactive reinstatement of the Research and Experimentation Credit in the U.S. in the
current year.

The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S.
subsidiaries of approximately $757.0 million. The Company currently intends to indefinitely reinvest these
undistributed earnings as there are significant investment opportunities there or to repatriate the earnings
only when it is tax effective to do so. If any portion were to be distributed, the related U.S. tax liability may
be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carryovers.
Determination of the unrecognized deferred tax liability related to these undistributed earnings is
not practicable.

The Company has cumulative pre-tax loss carryforwards of $3.1 million, which exist in various
international subsidiaries. If fully realized, the unexpired net operating losses may be carried forward to
offset future local income tax payments of $0.9 million, at current rates of tax.The majority of the remaining
net operating loss carryforwards expire more than 5 years out or have no statutory expiration under current
local laws. However, as it is more-likely-than-not that certain of these losses will not be realized, a valuation
allowance of $0.8 million exists as of July 31, 2013.

The Company maintains a reserve for uncertain tax benefits. The accounting standard defines the
threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-
not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the
recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit
that in the Company’s judgment is greater than 50 percent likely to be realized. A reconciliation of the
beginning and ending amount of gross unrecognized tax benefits is as follows:

Gross unrecognized tax benefits at beginning of fiscal year. .
Additions for tax positions of the current year . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years. . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions due to lapse of applicable statute of limitations .
Gross unrecognized tax benefits at end of fiscal year . . . . . . .

52

2011
_______

2013
_______

2012
_______
(thousands of dollars)
$20,005
3,323
261
(4,462)
—
(2,613)
_______
$16,514
_______
_______

$16,514
5,453
407
(1,640)
(277)
(2,038)
_______
$18,419
_______
_______

$18,994
7,406
668
(4,059)
—
(3,004)
_______
$20,005
_______
_______

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income
tax expense. During the fiscal year ended July 31, 2013, the Company recognized interest expense, net of tax
benefit, of approximately $0.3 million. At July 31, 2013 and July 31, 2012, accrued interest and penalties on
a gross basis were $1.1 million and $1.3 million, respectively.

The Company’s uncertain tax positions are affected by the tax years that are under audit or remain
subject to examination by the relevant taxing authorities. The following tax years, in addition to the current
year, remain subject to examination, at least for certain issues, by the major tax jurisdictions indicated:

Major Jurisdictions
______________
Belgium . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . .
Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . .
Thailand . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . .

Open Tax Years
________________
2011 through 2012
2003 through 2012
2010 through 2012
2009 through 2012
2003 through 2012
2012
2008 through 2012
2005 through 2012
2012
2011 through 2012

If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the
unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of
about 5 years, up to $0.8 million of the unrecognized tax benefits could potentially expire in the next 12
month period, unless extended by audit. It is possible that quicker than expected settlement of either current
or future audits and disputes would cause additional reversals of previously recorded reserves in the next
12 month period. Currently, the Company has approximately $0.2 million of unrecognized tax benefits that
are in formal dispute with various taxing authorities related to transfer pricing and deductibility of expenses.
Quantification of an estimated range and timing of future audit settlements cannot be made at this time.

NOTE L Segment Reporting

Consistent with FASB guidance related to segment reporting, the Company identified two reportable
segments: Engine Products and Industrial Products. Segment selection was based on the internal
organizational structure, management of operations, and performance evaluation by management and the
Company’s Board of Directors.

The Engine Products segment sells to OEMs in the construction, mining, agriculture, aerospace, defense,
and truck markets and to independent distributors, OEM dealer networks, private label accounts, and large
equipment fleets. Products include air filtration systems, exhaust and emissions systems, liquid filtration
systems including hydraulics, fuel and lube, and replacement filters.

The Industrial Products segment sells to various industrial dealers, distributors, and end-users, OEMs
of gas-fired turbines, and OEMs and end-users requiring clean air. Products include dust, fume, and mist
collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane-
based products, and specialized air and gas filtration systems for applications including computer hard disk
drives and semi-conductor manufacturing.

Corporate and Unallocated includes corporate expenses determined to be non-allocable to the
segments, interest income, and interest expense. Assets included in Corporate and Unallocated principally
are cash and cash equivalents, inventory reserves, certain prepaids, certain investments, other assets, and
assets allocated to general corporate purposes.

The Company has an internal measurement system to evaluate performance and allocate resources
based on profit or loss from operations before income taxes. The Company’s manufacturing facilities serve
both reporting segments. Therefore, the Company uses an allocation methodology to assign costs and assets
to the segments. A certain amount of costs and assets relate to general corporate purposes and are not
assigned to either segment. Certain accounting policies applied to the reportable segments differ from those
described in the summary of significant accounting policies.The reportable segments account for receivables
on a net basis and account for inventory on a standard cost basis.

53

Segment allocated assets are primarily accounts receivable, inventories, property, plant, and equipment,
and goodwill. Reconciling items included in Corporate and Unallocated are created based on accounting
differences between segment reporting and the consolidated, external reporting as well as internal allocation
methodologies.

The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost
allocations, and sharing of assets. Therefore, we do not represent that these segments, if operated
independently, would report the operating profit and other financial information shown below.

Segment detail is summarized as follows:

_________ _________

Industrial
Products

Engine
Products

Corporate &
Unallocated
_________

Total
Company
_________

2013
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . .
Earnings before income taxes. . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated

affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures, net of acquired
businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . .
Earnings before income taxes. . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated

affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital expenditures, net of acquired
businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . .
Earnings before income taxes. . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated

affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital expenditures, net of acquired
businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(thousands of dollars)

$1,504,188
35,815
4,000
220,892
826,151

$932,760
22,447
693
139,108
527,416

$

— $2,436,948
64,290
4,693
348,181
1,743,556

6,028
—
(11,819)
389,989

15,563

3,277

—

18,840

52,864

33,134

8,897

94,895

$1,570,140
36,646
3,966
227,941
845,176

$923,108
18,852
769
149,249
520,739

$

— $2,493,248
61,165
4,735
370,780
1,730,082

5,667
—
(6,410)
364,167

17,304

2,822

—

20,126

46,816

24,083

7,240

78,139

$1,440,495
36,338
3,302
211,255
888,080

$853,534
19,396
803
123,871
519,730

$

— $2,294,029
60,491
4,105
312,263
1,726,093

4,757
—
(22,863)
318,283

16,619

2,558

—

19,177

36,423

19,442

4,768

60,633

Following are net sales by product within the Engine Products segment and Industrial Products

segment:

Engine Products segment:

Off-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aftermarket Products* . . . . . . . . . . . . . . . . . . . . . . . . . .
Retrofit Emissions Products . . . . . . . . . . . . . . . . . . . . . .
Aerospace and Defense Products . . . . . . . . . . . . . . . . .
Total Engine Products segment . . . . . . . . . . . . . . . . .

Industrial Products segment:

Industrial Filtration Solutions Products . . . . . . . . . . . .
Gas Turbine Products. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special Applications Products . . . . . . . . . . . . . . . . . . . .
Total Industrial Products segment. . . . . . . . . . . . . . .
Total Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
_________

$ 358,834
128,446
900,419
12,298
104,191
_________
1,504,188
_________

529,751
232,922
170,087
_________
932,760
_________
$2,436,948
_________
_________

*

Includes replacement part sales to the Company’s OEM Customers.

54

_________ _________

2012
(thousands of dollars)

2011

$ 376,870 $ 327,557
163,934
127,107
907,306
861,393
15,354
19,555
106,676
104,883
_________ _________
1,570,140
1,440,495
_________ _________

553,453
180,669
188,986
923,108

507,646
154,726
191,162
_________ _________
853,534
_________ _________
$2,493,248 $2,294,029
_________ _________
_________ _________

Geographic sales by origination and property, plant, and equipment:

Net Sales
_________

Property, Plant &
Equipment — Net
_____________

(thousands of dollars)

2013
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,010,934
678,996
546,406
200,612
_________
$2,436,948
_________

$1,064,474
678,619
572,163
177,992
_________
$2,493,248
_________

$941,218
653,275
540,874
158,662
_________
$2,294,029
_________

$166,614
123,710
75,206
53,750
________
$419,280
________

$146,328
114,266
80,200
44,115
________
$384,909
________

$141,584
131,739
81,035
37,144
________
$391,502
________

Concentrations There were no Customers over 10 percent of net sales during Fiscal 2013, 2012, and
2011. There were no Customers over 10 percent of gross accounts receivable in Fiscal 2013 or Fiscal 2011
and one Customer over 10 percent of gross accounts receivable in Fiscal 2012.

NOTE M Guarantees

The Company and Caterpillar Inc. equally own the shares of Advanced Filtration Systems Inc. (AFSI),
an unconsolidated joint venture, and guarantee certain debt of the joint venture.As of July 31, 2013, the joint
venture had $29.1 million of outstanding debt, of which the Company guarantees half. In addition, during
Fiscal 2013, 2012, and 2011, the Company recorded its equity in earnings of this equity method investment
of $2.3 million, $2.0 million, and $1.6 million and royalty income of $6.0 million, $6.2 million, and $6.2 million,
respectively, related to AFSI.

At July 31, 2013 and 2012, the Company had a contingent liability for standby letters of credit totaling
$12.2 million and $10.9 million, respectively, which have been issued and are outstanding. The letters of
credit guarantee payment to third parties in the event the Company is in breach of a specified bond financing
agreement and insurance contract terms as detailed in each letter of credit. At July 31, 2013 and 2012, there
were no amounts drawn upon these letters of credit.

NOTE N Warranty

The Company provides for warranties on certain products. In addition, the Company may incur specific

Customer warranty issues. Following is a reconciliation of warranty reserves (in thousands of dollars):

Balance at July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued during the reporting period. . . . . . . . . . . . . . . . . . . . . . . .
Accruals related to pre-existing warranties (including changes in estimates) . . . . . . . . .
Less settlements made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued during the reporting period. . . . . . . . . . . . . . . . . . . . . . . .
Accruals related to pre-existing warranties (including changes in estimates) . . . . . . . . .
Less settlements made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$19,720
5,002
(2,956)
(10,861)
_______
$10,905
5,940
(1,081)
(5,238)
_______
$10,526
_______
_______

55

There were no significant specific warranty matters accrued for in Fiscal 2013 or Fiscal 2012. These
warranty matters are not expected to have a material impact on the Company’s results of operations,
liquidity, or financial position. There were no significant settlements made in Fiscal 2013. The settlements
made during Fiscal 2012 were primarily in relation to the Company’s Retrofit Emissions Product group for
$3.6 million, one in the Company’s Off-Road Products group for $1.8 million, and one in the On-Road
Product group for $4.1 million.

NOTE O Commitments and Contingencies

Operating Leases The Company enters into operating leases primarily for office and warehouse
facilities, production and non-production equipment, automobiles, and computer equipment. Total expense
recorded under operating leases for the periods ended July 31, 2013 and 2012 were $27.5 million and
$26.8 million, respectively. Future commitments under operating leases are: $11.4 million in Fiscal 2014,
$8.0 million in Fiscal 2015, $4.3 million in Fiscal 2016, $1.9 million in Fiscal 2017, $1.0 million in Fiscal 2018,
and $0.1 million thereafter.

Litigation The Company records provisions with respect to identified claims or lawsuits when it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims
and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular
matter. The Company believes the recorded reserves in its consolidated financial statements are adequate
in light of the probable and estimable outcomes.The recorded liabilities were not material to the Company’s
financial position, results of operations, or liquidity and the Company does not believe that any of the
currently identified claims or litigation will materially affect its financial position, results of operations,
or liquidity.

NOTE P Quarterly Financial Information (Unaudited)

2013
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . .
2012
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . .

First
Quarter
________

$588,947
198,293
54,113
0.36
0.36
0.090
0.090

$608,295
214,934
68,553
0.46
0.45
0.075
0.075

Second
Third
Quarter
Quarter
________
(thousands of dollars)

________ ________

Fourth
Quarter

$596,036
198,977
50,813
0.34
0.34
0.100
0.090

$580,883
200,817
53,821
0.36
0.35
0.080
0.075

$619,371
221,501
69,842
0.47
0.46
0.130
0.100

$647,237
228,229
70,946
0.47
0.46
0.090
0.080

$632,594
228,356
72,609
0.49
0.48
0.130
0.130

$656,833
229,783
70,981
0.47
0.47
0.090
0.090

Note: the above table reflects the impact of the two-for-one stock split that occurred on March 23, 2012.

NOTE Q Subsequent Events

On August 13, 2013, the Company announced it had entered into a definitive agreement to sell Ultratroc
Gmbh (Ultratroc), a wholly owned subsidiary and manufacturer of compressed air dryers located in
Flensburg, Germany, which was effective September 23, 2013.The Ultratroc business is currently part of the
Company’s Industrial Products segment. Under the terms of the agreement, Donaldson will continue selling
Ultratroc’s compressed air dryers and will retain the naming rights to the brand names “Donaldson
Ultrafilter” and “Ultrafilter.” The sale will not have a material impact on the Company’s results of
operations, liquidity, or financial position.

56

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the Evaluation Date), the Company 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 the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation
Date, the Company’s disclosure controls and procedures were effective to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in applicable rules and forms, and
(ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) identified in connection with such evaluation during the fiscal quarter ended July 31,
2013, has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.

The Company is in the process of a multi-year implementation of a Strategic Business System project
(which is the Company’s global enterprise resource planning, or ERP, system). In fiscal 2014, the Company
expects this system will be deployed in certain operations, primarily in the Americas. In response to business
integration activities related to the new system, the Company will align and streamline the design and
operation of the financial reporting controls environment to be responsive to the changing operating
environment.

Management’s Report on Internal Control over Financial Reporting

See Management’s Report on Internal Control over Financial Reporting under Item 8 on page 27.

Report of Independent Registered Public Accounting Firm

See Report of Independent Registered Public Accounting Firm under Item 8 on page 28.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

The information under the captions “Item 1: Election of Directors”;“Director Selection Process,”“Audit
Committee,”“Audit Committee Expertise; Complaint-Handling Procedures,” and “Section 16(a) Beneficial
Ownership Reporting Compliance” of the 2013 Proxy Statement is incorporated herein by reference.
Information on the Executive Officers of the Company is found under the caption “Executive Officers of
the Registrant” on page 7 of this Annual Report on Form 10-K.

The Company has adopted a code of business conduct and ethics in compliance with applicable rules
of the Securities and Exchange Commission that applies to its principal executive officer, its principal
financial officer and its principal accounting officer or controller, or persons performing similar functions.
A copy of
the code of business conduct and ethics is posted on the Company’s website at
www.donaldson.com. The code of business conduct and ethics is available in print, free of charge to any
shareholder who requests it. The Company will disclose any amendments to, or waivers of, the code of
business conduct and ethics for the Company’s principal executive officer, principal financial officer, and
principal accounting officer on the Company’s website.

57

Item 11. Executive Compensation

The information under the captions “Executive Compensation” and “Director Compensation” of the

2013 Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

The information under the caption “Security Ownership” of the 2013 Proxy Statement is incorporated

herein by reference.

The following table sets forth information as of July 31, 2013 regarding the Company’s equity

compensation plans:

Plan Category
__________

Equity compensation plans approved
by security holders:
1980 Master Stock Compensation Plan:
Deferred Stock Gain Plan. . . . .
1991 Master Stock Compensation Plan:

Deferred Stock Option
Gain Plan . . . . . . . . . . . . . . . . .
Deferred LTC/
Restricted Stock . . . . . . . . . . . .
2001 Master Stock Incentive Plan:
Stock Options . . . . . . . . . . . . . . .
Deferred Stock Option
Gain Plan . . . . . . . . . . . . . . . . .
Deferred LTC/|
Restricted Stock . . . . . . . . . . . .
Long-Term Compensation . . . .

2010 Master Stock Incentive Plan:

Stock Options . . . . . . . . . . . . . . .
Stock Options for Non-
Employee Directors. . . . . . . . .
Long-Term Compensation . . . .

Subtotal for plans approved by
security holders . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by security holders:

Non-qualified Stock Option Program
for Non-Employee Directors. . . . .
ESOP Restoration . . . . . . . . . . . . . .
Subtotal for plans not approved by
security holders . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of securities
to be issued upon exercise
of outstanding options,
warrants, and rights
_________________
(a)
_________________

Weighted-average
exercise price of
outstanding options,
warrants, and rights
______________
(b)
______________

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
_______________
(c)
_______________

57,775

$ 7.6108

572,991

220,008

3,999,220

3,511

270,002
74,773

2,304,260

$18.3960

$12.1824

$18.5604

$29.0143

$18.1362
$23.7350

$32.5917

409,200
32,641
_________________

32.6111
$31.6252
______________

7,944,381
_________________

$23.1784
______________

—

—

—

—

—

—
—

See Note 1

—

617,140
39,259
_________________

$19.9868
$ 7.0989
______________

See Note 2
See Note 3

656,399
_________________
8,600,780
_________________
_________________

19.2160
______________
22.8760
______________
______________

Note 1: The 2010 Master Stock Incentive Plan limits the number of shares authorized for issuance to
9,200,000 during the 10-year term of the plan in addition to any shares forfeited under the 2001
plan. The Plan allows for the granting of nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, SAR, dividend equivalents, and other stock-based awards.
There are currently 6,326,334 shares of the authorization remaining.

58

Note 2: The stock option program for non-employee directors (filed as exhibit 10-H to Form 10-Q report
filed for the first quarter ended October 31, 2008) provides for each non-employee director to
receive annual option grants of 14,400 shares. The 2010 Master Stock Incentive Plan, which was
approved by the Company’s stockholders on November 19, 2010, provides for the issuance of stock
options to non-employee directors, and the stock option program for non-employee directors has
been adopted as a sub-plan under the 2010 Master Stock Incentive Plan and shares issued to
directors after December 10, 2010 will be issued under the 2010 Master Stock Incentive Plan.

Note 3: The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990 (filed as
exhibit 10-D to the Company’s 2009 Form 10-K report), 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 10-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.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information under the captions “Policy and Procedures Regarding Transactions with Related
Persons” and “Board Oversight and Director Independence” of the 2013 Proxy Statement is incorporated
herein by reference.

Item 14. Principal Accounting Fees and Services

The information under the captions “Independent Auditor Fees” and “Audit Committee Pre-Approval

Policies and Procedures” of the 2013 Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

Documents filed with this report:

(1) Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings — years ended July 31, 2013, 2012 and 2011

Consolidated Balance Sheets — July 31, 2013 and 2012

Consolidated Statements of Comprehensive Income — years ended July 31, 2013, 2012
and 2011

Consolidated Statements of Cash Flows — years ended July 31, 2013, 2012 and 2011

Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, 2013,
2012 and 2011

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules —

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.

59

SIGNATURES

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.

Date: September 27, 2013

By:

William M. Cook
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 indicated on September 27, 2013.

_____________________________________
William M. Cook

_____________________________________
James F. Shaw

_____________________________________
Melissa A. Osland

*
_____________________________________
F. Guillaume Bastiaens
*
_____________________________________
Andrew Cecere
*
_____________________________________
Janet M. Dolan
*
_____________________________________
Michael J. Hoffman
*
_____________________________________
Paul David Miller
*
_____________________________________
Jeffrey Noddle
*
_____________________________________
Willard D. Oberton
*
_____________________________________
James J. Owens
*
_____________________________________
Ajita G. Rajendra
*
_____________________________________
John P. Wiehoff

*By:
_____________________________________
Norman C. Linnell
As attorney-in-fact

President, Chief Executive Officer and Chairman
(Principal Executive Officer)

Vice President and Chief Financial Officer
(Principal Financial Officer)

Controller
(Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

Director

Director

Director

Director

60

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

DONALDSON COMPANY, INC. AND SUBSIDIARIES
(thousands of dollars)

Additions
____________________

Balance at Charged to
Beginning
of Period
_______

Charged to
Costs and Other Accounts Deductions
(B)
(A)
Expenses
________
___________
_______

Balance at
End of
Period
_______

Description
________

Year ended July 31, 2013:

Allowance for doubtful accounts

deducted from accounts receivable . . . . . . .

$6,418

$1,241

$ 230

$(849)

$ 7,040

Year ended July 31, 2012:

Allowance for doubtful accounts

deducted from accounts receivable . . . . . . .

$6,908

$1,151

$(676)

$(965)

$6,418

Year ended July 31, 2011:

Allowance for doubtful accounts

deducted from accounts receivable . . . . . . .

$6,315

$ 482

$ 481

$(370)

$6,908

Note A - Allowance for doubtful accounts foreign currency translation losses (gains) recorded directly to equity.

Note B - Bad debts charged to allowance, net of reserves and changes in estimates.

61

EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
* 3-A — Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit

3-A to Form 10-Q Report for the Second Quarter ended January 31, 2012)

*3-B

— Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock of Registrant, dated as of March 3, 2006 (Filed as Exhibit 3-B to 2011 Form 10-K Report)
* 3-C — Amended and Restated Bylaws of Registrant (as of January 30, 2009) (Filed as Exhibit 3-C to

Form 10-Q Report for the Second Quarter ended January 31, 2009)

— **

* 4
*4-A — Preferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo
Bank, N.A., as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4-A to 2011 Form 10-
K Report)

*10-A — Officer Annual Cash Incentive Plan (Filed as Exhibit 10-A to 2011 Form 10-K Report)***
*10-B — 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-A to Form 10-Q Report

filed for the first quarter ended October 31, 2008)***

*10-C — Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as

Exhibit 10-B to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

*10-D — ESOP Restoration Plan (2003 Restatement) (Filed as Exhibit 10-D to 2009 Form 10-K

Report)***

*10-E — Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit 10-C to

Form 10-Q Report filed for the first quarter ended October 31, 2008)***

*10-F — Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-D to Form

10-Q Report filed for the first quarter ended October 31, 2008)***

*10-G — Supplemental Executive Retirement Plan (2008 Restatement) (Filed as Exhibit 10-G to 2011

Form 10-K Report)***

*10-H — 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-E to Form 10-Q Report

filed for the first quarter ended October 31, 2008)***

*10-I — Form of Restricted Stock Award under 1991 Master Stock Compensation Plan (Filed as Exhibit
10-F to Form 10-Q Report filed for the first quarter ended October 31, 2008)***
*10-J — Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit 10-

G to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

*10-K — Stock Option Program for Non-employee Directors (Filed as Exhibit 10-H to Form 10-Q Report

filed for the first quarter ended October 31, 2008)***

*10-L — Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance
Companies Dated as of July 15, 1998 (Filed as Exhibit 10-I to Form 10-Q Report filed for the
first quarter ended October 31, 2008)

*10-M — Second Supplement and First Amendment to Note Purchase Agreement among Donaldson
Company, Inc. and certain listed Insurance Companies dated as of September 30, 2004 (Filed as
Exhibit 10-N to 2010 Form 10-K Report)

*10-N — 2001 Master Stock Incentive Plan (Filed as Exhibit 10-O to 2009 Form 10-K Report)***
*10-O — Form of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan

(Filed as Exhibit 10-P to 2010 Form 10-K Report)***

*10-P — Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master

Stock Incentive Plan (Filed as Exhibit 10-Q to 2010 Form 10-K Report)***

*10-Q — Restated Compensation Plan for Non-Employee Directors dated July 28, 2006 (Filed as Exhibit

10-Q to 2011 Form 10-K Report)***

*10-R — Restated Long-Term Compensation Plan dated May 23, 2006 (Filed as Exhibit 10-R to 2011 Form

10-K Report)***

*10-S — Qualified Performance-Based Compensation Plan (Filed as Exhibit 10-S to 2011 Form 10-K

Report)***

*10-T — Deferred Compensation and 401(k) Excess Plan (2008 Restatement) (Filed as Exhibit 10-T to

2011 form 10-K Report)***

*10-U — Deferred Stock Option Gain Plan (2008 Restatement) (Filed as Exhibit 10-U to 2011 Form 10-

K Report) ***

*10-V — Excess Pension Plan (2008 Restatement) (Filed as Exhibit 10-V to 2011 Form 10-K Report) ***

62

*10-W — Form of Management Severance Agreement for Executive Officers (Filed as Exhibit 10-A to

Form 10-Q Report for the Third Quarter ended April 30, 2008)***

*10-X — 2010 Master Stock Incentive Plan (Filed as Exhibit 4.5 to Registration Statement on Form S-*

(File No. 333-170729) filed on November 19, 2010)***

*10-Y — Form of Officer Stock Option Award Agreement under the 2010 Master Stock Incentive Plan

(Filed as Exhibit 10.1 to Form 8-K Report filed on December 16, 2010) ***

*10-Z — Form of Restricted Stock Award Agreement under the 2010 Master Stock Incentive Plan (Filed

as Exhibit 10.2 to Form 8-K Report filed on December 16, 2010) ***

*10-AA — Non-Employee Director Automatic Stock Option Grant Program (Filed as Exhibit 10-AA to

2011 Form 10-K Report)***

*10-BB — Form of Indemnification Agreement for Directors (Filed as Exhibit 10.1 to Form 8-K Report

filed on April 2, 2012)***

*10-CC — Form of Employee Director Non-Qualified Stock Option Agreement under the 2010 Master

Stock Incentive Plan (Filed as Exhibit 10-CC to 2012 Form 10-K Report)***

*10-DD — Form of Management Severance Agreement for Executive Officers (Filed as Exhibit 10.1 to Form

8-K Report filed March 7, 2013)***

*10-EE — Compensation Plan for Non-Employee Directors (Filed as Exhibit 10-B to Form 10-Q Report

filed March 7, 2013)***

10-FF — Non-Employee Director Automatic Stock Option Grant Program***

*10-GG — Credit Agreement among Donaldson Company, Inc. and certain listed lending parties dated as

of December 7, 2012 (Filed as Exhibit 10.1 to Form 8-K Report filed December 13, 2012)*

11

21

23

24

— Computation of net earnings per share (See “Earnings Per Share” in “Summary of Significant
Accounting Policies” in Note A in the Notes to Consolidated Financial Statements on page 34)

— Subsidiaries

— Consent of PricewaterhouseCoopers LLP

— Powers of Attorney

31-A

— Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of

2002

31-B

— Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of

2002

32

— Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section

1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

*

**

— The following financial information from the Donaldson Company, Inc. Annual Report on
Form 10-K for the fiscal year ended July 31, 2013 as filed with the Securities and Exchange
Commission, formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Statements of Earnings, (ii) the Consolidated Balance Sheets, (iii) the Consolidated
Statements of Cash Flows (iv) the Consolidated Statement of Changes in Shareholders’ Equity
and (v) the Notes to Consolidated Financial Statements.

Exhibit has previously 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 the Company and its subsidiaries are not filed and in lieu thereof the
Company 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.

63

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8
(No. 333-170729, 333-107444, 333-97771, 333-56027, 33-27086, 2-90488 and 33-44624) of Donaldson Company,
Inc. of our report dated September 27, 2013 relating to the financial statements, financial statement schedule
and the effectiveness of internal control over financial reporting, which appears in this Annual Report on
Form 10-K.

Exhibit 23

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
September 27, 2013

64

Exhibit 31-A

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William M. Cook, certify that:

1.

I have reviewed this annual report on Form 10-K of Donaldson Company, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this
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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date:

September 27, 2013

William M. Cook
Chief Executive Officer

65

Exhibit 31-B

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James F. Shaw, certify that:

1.

2.

3.

4.

I have reviewed this annual report on Form 10-K of Donaldson Company, Inc.;

Based on my knowledge, this 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 report;

Based on my knowledge, the financial statements, and other financial information included in this
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 report;

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-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:

a)

b)

c)

d)

Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is
being prepared;

Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):

a)

b)

All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.

Date:

September 27, 2013

James F. Shaw
Chief Financial Officer

66

Exhibit 32

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes–Oxley Act of 2002, the
following certifications are being made to accompany the annual report on Form 10-K for the fiscal year
ended July 31, 2013 for Donaldson Company, Inc.:

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William M. Cook, Chief Executive Officer of Donaldson Company, Inc., certify that:

1. The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2013
(the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and

\2. The information contained in the Report fairly presents, in all material respects, the financial condition

and results of operations of Donaldson Company, Inc.

Date:

September 27, 2013

William M. Cook
Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, James F. Shaw, Chief Financial Officer of Donaldson Company, Inc., certify that:

1. The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2013
(the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition

and results of operations of Donaldson Company, Inc.

Date:

September 27, 2013

James F. Shaw
Chief Financial Officer

67

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