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, 2014 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

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

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

⌧ 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 shorter 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, 2014, 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 $5,927,321,901 (based on the closing
price of $41.26 as reported on the New York Stock Exchange as of that date).

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

As of September 24, 2014, there were approximately 138,365,916 shares of the registrant’s common stock outstanding.

Portions of the registrant’s Proxy Statement for its 2014 annual meeting of stockholders (the “2014 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

Item 1.

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

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

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters

PART II

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.

and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Management’s Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

PART III

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . 59
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Certain Relationships and Related Transactions, and Director Independence . . . . . . . 61
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

PART IV

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

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
core strengths are leading filtration technology, strong Customer relationships, and its global presence.
Products are manufactured at 39 plants around the world and through three 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 including
hydraulics, fuel, and lube, 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 independent distributors, OEM dealer networks, 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 and gas filtration systems for applications including computer hard disk drives and semi-conductor
manufacturing.The Industrial Products segment sells to various industrial dealers, distributors, OEMs of gas-
fired turbines, and OEMs and end-users requiring filtration solutions and replacement filters.

The discussion below should be read in conjunction with the risk factors discussed in this report in

Part I, Item 1A, “Risk Factors.”

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*
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,
______________________________
2012
2013
2014
_____
____
____

14%
5%
41%
4%

23%
6%
7%

15%
5%
38%
4%

22%
9%
7%

15%
7%
37%
4%

22%
7%
8%

Total net sales contributed by the principal classes of similar products and financial information about
segment operations and geographic regions appear in Note K in the Notes to Consolidated Financial
Statements on page 54.

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 person who requests them in writing to the attention of Investor Relations, MS 102, Donaldson
Company, Inc., 1400 West 94th Street, Minneapolis, Minnesota 55431. 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.

1

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
typically characterized by more Customer plant closures.

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 2014, 2013, or 2012.
There were no Customers that accounted for over 10 percent of gross accounts receivable in Fiscal 2014 or
Fiscal 2013.

Backlog

At August 31, 2014, the backlog of orders expected to be delivered within 90 days was $375.1 million.
The 90-day backlog at August 31, 2013, was $351.7 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 2014, the Company spent $61.8 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 $62.6 million and
$59.6 million in Fiscal 2013 and Fiscal 2012, 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 2015 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 12,500 persons in worldwide operations as of August 31, 2014.

Geographic Areas

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

Statements on page 54.

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, outline 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 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, governmental laws and
regulations, including the impact of the various economic stimulus and financial reform measures, the
implementation of our new information technology systems, information security and data breaches,
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 and Ukraine, 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, Ukraine, China,
Thailand, and other emerging markets where we do business,

potential global health outbreaks, and

natural disasters.

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

3

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.

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 reduce 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 our 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 continue to upgrade and
standardize our multi-year implementation of a global enterprise resource planning system (Global ERP
Project) 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.

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 2014,
2013, and 2012, an adverse change in Caterpillar’s financial performance or a material reduction in our
sales to Caterpillar could negatively impact our operating results.

4

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 impact 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.

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 by
tax authorities. The results of audits and examinations of previously filed tax returns and continuing

5

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 and
Latin America regions.

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
Johannesburg, South Africa
Seoul, South Korea*

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
Lima, Peru
Singapore
Greeneville, Tennessee (I)

6

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
_____
Amy C. Becker
Tod E. Carpenter
William M. Cook
Sandra N. Joppa
Mary Lynne Perushek
Thomas R. Scalf
James F. Shaw
Wim Vermeersch
Jay L. Ward
Eugene X. Wu

Age
____
49
55
61
49
56
48
45
48
50
46

Positions and Offices Held
______________________________________________________
Vice President, General Counsel and Secretary
Chief Operating Officer
Chairman, President and Chief Executive Officer
Vice President, Human Resources
Vice President and Chief Information Officer
Senior Vice President, Engine Products
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
_________________
2014
2008
1994
2006
2007
2014
2012
2012
2006
2012

Ms. Becker joined the Company in 1998 as Senior Counsel and Assistant Corporate Secretary and was
appointed to Vice President, General Counsel and Secretary in August 2014. Prior to joining the Company,
Ms. Becker was an attorney for Dorsey and Whitney, LLP from 1991 to 1995 and was a Project Manager and
Corporate Counsel for Harmon, Ltd. from 1995 to 1998.

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;
Vice President, Europe and Middle East from 2008 to 2011; and Senior Vice President, Engine Products
from 2011 to 2014. In April 2014, Mr. Carpenter was appointed Chief Operating Officer.

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.

7

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. Scalf joined the Company in 1989 and has held various positions, including Director of Global
Operations from 2003 to 2006; General Manager of Exhaust & Emissions from 2006 to 2008; General
Manager of Industrial Filtration Solutions from 2008 to 2012; and Vice President of Global Industrial Air
Filtration from 2012 to 2014. Mr. Scalf was appointed Senior Vice President, Engine Products, in April 2014.

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
2014 and 2013 appear in Note O of the Notes to Consolidated Financial Statements on page 58. 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 guidance is expected to be used for future dividend payouts. As of
September 24, 2014, there were 1,779 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 2014 and 2013 were as follows:

Fiscal 2014
Fiscal 2013

First Quarter
________________
$34.60 – 41.31
$30.90 – 38.18

Second Quarter
________________
$38.98 – 43.74
$31.83 – 38.30

Third Quarter
________________
$38.66 – 43.39
$34.26 – 38.08

Fourth Quarter
________________
$38.77 – 43.00
$34.35 – 39.36

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, 2014.

Period
______
May 1 – May 31, 2014 . .
June 1 – June 30, 2014 . .
July 1 – July 31, 2014 . . .
Total. . . . . . . . . . . . . . . . .

Total Number of
Shares Purchased (1)
___________________
756,257
1,204,889
801,028
__________________
2,762,174
__________________
__________________

Average Price
Paid per Share
_____________
$41.35
$41.29
$40.86
$41.18

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
________________
756,257
1,204,889
795,545
________________
2,756,691
________________
________________

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
________________
10,544,144
9,339,255
8,543,710
8,543,710

(1) On September 27, 2013, the Company announced that the Board of Directors authorized the repurchase of up to
15.0 million shares of common stock. This repurchase authorization, which is effective until terminated by the
Board of Directors, replaced the existing authority that was authorized on March 26, 2010. There were no
repurchases of common stock made outside of the Company’s current repurchase authorization during the
quarter ended July 31, 2014. However, the “Total Number of Shares Purchased” column of the table above
includes 5,483 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.

The table set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and

Management and Related Stockholder Matters,” of this report is also incorporated herein by reference.

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

$300

$250

$200

$150

$100

$50

$0

7/09

7/10

7/11

7/12

7/13

7/14

Donaldson Company, Inc.

S&P 500

S&P Industrial Machinery

Donaldson Company, Inc. . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . .
S&P Industrial Machinery . . . . . .

Item 6. Selected Financial Data

__________________________________________________________________________
2014
2009
________
_________
$216.11
$100.00
217.28
100.00
274.37
100.00

Year Ended July 31,
2012
2011
_________
_________
$185.33
$148.88
148.64
136.21
166.58
158.27

2013
_________
$199.13
185.80
233.72

2010
_________
$126.32
113.83
131.25

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

ended July 31, 2014 (in millions, except per share data):

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

Year Ended July 31,
__________________________________________________________________
2010
2012
2014
_________
_________
_________
$1,877.1
$2,493.2
$2,473.5
166.2
264.3
260.2
1.07
1.76
1.79
1.05
1.76
1.73
1,499.5
1,730.1
1,942.4
256.2
203.5
243.7
0.240
0.335
0.610
0.235
0.320
0.575

2013
_________
$2,436.9
247.4
1.67
1.64
1,743.6
102.8
0.450
0.410

2011
_________
$2,294.0
225.3
1.46
1.43
1,726.1
205.7
0.280
0.268

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.

10

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 filtration systems, exhaust and emission systems, liquid filtration systems including
hydraulics, fuel, and lube, and replacement filters. 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 global 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 2014 of $2,473.5 million, up 1.5 percent from $2,436.9 million in
the prior year. The Company’s results were negatively impacted by foreign currency translation, which
decreased sales by $11.4 million. Excluding the current year impact of foreign currency translation,
worldwide sales increased 2.0 percent.

The Company reported net earnings in Fiscal 2014 of $260.2 million, an increase of 5.2 percent from
$247.4 million in the prior year. The Company’s net earnings were negatively impacted by foreign currency
translation, which decreased net earnings by $1.0 million. Excluding the current year impact of foreign
currency translation, net earnings increased 5.6 percent.

Although net sales and net earnings excluding foreign currency translation are not measures of financial
performance under generally accepted accounting principles in the United States of America (U.S. GAAP),
the Company believes they are useful in understanding its financial results and provide comparable
measures for understanding the operating results of the Company between different fiscal periods. Following
are reconciliations to the most comparable U.S. GAAP financial measures of these non-GAAP financial
measures (in millions):

Year ended July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings change, excluding
foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation impact . . . . . . . . . . . . . . . . . . . . . . . .
Year ended July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Sales
_________
$2,493.2

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

48.0
(11.4)
_________
$2,473.5
_________
_________

Net Earnings
_________
$ 264.3

(14.8)
(2.1)
_________
$ 247.4
_________

13.8
(1.0)
_________
$ 260.2
_________
_________

Percent
Change in
Net Sales
_________
NA

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

2.0%
(0.5)%
_________
1.5%
_________
_________

Percent
Change in
Net Earnings
_________
NA

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

5.6%
(0.4)%
_________
5.2%
_________
_________

The Company reported diluted earnings per share of $1.76, a 7.3 percent increase from $1.64 in the

prior year.

11

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, such as interest income and interest expense. See further
discussion of segment information in Note K of the Company’s Notes to Consolidated Financial Statements.

Engine Products segment:

Off-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-Road Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aftermarket 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
_________

2013
_________
(thousands of dollars)

2012
_________

$ 342,205
130,029
1,012,165
99,628
_________
1,584,027
_________
_________

553,356
156,860
179,223
_________
889,439
_________
$2,473,466
_________
_________

$ 358,834
128,446
912,717
104,191
_________
1,504,188
_________
_________

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

$ 376,870
163,934
922,660
106,676
_________
1,570,140
_________
_________

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

*

Includes replacement part sales to the Company’s OEM Customers

2014
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .
2013
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .
2012
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . .

Engine
Products
____________

Industrial
Products
____________

Corporate &
Unallocated
___________

Total
Company
________

(thousands of dollars)

$1,584,027
233,920

$889,439
133,978

$ — $2,473,466
360,703

(7,195)

$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)

The Company’s overall sales increased compared to the prior year period. Many factors contributed to
the Company’s results for each of its reportable segments for Fiscal 2014. The Company saw mixed
conditions in its OEM first-fit equipment end markets with some improving, some stable, and some
weakening. Conditions were better for aftermarket sales as the Company saw continued strength in demand
for replacement filters in both its Engine and Industrial end markets. These sales increases were partially
offset by a 32.7 percent decrease in its Gas Turbine sales from Fiscal 2013 sales of $232.9 million. As the
Company has discussed previously, there was a large increase in the Company’s gas turbine shipments in
Fiscal 2013, and the overall industry is now absorbing that new electrical generation capacity, resulting in
the Fiscal 2014 decrease over the prior year period. The Company’s sales increased in Europe by
$49.6 million, or 7.3 percent, and in the Americas by $27.3 million, or 2.4 percent, compared to Fiscal 2013,
partially offset by a $29.1 million, or 5.3 percent, decrease in Asia.

In the Engine Products segment, the Company experienced mixed results in its end-markets. Off-Road
Product sales decreased by 4.6 percent driven by weakness in mining and agricultural equipment markets,
which was partially offset by an improving construction equipment market. Aftermarket Products sales
increased 10.9 percent, driven by increases in utilization rates of equipment fleets, increased sales of the
Company’s proprietary replacement filters, and expansion of the Company’s product portfolio and
distribution. PowerCore brand replacement filter sales contributed $15.4 million to the increase over the
prior year. On-Road Products sales increased by 1.2 percent, primarily due to growth after the Euro VI
diesel emissions regulations went into effect January 1, 2014. Earnings before income taxes as a percentage
of Engine Products segment sales of 14.8 percent increased slightly from 14.7 percent in the prior year.

12

In the Industrial Products segment, where many product lines are later economic cycle businesses, sales
decreased primarily due to a 32.7 percent decrease in Gas Turbine Systems products due to fewer shipments
of large systems used in power generation. Earnings before income taxes as a percentage of Industrial
Products segment sales of 15.1 percent increased from 14.9 percent in the prior year. Industrial Filtration
Solutions Products sales increased 4.5 percent due to strong replacement air filter sales and improved
manufacturing activity.This was partially offset by continued soft new equipment sales, due to the continued
weak capital spending environment, particularly in the Americas. Sales in Special Applications Products
increased by 5.4 percent due to an increase in demand for the Company’s disk drive, semiconductor, and
venting products, partially offset by weakness in industrial end-markets impacting the Company’s membrane
product sales.

Outlook

The following Outlook excludes the impact of the Company’s pending acquisition of Northern Technical
L.L.C., which is expected to close in September 2014. See Note P of the Company’s Notes to Consolidated
Financial Statements.

• The Company forecasts its total Fiscal 2015 sales to be between $2.57 and $2.67 billion, or an

increase of 4 to 8 percent from Fiscal 2014.

• The Company’s Fiscal 2015 operating margin is forecasted to be 14.1 to 14.9 percent. Included in
this forecast is approximately $10 million in incremental operating expense increases for the
Company’s Global ERP Project and targeted sales growth initiatives.

• The Company’s Fiscal 2015 tax rate is anticipated to be between 27 and 30 percent.

• The Company forecasts its Fiscal 2015 EPS to be between $1.81 and $2.01.

• The Company projects that cash generated by its operating activities will be between $260 and $300
million. Capital spending is estimated to be between $90 and $100 million. The Company plans to
repurchase between 2 and 4 percent of its outstanding shares in FY15.

Fiscal 2014 Compared to Fiscal 2013

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 and lube, and replacement filters.

Sales for the Engine Products segment were $1,584.0 million, an increase of 5.3 percent from
$1,504.2 million. Fiscal 2014 Engine Products sales increased by 11.6 percent in Europe and 5.3 percent in
the Americas, partially offset by a decrease of 0.5 percent in Asia, compared to Fiscal 2013. The impact of
foreign currency decreased total sales by $13.7 million, or 0.9 percent.

Worldwide sales of Off-Road Products were $342.2 million, a decrease of 4.6 percent from $358.8 million
in the prior year. Sales declined 13.6 percent in Asia and 6.4 percent in the Americas, partially offset by
growth of 2.7 percent in Europe. The sales decreases were driven by continued weakness in mining
equipment markets and a decline in the agricultural equipment market, driven by anticipated lower farm
cash receipts in key grain producing regions moderating agricultural sales. These decreases were partially
offset by an improving construction equipment market, particularly in North America, and new program
wins in Europe.

Worldwide sales of On-Road Products were $130.0 million, an increase of 1.2 percent from
$128.4 million in the prior year. Sales increased 37.5 percent in Europe, partially offset by sales decreases of
4.2 percent in the Americas and 2.7 percent in Asia.The increase in Europe was due primarily to growth after
the Euro VI diesel emissions regulations went into effect January 1, 2014. Sales decreased in the Americas
primarily due to lower emissions sales in that region for an OEM program the Company no longer supplies,
totaling $6.3 million.

13

Worldwide sales of Aftermarket Products were $1,012.2 million, an increase of 10.9 percent from
$912.7 million in the prior year. Sales increased 14.8 percent in Europe, 12.3 percent in the Americas, and
6.6 percent in Asia. The overall sales increases were primarily driven by increases in utilization rates of
equipment fleets, increased sales of the Company’s proprietary replacement filters, and expansion of the
Company’s product portfolio and distribution. PowerCore brand replacement filter sales contributed
$15.4 million to the increase over the prior year period.

Worldwide sales of Aerospace and Defense Products were $99.6 million, a decrease of 4.4 percent from
$104.2 million in the prior year. Sales of Aerospace and Defense Products decreased 10.2 percent in the
Americas, partially offset by sales increases of 16.6 percent over the prior year in Europe.The sales decrease
was due to the continued slowdown in U.S. military ground vehicle spending, which is forecasted to continue
into Fiscal 2015, partially offset by higher helicopter air filter sales, which increased $2.9 million over the
prior year.

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 and compressors, 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 $889.4 million, a decrease of 4.6 percent from
$932.8 million in the prior year.This result was driven by a 32.7 percent sales decline in Gas Turbine Products,
partially offset by sales increases in Special Applications Products and Industrial Filtration Solutions
Products of 5.4 percent and 4.5 percent, respectively. Industrial Products sales decreased by 9.8 percent in
Asia and 4.9 percent in the Americas, and grew by 2.0 percent in Europe compared to Fiscal 2013. The
impact of foreign currency decreased total sales by $2.3 million, or 0.3 percent.

Worldwide sales of Industrial Filtration Solutions Products were $553.4 million, a 4.5 percent increase
from $529.8 million in the prior year. Sales increased 9.4 percent, 7.9 percent, and 1.7 percent in Asia, Europe,
and the Americas, respectively. Strong replacement air filter sales, due to improved manufacturing activity,
were partially offset by continued soft new dust collector equipment sales, due to the continued weak capital
spending environment, particularly in the Americas. The externally published durable goods index in the
U.S., which has historically been a leading indicator for equipment sales, increased 5.4 percent as compared
to last year.

Worldwide sales of Gas Turbine Products were $156.9 million, a decrease of 32.7 percent from
$232.9 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 Gas Turbine Products systems
were down for the year, primarily due to fewer shipments of large systems used in power generation
compared to the prior year period. There was a large increase in the Company’s gas turbine shipments in
Fiscal 2013, and the overall industry is now absorbing that new electrical generation capacity, driving the
Fiscal 2014 decrease over the prior year period.

Worldwide sales of Special Applications Products were $179.2 million, a 5.4 percent increase from
$170.1 million in the prior year. Sales increased 10.6 percent and 5.9 percent in Europe and Asia, respectively,
from the prior year, partially offset by a sales decrease in the Americas of 1.5 percent. The sales increases
were driven by a worldwide increase in demand for the Company’s disk drive, semiconductor, and venting
products, partially offset by weakness in industrial end-markets impacting the Company’s membrane
product sales.

Consolidated Results The Company reported net earnings for Fiscal 2014 of $260.2 million compared
to $247.4 million in Fiscal 2013, an increase of 5.2 percent. Diluted net earnings per share were $1.76, up
7.3 percent from $1.64 in the prior year. The Company’s operating income of $355.7 million increased by
3.6 percent from prior year operating income of $343.3 million.

14

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 earnings and expenses
determined to be non-allocable to the segments, such as interest income and interest expense:

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

2013
2014
2012
______
______
______
60.8%
61.5%
59.1%
40.3%
39.7%
37.9%
(0.5)%
0.6%
0.6%
______
______
______
100.0% 100.0% 100.0%
______
______
______
______
______
______

International operating income, prior to corporate expense allocations, totaled 79.7 percent of
consolidated operating income in Fiscal 2014 as compared to 74.0 percent in Fiscal 2013.Total international
operating income increased 11.6 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
2012
2013
______
______
______
20.3%
30.3%
26.0%
33.7%
29.9%
31.6%
33.8%
31.1%
30.3%
8.7%
12.1%
12.2%
______
______
______
100.0% 100.0% 100.0%
______
______
______
______
______
______

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

Consolidated Financial Statements.

Gross margin for Fiscal 2014 was 35.5 percent, or a 0.7 percent increase from 34.8 percent in the prior
year. The increase in gross margin is primarily attributable to positive mix impacts from the reduction in
large Gas Turbine projects, and a higher percentage of replacement filter sales, which was due to strong
utilization of existing equipment in the field and the Company’s focus on innovative products that capture
higher levels of aftermarket sales. Overall, product mix had a positive 50 basis points impact on gross margin.
In addition, the Company’s ongoing Continuous Improvement initiatives, which include Lean, Kaizen, Six
Sigma, and cost reduction efforts, improved gross margin by 60 basis points. Offsetting these benefits was a
40 basis points reduction in margin from higher engineering costs and lower fixed cost absorption. Within
gross profit, the Company incurred $1.7 million in restructuring charges compared to $1.6 million in Fiscal
2013. The Fiscal 2014 expenses were employee severance costs related to reductions 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 2014, varied by grade, but in aggregate,
it slightly increased during the fiscal year.The Company’s cost of filter media also varies by type and slightly
decreased during the fiscal year. The cost of petroleum-based products (plastics, rubber, and adhesives)
slightly decreased during the fiscal year. The Company anticipates a moderately unfavorable impact from
commodity prices in Fiscal 2015, as compared to Fiscal 2014, specifically for steel and petroleum-based
products, 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 2014 were $522.1 million or 21.1 percent of sales, as compared to
$503.8 million or 20.7 percent in the prior year. The increase in operating expenses as a percent of sales was
primarily due to higher incentive compensation expenses, the incremental expenses related to the
Company’s Global ERP Project and increased travel expenses, which contributed 90 basis points in total.
These increases were partially offset by improved fixed cost leverage and lower warranty expenses, which
reduced the Company’s operating expenses as percent of sales by 50 basis points. Restructuring expenses
included in operating expenses were $0.4 million for the year, which were employee severance costs related
to a reduction in workforce.

15

Interest expense of $10.2 million decreased $0.7 million from $10.9 million in the prior year. Other
income, net totaled $15.2 million in Fiscal 2014, down from $15.8 million in the prior year. The decrease of
$0.6 million in other income was driven by $0.9 million of restructuring expenses related to the sale of a
facility in Germany. In addition, the prior year included the impact of a favorable insurance recovery. These
decreases were partially offset by an increase in foreign exchange gains of $1.5 million and an increase of
$1.4 million in income generated from the Company’s joint venture with Caterpillar.

The effective tax rate for Fiscal 2014 was 27.9 percent compared to 29.0 percent in Fiscal 2013. The
decrease in the effective tax rate is primarily due to the favorable settlement of a tax audit, the
remeasurement of certain deferred tax assets, and a favorable shift in the mix of earnings between tax
jurisdictions. This was partially offset by tax costs associated with certain foreign dividend distributions and
the expiration of the Research and Experimentation Credit in the U.S. in the current year.

Total backlog at July 31, 2014, was $748.2 million, up 4.5 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
1.1 percent from the prior year. In the Industrial Products segment, total open order backlog increased
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 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 and 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 Fiscal 2012 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 Fiscal 2012. 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 Fiscal 2012 levels. Reductions in large non-residential construction and non-building
infrastructure projects led 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 Fiscal 2012. 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 Fiscal 2012.

Worldwide sales of Aftermarket Products were $912.7 million, a decrease of 1.1 percent from
$922.7 million in Fiscal 2012. Sales in Asia and Europe decreased 4.4 percent and 1.8 percent, respectively,
while sales in the Americas grew 3.4 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 Aerospace and Defense Products were $104.2 million, a decrease of 2.3 percent
from $106.7 million in Fiscal 2012. Sales of Aerospace and Defense Products were relatively flat over Fiscal
2012 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.

16

Industrial Products Segment The Industrial Products segment sells to various industrial dealers,
distributors, 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 $932.8 million, an increase of 1.0 percent from
$923.1 million in Fiscal 2012 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.

Worldwide sales of Industrial Filtration Solutions Products were $529.8 million, a 4.3 percent decrease
from $553.5 million in Fiscal 2012. 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 Fiscal 2012.
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 Fiscal 2012.

Worldwide sales of Gas Turbine Products were $232.9 million, an increase of 28.9 percent from
$180.7 million in Fiscal 2012. 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.

Worldwide sales of Special Applications Products were $170.1 million, a 10.0 percent decrease from
$189.0 million in Fiscal 2012. Sales decreased 13.0 percent and 11.7 percent in Europe and Asia, respectively,
from Fiscal 2012, 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. According to the International Data Corporation, the number of disk drives produced in
Fiscal 2013 declined 9.2 percent from the Fiscal 2012 period. In addition, weakness in industrial end markets
resulted in lower sales of the Company’s membrane products.

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 Fiscal 2012. The Company’s operating income of $343.3 million decreased from
Fiscal 2012 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 such as 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%
______
______
______

17

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 Fiscal 2012. 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%
______
______
______

Gross margin for Fiscal 2013 was 34.8 percent, or a 0.2 percent decrease from 35.0 percent in Fiscal
2012. 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 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 Fiscal 2012. 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 Global
ERP Project.

Interest expense of $10.9 million decreased $0.6 million from $11.5 million in Fiscal 2012. Other income,
net totaled $15.8 million in Fiscal 2013, down from $19.3 million in Fiscal. 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
Fiscal 2013.

Total backlog at July 31, 2013, was $715.8 million, down 10.4 percent from the same period in Fiscal
2012. 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 Fiscal 2012. In the Industrial Products segment, total open order backlog decreased
18.4 percent from Fiscal 2012. 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.

18

Liquidity and Capital Resources

Financial Condition At July 31, 2014, the Company’s capital structure was comprised of $187.0 million
of current debt, $243.7 million of long-term debt, and $1,002.5 million of shareholders’ equity.The Company
had cash and cash equivalents of $296.4 million and short-term investments of $127.2 million at July 31,
2014. The ratio of long-term debt to total capital was 19.6 percent and 8.7 percent at July 31, 2014 and 2013,
respectively.

Total debt outstanding increased $220.1 million during the year to $430.8 million outstanding at July 31,
2014, as a result of increases in short-term and long-term borrowings, offset by a decrease in current
maturities of long-term debt. Short-term borrowings outstanding at the end of the year increased $176.1
million driven by the Company drawing $180.0 million on the Company’s multi-currency revolving credit
facility.

The following table summarizes the Company’s cash obligations as of July 31, 2014, 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less than
1 year
________
$

Payments Due by Period
___________________________________________________________
More than
3 – 5
1 – 3
5 years
years
years
________ ________ ________
— $ — $116,051 $125,000
—
23,250
107
16
52,324
________ ________ ________
$142,544 $200,697
________ ________ ________
________ ________ ________

Total
________
$241,051
3,177
64,861
31,464
162,727
91,504
________
$594,784
________
________

1,329
10,294
12,877
154,297
17,913
________
$196,710
________
________

1,766
20,481
13,504
8,412
10,670
$54,833

82
10,836
4,976
2
10,597

(1)

(2)

(3)

Purchase obligations consist primarily of inventory, tooling, 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
$16.7 million for potential tax obligations, including accrued interest and penalties.The payment and timing of any
such payments is 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.

The Company has a 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. There was $180.0 million
outstanding at July 31, 2014 and no outstanding amounts at July 31, 2013, under these facilities. At July 31,
2014 and 2013, $62.2 million and $237.8 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,
2014, the Company was in compliance with all such covenants.

19

On March 27, 2014, the Company issued $125.0 million of senior unsecured notes due March 27, 2024.
The debt was issued at face value and bears interest payable semi-annually at an annual rate of interest of
3.72 percent. The proceeds from the notes were used to refinance existing debt and for general corporate
purposes.The notes contain debt covenants specifically related to maintaining 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,
2014, the Company was in compliance with all such covenants.

On May 19, 2014, the Company refinanced its 1.65 billion yen guaranteed note that matured on May 18,
2014. The debt was issued at face value, or approximately $16.1 million as of July 31, 2014, is due May 19,
2019, and bears interest payable quarterly at a variable interest rate. The interest rate was 0.56 percent as
of July 31, 2014.

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings
for general corporate purposes.At July 31, 2014 and 2013, there was $45.7 million and $50.0 million available
for use, respectively, under these two facilities. There was $4.3 million outstanding at July 31, 2014 and no
amounts outstanding at July 31, 2013. The weighted average interest rate on the short-term borrowings
outstanding at July 31, 2014, was 0.91 percent.

The Company has a €100.0 million, or $133.9 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, 2014 or 2013. Additionally, the Company’s European operations have lines of
credit with an available limit of €43.6 million or $58.3 million. There were no amounts outstanding on these
lines of credit as of July 31, 2014 or 2013.

Other international subsidiaries may borrow under various credit facilities. There was $1.0 million
outstanding under these credit facilities as of July 31, 2014 and $9.2 million outstanding as of July 31, 2013.
The weighted average interest rate on these short-term borrowings outstanding at July 31, 2014 and July 31,
2013, was 0.75 percent and 0.44 percent, respectively.

Also, at July 31, 2014 and 2013, the Company had outstanding standby letters of credit totaling
$7.8 million and $12.2 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 2014, 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, 2014, the Company was in compliance with all such covenants.

Shareholders’ equity decreased by $82.7 million from $1,085.2 million at July 31, 2013, to $1,002.5 million
at July 31, 2014. The decrease was primarily due to the repurchase of treasury stock for $279.4 million and
$87.3 million of dividends declared. These decreases were partially offset by current year earnings of
$260.2 million, $13.0 million of stock options exercised, $10.6 million in tax reductions related to employee
plans, and $9.9 million of the equity impact of stock option expense.

The Company’s inventory balance was $253.4 million as of July 31, 2014, compared to $234.8 million as
of July 31, 2013. Excluding the impact of foreign exchange fluctuations, inventories increased $18.2 million.
Current year inventory levels increased over prior year to match the increased Customer demand as
compared to the prior year. Additionally, as of July 31, 2014, several large gas turbine projects were being
constructed for Fiscal 2015 projects, resulting in an increase in the inventory balance held at year end. The
Company’s accounts receivable balance was $474.2 million as of July 31, 2014, compared to $430.8 million
as of July 31, 2013. Excluding the impact of foreign exchange fluctuations, accounts receivable increased
$43.8 million driven by the timing of receipt of payments from some of our larger Customers compared to
the fourth quarter of the prior fiscal year.

20

Cash Flows During Fiscal 2014, $317.8 million of cash was generated from operating activities,
compared with $315.9 million in Fiscal 2013. The increase in cash generated from operating activities of
$1.9 million was primarily attributable to an increase in accounts payable due to an increase in purchasing
activity, partially offset by changes in working capital needs resulting in increases in accounts receivable
and inventory levels versus the prior year. Operating cash flows, cash on hand, and short-term debt facilities
were used to support $97.2 million of net capital expenditures, $279.4 million of stock repurchases,
$83.1 million of dividend payments, and $81.9 million of long-term debt repayments. Cash and cash
equivalents increased $72.3 million during Fiscal 2014.

At the end of the year, the Company held $296.4 million in cash and cash equivalents, up from $224.1
million at July 31, 2013. Short-term investments were $127.2 million compared to $99.8 million at July 31,
2013. Short-term investments may change year to year based on maturity dates of existing investments, the
Company’s outlook for cash needs, and available access to other sources of liquidity. The amount of unused
lines of credit as of July 31, 2014, was approximately $357.6 million. Current maturities of long-term debt of
$1.7 million at year-end decreased from $98.7 million at July 31, 2013, as the Company repaid $80.0 million
of current maturities of 6.59 percent unsecured senior notes due November 14, 2013. Long-term debt of
$243.7 million at July 31, 2014, increased from $102.8 million at July 31, 2013, due to the issuance of
$125.0 million of senior unsecured notes during the third quarter. Long-term debt represented 19.6 percent
of total long-term capital, defined as long-term debt plus total shareholders’ equity, compared to 8.7 percent
at July 31, 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 plus the Company’s short-term debt facilities are 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 $96.8 million in Fiscal 2014,
$94.3 million in Fiscal 2013, and $77.2 million in Fiscal 2012. Fiscal 2014 capital expenditures primarily
related to the Company’s Global ERP Project, plant capacity additions, information and lab technology,
productivity-enhancing investments at manufacturing sites, and tooling to manufacture new products.

Capital spending in Fiscal 2015 is estimated to be between $90 and $100 million.The Company’s capital
spending in Fiscal 2015 will be approximately 25 percent for technology initiatives, including the Global
ERP Project and research and development labs, 30 percent for tooling for new products, 30 percent will be
in the form of automation or cost reduction projects related to the Company’s ongoing Continuous
Improvement initiatives, and 15 percent related to capacity expansion. It is anticipated that Fiscal 2015
capital expenditures will be financed primarily by cash on hand, cash generated from operations, and lines
of credit.

The Company expects that cash generated by operating activities will be between $260 and $300 million
in Fiscal 2015.At July 31, 2014, the Company had cash and cash equivalents of $296.4 million and short-term
investments of $127.2 million. The Company also had $107.9 million available under existing credit facilities
in the U.S., €143.6 million or $192.2 million, available under existing credit facilities in Europe, and
$57.5 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
2015, including debt repayment, issuance of anticipated dividends, possible share repurchase activity,
potential acquisitions, 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.

21

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 25, 2014, of a $0.165 per share dividend to be paid on September 5, 2014, the
dividend payout ratio was 38.8 percent of the prior three years average diluted earnings per share on
July 31, 2014.

Share Repurchase Plan The Board of Directors authorized the repurchase of 15.0 million shares of
common stock under the stock repurchase plan dated September 27, 2013. In Fiscal 2014, the Company
repurchased 6.8 million shares of common stock for $279.4 million, or 4.6 percent of its diluted outstanding
shares, at an average price of $41.11 per share, of which 0.3 million were repurchased under the prior share
repurchase authority. Under the prior stock repurchase plan, the Company repurchased 3.0 million shares
for $102.6 million in Fiscal 2013 and 4.5 million shares for $130.2 million in Fiscal 2012. As of July 31, 2014,
the Company had remaining authorization to repurchase 8.5 million shares pursuant to the current
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 L of the Company’s Notes to Consolidated Financial
Statements. As of July 31, 2014, the joint venture had $28.7 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 Not Yet Adopted In February 2013, the Financial Accounting Standards
Board (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.

In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for
recognizing revenue from contracts with Customers. The guidance requires an entity to recognize revenue
to depict the transfer of goods or services to Customers in an amount that reflects the consideration to
which an entity expects to be entitled in exchange for those goods or services. The guidance also requires
expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with Customers. Additionally, qualitative and quantitative disclosures are required
about Customer contracts, significant judgments and changes in judgments, and assets recognized from the
costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the
first quarter of Fiscal 2018 using one of two prescribed retrospective methods. Early adoption is not
permitted. The Company is evaluating the impact of the amended revenue recognition guidance on the
Company’s consolidated financial statements.

In June 2014, the FASB issued amended guidance related to share-based payments where terms of the
award provide that a performance target could be achieved after the requisite service period. This guidance
is effective for the Company beginning the first quarter of Fiscal 2018.The Company is evaluating the impact
of the amended share-based payment guidance on the Company’s consolidated financial statements.

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

22

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.

Foreign Currency During Fiscal 2014, the U.S. dollar was generally stronger than in Fiscal 2013
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, 2014, the
impact of foreign currency translation resulted in an overall decrease in reported net sales of $11.4 million
and a decrease in reported net earnings of $1.0 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 $17.7 million in reported net sales. The stronger U.S. dollar relative to the Australian Dollar, 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 $7.8 million, $7.2 million, $3.1 million, and $2.2 million, respectively.
In Europe, the weaker U.S. dollar relative to the euro and British pound resulted in a total increase of
$28.6 million in reported net sales. Additionally, the weaker U.S. dollar relative to the Chinese renminbi
had a positive impact on foreign currency translation, with an increase in reported net sales of $2.3 million.

The Company maintains significant assets and operations in Europe, Asia-Pacific, and South Africa,
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 limited earnings or cash flow exposure due to market risks on its long-term debt obligations as a result
of the majority of the debt being fixed-rate. However, interest rate changes would affect the fair market
value of the debt. As of July 31, 2014, the estimated fair value of long-term debt with fixed interest rates was
$237.6 million compared to its carrying value of $225.0 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, 2014, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly
of $185.3 million of short-term debt outstanding and ¥1.65 billion or $16.1 million of variable rate long-term
debt. Assuming a hypothetical increase of one-half percent in short-term interest rates, with all other
variables remaining constant, interest expense would have increased $0.4 million and interest income would
have increased $1.9 million in Fiscal 2014.

23

Pensions The Company is exposed to market return fluctuations on its qualified defined benefit
pension plans. In Fiscal 2014, the Company reduced its long–term rate of return from 7.50 percent to
7.14 percent on its U.S. plans and increased its weighted average discount rate of 5.20 percent to 5.48 percent
on its non-U.S. plans, to reflect its future expectation for returns. In addition, the Company adjusted the
discount rate used to value its pension obligation for its 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. The plans were underfunded by $8.8 million at July 31,
2014, since the projected benefit obligation exceeded the fair value of the plan assets.

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 are those 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 Revenue is recognized when both product ownership and the risk of loss have
transferred to the Customer, the Company has no remaining obligations, the selling price is fixed and
determinable, and collectability is reasonably assured. Although the majority of the Company’s sales
agreements contain standard terms and conditions, there are also agreements that contain multiple elements
or non-standard terms and conditions. For the Company’s Gas Turbine Systems (GTS) sales, which typically
consists of multiple shipments of components that will comprise the entire GTS project, it must carefully
monitor the transfer of title related to each portion of a system sale and may defer recognition of revenue
until all terms specified in the contract are met. The Company records estimated discounts and rebates as
a reduction of sales in the same period revenue is recognized.

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 2014 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.

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. 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, 2014. As of July 31, 2014, the liability for
unrecognized tax benefits, accrued interest, and penalties was $16.7 million.

24

Defined Benefit Pension Plans The Company incurs expenses relating to employee benefits such as
non-contributory defined benefit pension plans. In accounting for these defined benefit pension plans,
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
7.14 percent long-term rate of return on assets assumption as of July 31, 2014, for developing the Fiscal 2015
expense for the Company’s U.S. pension plans. In addition, the Company decreased the discount rate used
to value the pension obligation for its U.S. plans from 4.58 percent to 4.33 percent. The Company also
selected the long-term rate of return on assets for its non-U.S. plans of 5.41 percent and adjusted the discount
rate used to 3.64 percent for developing the Fiscal 2015 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 65 percent of the
plans assets are invested in equity securities, 30 percent in fixed income, and 5 percent in real assets
(investments into funds containing commodities and real estate). In Fiscal 2015, the Company plans to begin
investing in liability-driven investment funds, which will change the asset allocations.

A one percent change in the expected long-term rate of return on U.S. plan assets, from 7.14 percent,
would have changed the Fiscal 2014 annual pension expense by approximately $4.5 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, 2014, the Company decreased its discount rate for the U.S. pension plans to 4.33 percent from
4.58 percent as of July 31, 2013. The decrease of 25 basis points is consistent with published bond indices.
The change increased the Company’s U.S. projected benefit obligation as of July 31, 2014, by approximately
$8.3 million and is expected to increase pension expense in Fiscal 2015 by approximately $0.7 million.
The rates discussed above are weighted average rates as the Company has multiple plans both in the U.S.
and internationally.

In Fiscal 2014, the Company’s global pension expense was $15.5 million. The Company expects that
global pension expenses will increase approximately $3.1 million in Fiscal 2015 as compared to Fiscal 2014,
which is driven primarily by the changes in assumptions. While changes to the Company’s pension
assumptions would not be expected to impact pension expense by a material amount, such changes could
significantly impact the Company’s pension liability. In July 2013, the Company announced that, effective
August 1, 2013, the salaried plan in the U.S. was 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 that plan. Additionally, in July 2013, the Company announced that
Employees hired on or after August 1, 2013, would be eligible for a 3.0 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 3.0 percent annual Company retirement contribution.

25

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,” “will allow,” “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, information security and data breaches, 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 22 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 – version 1992
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, 2014. 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, 2014, as stated in its report which follows in Item 8 of this Form 10-K.

William M. Cook
Chief Executive Officer
September 26, 2014

James F. Shaw
Chief Financial Officer
September 26, 2014

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 consolidated 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, 2014 and July 31, 2013, and
the results of their operations and their cash flows for each of the three years in the period ended July 31,
2014 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 accompanying 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, 2014, based on criteria
established in Internal Control – Integrated Framework – version 1992 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 26, 2014

28

Consolidated Statements of Earnings
Donaldson Company, Inc. and Subsidiaries

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 . . . . . . . . . . . . . . . . . . . . . .

Year ended July 31,
________________________________________
2013
2014
____________ ____________
____________

2012

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

$ 2,473,466
1,595,640
___________
877,826
460,250
61,837
___________
355,739
(15,164)
10,200
___________
360,703
100,479
___________
$
260,224
___________
___________
145,594,300
147,641,113
1.79
1.76

$
$

$ 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
$

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 ($69), ($196), and $117, respectively . . . . . . . . . . .
Pension and postretirement liability adjustment,
net of deferred taxes of $1,319, ($25,656), and
$23,527, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .

At July 31,
____________________________________
2014
2012
2013
________
________
________
(thousands of dollars, except share amounts)
$247,377
17,435

$260,224
(2,122)

$264,301
(98,723)

71

120

(672)

(6,286)
________
$251,887
________
________

46,860
________
$311,792
________
________

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

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 $6,763 and $7,040 . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaids and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term 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 L and Note N)
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 2014 and 2013 . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . .
Treasury stock, 11,237,522 and 5,490,725 shares
in 2014 and 2013, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

At July 31,
_______________________
_________
_________
2014
2013
(thousands of dollars,
except share amounts)

$ 296,418
127,201
474,157
253,351
27,886
46,264
_________
$1,225,277
_________
_________
451,665
166,406
36,045
63,018
_________
$1,942,411
_________
_________

$ 185,303
1,738
216,603
84,944
40,845
80,147
_________
609,580
243,726
22,386
64,236
_________
939,928

$ 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

—

—

758,216
702,435
19,601
(45,810)

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

(431,959)
_________
1,002,483
_________
$1,942,411
_________
_________

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

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 . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . .
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,
_______________________________
2013
2012
2014
________
________
________
(thousands of dollars)

$260,224

$247,377

$264,301

67,163
(3,384)
(7,762)
(8,781)
11,640
905
10,041

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

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

(44,851)
(19,273)
(7,769)
59,686
________
317,839
________

(97,210)
395
(108,793)
81,486
________
(124,122)
________

125,000
(81,898)
175,344
(279,395)
(83,070)
8,781
14,437
________
(120,801)
________
(636)
________
72,280
224,138
________
$296,418
________
________

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
________
________

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

$93,086
11,050

$84,898
13,531

$91,915
13,410

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

Additional
Paid-in
Capital
_______ _______ __________

Retained Compensation Comprehensive
Income (Loss)
Earnings
__________

Stock

Plans

Accumulated
Other

Common
Stock
_______

Treasury
Stock
_______

Total
________

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 . . . . . . . . . . . . . . . . .
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 ($0.61 per share). . . . . . . . . . . .
Balance July 31, 2014 . . . . . . . . . . . . . . . . .

$443,216

— $925,542

$24,736

$ 40,027

$(498,810)

$ 934,711

(thousands of dollars, except per share amounts)

315,000
_______
758,216
_______

_______
758,216
_______

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)

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

21,745

—

260,224

(7,000)
(3,144)
(409)

10,553

(10,493)
(1,772)
(505)
9,933

(431)
(1,713)

(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

__________
__________

(37,473)

_______
(189,608)
_______

(2,122)

(6,286)

71

(279,395)
30,538
4,855
1,651

_______
$758,216
_______

(87,259)
_______ _______ __________
— $702,435
$
_______ _______ __________

$19,601

__________
$(45,810)
__________

_______
$(431,959)
_______

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
________

260,224
(2,122)

(6,286)

71
________
251,887
________
(279,395)
13,045
(492)
(976)
9,933
10,553
(87,259)
________
$1,002,483
________

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 core strengths are leading
filtration technology, strong Customer relationships, and its global presence. Products are manufactured at
39 plants around the world and through three 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.

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 substantially all foreign operations, local currencies are considered
the functional currency. Assets and liabilities of non-U.S. dollar functional currency entities 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 $1.7 million, $0.2 million, and
$1.8 million are included in Other income, net in the Consolidated Statements of Earnings in Fiscal 2014,
2013, and 2012, 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 As of July 31, 2014 and 2013, the Company’s short-term investments consisted
exclusively of time deposits with durations longer than 3 months, but less than 1 year.These investments are
carried at cost, which approximates their estimated fair value. 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.

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 of total inventories at July 31, 2014
and 2013. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values
by $37.9 million and $37.8 million at July 31, 2014 and 2013, 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,
____________________
2013
2014
________
________
$ 99,814
$112,522
29,097
17,256
105,909
123,573
________
________
$234,820
$253,351
________
________
________
________

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 $62.0 million in Fiscal 2014, $58.8 million in Fiscal 2013, and $55.3 million
in Fiscal 2012. 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,
____________________
2013
2014
________
________
$ 21,116
$ 20,558
270,022
273,599
687,797
753,637
46,078
51,394
(605,733)
(647,523)
________
________
$419,280
$451,665
________
________
________
________

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 to seven 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 operating segment level, but can be combined
when reporting units within the same operating 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.

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 2014, Fiscal 2013, or Fiscal 2012.

35

Income Taxes The provision for income taxes is computed based on the pre-tax income reported for
financial statement purposes. 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 gains
or losses 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 loss on cash flow hedging derivatives,
net of deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement liability adjustment,
net of deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated other comprehensive loss . . . . . . . . .

At July 31,
_________________________________
2012
2013
2014
_________
_________
_________
$ 32,976
$ 50,411
$ 48,289

(101)

(172)

(292)

(93,998)
_________
$(45,810)
_________

(87,712)
_________
$(37,473)
_________

(134,572)
_________
$(101,888)
_________

Cumulative foreign currency translation is not adjusted for income taxes. See Note H for additional

disclosures related to AOCI.

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
884,138 options, 22,619 options, and 1,063,135 options excluded from the diluted net earnings per share
calculation for the fiscal year ended July 31, 2014, 2013, and 2012, 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 . . . . . . . . . . . . . . . . . . . .

2014
2012
2013
_______
________
_______
(thousands, except per share amounts)
145,594
2,047
_______
147,641
_______
_______

148,274
2,181
________
150,455
________
________

150,286
2,655
_______
152,941
_______
_______

$260,224
1.79
$
1.76
$

$247,377
1.67
$
1.64
$

$264,301
1.76
$
1.73
$

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 (determined on an average cost basis) 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 I. 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 2014, 2013, and 2012 totaled $64.2 million, $66.2 million, and $67.0 million, respectively, and 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 M.

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.

New Accounting Standards Recently Adopted 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 only impacts disclosure requirements and does not affect how
net income or other comprehensive income are calculated. The updated guidance was adopted by the
Company beginning in the first quarter of Fiscal 2014. For additional information, refer to Note H.

NOTE B Goodwill and Other Intangible Assets

The Company has allocated goodwill to its Engine Products and Industrial Products segments. There
was no acquisition or disposition activity during Fiscal 2014 or 2013. The Company completed its annual
impairment assessments in the third quarters of Fiscal 2014 and 2013.The results of this assessment showed
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, resulting in no goodwill
impairment.

Following is a reconciliation of goodwill for the years ended July 31, 2014 and 2013:

Industrial
Products
________
(thousands of dollars)
$91,202
2,045
_______
$93,247
786
_______
$94,033
_______
_______

Total
Goodwill
________

$162,949
2,619
________
$165,568
838
________
$166,406
________
________

Balance as of July 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . .

Engine
Products
_______

$71,747
574
_______
$72,321
52
_______
$72,373
_______
_______

37

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, 2014 and 2013:

Balance as of July 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation . . . . . . . . . . . . . . . . . . . . . .
Balance as of July 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount
_______

$80,075
—
1,807
_______
$81,882
—
(775)
176
_______
$81,283
_______
_______

Accumulated
Amortization
__________
(thousands of dollars)
$(33,875)
(5,503)
(1,197)
________
$(40,575)
(5,154)
600
(109)
________
$(45,238)
________
________

Net
Intangible
Assets
________

$46,200
(5,503)
610
________
$41,307
(5,154)
(175)
67
________
$36,045
________
________

Net intangible assets consist of patents, trademarks, and trade names of $11.5 million and $13.3 million
as of July 31, 2014 and 2013, respectively, and Customer related intangibles of $24.5 million and $28.0 million
as of July 31, 2014 and 2013, respectively. As of July 31, 2014, patents, trademarks, and trade names had a
weighted average remaining life of 7.95 years and Customer related intangibles had a weighted average
remaining life of 11.13 years. Expected amortization expense relating to existing intangible assets is as
follows (in thousands):

Fiscal Year
________
2015 . . . . . . . . . . . . . . . . . . . $ 5,029
2016 . . . . . . . . . . . . . . . . . . . $ 5,027
2017 . . . . . . . . . . . . . . . . . . . $ 4,910
2018 . . . . . . . . . . . . . . . . . . . $ 3,474
2019 . . . . . . . . . . . . . . . . . . . $ 2,923
Thereafter . . . . . . . . . . . . . . $14,682

NOTE C Credit Facilities

The Company has a 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. There was $180.0 million
outstanding at July 31, 2014 and no amounts outstanding at July 31, 2013. At July 31, 2014 and 2013,
$62.2 million and $237.8 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, 2014, the Company was
in compliance with all such covenants.The Company expects to remain in compliance with these covenants.

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings
for general corporate purposes.At July 31, 2014 and 2013, there was $45.7 million and $50.0 million available
for use, respectively, under these two facilities. There was $4.3 million outstanding at July 31, 2014, and no
amounts outstanding at July 31, 2013. The weighted average interest rate on the short-term borrowings
outstanding at July 31, 2014, was 0.91 percent.

The Company has a €100.0 million, or $133.9 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, 2014 or 2013. Additionally, the Company’s European operations have lines of
credit with an available limit of €43.6 million or $58.3 million. There were no amounts outstanding on these
lines of credit as of July 31, 2014 or 2013.

38

Other international subsidiaries may borrow under various credit facilities. There was $1.0 million
outstanding under these credit facilities as of July 31, 2014, and $9.2 million as of July 31, 2013. At July 31,
2014 and 2013, there was $57.5 million and $50.4 million available for use, respectively, under these facilities.
The weighted average interest rate on these short-term borrowings outstanding at July 31, 2014 and July 31,
2013, was 0.75 percent and 0.44 percent, respectively.

NOTE D 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. . . . . . . . . . . .
3.72% Unsecured senior notes, interest payable semi-annually,
principal payment of $125.0 million due March 27, 2024. . . . . . . . . . . . . . .
2.019% Guaranteed senior note, interest payable semi-annually,
principal payment of ¥1.65 billion due May 18, 2014 . . . . . . . . . . . . . . . . . .
Variable Rate Guaranteed senior note, interest payable quarterly,

principal payment of ¥1.65 billion due May 19, 2019
and an interest rate of 0.56% as of July 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
2013
________
________
(thousands of dollars)

$

— $ 80,000

50,000

50,000

25,000

25,000

25,000

25,000

125,000

—

—

16,848

16,051

—

3,177
1,236
________
245,464
1,738
________
$243,726
________
________

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

Annual maturities of long-term debt are $1.7 million in Fiscal 2015, $1.8 million in Fiscal 2016, $50.8
million in Fiscal 2017, $50.1 million in Fiscal 2018, and $141.1 million thereafter. Certain note agreements
contain debt covenants related to working capital levels and limitations on indebtedness.As of July 31, 2014,
the Company was in compliance with all such covenants.

On March 27, 2014, the Company issued $125.0 million of senior unsecured notes due March 27, 2024.
The debt was issued at face value and bears interest payable semi-annually at an annual rate of interest of
3.72 percent. The proceeds from the notes were used to refinance existing debt and for general corporate
purposes.The notes contain debt covenants specifically related to maintaining 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,
2014, the Company was in compliance with all such covenants.

On May 19, 2014, the Company refinanced its 1.65 billion yen guaranteed note that matured on May 18,
2014. The debt was issued at face value, or approximately $16.1 million as of July 31, 2014, is due May 19,
2019, and bears interest payable quarterly at a variable interest rate. The interest rate was 0.56 percent as
of July 31, 2014.

39

NOTE E Fair Value

Fair Value of Financial Instruments At July 31, 2014 and 2013, the Company’s financial instruments
included cash and cash equivalents, accounts receivable, accounts payable, 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 and are classified as Level 1 in the fair value hierarchy. Derivative contracts are reported
at their fair values based on third-party quotes.As of July 31, 2014, the estimated fair value of long-term debt
with fixed interest rates was $237.6 million compared to its carrying value of $225.0 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.

The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2014, and

2013, on the Consolidated Balance Sheets:

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

2014
_______

2013
_______

(thousands of dollars)

Asset derivatives recorded under the caption
Prepaids and other current assets

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

$

931

$ 734

Liability derivatives recorded under the caption
Other current liabilities

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

(1,242)
_______
$ (311)
_______
_______

(845)
______
$(111)
______
______

*

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 long-term assets in the
consolidated balance sheets. The aggregate carrying amount of these investments was $21.4 million and
$18.8 million as of July 31, 2014 and 2013, 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 in privately-held entities or divisions of
public companies without quoted market prices.

Goodwill and intangible assets are assessed for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. The Company’s goodwill and intangible
assets are not recorded at fair value as there have been no events or circumstances that would have an
adverse impact on the value of these assets. 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 B for further discussion of the
annual goodwill impairment analysis and carrying values of goodwill and other intangible assets.

40

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 property, plant, and
equipment assets may not be recoverable. There were no significant impairment charges recorded in Fiscal
2014, Fiscal 2013, or Fiscal 2012. Refer to Note B for further discussion of the annual goodwill impairment
analysis and carrying values of intangible assets.

NOTE F 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 non-U.S. 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 are no longer any new entrants into the plan.Then effective,August 1, 2016, employees
hired prior to August 1, 2013, will no longer continue to accrue Company contribution credits under the plan.

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

2014
_______

$18,821
19,499
(30,794)
590
7,403
_______
$15,519
_______
_______

2013
_______
(thousands of dollars)
$19,439
16,953
(28,111)
591
10,362
_______
$19,234
_______
_______

2012
_______

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

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

41

The obligations and funded status of the Company’s pension plans as of 2014 and 2013, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Funded status:

2014
________
(thousands of dollars)

2013
________

$444,943
18,821
19,499
—
1,308
29,638
8,873
(3,200)
—
(21,229)
________
$498,653
________
________

$452,724
45,978
4,263
1,308
9,912
(3,086)
(21,229)
________
$489,870
________
________

$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
________
________

Funded/(Underfunded) status at July 31, 2014 and 2013 . . . . . . . . . . . . .

Amounts recognized on the consolidated balance sheets consist of:

Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized asset / (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (8,783)
________
________

7,781
$
________
________

17,800
(832)
(25,751)
________
$ (8,783)
________
________

23,234
(949)
(14,504)
________
$
7,781
________
________

AOCI at July 31, 2014 consists primarily of unrecognized actuarial losses, net of tax. The loss expected
to be recognized in net periodic pension expense during Fiscal 2015 is $7.6 million. The accumulated benefit
obligation for all defined benefit pension plans was $476.1 million and $427.8 million at July 31, 2014 and
2013, 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 $234.8 million,
$233.8 million, and $215.9 million, respectively, as of July 31, 2014, and $20.5 million, $19.7 million, and
$8.4 million, respectively, as of July 31, 2013.

For the years ended July 31, 2014 and 2013, the U.S. pension plans represented approximately 69 percent
and 70 percent, respectively, of the Company’s total plan assets, approximately 69 percent and 71 percent,
respectively, of the Company’s total projected benefit obligation, and approximately 80 percent and
75 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
______

2013
______

4.33%
2.61%

3.64%
2.79%

4.58%
2.61%

4.04%
2.92%

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

compensation 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 . . . . . . . . . . . . . . . . . . . . . . . . .

2014
______

2013
______

2012
______

4.58%
7.50%
2.61%

4.04%
5.48%
2.92%

3.59%
7.50%
2.61%

4.13%
5.20%
2.86%

4.91%
7.75%
4.50%

5.36%
6.03%
3.57%

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. In Fiscal 2014 the Company adopted
a plan to adjust the target asset allocation for all U.S. plans and to employ differing allocation strategies for
each plan. These investment changes, which will be implemented in the first quarter of Fiscal 2015, will help
the Company to maintain or reduce the risk profile while continuing to ensure an appropriate funded status
in each plan.Therefore, as of the measurement date of July 31, 2014, the Company reduced its long-term rate
of return for the U.S. pension plans to an asset-based weighted average of 7.14 percent. 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):

Asset Category
_______________
2014

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. . . . . . . . . . . . . . . . . . . . . .
Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Assets at July 31, 2014. . . . . . . . . . . . . . . .

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. . . . . . . . . . . . . . . .

$ 14.2
107.3
27.0
7.1
________
$155.6
________
________

$ 18.5
82.5
42.9
—
________
$143.9
________
________

$ 0.9
61.5
29.2
—
________
$ 91.6
________
________

$ —
87.3
—
—
________
$ 87.3
________
________

$ —
50.2
20.8
—
________
$71.0
________
________

$ —
57.3
19.5
—
________
$76.8
________
________

$ —
21.1
58.7
13.5
________
$ 93.3
________
________

$ —
19.4
60.8
22.1
________
$102.3
________
________

$ —
19.4
55.0
31.4
________
$105.8
________
________

Total
________

$ 14.2
215.7
85.7
20.6
________
$336.2
________
________

$ 18.5
152.1
124.5
22.1
________
$ 317.2
________
________

$
0.9
138.2
103.7
31.4
________
$274.2
________
________

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 is 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 was 65 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.

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.

44

The target allocation for Fixed Income was 30 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 is also invested 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 was 5 percent. The Fund invests in real assets to provide a hedge
against unexpected inflation, to capture unique sources of returns, and to provide diversification benefits.
The Fund pursues 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.

Reflecting the relatively long-term nature of the plans’ obligations, approximately 65 percent of the
plans assets are invested in equity securities, 30 percent in fixed income, and 5 percent in real assets
(investments into funds containing commodities and real estate). In Fiscal 2015, the Company plans to begin
investing in liability-driven investment funds, which will change the asset allocations.

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, 2014, 2013, and 2012 (in millions):

Beginning balance at August 1, 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 . . . . . .
Unrealized gains. . . . . . . . . . . . . . . . . . .
Realized gains. . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2014 . . . . . .

Fixed Income
___________
$31.4
0.6
0.4
17.0
(1.7)
7.3
___________
$55.0
6.4
0.7
—
(1.3)
___________
$60.8
(2.0)
8.9
20.0
(29.0)
___________
$58.7
___________
___________

Real Assets
_________
$38.0
(2.1)
—
2.8
—
(7.3)
_________
$31.4
1.1
—
1.0
(11.4)
_________
$22.1
—
0.8
2.7
(12.1)
_________
$13.5
_________
_________

Total
________
$ 87.3
(1.4)
1.9
20.8
(2.8)
—
________
$105.8
6.7
2.4
3.1
(15.7)
________
$102.3
(0.3)
12.1
24.7
(45.5)
________
$ 93.3
________
________

Global Equity
___________
$17.9
0.1
1.5
1.0
(1.1)
—
___________
$19.4
(0.8)
1.7
2.1
(3.0)
___________
$19.4
1.7
2.4
2.0
(4.4)
___________
$21.1
___________
___________

45

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

ended July 31, 2014 (in millions):

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

Fair Value
__________
$215.7
85.7
20.6
__________
$322.0
__________
__________

Unfunded
Commitments
______________
$ 5.2
—
6.9
______________
$12.1
______________
______________

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

Redemption
Notice Period
________________
10 – 100 days
60 – 120 days
95 days

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

Asset Category
_______________
2014

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 Non-U.S. Assets at July 31, 2014 . . . . . . . . . . .

2013

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Equity Securities . . . . . . . . . . . . . . . . . . . . .
Fixed Income Securities. . . . . . . . . . . . . . . . . . . . . .
Equity/Fixed Income . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-U.S. Assets at July 31, 2013 . . . . . . . . . . .

2012

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

$ 5.7
71.3
4.8
18.0
________
$99.8
________
________

$0.6
63.8
6.9
16.9
________
$88.2
________
________

$ 37.1
5.9
13.3
—
________
$56.3
________
________

$ —
—
23.3
—
________
$23.3
________
________

$ —
—
21.0
—
________
$21.0
________
________

$ —
28.4
—
6.8
________
$35.2
________
________

$ —
—
—
30.5
________
$30.5
________
________

$ —
—
—
26.3
________
$26.3
________
________

$ —
—
21.8
—
________
$21.8
________
________

Total
________

$

5.7
71.3
28.1
48.5
________
$153.6
________
________

$0.6
63.8
27.9
43.2
________
$135.5
________
________

$37.1
34.3
35.1
6.8
________
$113.3
________
________

Global equity consists of publicly traded 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.

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).

46

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 non-U.S. pension plans’

Level 3 assets for the years ended July 31, 2014, 2013, and 2012 (in millions):

Beginning balance at August 1, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . .

Equity/Fixed
Income
_______
$26.3
1.4
(3.8)
2.6
(4.6)
(0.1)
_______
$21.8
1.1
1.7
2.6
(0.9)
_______
$26.3
4.3
0.1
0.1
3.1
(3.4)
_______
$30.5
_______
_______

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

year ended July 31, 2014 (in millions):

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

Fair Value
__________
$23.3
30.5
__________
$53.8
__________
__________

Unfunded
Commitments
______________
$ —
—
______________
$ —
______________
______________

Redemption Frequency
(If Currently Eligible)
_______________________
Weekly
Yearly

Redemption
Notice Period
______________
7 days
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. In Fiscal 2014, the Company’s asset allocation
guidelines targeted an allocation of 65 percent global equity securities, 30 percent fixed income, and
5 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.
In Fiscal 2015, the Company plans to begin investing in liability-driven investment funds, which will change
the asset allocations.

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.

47

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. Additionally, the
Company may elect to make additional contributions up to the maximum tax deductible contribution. The
Company made contributions of $0.6 million to its U.S. pension plans in Fiscal 2014. The minimum funding
requirement for the Company’s U.S. plans is $12.2 million in Fiscal 2015. 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 2015 to its U.S. pension plans.The Company made contributions of $3.7 million to its non-U.S. pension
plans in Fiscal 2014 and estimates that it will contribute approximately $3.9 million in Fiscal 2015 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
________
2015 . . . . . . . . . . . . . . . . . . . $ 23,032
2016 . . . . . . . . . . . . . . . . . . . $ 22,728
2017 . . . . . . . . . . . . . . . . . . . $ 27,717
2018 . . . . . . . . . . . . . . . . . . . $ 25,059
2019 . . . . . . . . . . . . . . . . . . . $ 27,754
2020-2024 . . . . . . . . . . . . . . $149,865

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 for both the years ended July 31, 2014 and 2013. The annual cost resulting from these benefits
is not material. For measurement purposes, a 7.0 percent annual rate of increase in the per capita cost of
covered health care benefits was assumed for Fiscal 2014.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 2014 and 2013 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 $8.1 million, $7.3 million, and
$5.5 million for the years ended July 31, 2014, 2013, and 2012, respectively.This plan also includes shares from
an Employee Stock Ownership Plan (ESOP).As of July 31, 2014, 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 of $9.1 million and
$9.5 million the years ended July 31, 2014 and July 31, 2013, respectively, related primarily to its deferred
compensation plans.

48

NOTE G 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 I.

Treasury Stock The Board of Directors authorized the repurchase, at the Company’s discretion, of up
to 15.0 million shares of common stock under the Company’s stock repurchase plan dated September 27,
2013. As of July 31, 2014, the Company had remaining authorization to repurchase 8.5 million shares under
this plan. Following is a summary of treasury stock share activity for Fiscal 2014 and 2013:

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance upon exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Issuance under compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
_________
5,490,725
6,795,545
(863,249)
(175,160)
(10,339)
_________
11,237,522
_________
_________

2013
_________
3,980,832
2,986,794
(1,288,560)
(174,408)
(13,933)
_________
5,490,725
_________
_________

49

NOTE H Accumulated Other Comprehensive Loss

In the first quarter of Fiscal 2014, the Company prospectively adopted guidance issued by the FASB that
requires additional disclosure related to the impact of reclassification adjustments out of accumulated other
comprehensive income or loss on net income. Changes in accumulated other comprehensive loss by
component are as follows:

(Thousands of dollars)
Balance as of July 31, 2013, net of tax . . . . . . . . . . .

Other comprehensive (loss) income before
reclassifications and tax . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive (loss) income before
reclassifications, net of tax . . . . . . . . . . . . . . . . . . . .
Reclassifications, before tax . . . . . . . . . . . . . . . . . .
Tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications, net of tax . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . . .
Balance as of July 31, 2014, net of tax . . . . . . . . . . .

Foreign
currency
translation
adjustment
(a)
___________
$50,411

Pension
benefits
___________
$ (87,712)

Derivative
financial
instruments
___________
$(172)

Total
___________
$ (37,473)

(2,949)
—
___________

(16,120)
4,391
___________

413
(145)
___________

(18,656)
4,246
___________

$(2,949)
___________
827
—
___________
827
___________
(2,122)
___________
$48,289
___________
___________

$(11,729)
___________
8,514
(3,071)
___________
5,443(b)
___________
(6,286)
___________
$(93,998)
___________
___________

$ 268
___________
(273)
76
___________
(197)
___________
71(c)
___________
$(101)
___________
___________

$(14,410)
___________
9,068
(2,995)
___________
6,073
___________
(8,337)
___________
$(45,810)
___________
___________

(a)

(b)

Taxes are not provided on cumulative translation adjustments as substantially all translation adjustments relate
to earnings that are intended to be indefinitely reinvested outside the U.S. Amounts were reclassified from
accumulated other comprehensive loss to other income, net.

Primarily includes net amortization of prior service costs and actuarial losses included in net periodic benefit
cost (see Note F) that were reclassified from accumulated other comprehensive loss to operating expenses or
cost of sales.

(c) Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss

to other income, net (see Note E).

NOTE I Stock Option Plans

Employee Incentive Plans

In November 2010, shareholders approved the 2010 Master Stock Incentive
Plan (the Plan).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 $0.7 million
in Fiscal 2014, $0.1 million in Fiscal 2013, and $1.9 million in Fiscal 2012.

Stock options for non-executives are exercisable 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 2004 to Fiscal 2010 became exercisable for most executives immediately upon the
date of grant. For Fiscal 2014, the Company recorded pre-tax compensation expense associated with stock
options of $9.9 million and recorded $3.2 million of related tax benefit. For Fiscal 2013 and 2012, the
Company recorded pre-tax compensation expense associated with stock options of $8.3 million and $7.8
million, respectively, and $2.7 million and $2.5 million, respectively, of related tax benefit.

50

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 and officer grants . . . . . . . . . . . . . . . . . .
Non - officer original grants . . . . . . . . . . . . . . . . .
Reload grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
___________

2012
2013
___________
___________
0.31 - 2.8% 0.02 - 1.7% 0.10 - 1.8%
18.2 - 28.0% 22.5 - 29.7% 25.8 - 31.9%
1.0%

1.0 - 1.4%

1.4 - 1.6%

8 years
7 years
≤6 years

8 years
7 years
≤5 years

8 years
7 years
≤8 years

Black-Scholes is a widely accepted stock option pricing model. The weighted average fair value for
options granted during Fiscal 2014, 2013, and 2012 was $11.44, $8.18, and $9.37 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. Options with a reload provision were no longer issued to officers
with more than five years of service and all directors beginning in Fiscal 2006. The Company continued to
issue options with a reload provision to officers with less than five years of service until Fiscal 2011 when
this was discontinued.

The following table summarizes stock option activity:

Outstanding at July 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at July 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options
Outstanding
_________
8,387,994
1,082,979
(1,379,827)
(34,819)
_________
8,056,327
965,050
(1,607,081)
(84,476)
_________
7,329,820
900,073
(1,008,848)
(23,163)
_________
7,197,882
_________
_________

Weighted
Average
Exercise Price
__________
$17.72
34.76
11.90
27.45
20.97
33.91
14.79
33.94
23.88
42.17
18.80
34.02
26.84

The total intrinsic value of options exercised during Fiscal 2014, 2013, and 2012 was $21.5 million,

$33.7 million, and $29.5 million, respectively.

Shares reserved at July 31, 2014 for outstanding options and future grants were 12,599,147. Shares

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

51

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

July 31, 2014:

Range of Exercise Prices
__________________
$0.00 to $16.69 . . . . . . . . . . . . . . . . . . . .
$16.70 to $22.69 . . . . . . . . . . . . . . . . . . .
$22.70 to $28.69 . . . . . . . . . . . . . . . . . . .
$28.70 to $34.69 . . . . . . . . . . . . . . . . . . .
$34.70 and above . . . . . . . . . . . . . . . . . .

Weighted
Average
Remaining
Contractual
Life (Years)
________
1.18
4.12
3.41
7.25
8.10
5.44

Weighted
Average
Exercise
Price
______
$15.93
19.13
22.97
31.58
38.64
26.84

Weighted
Average
Exercise
Price
______
$15.93
19.13
22.97
30.59
35.52
23.31

Number
Exercisable
________
1,003,381
2,197,543
400,114
1,254,101
622,680
________
5,477,819
________

Number
Outstanding
_________
1,003,381
2,197,543
400,114
1,839,809
1,757,035
_________
7,197,882
_________

At July 31, 2014, the aggregate intrinsic value of shares outstanding and exercisable was $89.0 million

and $84.9 million, respectively.

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

Non - vested at July 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - vested at July 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average Grant
Date Fair
Value
_________
$9.18
11.63
9.24
9.47
10.35

Options
_________
1,805,803
849,850
(915,677)
(19,913)
_________
1,720,063
_________
_________

The total fair value of shares vested during Fiscal 2014, 2013, and 2012 was $35.5 million, $29.8 million,

and $19.5 million, respectively.

As of July 31, 2014, there was $7.7 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 2015,
Fiscal 2016, and Fiscal 2017.

NOTE J Income Taxes

The components of earnings before income taxes are as follows:

2014
________

2013
________
(thousands of dollars)

2012
________

Earnings before income taxes:

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

$131,396
229,307
________
$360,703
________
________

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

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

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

2014
________

2013
________
(thousands of dollars)

2012
________

Income taxes:
Current

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

Deferred

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

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

$ 48,981
4,724
54,536
________
108,241
________

(9,465)
365
1,338
________
(7,762)
________
$100,479
________
________

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

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

$ 45,468
4,012
50,655
________
100,135
________

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

52

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

Statutory U.S. federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Export, manufacturing, and research credits . . . . . . . . . . . .
Change in unrecognized tax benefits . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
________
35.0%
1.1%
(6.1)%
(0.8)%
(1.1)%
(0.2)%
________
27.9%
________
________

2013
________
35.0%
1.2%
(6.3)%
(1.5)%
0.5%
0.1%
________
29.0%
________
________

2012
_________
35.0%
1.2%
(5.2)%
(1.0)%
(1.0)%
(0.3)%
_________
28.7%
_________
_________

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 and tax credit 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
2014
_______
_______
(thousands of dollars)

$11,118
32,317
3,471
5,482
4,470
_______
56,858
(3,471)
_______
53,387
_______

(49,901)
(1,025)
_______
(50,926)
_______
4,392
_______
$ 6,853
_______
_______

$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
_______
_______

Deferred income tax assets on the face of the balance sheet include $4.4 million and $4.0 million of
prepaid tax assets related to intercompany transfers of inventory as of July 31, 2014 and 2013, respectively.

The effective tax rate for Fiscal 2014 was 27.9 percent compared to 29.0 percent in Fiscal 2013. The
decrease in the effective tax rate is primarily due to the favorable settlement of a tax audit, the
remeasurement of certain deferred tax assets due to a change in tax rates in certain foreign jurisdictions, and
a favorable shift in the mix of earnings between tax jurisdictions. This was partially offset by tax costs
associated with foreign dividend distributions and the expiration 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 $914.0 million. The Company currently intends to indefinitely reinvest these
undistributed earnings as there are significant investment opportunities outside the U.S. 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. In August 2014, the Company repatriated $52.4 million of cash held by its foreign
subsidiaries in the form of a cash dividend. This dividend represented a portion of the total planned
dividends for Fiscal 2015. At this time, the Company anticipates the net tax impact of the Fiscal 2015
dividends to be tax neutral.

53

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 . . . . . . .

2012
_______

2014
_______

2013
_______
(thousands of dollars)
$16,514
5,453
407
(1,640)
(277)
(2,038)
_______
$18,419
_______
_______

$18,419
2,959
1,706
(7,113)
(240)
(726)
_______
$15,005
_______
_______

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

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income
tax expense. During the fiscal year ended July 31, 2014, the Company recognized interest expense, net of tax
benefit, of approximately $0.3 million. At July 31, 2014 and July 31, 2013, accrued interest and penalties on
a gross basis were $1.7 million and $1.1 million, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax
examinations by tax authorities for years before 2008. The IRS has completed examinations of the
company’s U.S. federal income tax returns 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 $1.0 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 K 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 original equipment manufacturers (OEM) 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, 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 such as 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.

54

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. The accounting policy applied to inventory for the reportable segments differs
from that described in the summary of significant accounting policies. The reportable segments account for
inventory on a standard cost basis, which is consistent with our internal reporting.

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, the Company does 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
_________

2014
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . .
Equity earnings in unconsolidated affiliates . . .
Earnings before income taxes. . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments in unconsolidated

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

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

affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . .

(thousands of dollars)

$1,584,027
38,925
5,596
233,920
900,083

$889,439
23,942
940
133,978
572,000

$

— $2,473,466
67,163
6,536
360,703
1,942,411

4,296
—
(7,195)
470,328

17,439
56,340

3,959
34,652

—
6,218

21,398
97,210

$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
52,864

3,277
33,134

—
8,897

18,840
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
46,816

2,822
24,083

—
7,240

20,126
78,139

55

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* . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014
_________

$ 342,205
130,029
1,012,165
99,628
_________
1,584,027
_________

553,356
156,860
179,223
_________
889,439
_________
$2,473,466
_________
_________

*

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

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

_________ _________

2013
(thousands of dollars)

2012

$ 358,834 $ 376,870
163,934
128,446
922,660
912,717
106,676
104,191
_________ _________
1,570,140
1,504,188
_________ _________

529,751
232,922
170,087
932,760

553,453
180,669
188,986
_________ _________
923,108
_________ _________
$2,436,948 $2,493,248
_________ _________
_________ _________

Net Sales
_________

Property, Plant, &
Equipment — Net
_____________

(thousands of dollars)

2014
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia - Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,019,926
728,554
517,305
207,681
_________
$2,473,466
_________

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

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

$ 196,712
128,904
72,089
53,960
________
$ 451,665
________

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

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

Concentrations There were no Customers over 10 percent of net sales during Fiscal 2014, 2013, and
2012. There were no Customers over 10 percent of gross accounts receivable in Fiscal 2014 or Fiscal 2013.

NOTE L 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, 2014, the joint
venture had $28.7 million of outstanding debt, of which the Company guarantees half. In addition, during
Fiscal 2014, 2013, and 2012, the Company recorded its equity in earnings of this equity method investment
of $3.7 million, $2.3 million, and $2.0 million and royalty income of $6.8 million, $6.0 million, and $6.2 million,
respectively, related to AFSI.

56

At July 31, 2014 and 2013, the Company had a contingent liability for standby letters of credit totaling
$7.8 million and $12.2 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, 2014 and 2013, there
were no amounts drawn upon these letters of credit.

NOTE M 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, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,905
5,940
(1,081)
(5,238)
_______
$10,526
4,339
(1,185)
(4,651)
_______
$ 9,029
_______
_______

There were no significant specific warranty matters accrued for in Fiscal 2014 or Fiscal 2013. 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 2014 or Fiscal 2013.

NOTE N 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, 2014 and 2013 were $28.0 million and
$27.5 million, respectively. Future commitments under operating leases are: $12.9 million in Fiscal 2015,
$8.5 million in Fiscal 2016, $5.0 million in Fiscal 2017, $3.5 million in Fiscal 2018, $1.5 million in Fiscal 2019,
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.

57

NOTE O Quarterly Financial Information (Unaudited)

2014
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . .
2013
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . .

NOTE P Subsequent Events

First
Quarter
________

$599,384
214,394
61,592
0.42
0.41
0.140
0.130

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

Third
Second
Quarter
Quarter
________
(thousands of dollars)

________ ________

Fourth
Quarter

$581,622
201,648
58,340
0.40
0.39
0.140
0.140

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

$624,234
223,461
67,336
0.46
0.46
0.165
0.140

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

$668,226
238,323
72,956
0.51
0.50
0.165
0.165

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

On August 14, 2014, the Company announced that it entered into an agreement to acquire 100 percent
of the voting equity interests in Northern Technical L.L.C., a manufacturer of gas turbine inlet air filtration
systems and replacement filters. The acquisition of Northern Technical reinforces the Company’s
commitment to growth with a company that is an excellent strategic fit with its existing Gas Turbine Products
business. The acquisition will allow Donaldson to leverage Northern Technical’s strong Customer
relationships in the Middle East, the largest gas turbine market in the world, with significant continued
growth expected over the next decade.The acquisition is expected to close in the first quarter of Fiscal 2015,
subject to normal closing conditions.

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,
2014, has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.

58

The Company is in the process of a multi-year implementation of a Global ERP Project. In the second
quarter of Fiscal 2014, the Company began deploying the system in certain operations, primarily in the
Americas. The deployment continued in the second half of Fiscal 2014 to additional operations also in the
Americas. In Fiscal 2015, the Company expects this system will continue to be deployed further in the
Americas and Europe. 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 2014 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.

Item 11. Executive Compensation

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

2014 Proxy Statement is incorporated herein by reference.

59

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

The information under the caption “Security Ownership” of the 2014 Proxy Statement is incorporated

herein by reference.

The following table sets forth information as of July 31, 2014 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 LTC/Restricted Stock

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)
_______________

44,312

527,737
200,760

3,166,009
238,861

2,936,465

$8.1173

$19.3285
$12.7226

$19.3330
$18.9174

$34.9944

517,712
52,128
_________________

34.7748
$32.6187
______________

7,683,984
_________________

$26.1980
______________

—

—
—

—
—

See Note 1

—

577,696
35,367
_________________

$19.4558
$7.5708
______________

See Note 2
See Note 3

613,063
_________________
8,297,047
_________________
_________________

18.7702
______________
25.6491
______________
______________

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 5,401,265 shares of the authorization remaining.

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. Based
on Mercer’s Director compensation review, the Committee approved changing the annual stock
option grant from a fixed number of shares to a fixed value. The annual stock option grant will be
based on a $140,000 fixed value. This change is designed to maintain a stable value of equity grant

60

for our Director compensation. The number of options granted will be determined by dividing the
fixed value of $140,000 by the Black-Scholes value as of the date of the grant (the shares will be
rounded to the nearest 100 shares). This change was effective for stock options granted beginning
in January 2014.

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 2014 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 2014 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, 2014, 2013, and 2012

Consolidated Statements of Comprehensive Income — years ended July 31, 2014, 2013,
and 2012

Consolidated Balance Sheets — July 31, 2014 and 2013

Consolidated Statements of Cash Flows — years ended July 31, 2014, 2013, and 2012

Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, 2014,
2013, and 2012

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.

61

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.

SIGNATURES

DONALDSON COMPANY, INC.

Date: September 26, 2014

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 26, 2014.

_____________________________________
William M. Cook

*
_____________________________________
Tod E. Carpenter

_____________________________________
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:
_____________________________________
Amy C. Becker
As attorney-in-fact

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

Director, Chief Operating Officer

Vice President and Chief Financial Officer
(Principal Financial Officer)

Controller
(Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

Director

Director

Director

Director

62

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

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

Description
________

Year ended July 31, 2014:

Allowance for doubtful accounts deducted
from accounts receivable . . . . . . . . . . . . . . .

Year ended July 31, 2013:

Allowance for doubtful accounts deducted
from accounts receivable . . . . . . . . . . . . . . .

Year ended July 31, 2012:

Allowance for doubtful accounts deducted
from accounts receivable . . . . . . . . . . . . . . .

Additions
____________________

Balance at Charged to
Beginning
of Period
_______

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

Balance at
End of
Period
_______

$7,040

$393

$(1)

$(669)

$6,763

$6,418

$1,241

$230

$(849)

$7,040

$6,908

$1,151

$(676)

$(965)

$6,418

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.

63

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 — 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 Death 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) ***

64

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

***

*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 Non-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 October 4, 2012)***

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

filed December 6, 2012)***

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

2013 Form 10-K Report)***

*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)*
*10-HH — Note Purchase Agreement, dated as of March 27, 2014, by and among Donaldson Company,
Inc. and the purchasers named therein (Filed as Exhibit 10.1 to Form 8-K filed April 2, 2014)
10-II — Form of Employment Agreement for Director Level Employees in Belgium (unofficial

English translation)***

11

— 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

21
23
24
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

101

*

**

— 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

— The following financial information from the Donaldson Company, Inc. Annual Report on
Form 10-K for the fiscal year ended July 31, 2014 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.

65

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 26, 2014 relating to the financial statements, financial statement schedule
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

Exhibit 23

PricewaterhouseCoopers LLP

Minneapolis, Minnesota
September 26, 2014

66

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 26, 2014

William M. Cook
Chief Executive Officer

67

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.

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 26, 2014

James F. Shaw
Chief Financial Officer

68

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, 2014 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, 2014
(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 26, 2014

William M. Cook
Chief Executive Officer

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

CERTIFICATION OF CHIEF FINANCIAL OFFICER

1. The Annual Report on Form 10-K of Donaldson Company, Inc. for the fiscal year ended July 31, 2014
(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 26, 2014

James F. Shaw
Chief Financial Officer

69