~~UNITED STATES~~
~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~

~~Form 10-K~~
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, ~~2009~~2011 or

oTransition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from __________ to __________

Commission File Number: 1-7891

~~DONALDSON COMPANY, INC.~~

~~(Exact name of registrant as specified in its charter)~~

~~Delaware~~		~~41-0222640~~
~~(State or other jurisdiction of~~ ~~incorporation or organization)~~		~~(I.R.S. Employer~~ ~~Identification No.)~~

~~1400 West 94th Street,~~ ~~Minneapolis, Minnesota~~		~~55431~~ DONALDSON COMPANY, INC.
(~~Address~~Exact name of ~~principal executive offices)~~		~~(Zip Code)~~registrant as specified in its charter)

~~Registrant’s telephone number, including area code: (952) 887-3131~~
~~Securities registered pursuant to Section 12(b) of the Act:~~


Delaware			41-0222640
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)


1400 West 94th Street, Minneapolis, Minnesota			55431
(Address of principal executive offices)			(Zip Code)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ~~Yes~~x NoYeso 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. ~~Yes~~o NoYesx 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~~x NoYeso No

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

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.o

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 filerx	Accelerated filero


Non-accelerated filero ~~(Do not check if a smaller reporting company)~~	Smaller reporting companyo

(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). ~~Yes~~

o NoYesx

No

As of January ~~31, 2009,~~28, 2011, 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 ~~$2,375,100,091~~$4,424,036,897 (based on the closing price of ~~$31.12~~$58.04 as reported on the New York Stock Exchange as of that date).

As of August 31, ~~2009,~~2011, there were approximately ~~77,279,071~~74,522,228 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for its ~~2009~~2011 annual meeting of stockholders (the ~~“2009~~“2011 Proxy Statement”) are incorporated by reference in Part III, as specifically set forth in Part III.

DONALDSON COMPANY, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


		Page
PART I
	~~PART I~~

Item 1.	Business	1

	General	1

	Seasonality	2
1
	Competition	2

	Raw Materials	2

	Patents and Trademarks	2

	Major Customers	2

	Backlog	2

	Research and Development	32

	Environmental Matters	32

	Employees	32

	Geographic Areas	3
2
Item 1A.	Risk Factors	3

Item 1B.	Unresolved Staff Comments	5

Item 2.	Properties	5

Item 3.	Legal Proceedings	6

Item 4.	~~Submission of Matters to a Vote of Security Holders~~(Removed and Reserved)	76

	Executive Officers of the Registrant	76

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
7
Item 6.	Selected Financial Data	9
10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	910

	~~Forward-Looking Statements~~Safe Harbor Statement under the Securities Reform Act of 1995	26
23
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	26
24
Item 8.	Financial Statements and Supplementary Data	27
25
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
54
Item 9A.	Controls and Procedures	55
54
Item 9B.	Other Information	5655

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	56
55
Item 11.	Executive Compensation	56
55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
55
Item 13.	Certain Relationships and Related Transactions, and Director Independence	58
56
Item 14.	Principal Accounting Fees and Services	5857

	PART IV

Item 15.	Exhibits, Financial Statement Schedules	5857

	Signatures	5958

	Schedule II – Valuation and Qualifying Accounts	6059

	Exhibit Index	61

	~~Consent of Independent Registered Public Accounting Firm~~	63

	~~Certifications of Officers~~	6460

Table of Contents

PART I

Item 1. Business

General

Donaldson Company, Inc. (“Donaldson” or the “Company”) was founded in 1915 and organized in its present corporate form under the laws of the State of Delaware in 1936.

The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company’s product mix includes air and liquid filtration systems and exhaust and emission control products. Products are manufactured at 4039 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, and replacement ~~parts.~~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, independent distributors, private label accounts, and large equipment fleets. Products in the Industrial Products segment consist of dust, fume, and mist collectors, compressed air purification systems, ~~liquid~~air filtration ~~systems, air filter~~ systems for gas turbines, PTFE membrane-based products, and specialized air filtration systems for ~~diverse~~ applications including computer hard disk drives. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring clean air.

The table below shows the percentage of total net sales contributed by the principal classes of similar products for each of the last three fiscal years:


	Year Ended July 31									Year Ended July 31,
	2009			2008			2007			2011			2010			2009
Engine Products segment
Off-Road Equipment Products (including Aerospace and Defense products)		20	%		20	%		18	%
Off-Road Products											14	%		12	%		13	%
Aerospace and Defense Products											5	%		6	%		6	%
On-Road Products		4	%		6	%		9	%		5	%		4	%		4	%
Aftermarket Products (including replacement part sales to the Company’s OEM’s)		30	%		29	%		30	%
Aftermarket Products*											38	%		37	%		30	%
Retrofit Emissions Products											1	%		1	%		2	%
*includes replacement part sales to the Company’s OEMs customers

Industrial Products segment
Industrial Filtration Solutions Products		27	%		27	%		27	%		22	%		22	%		26	%
Gas Turbine Systems Products		11	%		10	%		8	%
Gas Turbine Products											7	%		8	%		11	%
Special Applications Products		8	%		8	%		8	%		8	%		10	%		8	%

Financial information about segment operations appears in Note JK in the Notes to Consolidated Financial Statements on page ~~51.~~49.

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 available in print, free of charge to any shareholder who requests them. The information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Form 10-K.

~~Table of Contents~~

Seasonality

~~In general, the Company’s Engine and Industrial Products segments are not considered to be seasonal. However, a~~A number of the Company’s end markets are dependent on the construction, agricultural, and power generation industries, which are generally stronger in the second half of the Company’s fiscal year. The first two quarters of the fiscal year also contain the traditional summer and winter holiday periods, which are characterized by more Customer plant closures.

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Competition

Principal methods of competition in both the Engine and Industrial Products segments are technology, 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 with many of its product lines. The Company believes within the Engine Products segment it is a market leader in 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 plastics. ~~The Company purchases a variety of types of steel.~~ Commodity prices ~~were high during the first half of~~generally increased throughout the year, but ~~decreased~~the impact was moderated by certain long term supply contracts. The Company anticipates a further impact from rising commodity prices in Fiscal 2012, as compared to Fiscal 2011, specifically for steel and media, as these supply contracts expired during the ~~second~~latter half ~~such that the full year was comparable with~~of Fiscal ~~2008.~~2011. The Company experienced no significant supply problems in the purchase of its major raw materials. The Company typically has multiple sources of supply for the raw materials essential to its ~~business. The Company~~business, and 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.

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 2011, 2010 or 2009. Sales to Caterpillar Inc. and its subsidiaries (“Caterpillar”) accounted for 10 percent of net sales in Fiscal 2008 and Fiscal 2007. Caterpillar has been a customer of the Company for many years and purchases many models and types of products for a variety of applications. Sales to the U.S. Government do not constitute a material portion of the Company’s business. There were no Customers over 10 percent of gross accounts receivable in Fiscal ~~2009~~2011 or ~~2008.~~2010.

Backlog

At August 31, ~~2009,~~2011, the backlog of orders expected to be delivered within 90 days was ~~$259,181,000.~~$423.8 million. All of this backlog is expected to be shipped during Fiscal ~~2010.~~2012. The 90-day backlog at August 31, ~~2008,~~2010, was ~~$415,078,000.~~$361.1 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 ~~business~~businesses and the timing of orders in many of the Company’s Engine OEM and Industrial markets.

~~Table of Contents~~

Research and Development

During Fiscal ~~2009,~~2011, the Company spent ~~$40,643,000~~$55.3 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 ~~$43,757,000~~$44.5 million and $40.6 million in Fiscal ~~2008~~2010 and ~~$36,458,000 in~~ Fiscal ~~2007~~2009, respectively, on research and development activities. Substantially all commercial research and development is performed in-house.

Environmental Matters

The Company does not anticipate any material effect on its capital expenditures, earnings, or competitive position during Fiscal ~~2010~~2012 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 ~~10,600~~13,000 persons in worldwide operations as of August 31, ~~2009.~~2011.

Geographic Areas

Financial information about geographic areas appears in Note JK of the Notes to Consolidated Financial Statements on page ~~51.~~49.

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Item 1A. Risk Factors

There are inherent risks and uncertainties associated with our global operations that involve the ~~design,~~ manufacturing and sale of products for highly demanding Customer applications throughout the world. These risks and uncertainties ~~associated with our business~~ could adversely affect our operating performance and financial condition. The following discussion, along with discussions elsewhere in this report, outlines the risks and uncertainties that we believe are the most material to our business. In light of the ~~current~~ global economic slowdown in recent years and the continued uncertainty, we want to further highlight the risks and uncertainties associated with: world economic ~~factors;~~factors and the ~~reduction in sales volume and orders due to decreased global demand~~ongoing economic uncertainty that is impacting many regions of the world, the financial condition of our suppliers and Customers, ~~aggressively working~~the potential for some Customers to ~~reduce~~increase their ~~levels~~reliance on their own filtration capabilities, currency fluctuations, commodity prices, political factors, the Company’s international operations, the possible reduced demand for hard disk drive products with the increased use of ~~inventory; increased~~flash memory, highly competitive markets, governmental laws and regulations, including the ~~unprecedented~~impact of the various economic stimulus and financial ~~actions~~reform measures being ~~undertaken~~implemented by governments around the ~~world; a significant tightening~~world, the implementation of ~~credit availability; and~~our new information systems, potential global events resulting in instability and unpredictability in the world’s markets, including financial bailouts of sovereign nations, political changes, military and terrorist activities, health ~~outbreaks. We undertake~~outbreaks, and other factors discussed below. The Company undertakes no obligation to publicly update or revise any forward-looking ~~statements.~~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 North America, 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, ~~and~~ defense regulations, 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 China and Thailand where we have significant investments and

	•	potential global health outbreaks.

~~Table of Contents~~

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~~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.

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

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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 and

	•	reduced demand for disk drive products ifby flash memory or a similar technology, which would eliminate the need for our filtration ~~solutions.~~solutions in disk drives.

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, ~~delivery,~~geographic coverage, product performance, and Customer service. Large Customers continue to seek productivity gains and lower prices from their suppliers. We may lose business or negatively impact our margins if we are unable to deliver the best value to our Customers.

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

Demand for our products tends to respond to varying levels of economic, construction, agricultural, mining, and industrial activity in the United States and in other industrialized nations.

Sales to Caterpillar accounted for slightly less than 10 percent of our net sales in Fiscal ~~2009~~2011, 2010 and ~~10 percent of our net sales in Fiscal 2008.~~2009. An adverse change in Caterpillar’s financial performance or a material reduction in our sales to Caterpillar could negatively impact our operating results.

Changes in our product mix impacts our financial performance.

We sell products that have varying profit margins. Our financial performance can be impacted depending on the mix of products we sell during a given period.

Unavailable or higher cost materials could ~~result in~~impact our ~~Customers being dissatisfied.~~financial performance.

We obtain raw ~~material,~~materials including steel, filter media, ~~and~~ plastics, 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 ~~during a recession or an otherwise challenging business and economic environment~~ could also result in lower operating margins.

~~Table of Contents~~

Difficulties with the Company’s information technology systems could adversely affect ~~the Company’s~~our results.

The Company has many information technology systems that are important to the operation of its businesses. The Company could encounter difficulties in developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses due to disruption in business operations and could adversely affect the Company’s results.

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 foreign 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.

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

We are subject to many environmental 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.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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

~~Table of Contents~~

The Company’s principal ~~plant~~manufacturing and distribution activities are ~~carried out in~~located throughout the ~~United States and internationally. Following~~world. The following is a summary of the principal plants and other materially important physical properties owned or leased by the Company.

~~Americas~~
Americas	Europe / Middle East / Africa
Auburn, Alabama (E)		Kadan, Czech Republic (I)
Riverbank, California (I)*		Klasterec, Czech Republic
Valencia, California (E)*		Domjean, France (E)
Dixon, Illinois		Paris, France (E)*
Frankfort, Indiana		Dulmen, Germany (E)
Cresco, Iowa		Flensburg, Germany (I)
Grinnell, Iowa (E)		Haan, Germany (I)
Nicholasville, Kentucky		Ostiglia, Italy
Bloomington, Minnesota		~~Barcelona, Spain (I)~~Cape Town, South Africa
Chillicothe, Missouri (E)	Johannesburg, South Africa*
Chesterfield, Missouri (E)*	Hull, United Kingdom
~~St. Charles, Missouri* (E)~~	Philadelphia, Pennsylvania (I)	Leicester, United Kingdom (I)
~~Philadelphia, Pennsylvania (I)~~		~~Cape Town, South Africa~~
Greeneville, Tennessee		Johannesburg, South Africa*
Baldwin, Wisconsin		Australia
Stevens Point, Wisconsin		Wyong, Australia
Sao Paulo, Brazil (E)*		~~Wyong, Australia~~
~~Athens,~~Brockville, Canada (I)*		Asia
Aguascalientes, Mexico		~~Asia~~
~~Monterrey, Mexico~~		Hong Kong, China*
	Monterrey, Mexico (I)	Wuxi, China
~~Joint Venture Facilities~~		New Delhi, India
~~Most, Czech Republic (E)~~	Joint Venture Facilities	Gunma, Japan
Champaign, Illinois (E)		Rayong, Thailand (I)
Jakarta, Indonesia
Dammam, Saudi Arabia (I)		Third-Party Logistics Providers
		~~Alsip, Illinois~~Santiago, Chile
Distribution Centers	Wuxi, China
Wyong, Australia	Mumbai, India
Brugge, Belgium	Plainfield, Indiana (I)
~~Brugge, Belgium~~		~~New Hampton, Iowa~~
Rensselaer, Indiana	Gunma, Japan
Ostiglia, Italy	~~Waterloo, Iowa (E)~~Singapore
Aguascalientes, Mexico		Greeneville, Tennessee (I)
Johannesburg, South Africa		~~Singapore~~

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 ~~operations~~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.

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Item 3. Legal Proceedings

~~In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the~~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 operation ~~and~~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 operation or liquidity.

The Company has reached a preliminary agreement to settle the class action lawsuits that were previously disclosed in its SEC filings, including most recently the Form 10-Q for the quarter ending April 30, 2011. On March 31, 2008, S&E Quick Lube, a filter distributor, filed a lawsuit alleging that 12 filter manufacturers, including the Company, engaged in a conspiracy to fix prices, rig bids, and allocate U.S. Customers for aftermarket automotive filters. The U.S. cases have been consolidated into a single multi-district litigation in the Northern District of Illinois. The Company denies any liability and has vigorously defended the claims raised in these lawsuits. The settlement will fully resolve all claims brought against the Company in the lawsuits and the Company does not admit any liability or wrongdoing. The settlement is still subject to Court approval and will not have a material impact on the Company’s financial position, results of operations or liquidity.

The Company has reached a preliminary agreement with the Air Resources Board for the State of California (“ARB”) to settle regulatory claims brought by ARB in connection with the sales of our Diesel Multi-Stage Filter System (“DMF”) for an immaterial amount. On May 19, 2010, ARB revoked its verification of the Company’s DMF for use with on-road diesel engines, for which verification was originally issued on December 16, 2005. The Company denies that any sales were made in California without ARB verification. The Company is not currently selling any DMF product and is working with the Environmental Protection Agency to verify the product for any future sales.

~~Table of Contents~~

Item 4. ~~Submission of Matters to a Vote of Security Holders~~(Removed and Reserved)

~~No matters were submitted to a vote of security holders of the Company during the quarter ended July 31, 2009.~~

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		Age	Positions and Offices Held	First Year Elected or Appointed as an Executive Officer		Age	Positions and Offices Held	First Fiscal Year Appointed as an Executive Officer
Tod E. Carpenter	Tod E. Carpenter	50	Vice President, Europe and Middle East	2008	Tod E. Carpenter	52	Vice President, Europe and Middle East	2008

William M. Cook	William M. Cook	56	Chairman, President and Chief Executive Officer	1994	William M. Cook	58	Chairman, President and Chief Executive Officer	1994

Sandra N. Joppa	Sandra N. Joppa	44	Vice President, Human Resources	2005	Sandra N. Joppa	46	Vice President, Human Resources	2005

Norman C. Linnell	Norman C. Linnell	50	Vice President, General Counsel and Secretary	1996	Norman C. Linnell	52	Vice President, General Counsel and Secretary	1996

Charles J. McMurray	Charles J. McMurray	55	Senior Vice President, Industrial Products	2003	Charles J. McMurray	57	Senior Vice President, Industrial Products	2003

Mary Lynne Perushek	Mary Lynne Perushek	51	Vice President and Chief Information Officer	2006	Mary Lynne Perushek	53	Vice President and Chief Information Officer	2006

Lowell F. Schwab		61	Senior Vice President, Global Operations	1994

David W. Timm	David W. Timm	56	Vice President, Asia-Pacific	2007	David W. Timm	58	Vice President, Asia-Pacific	2007

Thomas R. VerHage	Thomas R. VerHage	56	Vice President and Chief Financial Officer	2004	Thomas R. VerHage	58	Vice President and Chief Financial Officer	2004

Jay L. Ward	Jay L. Ward	45	Senior Vice President, Engine Products	2006	Jay L. Ward	47	Senior Vice President, Engine Products	2006

Debra L. Wilfong	Debra L. Wilfong	54	Vice President and Chief Technology Officer	2007	Debra L. Wilfong	56	Vice President and Chief Technology Officer	2007

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)~~(“IFS’) Sales from 2004 to 2006; General Manager, IFS Americas in 2006; and Vice President, Global IFS from 2006 to 2008. Mr. Carpenter was appointed Vice President, Europe and Middle East in August 2008. Mr. Carpenter has been appointed Senior Vice President, Engine Products, effective October 1, 2011.

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.

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

Mr. Linnell joined the Company in 1996 as General Counsel and Secretary and was appointed Vice President, General Counsel and Secretary in 2000.

Mr. McMurray joined the Company in 1980 and has held various positions, including Director, Global Information Technology from 2001 to 2003; Vice President, Human Resources from 2004 to 2005; and Vice President, Information Technology, Europe, South Africa, and Mexico from 2005 to 2006. Mr. McMurray became Senior Vice President, Industrial Products in September 2006. Mr. McMurray has been appointed Senior Vice President and Chief Administrative Officer, effective October 1, 2011.

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. Schwab joined the Company in 1977 and has held various positions, including Senior Vice President, Operations from 1994 to 2004 and Senior Vice President, Engine Products from 2004 to 2008. Mr. Schwab was appointed Senior Vice President, Global Operations, in August 2008.

~~Mr.~~ Timm joined the Company in 1983 and has held various positions, including General Manager, Disk Drive from 1995 to 2005 and General Manager, Gas Turbine Systems Products from 2005 to 2006. Mr. Timm was appointed Vice President, Asia-Pacific in December 2006.

~~Table~~ The Company has announced that Mr. Timm will retire from the Company at the end of ~~Contents~~2011, with his replacement to be announced at a later date.

Mr. VerHage was appointed Vice President and Chief Financial Officer in March 2004. Prior to that time, Mr. VerHage was a partner for Deloitte & Touche, LLP, an international accounting firm, from 2002 to 2004. The Company has announced that Mr. VerHage is leaving the Company on October 31, 2011 and that James F. Shaw, age 42, currently Controller and Principal Accounting Officer for the Company, has been appointed Vice President and Chief Financial Officer, effective November 1, 2011.

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. Mr. Ward has been appointed Senior Vice President, Industrial Products, effective October 1, 2011.

Ms. Wilfong was appointed Vice President and Chief Technology Officer in May 2007. Prior to that time, Ms. Wilfong ~~held various director positions in research~~was Director, Research and ~~development~~Development at 3M Company, an international consumer products company, from 2000 to 2007, most recently as Director, Research and Development for the 3M Automotive Division from 2006 to 2007.

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 ~~2009~~2011 and ~~2008~~2010 appear in Note NP of the Notes to Consolidated Financial Statements on page ~~55.~~54. The Company’s dividend payout ratio target is 20 percent to 30 percent of the average earnings per share of the last three years. This guidance is expected to be used for future dividend payouts. As of September ~~23, 2009,~~22, 2011, there were ~~2,109~~1,950 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 ~~2009~~2011 and ~~2008~~2010 were as follows:


	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Fiscal ~~2008~~2011	$~~34.40 — 44.59~~40.86 - 50.19	$~~35.14 — 48.40~~48.51 - 60.28	$~~38.83 — 44.29~~54.59 - 62.90	$~~40.95 — 52.33~~54.62 - 63.04

Fiscal ~~2009~~2010	$~~28.04 — 49.00~~32.60 - 39.82	$~~23.40 — 36.29~~35.24 - 45.19	$~~21.82 — 34.37~~37.24 - 47.38	$~~31.00 — 38.93~~40.51 - 48.21

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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, ~~2009.~~2011.

Period

Total Number of
Shares Purchased (1)

Average Price
Paid per Share

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

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

May 1-May 31, 2009

—

—

—

930,210

June 1-June 30, 2009

18,972

$
36.12

—

930,210

July 1-July 31, 2009

—

—

—

930,210

Total

18,972

$
36.12

—

930,210


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
May 1 - May 31, 2011		—	$	—		—		6,187,240
June 1 - June 30, 2011		900,000	$	56.35		900,000		5,287,240
July 1 - July 31, 2011		291,558	$	59.23		256,648		5,030,592
Total		1,191,558	$	57.06		1,156,648		5,030,592

The Company initiated the purchase of an additional 162,900 shares for $9.2 million in July 2011 that are not included in Fiscal 2011 repurchases as the transactions did not settle until after fiscal year end. These repurchases will be included in Fiscal 2012 activity.




(1)	On March ~~31, 2006,~~26, 2010, the Company announced that the Board of Directors authorized the repurchase of up to 8.0 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 ~~January 17, 2003.~~March 31, 2006. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the quarter ended July 31, ~~2009.~~2011. However, the “Total Number of Shares Purchased” column of the table above includes ~~18,972~~34,910 previously owned shares tendered by option holders in payment of the exercise price of ~~options.~~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.

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The graph below compares the cumulative total stockholder return on the Company’s ~~Common Stock~~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 ~~Index of~~ Industrial Machinery ~~Companies.~~Index. The graph and table assume the investment of $100 in each of the Company’s ~~Common Stock~~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~~the S&P 500 Index
~~And The~~and the S&P Industrial Machinery Index


	Year ended July 31,												Year Ended July 31,
	2009		2008		2007		2006		2005		2004		2011		2010		2009		2008		2007		2006
Donaldson Company, Inc.	$	150.18	$	175.88	$	140.46	$	125.67	$	123.27	$	100.00	$	177.91	$	150.95	$	119.50	$	139.95	$	111.77	$	100.00
S&P 500		99.33		124.10		139.58		120.19		114.05		100.00		112.56		94.07		82.64		103.25		116.13		100.00
S&P Industrial Machinery		102.93		133.98		146.65		113.48		108.37		100.00		143.55		119.05		90.70		118.06		129.23		100.00

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Item 6. Selected Financial Data

The following table sets ~~fourth~~forth selected financial data for each of the fiscal years in the five-year period ended July 31, ~~2009~~2011 (in millions, except per share data):


	Year ended July 31,										Year Ended July 31,
	2009		2008		2007		2006		2005		2011		2010		2009		2008		2007
Net sales	$	1,868.6	$	2,232.5	$	1,918.8	$	1,694.3	$	1,595.7	$	2,294.0	$	1,877.1	$	1,868.6	$	2,232.5	$	1,918.8
Income from continuing operations		131.9		172.0		150.7		132.3		110.6		225.3		166.2		131.9		172.0		150.7
Diluted earnings per share		1.67		2.12		1.83		1.55		1.27		2.87		2.10		1.67		2.12		1.83
Total assets		1,334.0		1,548.6		1,319.0		1,124.1		1,111.8		1,726.1		1,499.5		1,334.0		1,548.6		1,319.0
Long-term obligations		253.7		176.5		129.0		100.5		103.3		205.7		256.2		253.7		176.5		129.0
Cash dividends declared per share		0.460		0.430		0.370		0.410		0.180		0.560		0.480		0.460		0.430		0.370
Cash dividends paid per share		0.455		0.420		0.360		0.320		0.235		0.535		0.470		0.455		0.420		0.360

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

Results of Operation

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.

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Overview

The Company ~~manufactures and distributes~~is a worldwide manufacturer of filtration systems and replacement parts. The Company’s core strengths are leading filtration technology, strong Customer relationships, and its global presence. The Company operates through two reporting segments, Engine Products and Industrial Products, and has a product mix including air and liquid ~~filters~~filtration systems and exhaust and emission control products. As a worldwide business, the Company’s results of operations are affected by conditions in the global economic environment. Under normal economic conditions, the Company’s ~~diversity~~market diversification between its ~~original equipment~~OEM and replacement parts Customers, its diesel engine and industrial end markets, and its North American and international end markets has helped to limit the impact of weakness in any one product line, market or geography on the consolidated results of the Company. ~~However, the global recession had a dramatic negative impact on the Company’s results in Fiscal 2009 as nearly every product group and geographic area was impacted.~~

The Company reported record sales in Fiscal ~~2009~~2011 of ~~$1,868.6~~$2,294.0 million, ~~down 16.3~~up 22.2 percent from ~~$2,233.5~~$1,877.1 million in the prior year. The Company’s results were ~~negatively~~positively impacted by foreign currency ~~translation. The impact of foreign currency~~ translation, ~~decreased~~which increased sales by ~~$76.8~~$49.8 million. Excluding the current year impact of foreign currency translation, worldwide sales ~~decreased 12.9 percent during the year.~~increased 19.6 percent.

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


						Year Ended July 31,
	July 31, 2009			July 31, 2008		2011		2010
Net sales, excluding foreign currency translation	$	1,945.4		$	2,110.0	$	2,244.2	$	1,833.9
Foreign currency translation impact		(76.8	)		122.5		49.8		43.2
Net sales	$	1,868.6		$	2,232.5	$	2,294.0	$	1,877.1

~~Although not as large as~~The Company also reported record net earnings in Fiscal 2011 of $225.3 million, an increase of 35.6 percent from $166.2 million in the ~~impact on net sales, the~~prior year. The Company’s net earnings were also ~~negatively~~positively impacted by foreign currency ~~translation. The impact of foreign currency~~ translation, ~~during the year decreased~~which increased net earnings by ~~$3.8~~$6.1 million. Excluding the current year impact of foreign currency translation, net earnings ~~decreased 21.1~~increased 31.9 percent.

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


						Year Ended July 31,
	July 31, 2009			July 31, 2008		2011		2010
Net earnings, excluding foreign currency translation	$	135.7		$	159.1	$	219.2	$	162.6
Foreign currency translation impact, net of tax		(3.8	)		12.9		6.1		3.6
Net earnings	$	131.9		$	172.0	$	225.3	$	166.2

The Company reported diluted earnings per share of ~~$1.67,~~$2.87, a ~~21.2~~36.7 percent ~~decrease~~increase from ~~$2.12~~$2.10 in the prior year.

~~Included in~~As discussed above, the ~~results are pre-tax restructuring charges~~Company recorded full year records for net sales and net earnings. In addition, operating margin was a record of ~~$17.8 million resulting primarily from workforce reductions of 2,800 since the beginning of~~13.7 percent for the year. ~~Gross margin~~The Company’s manufacturing plants and distribution centers executed very well and continued to make both capital and operating ~~expenses include $10.1 million~~investments which, along with the Company’s Continuous Improvement initiatives, resulted in a record year and ~~$7.7 million of restructuring expenses, respectively. The~~puts the Company ~~also realized $43.0 million~~ in ~~cost savings from restructuring actions completed throughout the year.~~

~~The effective tax rate for Fiscal 2009 was 18.3 percent compared~~a position to ~~27.2 percent in Fiscal 2008. This decrease is attributable to a number of discrete tax items, partially~~profitably support its Customers’ global growth plans. These improvements were slightly offset by ~~increased expense from the repatriation of foreign earnings. Absent these items, the underlying tax rate for the Fiscal 2009 has decreased~~

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~~from Fiscal 2008 by 1.2 points to 30.4 percent. The reinstatement of the U.S. Research~~increases in purchased raw material and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the mix of earnings between foreign jurisdictions all contributed to the reduction in the underlying rate.

The Company continued to improve an already strong liquidity position which allowed for continued investment in business and debt reduction while increasing cash reserves and maintaining its dividend. While Fiscal 2009 was significantly impacted by the global recession, there are signs that some of the Company’s end markets have begun to stabilize. While the Company’s future visibility remains limited and it’s too early to call a recovery, the Company believes that the worst of the global economic downturn is behind it in many of its early and mid-cycle end markets, including the heavy truck, construction, special applications and replacement parts markets. This view is factored into the Fiscal 2010 outlook discussed below.freight costs.

Following is financial information for the Company’s Engine and Industrial Products segments. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments and interest income and expense. See further discussion of segment information in Note JK of the Company’s Notes to Consolidated Financial Statements.


	Engine Products		Industrial Products		Corporate & Unallocated			Total Company		Engine Products		Industrial Products		Corporate & Unallocated			Total Company
										(thousands of dollars)
2011
Net sales										$	1,440,495	$	853,534	$	—		$	2,294,029
Earnings before income taxes											211,255		123,871		(22,863	)		312,263

2010
Net sales										$	1,126,007	$	751,057	$	—		$	1,877,064
Earnings before income taxes											155,833		91,084		(16,741	)		230,176
	(thousands of dollars)
2009
Net sales	$	1,001,961	$	866,668	$	—		$	1,868,629	$	1,027,685	$	840,944	$	—		$	1,868,629
Earnings before income taxes		83,797		89,526		(11,898	)		161,425		85,896		87,427		(11,898	)		161,425

2008
Net sales	$	1,229,171	$	1,003,350	$	—		$	2,232,521
Earnings before income taxes		158,931		102,420		(25,188	)		236,163

2007
Net sales	$	1,084,262	$	834,566	$	—		$	1,918,828
Earnings before income taxes		140,762		80,321		(16,222	)		204,861

~~During Fiscal~~For the twelve months ended July 31, 2010 and 2009, net sales reflect the ~~Company’s~~reclassification of $31,636 and $25,724, respectively, earnings before income taxes reflect a reclassification of $5,360 and $2,099, respectively, as a result of an internal reorganization of Industrial Hydraulics from Industrial Products to Engine Products, segment net sales decreased as a percent of total net sales to 53.6 percent compared to 55.1 percent in the prior year. For the Company’s Industrial Products segment, net sales as a percent of total net sales increased to 46.4 percent from 44.9 percent in the prior year.which became effective August 1, 2010.

~~Factors within the Company’s reporting segments that~~Many factors contributed to the Company’s results for ~~Fiscal 2009 included a significant impact from~~each of the Company’s ~~distributors~~reporting segments for Fiscal 2011, including an improvement in global economic conditions, the Company’s program of Continuous Improvement initiatives, new product introductions, emerging market growth, and ~~OEM customers aggressively working down their inventory levels.~~the expansion of the Company’s distribution capabilities.

In the Engine Products segment, the Company experienced ~~weak business conditions~~increased sales in ~~most end markets~~all end-markets and ~~regions. Spending in~~regions with the ~~construction and mining end-markets in the United States, Europe and Asia was down, resulting in a decrease in off-road equipment related sales. This decrease was partially offset by an increase in~~exception of Aerospace and Defense ~~sales~~Products. The earnings improvement for the current fiscal year was primarily driven by better absorption of fixed costs due to improved volumes at our manufacturing plants, and ~~the benefit of the acquisition of Western Filter Corporation in October 2008. On-road~~Continuous Improvement initiatives. The Aftermarket Products sales ~~decreased in the United States, Europe and Asia due to a drop in demand for new trucks, which lowered new truck build rates. Aftermarket sales also decreased due to decreases~~increases were driven by continued improvement in equipment utilization ~~in most off-road end markets and decreased freight activity which impacted on-road markets, partially offset by increases in retrofit emissions sales~~rates in the ~~United States. In the Industrial Products segment,~~mining, construction, and transportation industries globally. The Off-Road Product sales increase is driven by higher demand for agriculture and mining equipment, due to continued strong commodity prices and improved sales of heavy construction equipment, which was ~~also weak~~due to increased global infrastructure spending, especially in all markets across all regions. Demand for Industrial Filtration Solutions Products was down as a result of the decline in general industrial activity. Also contributing to the decrease in Industrial Filtration Solutionsdeveloping economies. On-Road Products sales was the sale of the air dryer business in Maryville, Tennessee, in October 2008, partially offset by the benefit from the acquisition of LMC West, Inc. in February of 2008. Worldwide sales in Gas Turbine Products weakened late in the yearimproved as North America and full year sales were slightly lower as compared to the prior year. Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from quarter to quarter. Sales of Special Applications Products were weak due to decreased demand for semiconductor fabrications and industrial uses for PTFE membranes and a sudden contraction of the disk drive market that resulted in decreased demand for the Company’s hard disk drive filters.Europe heavy truck build rates continued rebounding.

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In the Industrial Products segment, where many product lines are later economic cycle businesses, sales increased due to improving global economies leading to greater Customer demand. In Industrial Filtration Solutions Products, sales of new dust collection equipment and replacement filters continued to grow. Gas Turbine Products sales remained slow due to static Customer demand for large gas turbine power generation projects as a result of unchanged global power generation requirements. The increase in sales in Special Applications Products is due to strong sales in certain product lines serving the membrane, semiconductor, imaging, and venting end markets.

Following are net sales by product within both the Engine and Industrial Products segments:


	2009		2008		2007		2011		2010		2009
	(thousands of dollars)						(thousands of dollars)
Engine Products segment:
Off-Road Products*	$	362,785	$	448,681	$	352,065
Off-Road Products							$	327,557	$	222,329	$	243,691
Aerospace and Defense Products								104,883		111,977		119,094
On-Road Products		71,958		123,146		166,370		127,107		81,874		71,958
Aftermarket Products**		567,218		657,344		565,827
Aftermarket Products*								861,393		691,899		561,846
Retrofit Emissions Products								19,555		17,928		31,096
Total Engine Products segment		1,001,961		1,229,171		1,084,262		1,440,495		1,126,007		1,027,685
Industrial Products segment:
Industrial Filtration Solutions Products		503,611		600,526		515,022		507,646		423,050		477,908
Gas Turbine Products		206,760		213,138		158,025		154,726		150,131		206,760
Special Applications Products		156,297		189,686		161,519		191,162		177,876		156,276
Total Industrial Products segment		866,668		1,003,350		834,566		853,534		751,057		840,944

Total Company	$	1,868,629	$	2,232,521	$	1,918,828	$	2,294,029	$	1,877,064	$	1,868,629




*	~~Includes Aerospace and Defense products.~~

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

Outlook

~~While it appears that conditions may have stabilized at many of the Company’s Customers and~~The Company forecasts continued expansion in many of its end markets, ~~the~~with higher growth in emerging economies. The Company ~~continues~~forecasts its full year Fiscal 2012 EPS to ~~have limited visibility into the future. Consequently, the Company remains cautious in the near-term about forecasting a return to growth.~~be between $3.15 and $3.45.


	•	The Company is planning its total Fiscal ~~2010~~2012 sales to be between ~~$1.65~~$2.45 and ~~$1.75~~$2.60 billion, or ~~approximately the pace of the past two quarters. For the full year~~up about 7 to 15 percent from Fiscal ~~2010 versus Fiscal 2009, sales are projected to be down 6 to 12 percent.~~2011. Foreign currency translation is ~~expected to provide a small benefit~~ based on the Company’s planned rates for the Euro ofat US$~~1.39~~1.42 and 9881 Yen to the ~~US Dollar for Fiscal 2010.~~US$.

	•	The Company did not complete all of its planned restructuring actions by the end of the fourth quarter of Fiscal 2009 and anticipates there could be additional restructuring charges of up to $17 million in Fiscal 2010. Including these costs, theCompany’s full year Fiscal ~~2010~~2012 operating margin is ~~still expected~~forecasted to be 13.7 to 14.5 percent.

	•	The Company’s full year Fiscal 2012 tax rate is projected to be between ~~9.5 to 10.5~~28 and 30 percent.

	•	The Company ~~expects its full year Fiscal 2010 tax rate to be between 30 and 32 percent. The Company does not anticipate significant discrete tax benefits as occurred in Fiscal 2009.~~

	•	~~The Company expects~~projects that cash generated by operating activities will ~~exceed $150~~be between $275 and $305 million in Fiscal ~~2010.~~2012. Capital spending in Fiscal ~~2010~~2012 is ~~planned at $30.0 million~~estimated to ~~$40.0~~be approximately $100 million. ~~The Company will continue to use its cash flow for dividends, potential acquisitions, capital projects and maintenance of its strong liquidity position.~~

Engine Products– The Company ~~expects~~forecasts full year sales to ~~decrease 3~~increase 8 to 815 percent, ~~inclusive of~~including the impact of foreign currency translation.


	•	InThe Company anticipates sales to its ~~On-Road Products businesses, the~~agricultural, mining, and construction equipment OEM Customers to grow at a more moderate pace in Fiscal 2012 compared to Fiscal 2011’s growth rate. The Company ~~believes that global build rates for heavy- and medium-duty trucks are stabilizing at the current levels.~~also expects to continue to benefit from increased market share on their Customers’ new Tier IV equipment platforms.

	•	~~The~~In the On-Road Products’ business, the Company ~~is forecasting slightly lower sales~~believes build rates for ~~its Aerospace~~heavy and ~~Defense Products as the level of Customer demand for defense products is decreasing.~~medium duty trucks at their OEM Customers will be higher than Fiscal 2011, but are expected to grow at a more normal rate.

	•	~~The Company expects activity in~~Sales of the global construction and mining end markets to remain at their current levels during the first half of Fiscal 2010, and anticipates Customer demand in the farm equipment market outside of North America to continue its current decline.

	•	~~The~~ Company’s Aftermarket ~~sales~~Products are expected to ~~improve slightly from their~~remain strong based on current ~~levels as~~ utilization rates for both ~~heavy trucks and~~ off-road equipment ~~are stabilizing.~~and on-road heavy trucks. The Company ~~expects~~should also benefit as its distribution

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		networks continue to ~~benefit~~expand in the emerging economies and from the increasing ~~amount~~number of ~~equipment~~systems installed in the field with ~~PowerCore® technology as well as its other~~their proprietary filtration systems.

	•	The Company forecasts modest sales gains in Aerospace and Defense Products for Fiscal 2012 as the continued slowdown in military spending is anticipated to be offset by increased commercial aerospace sales.

Industrial Products– - The Company forecasts full year ~~Fiscal 2010~~FY12 sales to ~~decrease 11~~increase 7 to 1615 percent, ~~inclusive of~~including the impact of foreign currency translation.


	•	The Company’s Industrial Filtration Solutions Products’ sales are projected to ~~decrease 10~~increase 7 to 1514 percent, assuming demand for ~~the year due~~new filtration equipment and replacement filters both continue to ~~difficult comparable sales in the first half of Fiscal 2010. The Company expects~~improve as general ~~manufacturing~~industrial capital activity ~~to remain near its current level.~~and spending increase globally.

	•	The Company ~~expects full year sales of~~anticipates its Gas Turbine ~~Products~~Products’ sales to ~~decrease 21~~increase 14 to 2622 percent due ~~the slowdown~~to improvement in ~~demand for large~~the power generation ~~projects.~~market and ongoing strength in the oil and gas market segment.

	•	Special Applications Products’ sales are projected to ~~be flat~~increase 2 to ~~down 5~~9 percent ~~as conditions appear~~primarily due to ~~have stabilized in the hard disk drive market but may continue to weaken in the short-term in the Company’s membrane products’ industrial end-markets.~~growing sales of their membranes products.

Fiscal ~~2009~~2011 Compared to Fiscal ~~2008~~2010

Engine Products SegmentThe 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, and replacement filters.

Sales for the Engine Products segment were ~~$1,002.0~~$1,440.5 million, ~~a decrease~~an increase of ~~18.5~~27.9 percent from ~~$1,229.2~~$1,126.0 million in the prior year. ~~International~~ Engine Products ~~sales decreased 24.3 percent and~~ sales in the United States ~~decreased 12.4~~increased by 25.9 percent in Fiscal 2011 compared to Fiscal 2010. International Engine Products sales increased 29.8 percent from the prior year. The impact of foreign currency ~~decreased~~increased total sales by ~~$38.9~~$31.5 million, or ~~3.2~~2.8 percent. Earnings before income taxes as a percentage of Engine Products segment sales of ~~8.4~~14.7 percent ~~decreased~~increased from ~~12.9~~13.8 percent in the prior year. The ~~Engine Products segment has been negatively impacted~~earnings improvement for the current fiscal year was driven by ~~lower~~better absorption of fixed ~~manufacturing~~ costs due to ~~the drop in sales~~improved volumes and ~~increased costs related to restructuring,~~the Company’s ongoing Continuous Improvement initiatives, partially offset by ~~cost savings as a result of workforce reductions already completed, improved distribution efficiencies as~~increased commodity costs compared to the prior ~~year and~~year. There were $1.9 million in restructuring expenses for the ~~impact of cost control measures including reductions~~Engine Products segment in ~~incentive compensation.~~the prior year.

Worldwide sales of Off-Road Products were ~~$362.8~~$327.6 million, an increase of 47.3 percent from $222.3 million in the prior year. Sales in the United States increased 35.8 percent over the prior fiscal year. Internationally, sales of Off-Road Products were up 56.0 percent from the prior year, with sales increasing in Asia and Europe by 58.2 percent and 55.6 percent, respectively. The Company’s overall increase was driven by higher demand for agriculture, construction, and mining equipment due to continued strong commodity prices and improved sales of heavy construction equipment, which was due to increased global infrastructure spending, especially in developing economies. Off-Road Products sales in the U.S. also benefited from market share gains on new platforms that began production during calendar year 2011. These increases were slightly offset by U.S. residential and non-residential construction markets, which showed continued weakness, resulting in lower sales of the Company’s products into those markets.

Worldwide sales of Aerospace and Defense Products were $104.9 million, a 6.3 percent decrease ~~of 19.1 percent~~ from ~~$448.7~~$112.0 million in the prior year. Sales in the United States decreased 7.2 percent. Global mining activity started declining due to decreased commodity prices in the second quarter of Fiscal 2009, and remained weak throughout the remainder of the year. Spending in U.S. residential and non-residential construction markets was down more than 278.7 percent and 5 percent, respectively, over prior year, resulting in a decrease in the sales of the Company’s products into those markets. Domestic Aerospace and Defense sales benefited from the recent acquisition of Western Filter Corporation, which resulted in $15.4 million of incremental sales over the prior year ~~and continued strong demand~~as a result of slowdowns in U.S. military activity, which is causing an associated slowdown in government procurement spending for ~~filters for military equipment.~~major programs. Internationally, sales of ~~Off-Road~~Aerospace and Defense Products ~~were down 31.3~~increased 3.0 percent ~~from~~over the prior ~~year, with~~year. The international sales ~~decreasing in both Europe and Asia by 32.5 percent and 29.5 percent, respectively. Sales in the European construction equipment end market decreased~~increased primarily due to ~~a decline~~market share gains resulting from improving the Company’s Aerospace distribution capabilities in construction activity related to the economic downturn. Sales to the European agricultural end market also decreased. In Asia, sales have declined significantly in Japan in the construction end markets.Europe.

Worldwide sales of On-Road Products were ~~$72.0~~$127.1 million, ~~a decrease~~an increase of ~~41.6~~55.2 percent from ~~$123.1~~$81.9 million in the prior year. On-Road Products sales in the United States ~~decreased 43.2~~increased 86.0 percent from the prior ~~year, primarily as a result of a 29 percent decrease in~~year. Class 8 ~~truck~~ build rates 40increased 47.8 percent ~~decrease in~~and medium duty truck build rates ~~by the Company’s Customers and a reduction in high value product mix~~increased 37.1 percent over the prior year. International On-Road Products sales ~~decreased 39.6~~increased 27.4 percent from the prior year, driven by ~~decreased~~increased sales in Europe ~~and Asia~~ of ~~51.0 percent and 32.5 percent, respectively, reflecting~~45.6 percent. This increase is consistent with the ~~current economic downturn for freight activity and new~~increase in European build rates. The overall sales increase was a result of an increase in Customer truck build ~~rates.~~rates, higher content per truck, and a slightly higher market share.

Worldwide Engine Aftermarket Products sales of ~~$567.2~~$861.4 million ~~decreased 13.7~~increased 24.5 percent from ~~$657.3~~$691.9 million in the prior year. Sales in the United States ~~decreased 9.5~~increased 26.3 percent over the prior ~~year, driven~~year. International sales increased 23.1

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by inventory adjustments at the Company’s Customers and decreases in utilization rates in the mining, construction and transportation industries, partially offset by increases in retrofit emission sales of $5.2 million. International sales decreased 17.4 percent from the prior year, primarily driven by sales ~~decreases~~increases in Asia, Latin America and Europe ~~and Asia~~ of ~~26.1~~37.8 percent, 25.7 percent, and ~~8.0~~13.5 percent, ~~respectively, due~~respectively. The sales increases in the U.S. and internationally were attributable to ~~weak economic conditions.~~improved On-Road and Off-Road equipment utilization rates from a year ago, the Company’s increased distribution and market share growth, and the continued increase in the percentage of equipment in the field that uses the Company’s proprietary filtration systems.

Worldwide sales of Retrofit Emissions Products were $19.6 million, an increase of 9.1 percent from $17.9 million in the prior year. The Company’s Retrofit Emissions Products sales are solely in the United States. Sales of Retrofit Emissions Products increased overall, but challenges still remain in the supply chain for certain components and delays in regulatory approval for certain of the Company’s products have impacted the Company’s sales.

Industrial Products SegmentThe Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, and OEMs and end-users requiring ~~highly purified~~clean air. Products include dust, fume, and mist collectors, compressed air purification systems, ~~liquid filters and parts,~~ air ~~filter~~filtration systems for gas turbines, PTFE membrane ~~and laminates,~~based products, and specialized air filtration systems for applications, including computer hard disk drives.

Sales for the Industrial Products segment were ~~$866.7~~$853.5 million, ~~a decrease~~an increase of 13.6 percent from ~~$1,003.4~~$751.1 million in the prior year. International Industrial Products sales ~~decreased 14.2~~increased 8.5 percent and sales in the United States ~~decreased 12.3~~increased 27.2 percent from the prior year. The impact of foreign currency ~~decreased~~increased sales by ~~$37.9~~$18.3 million, or ~~3.8~~2.4 percent. ~~Despite the 13.6 percent decrease in sales, earnings~~Earnings before income taxes as a percentage of Industrial Products segment sales of ~~10.3~~14.5 percent increased from ~~10.2~~12.1 percent in the prior year. The improvement in earnings as a percent of sales over the prior year was driven by better execution on large project shipments, cost savings from restructuring actions and the impact of cost control measures including reductions in incentive compensation expense. These were slightly offset by lower absorptionleverage of fixed operating costs and ~~restructuring costs.~~better plant utilization. Restructuring expenses in Fiscal 2011 were $0.7 million, a decrease from $8.3 million in Fiscal 2010.

Worldwide sales of Industrial Filtration Solutions Products of ~~$503.6~~$507.6 million ~~decreased 16.1~~increased 20.0 percent from ~~$600.5~~$423.1 million in the prior year. Sales in the United States, Europe and ~~Europe decreased 18.3~~Asia increased 25.3 percent, 12.9 percent, and ~~21.0~~26.2 percent, respectively. ~~Sales~~The increased sales were due to increased manufacturing activity, higher investment in ~~Asia~~capital equipment by manufacturers, and the continued strengthening of replacement filter sales due to utilization of existing equipment. North American general industrial activity remained ~~relatively flat~~strong as evidenced by a 110 percent increase in machine tool consumption in the United States during Fiscal 2011 as compared to the prior year. The decline in Europe was due to reduced demand for industrial dust collectors and compressed air purification systems which fell with the downturn in general manufacturing activity during the year. Domestic sales decreased from the prior year as a result of this same decline in general industrial activity. The results in the year were also influenced by the sale of the air dryer business in Maryville, Tennessee, on October 31, 2008 and the acquisition of LMC West, Inc. (LMC West) in February of Fiscal 2008. The sale of the air dryer business in Maryville, Tennessee, decreased sales $7.6 million over last year. The acquisition of LMC West contributed to $7.0 million of sales during the twelve months of Fiscal 2009 and $4.7 million during the latter six months of Fiscal 2008.2010.

Worldwide sales of Gas Turbine Products were ~~$206.8~~$154.7 million, ~~a decrease~~an increase of ~~3.0~~3.1 percent from ~~$213.1~~$150.1 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 ~~quarter~~period to ~~quarter. Incoming orders declined 58 percent in Fiscal 2009 versus Fiscal 2008, a reflection of the reduced~~period. Sales slightly improved due to additional demand for smaller systems used in the oil and gas industry as a result of higher average oil prices and an increase in Aftermarket sales for replacement filters. These increases were slightly offset by a decline in the sales of air filtration systems for large turbines used for power ~~generation projects globally. This trend is expected to continue in Fiscal 2010.~~generation.

Worldwide sales of Special Applications Products were ~~$156.3~~$191.2 million, a ~~17.6~~7.5 percent ~~decrease~~increase from ~~$189.7~~$177.9 million in the prior year. ~~Domestic Special Application Products sales decreased 10.0 percent.~~ International sales of Special Application Products ~~decreased 18.7~~increased 6.1 percent over the prior ~~year. The primary decreases internationally were~~year, primarily in Europe, which increased 47.0 percent. Domestic Special Application Products sales increased 17.1 percent. The global sales increases were driven by strong sales in some of the Company’s product lines serving the membrane, semiconductor, imaging, and ~~Asia, which decreased 25.5 and 17.3 percent, respectively,~~venting end markets, partially offset by a slight decline in the Company’s disk drive filter sales due to ~~a significant reduction~~soft demand in ~~demand~~the global end market for hard disk drives. Overall, the decline in disk drive ~~filters, semiconductor filtration systems and PTFE membrane filtration products. The reduction in demand~~sales is ~~primarily a result of a worldwide contraction in the end markets for computers, data storage devices and other electronic products that began in the second quarter of Fiscal 2009.~~comparable with published disk drive build rates.

Consolidated ResultsThe Company reported net earnings for Fiscal ~~2009~~2011 of ~~$131.9~~$225.3 million compared to ~~$172.0~~$166.2 million in Fiscal ~~2008, a decrease~~2010, an increase of ~~23.3~~35.6 percent. Diluted net earnings per share ~~was $1.67, down 21.2~~were $2.87, up 36.7 percent from ~~$2.12~~$2.10 in the prior year. The Company’s operating income of ~~$170.0~~$315.3 million ~~decreased~~increased from prior year operating income of ~~$245.8~~$238.2 million by ~~30.9~~32.3 percent.

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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, ~~and~~ interest income, and interest expense:


	2009		2008		2007		2011			2010			2009
Engine Products	44.5	%	61.1	%	62.9	%		64.1	%		63.1	%		45.7	%
Industrial Products	51.8	%	42.1	%	37.8	%		38.7	%		37.8	%		50.6	%
Corporate and Unallocated	3.7	%	(3.2	%)	(0.7	%)		(2.8	)%		(0.9	)%		3.7	%
Total Company	100	%	100	%	100	%		100.0	%		100.0	%		100.0	%

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International operating income, prior to corporate expense allocations, totaled ~~77.9~~80.2 percent of consolidated operating income in Fiscal ~~2009~~2011 as compared to ~~89.4~~80.3 percent in Fiscal ~~2008.~~2010. Total international operating income ~~decreased 39.8~~increased 32.1 percent from the prior year. This ~~decrease~~increase is attributable to ~~restructuring charges internationally exceeding domestic restructuring~~increased Customer sales and the leverage of fixed costs ~~weaker foreign currencies and overall weak business conditions abroad.~~with the higher volume of sales. The table below shows the percentage of total operating income contributed by each major geographic region for each of the last three fiscal years:


	2009		2008		2007		2011			2010			2009
United States	22.1	%	10.6	%	22.3	%		19.8	%		19.7	%		22.1	%
Europe	23.3	%	43.3	%	34.8	%		31.0	%		24.6	%		23.3	%
Asia	43.5	%	37.9	%	38.6	%
Asia - Pacific								39.6	%		45.3	%		43.5	%
Other	11.1	%	8.2	%	4.3	%		9.6	%		10.4	%		11.1	%
Total Company	100	%	100	%	100	%		100.0	%		100.0	%		100.0	%

Gross margin for Fiscal ~~2009~~2011 was ~~31.6~~35.5 percent, ~~a decrease~~an increase from ~~32.5~~35.1 percent in the prior year. The ~~Company had $10.1 million in restructuring costs which reduced~~improved gross margin was the result of better fixed cost absorption and the Company’s ongoing Continuous Improvement initiatives of approximately $27 million, which were partially offset by increases in ~~the year. In addition, lower absorption~~purchased raw material (steel and petrochemical based raw materials) of ~~fixed costs due to the drop in production volumes,~~approximately $19 million, net of ~~savings from completed restructuring related activities, negatively impacted~~selective price increases to Customers. Within gross margin, by approximately $23 million. Partially offsetting these factors were the positive impacts of improved product mix, improved distribution efficiencies and better execution on large project shipments. During Fiscal 2008, the Company ~~began using a new warehouse management system at its main U.S. distribution center. The company encountered start-up problems~~incurred minimal restructuring and asset impairment charges during the ~~transition~~fiscal year, compared to ~~the new systems which, although now resolved, resulted in $7.6~~$7.5 million ~~in unanticipated~~last year. The fiscal 2010 charges ~~in Fiscal 2008 that did not recur in Fiscal 2009. The Company also incurred a charge of approximately $5.0 million to pretax income~~were primarily related to a downsizing at a plant in Germany and included severance and asset impairments for the use of the Last-In, First-Out (LIFO) accounting method for its U.S. inventories, which charges increasing commodity costs to income immediately. As commodity costs were relatively flat in Fiscal 2009, the Company did not experience a similar impact from rising commodity prices.building and inventory.

Operating expenses for Fiscal ~~2009~~2011 were ~~$419.8~~$498.5 million or ~~22.5~~21.7 percent of sales, as compared to ~~$480.1~~$420.5 million or ~~21.5~~22.4 percent in the prior year. ~~Operating~~The decrease in operating expenses as a ~~percent~~percentage of sales is driven by the higher volume of sales and benefits from the Company’s Continuous Improvement initiatives. In addition, the current year included a $1.9 million reduction in restructuring expenses compared to Fiscal 2010. These benefits were partially offset by costs for our strategic operating investments totaling $13.9 million for the fiscal year and higher compensation related expenses such as incentive compensation of $9.2 million and pension expense of $5.1 million over the prior year.

Interest expense of $12.5 million increased ~~due to sales volume declines and $7.7~~$0.5 million from $12.0 million in ~~restructuring cost during~~ the ~~year, offset by $19.4~~prior year. Net other income totaled $9.5 million in ~~benefits~~Fiscal 2011 up from ~~restructuring actions taken and $19.5~~$3.9 million ~~of lower incentive compensation expense as compared to~~in the prior year. The ~~Company’s expense reduction programs remain in effect.~~

~~Interest expense~~increase of ~~$17.0~~$5.6 million ~~increased $0.4 million from $16.6 million in~~over the prior year ~~as a result~~is primarily attributable to increased interest income of ~~higher debt levels. Net other~~$2.0 million, increased earnings from non-consolidated joint ventures of $2.1 million, and increased royalty income ~~totaled $8.5 million in Fiscal 2009 up from $6.9 million in the prior year.~~of $1.4 million. Components of other income for Fiscal ~~2009~~2011 were as follows: interest income of ~~$1.6~~$3.3 million, earnings from non-consolidated joint ventures of ~~$2.3~~$4.1 million, royalty income of ~~$6.1~~$8.7 million, partially offset by charitable donations of ~~$0.6~~$1.1 million, foreign exchange losses of ~~$0.4~~$4.5 million, and other miscellaneous income and expense items resulting in expenses of ~~$0.5~~$1.0 million.

The effective tax rate for Fiscal ~~2009~~2011 was ~~18.3~~27.9 percent compared to ~~27.2~~27.8 percent in Fiscal ~~2008.~~2010. The ~~decrease in effective~~average underlying tax rate isremained at 29.7 percent, while discrete items were also a consistent percentage of pre-tax profits. Fiscal 2010 contained $4.3 million of discrete tax benefits from the expiration of the statute of limitations at foreign subsidiaries. Fiscal 2011 contained $5.8 million of discrete tax benefits primarily ~~due to~~from the ~~settlements~~release of ~~long-standing court cases and examinations~~reserves after the favorable conclusions of foreign tax audits, the expiration of statutes in various jurisdictions, for tax years 2003 through 2006, the reassessment of the corresponding unrecognized tax benefits for the subsequent open years and a favorable resolution of a foreign tax matter. Partially offsetting these effects, the Company’s Fiscal 2009 tax rate was unfavorably impacted by an increased expense from the repatriation of foreign earnings. Absent these items, the underlying tax rate for the Fiscal

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2009 has decreased from Fiscal 2008 by 1.2 points to 30.4 percent. The reinstatement of the U.S. Research and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the ~~mix~~positive impact of ~~earnings between~~dividends from some foreign ~~jurisdictions all contributed to the reduction in the underlying rate.~~subsidiaries.

Total backlog at July 31, ~~2009,~~2011, was ~~$528.0~~$816.4 million, ~~down 33.7~~up 29.9 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 31.8~~increased 36.6 percent from the prior year. In the Industrial Products segment, total open order backlog ~~decreased 36.8~~increased 14.9 percent from the prior year. Because some of the change in backlog can be attributed to a change in the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to future sales.

Fiscal ~~2008~~2010 Compared to Fiscal ~~2007~~2009

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Sales for the Engine Products segment were ~~$1.229 billion,~~$1,126.0 million, an increase of ~~13.4~~9.6 percent from ~~$1.084 billion~~$1,027.7 million in the prior ~~year, reflecting increases in the Off-Road and Aftermarket Products businesses, partially offset by decreased On-Road~~year. Engine Products sales in the ~~NAFTA region.~~United States remained relatively flat in Fiscal 2010 compared to Fiscal 2009, increasing only 0.5 percent in the current fiscal year. International Engine Products sales increased 19.6 percent from the prior year. The impact of foreign currency increased sales by ~~$60.6~~$24.9 million, or ~~5.6~~2.4 percent. Earnings before income taxes as a percentage of Engine Products segment sales of ~~12.9~~13.8 percent ~~decreased~~increased from ~~13.0~~8.4 percent in the prior year. The earnings improvement for the current fiscal year was driven by a greater mix of higher-margin Aftermarket sales versus lower-margin first-fit product sales, better absorption of fixed manufacturing costs due to the increase in production volumes and benefits related to completed restructuring efforts and other Continuous Improvement initiatives. In addition, restructuring expenses for the Engine Products segment ~~as a percent~~were down $5.3 million over the prior year, but this was more than offset by $6.2 million of ~~sales was down slightly from last year due the impact of distribution inefficiencies and start-up costs~~increased warranty expenses related to ~~the implementation of a new warehouse management system at our Rensselaer, Indiana distribution center, offset by stronger global volume across most business units.~~Retrofit Emissions Products.

Worldwide sales of Off-Road Products were ~~$448.7~~$222.3 million, ~~an increase~~a decrease of ~~27.4~~8.8 percent from ~~$352.1~~$243.7 million in the prior year. Sales in the United States ~~showed an increase of 27.1~~decreased 15.0 percent ~~primarily driven by the impact of the acquisition of Aerospace Filtration Systems, Inc. in March of Fiscal 2007 and robust sales in the Company’s defense business due~~ to ~~the combination of replacement parts sales growth, new vehicle programs (including the Mine Resistant Ambush Protected armored vehicles) and retrofit programs~~$95.1 million for the Abrams Tank and military helicopters including the Black Hawk. In addition, strong sales in agriculture, mining and non-residential construction markets more than offset a decrease in residential construction markets.fiscal year. Internationally, sales of Off-Road Products were ~~up 27.8~~down 3.4 percent from the prior year, with sales ~~increasing~~decreasing in ~~both~~ Europe ~~and~~by 10.7 percent, which were slightly offset by an increase in Off-Road sales in Asia of 7.4 percent. The Company’s overall decrease was driven by ~~24.4 percent and 36.3 percent, respectively, reflecting strength~~a weakness in the ~~heavy~~early portion of the fiscal year with a gradual strengthening in end-markets in the last half of the fiscal year. This was evident in the gradual improvement of sales to OEMs during the last months of the fiscal year. The first half of the year was down primarily due to declines in spending in the residential and non-residential construction ~~market~~markets. The latter half of the year saw increases in the mining industry as a result of higher commodity prices and ~~increased demand for mining and agricultural equipment internationally.~~improvements in worldwide construction activity.

Worldwide sales of On-Road Products were ~~$123.1~~$81.9 million, ~~a decrease~~an increase of ~~26.0~~13.8 percent from ~~$166.4~~$72.0 million in the prior year. On-Road Products sales in the United States ~~decreased 43.3~~increased 3.4 percent from the prior year, primarily as a result of ~~lower new~~a slight market share improvement and higher content per truck. The Company performed better than the impact due to the change in truck build rates atfor the ~~Company’s Customers following the implementation of the 2007 Environmental Protection Agency diesel emission regulations.~~year in Class 8 truck builds, which decreased by 3.7 percent and medium duty truck build rates which increased 0.3 percent. International On-Road Products sales increased ~~14.9~~25.2 percent from the prior ~~year. On-Road Products~~year, driven by increased sales in Asia of 45.2 percent, as a result of increased truck exports by the Company’s Japanese OEM Customers to higher growth emerging markets, and rebounding sales in Europe ~~benefited from stronger build rates resulting in a sales increase~~during the second half of ~~28.1 percent.~~the fiscal year.

Worldwide Engine Aftermarket Products sales of ~~$657.3~~$691.9 million increased ~~16.2~~23.1 percent from ~~$565.8~~$561.8 million in the prior year. Sales in the United States increased ~~4.6~~14.7 percent over the prior year. International sales increased ~~28.4~~29.7 percent ~~with~~from the prior year, primarily driven by sales ~~increasing~~increases in Asia, Latin America and Europe ~~Asia and Mexico by 25.3~~of 36.9 percent, ~~23.5~~28.9 percent, and ~~77.0~~24.7 percent, respectively. The ~~large percentage increase~~sales increases in ~~Mexico is partially~~the United States and internationally were driven by rebounds in equipment utilization rates in the mining, construction, and transportation industries. The Company also improved its distribution capabilities to be closer to and better serve its Customers and increased sales due to the Company’s recent market share “wins.”

Worldwide sales of Retrofit Emissions Products were $17.9 million, a decrease of 42.3 percent from $31.1 million in the prior year. The Company’s Retrofit Emissions Products sales are solely in the United States. Sales of Retrofit Emissions Products decreased as a result of ~~transferring some Customer relationships to~~continuing postponements in the availability of government grant money and delays and losses of regulatory approval for certain of the Company’s ~~Mexican subsidiary~~products, including the DMF product.

Worldwide sales of Aerospace and Defense Products were $112.0 million, a 6.0 percent decrease from $119.1 million in the prior year. Sales in the United States to better serve the Customers. Geographic expansion and high equipment utilization rates contributed to the overall increases. In addition, sales continue to benefit from the increasing amount of equipment in the field with the Company’s PowerCore™ filtration systems. Sales of PowerCore™ replacement filters increased 58.9decreased 9.0 percent over the prior ~~year.~~

~~Table~~year as a result of ~~Contents~~slowdowns in government procurement for major defense programs. Internationally, sales of Aerospace and Defense Products increased 8.0 percent over the prior year. The international sales increased primarily as a result of the startup of recent defense program wins.

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

Sales for the Industrial Products segment were ~~$1,003.4~~$751.1 million, ~~an increase~~a decrease of ~~20.2~~10.7 percent from ~~$834.6~~$840.9 million in the prior ~~year, resulting from stronger~~year. International Industrial Products sales decreased 9.0 percent, and sales in ~~Industrial Filtration Solutions Products, Special Application Products and Gas Turbine Systems Products across all regions.~~the United States decreased 15.0 percent from the prior year. The impact of foreign currency increased sales by ~~$62.0~~$17.2 million, or ~~7.4~~2.0 percent. ~~Earnings~~Despite the 10.7 percent decrease in sales, earnings before income taxes as a percentage of Industrial Products segment sales ~~of 10.2~~were 12.1 percent, ~~increased~~increasing from ~~9.6~~10.4 percent in the prior year. The improvement in earnings as a percent of

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sales over the prior year was driven by ~~cost leverage across most business units due to strong global volumes offset slightly lower margins~~better execution on large project shipments, increased plant utilization, improved product mix, and Continuous Improvement initiatives. Restructuring expenses in Fiscal 2010 were $8.3 million, a ~~few large projects~~decrease from $10.1 million in ~~both our Gas Turbine and Industrial Air Filtration business units.~~Fiscal 2009.

Worldwide sales of Industrial Filtration Solutions Products of ~~$600.5~~$423.1 million ~~increased 16.6~~decreased 11.5 percent from ~~$515.0~~$478.0 million in the prior year. Sales in the United States, Europe and Asia ~~and South Africa increased 9.9~~decreased 11.9 percent, ~~22.0 percent, 16.5~~12.0 percent, and ~~25.0~~8.0 percent, respectively. ~~U.S.~~Sales in Mexico decreased 20.9 percent in Fiscal 2010 as compared to Fiscal 2009. Overall, the Company experienced weak sales ~~included~~conditions for its Industrial Filtration Solutions Products during the ~~impact~~beginning of the ~~acquisition~~fiscal year, with conditions improving towards the end of ~~LMC West, Inc. in February of Fiscal 2008. Demand was strong worldwide but specifically~~the fiscal year. The decreased sales in Europe ~~where~~and Asia were due to reduced demand for industrial dust collectors and compressed air purification systems due to the downturn in general manufacturing ~~investment conditions were favorable throughout~~activity. Domestic sales decreased due to a decline in general industrial activity that did not stabilize until late in the fiscal ~~year.~~year, as evidenced by a 19 percent drop in machine tool consumption in the United States during fiscal year 2010 as compared to fiscal year 2009.

Worldwide sales of Gas Turbine Products were ~~$213.1~~$150.1 million, ~~an increase~~a decrease of ~~34.9~~27.4 percent from ~~$158.0~~$206.8 million in the prior year. ~~Growth globally has been strong in both the power generation and oil and gas markets. The~~ Gas Turbine Products sales are typically large systems and, as a result, the Company’s shipments and revenues fluctuate from ~~quarter~~period to ~~quarter.~~period. Incoming orders declined 9 percent in Fiscal 2010 versus Fiscal 2009, a reflection of the reduced demand for power generation projects globally. Sales remained slow due to a deceleration in Customer demand for large gas turbine power generation projects as a result of the decrease in global electrical power requirements and also as a result of one Customer’s increased utilization of its own internal filtration businesses.

Worldwide sales of Special Applications Products were ~~$189.7~~$177.9 million, a ~~17.4~~13.8 percent increase from ~~$161.5~~$156.3 million in the prior year. ~~Sales~~Domestic Special Application Products sales increased 5.8 percent, driven by an increase in ~~the United States, Europe, and Asia~~sales to industrial Customers of PTFE membranes. International sales of Special Application Products increased ~~8.3~~15.1 percent ~~25.3 percent, and 17.8 percent, respectively, from~~over the prior year, primarily in Asia, which increased 18.6 percent. These international sales increases were driven by improved demand for the Company’s Customers’ hard disk drives as ~~sales of~~the end-markets for computers, data storage devices, and other electronic products rebounded. Overall, the Company’s market growth is comparable with published disk drive ~~filters and PTFE membranes remained strong.~~build rates.

Consolidated ResultsThe Company reported ~~record~~ net earnings for Fiscal ~~2008~~2010 of ~~$172.0~~$166.2 million compared to ~~$150.7~~$131.9 million in Fiscal ~~2007,~~2009, an increase of ~~14.1~~26.0 percent. Diluted net earnings per share ~~was a record $2.12,~~were $2.10, up ~~15.8~~25.7 percent from ~~$1.83~~$1.67 in the prior year. The Company’s operating income of ~~$245.8~~$238.2 million increased from prior year operating income of ~~$211.1~~$170.0 million by ~~16.4~~40.2 percent.


	2008		2007		2006		2010			2009			2008
Engine Products	61.1	%	62.9	%	67.7	%		63.1	%		45.7	%		61.1	%
Industrial Products	42.1	%	37.8	%	33.6	%		37.8	%		50.6	%		42.1	%
Corporate and Unallocated	(3.2	%)	(0.7	%)	(1.3	%)		(0.9	)%		3.7	%		(3.2	)%
Total Company	100	%	100	%	100	%		100.0	%		100.0	%		100.0	%

International operating income, prior to corporate expense allocations, totaled ~~89.4~~80.3 percent of consolidated operating income in Fiscal ~~2008~~2010 as compared to ~~77.7~~77.9 percent in Fiscal ~~2007.~~2009. Total international operating income increased ~~34.0~~44.6 percent from the prior year. This increase is attributable to increased Customer sales and stronger foreign ~~currencies, the favorable impact of new plants globally and overall strong business conditions.~~currencies. The table below shows the percentage of total operating income contributed by each major geographic region for each of the last three fiscal years:


	2008		2007		2006		2010			2009			2008
United States	10.6	%	22.3	%	22.8	%		19.7	%		22.1	%		10.6	%
Europe	43.3	%	34.8	%	32.7	%		24.6	%		23.3	%		43.3	%
Asia	37.9	%	38.6	%	37.5	%
Asia - Pacific								45.3	%		43.5	%		37.9	%
Other	8.2	%	4.3	%	7.0	%		10.4	%		11.1	%		8.2	%
Total Company	100	%	100	%	100	%		100.0	%		100.0	%		100.0	%

Gross margin for Fiscal ~~2008~~2010 was ~~32.5~~35.1 percent, an increase from ~~31.5~~31.6 percent in the prior year. The ~~primary drivers for the~~ improved gross margin ~~include~~was the result of improved fixed cost absorption, a higher ~~production volumes, a favorable product~~ mix ~~cost controls~~of replacement filter sales, savings from restructuring actions and ~~productivity improvements. Partially offsetting~~ongoing Continuous Improvement initiatives. Within gross margin, the ~~improvements was a charge of $5.0 million to pretax income related to the use of the Last-In, First-Out (LIFO) accounting method for its~~Company incurred

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~~U.S. inventories, which charges increasing commodity costs to income immediately. Also partially offsetting the improvements~~$7.5 million in ~~gross margin were higher than expected distribution costs associated with implementing the investments made to increase the Company’s distribution capabilities~~restructuring and higher purchased commodity costs. During the second quarter, the Company began utilizing a new warehouse management system at its main U.S. distribution center. The Company encountered start-up problemsasset impairment charges during the ~~transition~~fiscal year, compared to ~~the new system. There~~$10.1 million last year. This year’s charges were ~~incremental expenses~~primarily related to ~~refining the system which resulted~~a downsizing at a plant in ~~$7.6 million in unanticipated charges~~Germany and included severance and asset impairments for the ~~year. Gross margin in~~building and inventory.

Operating expenses for Fiscal ~~2007 was also negatively impacted by a higher mix~~2010 were $420.5 million or 22.4 percent of ~~systems~~ sales, versus replacement part sales and higher than expected distribution costs in Europe from the integration of new distribution facilities while Customer demand ramped up beyond expectations. Plant rationalization and start-up costs for new facilities were $0.6as compared to $419.8 million ~~in Fiscal 2008, down from $5.3 million~~or 22.5 percent in the prior year. Operating expenses ~~for Fiscal 2008 were $480.1 million or 21.5~~as a percent of sales ~~up from $393.8~~was relatively flat and included $15.1 million ~~or 20.5 percent~~of higher incentive compensation expense partially offset by a $5.0 million decrease in restructuring costs as compared to the prior year. ~~This increase was driven by~~During the ~~impact~~fiscal year the Company increased warranty accruals due to specific warranty matters in our Retrofit Emissions Products group, recording an expense of ~~foreign exchange as well as investments in research and development to support essential product development initiatives and~~$6.2 million for this matter during the development of next generation technologies and products across many product lines. The Company also increased its investment in information technology to improve Customer support capabilities and enhance its internal system infrastructure capabilities.year.

Interest expense of ~~$16.6~~$12.0 million ~~increased $2.0~~decreased $5.0 million from ~~$14.6~~$17.0 million in the prior year as a result of ~~increased borrowing costs associated with~~reduced debt levels and lower interest rates throughout the ~~increases in working capital and the Aerospace Filtration Systems, Inc. acquisition in March of 2007.~~year. Net other income totaled ~~$6.9~~$3.9 million in Fiscal ~~2008 compared to $8.3~~2010 down from $8.5 million in the prior year. Components of other income for Fiscal ~~2008~~2010 were as follows: interest income of ~~$1.5~~$1.3 million, earnings from non-consolidated joint ventures of ~~$1.9~~$2.0 million, royalty income of ~~$7.6~~$7.2 million, charitable donations of ~~$0.9~~$1.6 million, foreign exchange losses of ~~$3.1~~$4.6 million, and other miscellaneous income and expense items resulting in expenses of ~~$0.1~~$0.4 million.

The effective ~~income~~ tax rate for Fiscal ~~2008~~2010 was ~~27.2 percent.~~27.8 percent compared to 18.3 percent in Fiscal 2009. The increase in effective ~~income~~ tax rate for Fiscal 2007 was 26.4 percent. The Company’s Fiscal 2008 tax rate benefited from the effect of changes in foreign statutory tax rates on outstanding deferred tax positions and reduced state tax expenseis primarily due to ~~lower U.S. earnings. U.S. earnings were also~~ a ~~significantly lower percentage~~decrease in discrete tax benefits. Fiscal 2009 contained $19.6 million of ~~total earnings, emphasizing~~discrete tax benefits, which predominantly occurred in the ~~fact that~~second quarter, and primarily related to changes to uncertain tax position reserves in connection with the ~~average~~effective settlements of court cases and examinations in various jurisdictions covering various years. Fiscal 2010 contained $4.3 million of discrete tax ~~rate continues to reflect~~benefits, primarily recorded in the ~~significant contribution~~second quarter, from the Company’s international operations, the majority of which have statutory tax rates below those of the U.S. Offsetting these favorable effects, the Company’s Fiscal 2008 tax rate was also impacted by a reduced U.S. dividends received deduction, a reduced benefit from the repatriation of foreign earnings, the expiration of some foreign tax incentives, and the expiration of the ~~U.S. Research~~statute of limitations at foreign subsidiaries and ~~Experimentation credit.~~other discrete items. Without consideration of discrete items, the average underlying tax rate improved over the prior year to 29.7 percent from 30.4 percent mainly due to the mix of earnings between tax jurisdictions.

Total backlog at July 31, ~~2008,~~2010, was ~~$771.2~~$628.3 million, up ~~25.2~~19.0 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 receipt of orders in many of the Company’s Engine OEM and Industrial markets. In the Engine Products segment, total open order backlog increased ~~24.9~~31.5 percent from the prior year. In the Industrial Products segment, total open order backlog ~~increased 25.6~~decreased 1.8 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 ~~higher~~ future sales.

Liquidity and Capital Resources

Financial ConditionAt July 31, ~~2009,~~2011, the Company’s capital structure was comprised of ~~$35.1~~$61.0 million of current debt, ~~$253.7~~$205.7 million of long-term debt and ~~$688.6~~$934.7 million of shareholders’ equity. The Company had cash and cash equivalents of ~~$143.7~~$273.5 million at July 31, ~~2009.~~2011. The ratio of long-term debt to total capital was ~~26.9~~18.0 percent and ~~19.3~~25.5 percent at July 31, ~~2009~~2011 and ~~2008,~~2010, respectively.

Total debt outstanding decreased ~~$32.8~~$45.0 million during the year to ~~$288.7~~$266.7 million outstanding at July 31, ~~2009.~~2011. Short-term borrowings outstanding at the end of the year were ~~$109.8~~$36.9 million ~~lower as compared to~~less than the prior year, and long-term debt ~~increased $77.0~~decreased $8.1 million (including current maturities) from the prior year.

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The increase in long-term debt was comprised of a new note agreement. On November 14, 2008, the Company issued an $80 million senior unsecured note, due on November 14, 2013. The debt was issued at face value and bears interest payable semi-annually at a rate of 6.59 percent. The proceeds from the note were used to refinance existing debt and for general corporate purposes.

The following table summarizes the Company’s cash obligations as of July 31, ~~2009,~~2011, for the years indicated (thousands of dollars):


			Payments Due by Period								Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 – 5 years		More than 5 years		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Long-term debt obligations	$	257,879	$	4,982	$	47,678	$	97,434	$	107,785	$	247,037	$	45,595	$	101,442	$	—	$	100,000
Capital lease obligations		1,291		514		718		59		—		796		428		360		8		—
Interest on long-term debt obligations		79,030		13,484		25,344		19,952		20,250		49,508		11,946		19,752		10,960		6,850
Operating lease obligations		21,290		8,422		8,924		3,750		194		26,579		10,546		12,196		3,006		831
Purchase obligations(1)		125,599		106,621		18,500		478		—
Pension and deferred compensation(2)		78,643		6,416		10,100		9,725		52,402
Total(3)	$	563,732	$	140,439	$	111,264	$	131,398	$	180,631
Purchase obligations⁽¹⁾												246,872		236,709		9,339		824		—
Pension and deferred compensation⁽²⁾												78,324		5,070		10,533		10,372		52,349
Total⁽³⁾											$	649,116	$	310,294	$	153,622	$	25,170	$	160,030

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	⁽¹⁾	Purchase obligations consist primarily of inventory, tooling, contract employment services and capital expenditures. The Company’s purchase orders for inventory are based on expected Customer demand, and quantities and dollar volumes are subject to change.

	⁽²⁾	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~~Treasury bond rate as defined by the plan and are payable at the election of the participants.

	⁽³⁾	In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of ~~$16.9~~$21.5 million of potential tax ~~obligations.~~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, and are therefore not currently capable of estimation by period.

~~As a result of~~The Company’s general funding policy for its ~~past contribution practices,~~pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company ~~does not have a~~may elect to make additional contributions up to the maximum tax deductible contribution. As such, the Company made contributions of $20.6 million to its U.S. pension plans in Fiscal 2011. There is no minimum ~~required contribution under~~funding requirement for the ~~Pension Benefit Guarantee Corporation requirements for its~~Company’s U.S. pension plans for Fiscal ~~2010. As such, there~~2012. The Company is ~~no current intention to make~~currently evaluating whether or not a U.S. pension contribution will be made in Fiscal ~~2010. For~~2012. The Company made contributions of $7.1 million to its non-U.S. pension plans ~~the Company~~in Fiscal 2011 and estimates that it will contribute approximately $5$4.7 million in Fiscal ~~2010~~2012 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.

The Company has a five-year, multi-currency revolving facility with a group of banks under which the Company may borrow up to $250 million. This facility matures on April 2, 2013. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Advances or Off Shore Rate Advances. 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 ~~$20.0~~nothing outstanding at July 31, 2011 and $50.0 million outstanding at July 31, ~~2009, and $70.0 million outstanding at~~2010. At July 31, ~~2008.~~2011 and 2010, $238.6 million and $180.0 million, respectively, was 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. ~~At July 31, 2009 and 2008, $210.0 million and $161.5 million, respectively, was available for further borrowing under such facilities.~~ The weighted average interest rate on ~~these~~ short-term borrowings outstanding at July 31, ~~2009~~2010 was 0.6 percent. Our multi-currency revolving facility contains debt covenants specifically related to maintaining a certain interest coverage ratio and ~~2008,~~a certain leverage ratio as well as other covenants that under certain circumstances can restrict our ability to incur additional indebtedness, make investments and other restricted payments, create liens, and sell assets. As of July 31, 2011, the Company was ~~0.56 percent and 2.73 percent, respectively.~~in compliance with all such covenants.

The Company ~~also~~ has three uncommitted credit facilities in the United States, which provide unsecured borrowings for general corporate purposes. At July 31, ~~2009~~2011 and ~~2008,~~2010, there was $56.9 million and $70.0 million available for ~~use.~~use, respectively. There was ~~$9.6~~$13.1 million ~~and $28.0 million outstanding under these facilities at July 31, 2009 and 2008, respectively. The weighted average interest rate on these short-term borrowings~~ outstanding at July 31, ~~2009~~2011 and ~~2008, was 0.53 percent and 2.79 percent, respectively.~~nothing outstanding at July 31, 2010.

The Company ~~also~~ has a €100 million program for issuing treasury notes for raising short, medium, and long-term financing for its European operations. There ~~were no amounts~~was nothing outstanding on this program at

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July 31, ~~2009 and 2008.~~2011 or 2010. Additionally, the Company’s European operations have lines of credit with an available limit of ~~€72.9~~€45.6 million. There ~~were no amounts~~was nothing outstanding on these lines of credit as of July 31, ~~2009. As of July 31, 2008, there was €23.5 million,~~2011 or ~~$36.9 million outstanding. The weighted average interest rate of these short-term borrowings outstanding at July 31, 2008, was 5.60 percent.~~2010.

Other international subsidiaries may borrow under various credit facilities. There ~~were no amounts~~was nothing outstanding under these credit facilities as of July 31, ~~2009. As of July 31, 2008, borrowings under these facilities were $4.5 million. The weighted average interest rate on these international borrowings outstanding at July 31, 2008, was 2.88 percent.~~

During the first quarter of Fiscal 2009, the global credit market began to experience a significant tightening of credit availability and interest rate volatility. This crisis resulted in reduced funding available for commercial banks and corporate debt issuers. As a result, capital market financing became more expensive and less available. The Company has assessed the implications of these factors on its current business and believes that its current financial resources are sufficient to continue financing its operations. There can be no assurance, however, that the cost2011 or ~~availability of future borrowings will not be impacted by ongoing capital market disruptions.~~

The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure the Company entered into two fixed-to-variable interest rate swaps on August 3, 2009, subsequent to year end, for $80 million and $25 million, respectively, for approximately 5 and 8 years, respectively. These interest rate swaps will be accounted for as fair value hedges. Changes in the payment of interest resulting from the interest rate swaps will be recorded as an offset to interest expense.

Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, 2009, the Company was in compliance with all such covenants. The Company currently expects to remain in compliance with these covenants.2010.

Also, at July 31, ~~2009~~2011 and ~~2008,~~2010, the Company had outstanding standby letters of credit totaling ~~$20.0~~$11.4 million, ~~and $18.5 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 a specified bond financing agreement and insurance contract terms as detailed in each letter of credit.

During Fiscal 2011, credit in the global credit markets became more accessible than in recent years and market interest rates remained low. The Company believes that its current financial resources 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, 2011, the Company was in compliance with all such covenants. The Company currently expects to remain in compliance with these covenants.

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Shareholders’ equity ~~decreased $51.4~~increased $188.1 million in Fiscal ~~2009~~2011 to ~~$688.6~~$934.7 million at July 31, ~~2009.~~2011. The ~~decrease~~increase was primarily due to the current year earnings of $225.3 million, changes to foreign currency translation of ~~$63.4~~$72.5 million, ~~$58.6~~$13.8 million of stock options exercised, $12.2 million in tax reductions related to employee plans, $7.2 million (net of tax) of adjustments related to the pension liability, ~~$32.8~~and $6.5 million of stock option expense. These increases were partially offset by $108.9 million of treasury stock repurchases and ~~$35.5~~$42.8 million of dividend declarations. ~~These decreases were partially offset by current year earnings of $131.9 million.~~

Cash FlowsDuring Fiscal ~~2009, $276.9~~2011, $246.1 million of cash was generated from operating activities, compared with ~~$173.5~~$203.0 million in Fiscal ~~2008 and $117.0 million~~2010. The increase in Fiscal 2007. Operating cash flows in Fiscal 2009 increased by $103.4 million from the prior year. Operating cash flows were positively impacted by the decreased level of sales as a result of the worldwide recession and the Company’s cash flow improvement initiatives. This led to a decrease in accounts receivable and inventory levels of $146.8 million and $115.5 million, respectively, and corresponding increase operating cash flows. These positive impacts were partially offset by the negative impacts of decreases in accounts payable and accrued compensation of $82.3 million and $22.9 million, respectively, which reduced operating cash flows. In addition to cash generated from operating activities of $43.1 million was primarily attributable to the ~~Company~~Company’s net earnings increase of $59.1 million over the prior year, partially offset by changes in working capital needs resulting from increased ~~its outstanding net long-term debt by $72.7 million.~~inventory to support increased demand and a larger discretionary pension contribution than the prior year. Cash flow generated by operations ~~$3.9 million of proceeds from the sale of the Maryville, TN air dryer business~~ and ~~$80.0 million of additional long-term debt were~~cash on hand was used primarily to support ~~$45.6~~$59.9 million of net capital expenditures, ~~the acquisition of Western Filter Corporation for $78.5 million, $32.8~~$108.9 million for stock repurchases, ~~$35.2~~$41.0 million for dividend payments and ~~repayment of $103.7 million of short-term debt.~~to reduce total debt by $50.0 million. Cash and cash equivalents increased ~~$60.3~~$41.5 million during Fiscal ~~2009.~~2011.

Net capital expenditures for property, plant and equipment totaled ~~$45.6~~$59.9 million in Fiscal ~~2009, $70.8~~2011 and $42.7 million in Fiscal ~~2008 and $76.6 million in Fiscal 2007.~~2010. Net capital expenditures is comprised of purchases of property, plant, and equipment of ~~$46.1 million, $72.1~~$60.6 million and ~~$77.4~~$43.1 million in Fiscal ~~2009, 2008~~2011 and ~~2007,~~2010, respectively, partially offset by proceeds from the sale of property, plant and equipment of

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~~$0.5 million, $1.3 million, and~~ $0.8 million in Fiscal ~~2009, 2008~~2011 and ~~2007, respectively.~~$0.5 million in Fiscal ~~2009~~2010. Fiscal 2011 capital expenditures primarily related to new plant capacity additions, ~~and~~ productivity enhancing investments at various plants ~~worldwide.~~worldwide, and tooling to manufacture new products.

Capital spending in Fiscal ~~2010~~2012 is planned ~~at $30.0 million~~ to ~~$40.0~~be approximately $100.0 million. It is anticipated that Fiscal ~~2010~~2012 capital expenditures will be financed primarily by cash on hand, cash generated from operations, and existing lines of ~~credit.~~credit as needed.

The Company expects that cash generated by operating activities will ~~exceed $150~~be between $275 and $305 million in Fiscal ~~2010.~~2012. At July 31, ~~2009,~~2011, the Company had cash of ~~$143.7~~$273.5 million, which ~~primarily~~ exists at subsidiaries outside of the United States. The Company also had ~~$270.4~~$295.5 million available under existing credit facilities in the United States, ~~€172.9~~€145.6 million or ~~$245.3~~$209.7 million, available under existing credit facilities in Europe and ~~$41.4~~$67.5 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 ~~2010,~~2012, including debt repayment, issuance of anticipated dividends, possible share repurchase activity, and capital expenditures.

DividendsThe 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 20 percent to 30 percent of the average earnings per share of the last three years. Including the Company’s declaration on July 29, 2011 of a $0.15 per share dividend to be paid, the dividend payout ratio was 28.1 percent on July 31, 2011.

Share Repurchase PlanThe Board of Directors authorized the repurchase of 8.0 million shares of common stock under the stock repurchase plan dated March 26, 2010. In Fiscal ~~2009,~~2011, the Company repurchased ~~0.8~~2.0 million shares of common stock for ~~$32.8~~$108.9 million, ~~under the share repurchase plan authorized in March 2006~~or 2.5 percent of its diluted outstanding shares, at an average price of ~~$40.86~~$55.67 per share. The Company repurchased ~~2.2~~1.7 million shares for ~~$92.2~~$66.7 million in Fiscal ~~2008.~~2010. The Company repurchased ~~2.2~~0.8 million shares for ~~$76.9~~$32.8 million in Fiscal ~~2007.~~2009. As of July 31, ~~2009,~~2011, the Company had remaining authorization to repurchase ~~0.9~~5.0 million shares ~~under this plan.~~pursuant to the current authorization. The Company initiated the purchase of an additional 162,900 shares in July 2011 for $9.2 million that are not included in Fiscal 2011 repurchases as the transactions did not settle until after fiscal year end. These repurchases will be included in Fiscal 2012 activity.

Off-Balance Sheet ArrangementsThe 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 KL of the Company’s Notes to Consolidated Financial Statements. As of July 31, ~~2009,~~2011, the joint venture had ~~$27.7~~$24.6 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 operation, liquidity or capital resources.

�� New Accounting StandardsIn May 2009, the Financial Accounting Standards Board (FASB) issued FAS No. 165, Subsequent Events (FAS 165), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. This new standard was effective for interim or annual financial periods ending after June 15, 2009, and did not have an impact on our consolidated financial position or results of operations.

~~In April 2009,~~December 2010, the FASB ~~issued FSP No. FAS 107-1 and APB 28-1,~~~~Interim Disclosures about Fair Value~~updated the accounting guidance relating to the annual goodwill impairment test. The updated guidance requires companies to perform the second step of ~~Financial Instruments, (FSP No. FAS-107-1 and APB-28-1), which amends FAS 107,~~~~Disclosures about Fair Value~~the impairment test to measure the amount of ~~Financial Instruments~~~~and Accounting Principles Board (APB) Opinion No. 28,~~~~Interim Financial Reporting~~~~, to require disclosures about fair value of financial instruments for interim periods. This FSP will be effective for~~impairment loss, if any, when it is more likely than not that goodwill impairment exists when the ~~Company for the quarter ended October 31, 2009, and will expand the Company’s disclosures regarding the use of fair value in interim periods.~~

~~In December 2008, the FASB issued FSP No. FAS 132(R)-1,~~~~Employers’ Disclosures about Postretirement Benefit Plan Assets~~~~(FSP No. FAS 132(R)), which provides guidance on an employer’s disclosures about plan assets~~carrying amount of a ~~defined benefit pension~~reporting unit is zero or ~~other postretirement plan. This FSP~~negative. In considering whether it is ~~effective for fiscal years ending after December 15, 2009.~~more likely than not that goodwill impairment exists, an entity shall evaluate whether there are adverse qualitative factors. The ~~Company is currently evaluating the impact of adopting FSP No. FAS 132(R) on our defined benefit pension and other postretirement plan note disclosures.~~

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Fiscal 2007 with minimal impact. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. That provision required the Company to change its measurement date from April 30 to July 31 in Fiscal 2009. The adoption of the measurement date provision resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.

~~In September 2006, the FASB issued SFAS No. 157,~~~~Fair Value Measurements~~(SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever another standard requires (or permits) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS 157 does not expand the use of fair value to any new circumstances, and wasis effective for the ~~majority~~Company beginning in the first quarter of ~~the Company’s assets and liabilities for its Fiscal 2009~~fiscal year ~~beginning August 1, 2008.~~2012. The adoption of this ~~portion of SFAS 157 in Fiscal 2009 did not have a material impact on the Company’s financial statements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,~~~~Effective Date of FASB Statement No. 157~~~~(FSP FAS 157-2). FSP FAS 157-2 delays by one year the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities. The Company~~guidance is currently evaluating the impact the FSP FAS 157-2 will have on the determination of fair value related to non-financial assets and non-financial liabilities in Fiscal 2010. The adoption of FSP FAS 157-2 is not expected to have a material impact on the Company’s financial statements.

~~In February 2007, the FASB issued SFAS No. 159,~~~~The Fair Value Option for Financial Assets and Financial Liabilities~~(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and was effective for the Company with its 2009 fiscal year, beginning August 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements.

~~In December 2007, the FASB issued SFAS No. 141(R),~~~~Business Combinations~~(SFAS 141(R)), which changes the accounting for business combinations and their effects on the financial statements. SFAS 141(R) will be effective for the Company at the beginning of Fiscal 2010. In February 2009, the FASB issued FASB Staff Position 141(R)-a,~~Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies~~~~(FSP FAS 141(R)-a), which will amend certain provisions of SFAS 141(R). The adoptions of SFAS 141(R) and FSP FAS 141(R)-a are~~ not expected to have a material impact on the Company’s consolidated financial statements.

In ~~March 2008,~~May 2011, the FASB ~~issued SFAS No. 161,~~~~Disclosures~~updated the accounting guidance related to fair value measurements. The updated guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about ~~Derivative Instruments~~fair value between U.S. GAAP and ~~Hedging Activities, an amendment~~International Financial Reporting Standards (IFRS). The updated guidance is effective for the Company beginning in the third quarter of ~~FASB Statement No. 133~~(SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,~~Accounting for Derivative Instruments and Hedging Activities~~~~, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.~~fiscal year 2012. The Company ~~adopted~~is currently evaluating the ~~provisions~~impact of ~~SFAS 161 effective February 1, 2009. The~~ adoption of ~~SFAS 161 only~~this accounting guidance on its consolidated financial statements.

In June 2011, the FASB updated the disclosure requirements for comprehensive income. The updated guidance requires ~~additional disclosures about~~companies to disclose the ~~Company’s derivatives~~total of comprehensive income, the components of net income, and ~~thus did~~the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance does not affect how earnings per share is calculated or presented. The updated guidance is effective for the ~~Company’s~~Company beginning in the third quarter of fiscal year 2012. The Company is currently evaluating the impact of adoption of this accounting guidance on its 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 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

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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.~~below and in Note E of the Notes to Consolidated Financial Statements.

Foreign CurrencyDuring Fiscal ~~2009,~~2011, the U.S. dollar was ~~strong throughout the year~~generally weaker than Fiscal 2010 compared to many of the currencies of the foreign countries in which the Company operates. The overall ~~strength~~weakness of the dollar had a ~~negative~~positive impact on the Company’s international net sales results because the foreign denominated revenues translated into ~~fewer~~more 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, ~~2009,~~2011, the impact of foreign currency translation resulted in an overall ~~decrease~~increase in reported net sales of ~~$76.8~~$49.8 million, ~~a decrease in~~ operating expenses of ~~$24.5~~$9.7 million and ~~a decrease in~~ reported net earnings of ~~$3.8~~$6.1 million. Foreign currency translation had a ~~negative~~positive impact in most regions around the world. In Europe, the ~~stronger~~weaker U.S. dollar relative to the euro and British pound ~~sterling~~ resulted in a ~~decrease~~total increase of ~~$66.2~~$8.1 million in reported net ~~sales and an insignificant decrease in reported net earnings.~~sales. The ~~stronger~~weaker U.S. dollar relative to the Japanese yen, Australian dollar, ~~Korean won,~~ Mexican peso, ~~and~~Chinese renminbi, South African rand, and Thai baht also had a ~~negative~~positive impact on foreign currency translation, with ~~a decrease~~an increase in reported net sales of ~~$10.7~~$15.6 million, ~~$6.1~~$8.8 million, ~~$12.3~~$5.0 million, $4.8 million, $4.4 million, and ~~$8.4~~$4.1 million, respectively, and ~~a decrease~~an increase in reported net earnings of ~~$0.6~~$1.1 million, $1.2 million, $0.6 million, ~~$2.1~~$0.9 million, $0.4 million, and ~~$0.4~~$1.0 million, respectively. Foreign currency losses were partially offset by gains relative to the Japanese yen and Chinese renminbi of $13.8 million and $4.4 million, respectively, in reported net sales and $0.3 million and $0.7 million, respectively, in reported net earnings.

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

The foreign subsidiaries of the Company generally purchase the majority of their input costs and then sell to many of their Customers in the same local currency.

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

Some products made in the United States 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

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sales. Also, competitive conditions in the Company’s markets may limit its ability to increase product pricing in the face of adverse currency movements.

InterestThe Company’s exposure to market risks for changes in interest rates relates primarily to its short-term investments, short-term borrowings, and interest rate swap agreements as well as the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. The Company has no earnings or cash flow exposure due to market risks on its long-term debt obligations as a result of the fixed-rate nature of the debt. However, interest rate changes would affect the fair market value of the debt. As of July 31, ~~2009,~~2011, the estimated fair value of long-term debt with fixed interest rates was ~~$253.1~~$268.3 million compared to its carrying value of ~~$250.1~~$247.0 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed. As of July 31, ~~2009,~~2011, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of ~~$29.6~~$13.1 million of short-term debt outstanding. Assuming a hypothetical increase of one-half percent in short-term interest rates, with all other variables remaining constant, interest expense would have increased ~~$0.6~~$0.4 million in Fiscal ~~2009.~~2011.

PensionsThe Company is exposed to market return fluctuations on its qualified defined benefit pension plans. ~~During Fiscal 2009,~~Although the market value of these assets ~~declined in conjunction with the global economic downturn. This decline in market value is the principle reason that pension expense is expected to increase by $1.1 million~~increased in Fiscal ~~2010. At~~2011, we adjusted our long–term rate of return from 8.0 percent to 7.75 percent on our U.S. plans and from a weighted average of 6.17 percent to 6.03 percent on our non-U.S. plans to reflect our future expectation for returns. In addition, we adjusted our discount rate used to value our pension obligation for our U.S. plans from 5.25 percent to 4.91 percent and from 5.17 percent to 5.36 percent for the non-U.S plans. Our plans were underfunded by $30.5 million at July 31, ~~2009, the Company’s annual measurement date for its~~

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~~pension plans, the plans were under funded by $40.7 million~~2011, 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 generally accepted accounting principles ~~generally accepted~~ in the United States of ~~America.~~America (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 ~~generally accepted accounting principles~~U.S. GAAP and is consistently applied. Valuations based on estimates and underlying accounting assumptions are reviewed for reasonableness on a consistent basis throughout the Company. Management believes the Company’s critical accounting policies that require more significant judgments and estimates used in the preparation of its consolidated financial statements and that are the most important to aid in fully understanding its financial results are the following:

Revenue recognition, warranty and allowance for doubtful accountsRevenue is recognized when both product ownership and the risk of loss have transferred to the Customer and the Company has no remaining obligations. The Company records estimated discounts and rebates as a reduction of sales in the same period revenue is recognized. Accruals for warranties on products sold are recorded based on historical return percentages and specific product recall campaigns. Allowances for doubtful accounts are estimated by management based on evaluation of potential losses related to Customer receivable balances. ~~The allowance for doubtful accounts is the Company’s best estimate of the amount of probable 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 collectibility. 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~~off-balance sheet credit exposure related to its Customers. The establishment of this reserve requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though management considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have an effect on reserve balances required.

Goodwill and other intangible assetsGoodwill 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 ~~2009~~2011 to satisfy its annual impairment requirement. The impairment assessment in the third quarter indicated that the estimated fair value of each reporting unit exceeded its corresponding carrying amount, 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

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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. 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 taxesAs 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

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differences result in deferred tax assets and liabilities, which are included within the Company’s Consolidated Balance Sheet. These assets and liabilities are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance is established. To the extent that a valuation allowance is established or increased, an expense within the tax provision is included in the statement of operations. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company’s future taxable income levels.

~~The Company’s accounting for income taxes in Fiscal 2008 was affected by the adoption of FIN No. 48,~~~~Accounting for Uncertainty in Income Taxes,~~which the Company was required to adopt on August 1, 2007. This pronouncement prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As such, the standard required the Company to reassess all of the Company’s uncertain tax return positions in accordance with this new accounting principle. As of July 31, ~~2009,~~2011, the liability for unrecognized tax benefits, accrued interest and penalties was ~~$16.9~~$21.5 million.

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

To develop the assumption regarding the expected long-term rate of return on assets for its U.S. pension plans, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the ~~8.50~~7.75 percent long-term rate of return on assets assumption as of July 31, 2011 for developing the Fiscal 2012 expense for the Company’s U.S. pension plans. In addition, we lowered our discount rate used to value our pension obligation for our U.S. plans from 5.25 percent to 4.91 percent. The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. ~~The expected long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based weighted average of all non-U.S. plans.~~

Reflecting the relatively long-term nature of the plans’ obligations, approximately 45 percent of the plans assets are invested in equity securities, 30 percent in alternative investments (funds of hedge funds), 10 percent in real assets (investments into funds containing commodities and real estate), 10 percent in fixed income, and 5 percent in private equity. Within equity securities, the Company targets an allocation of 15 percent international, 15 percent equity long / short, 10 percent small cap, and 5 percent large cap.

A one percent change in the expected long-term rate of return on U.S. plan assets, from 8.0 percent, would have changed the Fiscal ~~2009~~2011 annual pension expense by approximately ~~$3.6~~$2.7 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, ~~2009,~~2011, the Company ~~elected to maintain the 6.00 percent~~decreased its discount rate ~~elected~~for the U.S. pension plans to 4.91 percent from 5.25 percent as of July 31, ~~2009, for the U.S. pension plans. This~~2010. The decrease of 34 basis points is consistent with published bond indices. ~~A 0.25 percent~~The change increased the Company’s U.S. projected benefit obligation as of July 31, 2011 by approximately $7.2 million and is expected to increase pension expense in fiscal year 2012 by approximately $0.5 million. The rates discussed above are weighted average rates as we have multiple plans both in the ~~discount rate would have changed the benefit obligation related to the~~ U.S. ~~plans by approximately $6.5 million at July 31, 2009,~~ and ~~changed Fiscal 2009 annual pension expense by approximately $0.3 million.~~internationally.

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~~Forward-Looking Statements~~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

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included in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A of this Form 10-K, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “believe,” “expect,” “anticipate,” ~~“forecast”~~“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~~Annual Report on Form ~~10-K.~~10-K, including those contained in the “Outlook” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

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, environmental laws and regulations, including regulatory approvals for Retrofit Emission Products, governmental laws and regulations, including the impact of the various economic stimulus and financial reform measures being implemented, the implementation of our new information technology systems, potential global events resulting in market instability including financial bailouts of sovereign nations, political changes, military and terrorist activities, health outbreaks, 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~~21under “Market Risk.”

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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 inInternal Control – Integrated Frameworkissued 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, ~~2009.~~2011. 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, ~~2009,~~2011, as stated in this report which follows in Item 8 of this Form 10-K.


/s/ William M. Cook	/s/ Thomas R. VerHage

William M. Cook ~~Chief Executive Officer~~ ~~September 25, 2009~~	Thomas R. VerHage
Chief Executive Officer	Chief Financial Officer
September ~~25, 2009~~23, 2011	September 23, 2011

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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, ~~shareholders'~~shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Donaldson Company, Inc. and its subsidiaries at July 31, ~~2009~~2011 and ~~July 31, 2008,~~2010, and the results of their operations and their cash flows for each of the three years in the period ended July 31, ~~2009,~~2011, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion the financial statement schedule ~~listed in the index~~ appearing under ~~Item 15(2)~~item 15(II) 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, ~~2009,~~2011, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The ~~Company's~~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 the accompanying ~~Management's~~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~~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.

As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit arrangements effective July 31, 2007. Also, as discussed in Note I to the consolidated financial statements, the Company changed the manner in which it accounts for unrecognized income tax positions effective August 1, 2007.

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.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 23, 2011

~~PricewaterhouseCoopers LLP~~
~~Minneapolis, Minnesota~~
~~September 25, 2009~~

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Consolidated Statements of Earnings
Donaldson Company, Inc. and Subsidiaries


	Year ended July 31,									Year ended July 31,
	2009			2008			2007			2011			2010			2009
	(thousands of dollars, except share and per share amounts)									(thousands of dollars, except share and per share amounts)
Net sales	$	1,868,629		$	2,232,521		$	1,918,828		$	2,294,029		$	1,877,064		$	1,868,629
Cost of sales		1,278,923			1,506,659			1,313,964			1,480,233			1,218,316			1,278,923
Gross margin		589,706			725,862			604,864			813,796			658,748			589,706
Selling, general and administrative		379,108			436,293			357,306			443,227			376,018			379,108
Research and development		40,643			43,757			36,458			55,286			44,486			40,643
Operating income		169,955			245,812			211,100			315,283			238,244			169,955
Interest expense		17,018			16,550			14,559			12,525			11,975			17,018
Other income, net		(8,488	)		(6,901	)		(8,320	)		(9,505	)		(3,907	)		(8,488	)
Earnings before income taxes		161,425			236,163			204,861			312,263			230,176			161,425
Income taxes		29,518			64,210			54,144			86,972			64,013			29,518
Net earnings	$	131,907		$	171,953		$	150,717		$	225,291		$	166,163		$	131,907
Weighted average shares — basic		77,879,036			79,207,604			80,454,861
Weighted average shares — diluted		79,172,042			81,211,343			82,435,756
Net earnings per share — basic	$	1.69		$	2.17		$	1.87
Net earnings per share — diluted	$	1.67		$	2.12		$	1.83
Weighted average shares - basic											77,196,370			77,848,528			77,967,141
Weighted average shares - diluted											78,598,459			79,177,772			79,199,838
Net earnings per share - basic										$	2.92		$	2.13		$	1.69
Net earnings per share - diluted										$	2.87		$	2.10		$	1.67

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

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Consolidated Balance Sheets
Donaldson Company, Inc. and Subsidiaries


	At July 31,						At July 31,
	2009			2008			2011			2010
	(thousands of dollars, except share amounts)						(thousands of dollars, except share amounts)
Assets
Current assets
Cash and cash equivalents	$	143,687		$	83,357		$	273,494		$	232,000
Accounts receivable, less allowance of $7,387 and $7,509		280,187			413,863
Inventories		180,238			264,129
Accounts receivable, less allowance of $6,908 and $6,315								445,700			358,917
Inventories, net								271,476			203,631
Deferred income taxes		21,501			32,061			29,805			22,054
Prepaids and other current assets		51,154			60,347			46,107			43,613
Total current assets		676,767			853,757		$	1,066,582		$	860,215
Property, plant and equipment, net		381,068			415,159			391,502			365,892
Goodwill		169,027			134,162			171,741			165,315
Intangible assets		65,386			46,317
Intangible assets, net								53,496			58,292
Other assets		41,748			99,227			42,772			49,792
Total assets	$	1,333,996		$	1,548,622		$	1,726,093		$	1,499,506

Liabilities and shareholders’ equity
Current liabilities
Short-term borrowings	$	29,558		$	139,404		$	13,129		$	50,000
Current maturities of long-term debt		5,496			5,669			47,871			5,536
Trade accounts payable		123,063			200,967			215,918			165,907
Accrued employee compensation and related taxes		54,662			66,155			86,974			73,632
Accrued liabilities		39,624			56,296			64,008			40,546
Other current liabilities		47,681			48,216			68,344			53,635
Total current liabilities		300,084			516,707			496,244			389,256
Long-term debt		253,674			176,475			205,748			256,192
Deferred income taxes		9,416			35,738			11,196			7,076
Other long-term liabilities		82,204			79,667			78,194			100,349
Total liabilities		645,378			808,587			791,382			752,873
Commitments and contingencies (Note K)
Commitments and contingencies (Note N)
Shareholders’ equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued		—			—			—			—
Common stock, $5.00 par value, 120,000,000 shares authorized, 88,643,194 shares issued in 2009 and 2008		443,216			443,216
Common stock, $5.00 par value, 120,000,000 shares authorized, 88,643,194 shares issued in 2011 and 2010								443,216			443,216
Retained earnings		615,817			522,476			925,542			744,247
Stock compensation plans		19,894			27,065			24,736			22,326
Accumulated other comprehensive income (loss)		(9,677	)		112,883			40,027			(40,486	)
Treasury stock-11,295,409 and 11,021,619 shares in 2009 and 2008, at cost		(380,632	)		(365,605	)
Treasury stock, 13,245,864 and 12,222,381 shares in 2011 and 2010, at cost								(498,810	)		(422,670	)
Total shareholders’ equity		688,618			740,035			934,711			746,633
Total liabilities and shareholders’ equity	$	1,333,996		$	1,548,622		$	1,726,093		$	1,499,506

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

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


	Year ended July 31,									Year ended July 31,
	2009			2008			2007			2011			2010			2009
	(thousands of dollars)									(thousands of dollars)
Operating Activities
Net earnings	$	131,907		$	171,953		$	150,717		$	225,291		$	166,163		$	131,907
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		58,597			56,732			49,566			60,491			59,232			58,597
Equity in earnings of affiliates, net of distributions		(982	)		(1,558	)		(691	)
Equity in losses (earnings) of affiliates, net of distributions											(2,585	)		183			(982	)
Deferred income taxes		(4,726	)		(1,205	)		(4,401	)		1,957			3,025			(4,726	)
Tax benefit of equity plans		(2,663	)		(9,178	)		(5,898	)		(9,873	)		(4,625	)		(2,663	)
Stock compensation plan expense		1,900			9,312			6,608			9,234			8,253			1,900
Other, net		(7	)		(2,528	)		(16,626	)		(11,991	)		(6,110	)		(7	)
Changes in operating assets and liabilities, net of acquired businesses
Accounts receivable		116,983			(29,779	)		(31,418	)		(62,274	)		(79,308	)		116,983
Inventories		66,145			(49,400	)		(36,469	)		(52,999	)		(25,826	)		66,145
Prepaids and other current assets		(11,489	)		(4,755	)		658			7,233			(3,970	)		(11,489	)
Trade accounts payable and other accrued expenses		(78,738	)		33,940			4,999			81,571			85,988			(78,738	)
Net cash provided by operating activities		276,927			173,534			117,045			246,055			203,005			276,927
Investing Activities
Purchases of property, plant and equipment		(46,080	)		(72,152	)		(77,440	)		(60,633	)		(43,149	)		(46,080	)
Proceeds from sale of property, plant, and equipment		511			1,330			857
Acquisitions, investments, and divestitures of affiliates		(74,318	)		(2,377	)		(40,615	)
Proceeds from sale of property, plant and equipment											782			490			511
Acquisitions, investments and divestitures of affiliates											3,493			(250	)		(74,318	)
Net cash used in investing activities		(119,887	)		(73,199	)		(117,198	)		(56,358	)		(42,909	)		(119,887	)
Financing Activities
Proceeds from long-term debt		80,471			50,297			64,903			6,774			531			80,471
Repayments of long-term debt		(7,745	)		(33,074	)		(9,507	)		(13,353	)		(5,508	)		(7,745	)
Change in short-term borrowings		(103,695	)		12,478			44,904			(36,603	)		20,713			(103,695	)
Purchase of treasury stock		(32,773	)		(92,202	)		(76,898	)		(108,929	)		(66,696	)		(32,773	)
Dividends paid		(35,166	)		(33,003	)		(28,806	)		(41,013	)		(36,242	)		(35,166	)
Tax benefit of equity plans		2,663			9,178			5,898			9,873			4,625			2,663
Exercise of stock options		4,476			9,308			7,346			15,899			13,053			4,476
Net cash provided by (used in) financing activities		(91,769	)		(77,018	)		7,840
Net cash used in financing activities											(167,352	)		(69,524	)		(91,769	)
Effect of exchange rate changes on cash		(4,941	)		4,803			2,083			19,149			(2,259	)		(4,941	)
Increase in cash and cash equivalents		60,330			28,120			9,770			41,494			88,313			60,330
Cash and cash equivalents, beginning of year		83,357			55,237			45,467			232,000			143,687			83,357
Cash and cash equivalents, end of year	$	143,687		$	83,357		$	55,237		$	273,494		$	232,000		$	143,687

Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes	$	41,196		$	50,629		$	59,179		$	57,688		$	40,032		$	41,196
Interest		14,861			14,589			12,630			12,852			11,446			14,861

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

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


	Common Stock		Additional Paid-in Capital			Retained Earnings			Stock Compensation Plans			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total			Common Stock		Additional Paid-in Capital			Retained Earnings			Stock Compensation Plans			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(thousands of dollars, except per share amounts)																				(thousands of dollars, except per share amounts)
Balance July 31, 2006	$	443,216	$	—		$	275,598		$	20,535		$	51,194		$	(243,741	)	$	546,802
Balance July 31, 2008																					$	443,216	$	—		$	522,476		$	27,065		$	112,883		$	(365,605	)	$	740,035
Comprehensive income
Net earnings							150,717												150,717								131,907												131,907
Foreign currency translation													28,615						28,615														(63,385	)					(63,385	)
Additional minimum pension liability, net of tax													312						312
Pension liability adjustment, net of deferred taxes																																	(58,593	)					(58,593	)
Net loss on cash flow hedging derivatives													118						118														(582	)					(582	)
Comprehensive income																			179,762																				9,347
Treasury stock acquired																(76,898	)		(76,898	)																(32,773	)		(32,773	)
Stock options exercised				(7,700	)		(9,499	)		1,513						19,133			3,447					(2,998	)		(6,151	)								12,104			2,955
Deferred stock and other activity							(2,273	)		541						3,276			1,544					(529	)		(88	)		(4,344	)					3,710			(1,251	)
Performance awards							(1,163	)		(1,768	)					1,626			(1,305	)				(266	)		(60	)		(2,827	)					1,932			(1,221	)
Stock option expense							3,422												3,422								4,143												4,143
Tax reduction — employee plans				7,700															7,700
Adjustment to adopt SFAS 158, net of tax													(10,231	)					(10,231	)
Dividends ($.370 per share)							(29,545	)											(29,545	)
Balance July 31, 2007		443,216		—			387,257			20,821			70,008			(296,604	)		624,698
Tax reduction - employee plans																								3,793															3,793
Adjustment to adopt retirement benefit compensation guidance, net of tax																											(887	)											(887	)
Dividends ($0.460 per share)																											(35,523	)											(35,523	)
Balance July 31, 2009																						443,216		—			615,817			19,894			(9,677	)		(380,632	)		688,618
Comprehensive income
Net earnings							171,953												171,953								166,163												166,163
Foreign currency translation													57,151						57,151														(15,961	)					(15,961	)
Additional minimum pension liability, net of tax													(14,671	)					(14,671	)
Pension liability adjustment, net of deferred taxes																																	(14,780	)					(14,780	)
Net loss on cash flow hedging derivatives																																	(68	)					(68	)
Comprehensive income																																							135,354
Treasury stock acquired																																				(66,696	)		(66,696	)
Stock options exercised																								(5,608	)		(7,678	)		2,676						22,951			12,341
Deferred stock and other activity																								(704	)		(30	)		(244	)					1,707			729
Performance awards																								7			(7	)											—
Stock option expense																											6,891												6,891
Tax reduction - employee plans																								6,305															6,305
Dividends ($0.480 per share)																											(36,909	)											(36,909	)
Balance July 31, 2010																						443,216		—			744,247			22,326			(40,486	)		(422,670	)		746,633
Comprehensive income
Net earnings																											225,291												225,291
Foreign currency translation																																	72,505						72,505
Pension liability adjustment, net of deferred taxes																																	7,166						7,166
Net gain on cash flow hedging derivatives													395						395														842						842
Comprehensive income																			214,828																				305,804
Treasury stock acquired																(92,202	)		(92,202	)																(108,929	)		(108,929	)
Stock options exercised				(7,827	)		(9,810	)		4,223						20,883			7,469					(10,792	)		(7,854	)		1,862						30,604			13,820
Deferred stock and other activity				(2,981	)		2,564			3,474						1,363			4,420					(1,418	)		174			548						2,185			1,489
Performance awards				(675	)		279			(1,453	)					955			(894	)				(7	)		7												—
Stock option expense							4,214												4,214								6,462												6,462
Tax reduction — employee plans				11,483															11,483
Adjustment to adopt FIN 48							(336	)											(336	)
Dividends ($.430 per share)							(33,645	)											(33,645	)
Balance July 31, 2008		443,216		—			522,476			27,065			112,883			(365,605	)		740,035
Comprehensive income
Net earnings							131,907												131,907
Foreign currency translation													(63,385	)					(63,385	)
Pension liability adjustment, net of tax													(58,593	)					(58,593	)
Net gain on cash flow hedging derivatives													(582	)					(582	)
Comprehensive income																			9,347
Treasury stock acquired																(32,773	)		(32,773	)
Stock options exercised				(2,998	)		(6,151	)								12,104			2,955
Deferred stock and other activity				(529	)		(88	)		(4,344	)					3,710			(1,251	)
Performance awards				(266	)		(60	)		(2,827	)					1,932			(1,221	)
Stock option expense							4,143												4,143
Tax reduction — employee plans				3,793															3,793
Adjustment to adopt FAS 158 measurement date provision, net of tax							(887	)											(887	)
Dividends ($.460 per share)							(35,523	)											(35,523	)
Balance July 31, 2009	$	443,216	$	—		$	615,817		$	19,894		$	(9,677	)	$	(380,632	)	$	688,618
Tax reduction - employee plans																								12,217															12,217
Dividends ($0.560 per share)																											(42,785	)											(42,785	)
Balance July 31, 2011																					$	443,216	$	—		$	925,542		$	24,736		$	40,027		$	(498,810	)	$	934,711

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

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

NOTE A
Summary of Significant Accounting Policies

Description of BusinessDonaldson Company, Inc. (“Donaldson” or the “Company”), is a ~~leading~~ worldwide ~~provider~~manufacturer of filtration systems and replacement parts. The Company’s product mix includes air and liquid filtration systems and exhaust and emission control products. Products are manufactured at 4039 plants around the world and through three joint ventures. Products are sold to original equipment manufacturers (“~~OEM”~~OEMs”), distributors, ~~and~~ dealers, and directly to ~~end users.~~end-users.

Principles of ConsolidationThe Consolidated Financial Statements include the accounts of Donaldson Company, Inc. and all majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s three joint ventures that are not majority-owned are accounted for under the equity method. The Company does not have any variable interests in variable interest entities as of July 31, ~~2009.~~2011. The ~~company~~Company uses a fiscal period which ends on a calendar basis for international affiliates and on the Friday nearest to July 31 for U.S. purposes. ~~Fiscal 2007 results included 53 weeks of U.S. sales and earnings.~~

Use of EstimatesThe preparation of Financial Statements in conformity with ~~accounting principles generally accepted in the United States of America~~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 TranslationFor foreign operations, local currencies are considered the functional currency. Assets and liabilities are translated to U.S. dollars at year-end exchange rates and the resulting gains and losses arising from the translation of net assets located outside the United States are recorded as a cumulative translation adjustment, a component of Accumulated other comprehensive income (loss) 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 transaction losses of ~~$0.2~~$4.5 million, ~~$3.1~~$4.6 million, and $0.2 million are included in ~~other~~Other income, net in the Consolidated Statements of Earnings in Fiscal ~~2009, 2008,~~2011, 2010, and ~~2007,~~2009, respectively.

Cash EquivalentsThe Company considers all highly liquid temporary investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost that approximates market value.

Short-Term Investments Classification of the Company’s investments as current or non-current is dependent upon management’s intended holding period, the investment’s maturity date and liquidity considerations based on market conditions. If management intends to hold the investments for longer than one year as of the balance sheet date, they are classified as non-current. The Company does not have any short-term investments as of July 31, 2011.

Accounts Receivable and Allowance for Doubtful AccountsTrade 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 probable 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 ~~collectibility.~~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.

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InventoriesInventories are stated at the lower of cost or market. U.S. inventories are valued using the last-in, first-out (“LIFO”) method, while the international subsidiaries use the first-in, first-out (“FIFO”) method. Inventories valued at LIFO were approximately 33 percent and 3531 percent of total inventories at July 31, ~~2009~~2011 and ~~2008,~~2010, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by ~~$34.0~~$37.1 million and ~~$37.7~~$32.7 million at July 31, ~~2009~~2011 and ~~2008,~~2010, respectively. Results of

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operations for all periods presented were not materially affected by the liquidation of LIFO inventory. As of July 31, 2011 and 2010, the Company had obsolete inventory reserves of $14.5 million and $14.9 million, respectively. The components of inventory are as follows (thousands of dollars):


					At July 31,
	July 31, 2009		July 31, 2008		2011		2010
Materials	$	71,518	$	110,135	$	110,466	$	79,371
Work in process		20,022		23,728		33,917		23,163
Finished products		88,698		130,266		127,093		101,097
Total inventories	$	180,238	$	264,129	$	271,476	$	203,631

Property, Plant and EquipmentProperty, 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 operating expense as incurred. Depreciation is computed under the straight-line method. Depreciation expense was $54.5 million in Fiscal 2011, $53.2 million in Fiscal 2010, and $52.9 million in Fiscal ~~2009, $52.4 million in Fiscal 2008, and $46.6 million in Fiscal 2007.~~2009. 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):


							At July 31,
	July 31, 2009			July 31, 2008			2011			2010
Land	$	21,793		$	21,561		$	22,578		$	21,771
Buildings		242,049			235,615			266,482			240,787
Machinery and equipment		600,198			586,937			625,439			587,977
Construction in progress		18,507			57,633			31,375			26,223
Less accumulated depreciation		(501,479	)		(486,587	)		(554,372	)		(510,866	)
Total property, plant and equipment, net	$	381,068		$	415,159		$	391,502		$	365,892

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

Goodwill and Other Intangible AssetsGoodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Other intangible assets, consisting primarily of patents, trademarks, ~~and~~ Customer relationships and lists, are recorded at cost and are amortized on a straight-line basis over their estimated useful lives of 3 to 20 years. Goodwill is assessed for impairment annually or if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The impairment assessment for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its annual impairment assessment in the third quarters of Fiscal ~~2009~~2011 and ~~2008,~~2010, which indicated no impairment.

Recoverability of Long-Lived AssetsThe 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.

Income TaxesThe provision for income taxes is computed based on the pretax income included in the Consolidated Statements of Earnings. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

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Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

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


										At July 31,
	July 31, 2009			July 31, 2008			July 31, 2007			2011			2010			2009
Foreign currency translation adjustment	$	75,155		$	138,540		$	81,389		$	131,699		$	59,194		$	75,155
Net gain (loss) on cash flow hedging derivatives, net of deferred taxes		(394	)		188			(207	)		380			(462	)		(394	)
Pension liability adjustment, net of deferred taxes		(84,438	)		(25,845	)		(11,174	)		(92,052	)		(99,218	)		(84,438	)
Total accumulated other comprehensive income (loss)	$	(9,677	)	$	112,883		$	70,008		$	40,027		$	(40,486	)	$	(9,677	)

Cumulative foreign translation is not adjusted for income taxes. ~~All translation relates to permanent investments in non-U.S. subsidiaries.~~

Earnings Per ShareThe Company’s basic net earnings per share isare computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and ~~dilutive~~common equivalent shares relating to stock options ~~restricted stock~~ 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 ~~1,158,451~~494,349 options, ~~245,344~~845,827 options, and ~~10,000~~1,158,451 options excluded from the diluted net earnings per share calculation for the fiscal year ended July 31, 2011, 2010, and 2009, ~~2008, and 2007,~~ respectively.

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

2009

2008

2007

(thousands of dollars,
except per share amounts)

Weighted average shares — basic

77,879

79,208

80,455

Dilutive shares

1,293

2,003

1,981

Weighted average shares — diluted

79,172

81,211

82,436

Net earnings for basic and diluted earnings per share computation

$
131,907

$
171,953

$
150,717

Net earnings per share — basic

$
1.69

$
2.17

$
1.87

Net earnings per share — diluted

$
1.67

$
2.12

$
1.83


	2011		2010		2009
	(thousands of dollars, except per share amounts)
Weighted average shares - basic		77,196		77,849		77,967
Diluted share equivalents		1,402		1,329		1,233
Weighted average shares - diluted		78,598		79,178		79,200
Net earnings for basic and diluted earnings per share computation	$	225,291	$	166,163	$	131,907
Net earnings per share - basic	$	2.92	$	2.13	$	1.69
Net earnings per share - diluted	$	2.87	$	2.10	$	1.67

Treasury StockRepurchased common stock is stated at cost and is presented as a separate reduction of shareholders’ equity.

Research and DevelopmentResearch 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.

Stock-Based CompensationThe Company offers stock-based employee compensation plans, which are more fully described in Note H.I. Stock-based employee compensation cost is recognized using the fair-value based method for all new awards granted after August 1, 2005. Compensation costs for unvested stock options and awards that were outstanding at August 1, 2005, are recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures.method.

Revenue RecognitionRevenue is recognized when both product ownership and the risk of loss have transferred to the Customer and the Company has no remaining obligations. The Company records estimated discounts and rebates as a reduction of sales in the same period revenue is recognized. Shipping and handling costs for Fiscal 2011, 2010, and 2009 ~~2008 and 2007~~ totaling ~~$50.4~~$61.9 million, ~~$53.0~~$49.8 million, and ~~$34.8~~$50.4 million, respectively, are classified as a component of operating expenses.

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Product WarrantiesThe 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.

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

Exit or Disposal ActivitiesThe Company accounts for costs relating to exit or disposal activities ~~under SFAS No. 146,~~~~Accounting for Costs Associated with Exit~~based on FASB guidance related to exit or ~~Disposal Activities~~~~. SFAS No. 146~~disposal cost obligations. This guidance addresses recognition, measurement, and reporting of costs associated with exit and disposal activities including restructuring. See Note LO for disclosures related to restructuring.

GuaranteesUpon issuance of a guarantee, the Company recognizes a liability for the fair value of an obligation assumed under a guarantee. See Note KL for disclosures related to guarantees.

New Accounting StandardsIn May 2009, the Financial Accounting Standards Board (FASB) issued FAS No. 165, Subsequent Events (FAS 165), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. This new standard was effective for interim or annual financial periods ending after June 15, 2009, and did not have an impact on our consolidated financial position or results of operations.

~~In April 2009,~~December 2010, the FASB ~~issued FSP No. FAS 107-1 and APB 28-1,~~~~Interim Disclosures about Fair Value~~updated the accounting guidance relating to the annual goodwill impairment test. The updated guidance requires companies to perform the second step of ~~Financial Instruments, (FSP No. FAS-107-1 and APB-28-1), which amends FAS 107,~~~~Disclosures about Fair Value~~the impairment test to measure the amount of ~~Financial Instruments~~~~and Accounting Principles Board (APB) Opinion No. 28,~~~~Interim Financial Reporting~~~~, to require disclosures about fair value~~impairment loss, if any, when it is more likely than not that goodwill impairment exists when the carrying amount of ~~financial instruments for interim periods. This FSP will be~~a reporting unit is zero or negative. In considering whether it is more likely than not that goodwill impairment exists, an entity shall evaluate whether there are adverse qualitative factors. The updated guidance is effective for the Company ~~for the quarter ended October 31, 2009, and will expand the Company’s disclosures regarding the use of fair value in interim periods.~~

~~In December 2008, the FASB issued FSP No. FAS 132(R)-1,~~~~Employers’ Disclosures about Postretirement Benefit Plan Assets~~(FSP No. FAS 132(R)), which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting FSP No. FAS 132(R) on our defined benefit pension and other postretirement plan note disclosures.

~~In September 2006, the FASB issued SFAS No. 158,~~~~Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)~~~~(SFAS 158). The portion of the statement that requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability~~beginning in the ~~statement~~first quarter of financial position was adopted in Fiscal 2007 with minimal impact. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. That provision required the Company to change its measurement date from April 30 to July 31 in Fiscal 2009. The adoption of the measurement date provision resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.

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~~material impact on the Company’s financial statements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,~~~~Effective Date of FASB Statement No. 157~~~~(FSP FAS 157-2). FSP FAS 157-2 delays by one year the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities. The Company~~guidance is currently evaluating the impact the FSP FAS 157-2 will have on the determination of fair value related to non-financial assets and non-financial liabilities in Fiscal 2010. The adoption of FSP FAS 157-2 is not expected to have a material impact on the Company’s financial statements.

NOTE B
Goodwill and Other Intangible Assets

The Company has allocated goodwill to its Industrial Products and Engine Products segments. ~~Additions~~As of August 1, 2010, as a result of an internal reorganization, the Company transferred Industrial Hydraulics, a component of its Industrial Filtration Solutions Products within the Industrial Products segment to ~~goodwill and other intangible assets in Fiscal 2009 relate to the acquisition of 100 percent of the stock of Western Filter Corporation on October 15, 2008, for $78.5 million, as part of~~Aftermarket Products within the Engine Products ~~segment. The weighted average life of~~segment, along with the ~~intangibles acquired in this acquisition is 17.6 years and consists primarily of customer related intangibles. Goodwill~~goodwill associated with this ~~acquisition is tax deductible. Dispositions~~component. Disposition of goodwill ~~and other intangible assets in~~during Fiscal ~~2009 relate~~2011 relates to the sale of the ~~air dryer~~Company’s Ultracool chiller business, based in ~~Maryville, Tennessee, on October 31, 2008,~~Terrassa, Spain, for ~~$4.6~~$3.6 million, which resulted in a ~~loss~~gain on sale of ~~$0.6 million. This air dryer~~$0.4 million in the second quarter. The Ultracool chiller business manufactured industrial circulation chillers and was part of the Company’s Industrial Products segment. ~~Additions to goodwill and other intangible assets in~~There was no acquisition or disposition activity during Fiscal 2008 relate to the acquisition of LMC West, Inc. on February 4, 2008, as part of the Industrial Products segment. Financial results for each of the above acquisitions are included in the Company’s consolidated results from the date of acquisition. Pro forma financial results are not presented as the acquisitions are not material, individually or in the aggregate.2010. The Company completed its annual impairment ~~assessment~~assessments in the third ~~quarter~~quarters of Fiscal ~~2009~~2011 and ~~2008,~~2010. The results of this assessment showed that the fair values of the reporting units to which ~~indicated~~goodwill is assigned continue to exceed the book values of the respective reporting units, resulting in no goodwill impairment.

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Following is a reconciliation of goodwill for the years ended July 31, ~~2009~~2011 and ~~2008:~~2010:


	Engine Products			Industrial Products			Total Goodwill			Engine Products			Industrial Products			Total Goodwill
	(thousands of dollars)									(thousands of dollars)
Balance as of July 31, 2007	$	17,912		$	106,695		$	124,607
Acquisition activity		—			625			625
Balance as of July 31, 2009										$	61,582		$	107,445		$	169,027
Foreign exchange translation		1,214			7,716			8,930			(668	)		(3,044	)		(3,712	)
Balance as of July 31, 2008	$	19,126		$	115,036		$	134,162
Acquisition activity		43,646			—			43,646
Balance as of July 31, 2010										$	60,914		$	104,401		$	165,315
Goodwill transferred											11,258			(11,258	)		—
Disposition activity		—			(1,089	)		(1,089	)		—			(325	)		(325	)
Foreign exchange translation		(1,190	)		(6,502	)		(7,692	)		794			5,957			6,751
Balance as of July 31, 2009	$	61,582		$	107,445		$	169,027
Balance as of July 31, 2011										$	72,966		$	98,775		$	171,741

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, ~~2009~~2011 and ~~2008:~~2010:


	Gross Carrying Amount			Accumulated Amortization			Net Intangible Assets			Gross Carrying Amount			Accumulated Amortization			Net Intangible Assets
	(thousands of dollars)									(thousands of dollars)
Balance as of July 31, 2007	$	57,203		$	(10,902	)	$	46,301
Intangibles acquired		1,868			—			1,868
Balance as of July 31, 2009										$	85,809		$	(20,423	)	$	65,386
Amortization expense		—			(4,330	)		(4,330	)		—			(6,007	)		(6,007	)
Foreign exchange translation		3,171			(693	)		2,478			(2,322	)		1,235			(1,087	)
Balance as of July 31, 2008	$	62,242		$	(15,925	)	$	46,317
Intangibles acquired		26,710			—			26,710
Intangibles sold		(300	)		114			(186	)
Balance as of July 31, 2010										$	83,487		$	(25,195	)	$	58,292
Amortization expense		—			(5,601	)		(5,601	)		—			(5,917	)		(5,917	)
Foreign exchange translation		(2,843	)		989			(1,854	)		1,952			(831	)		1,121
Balance as of July 31, 2009	$	85,809		$	(20,423	)	$	65,386
Balance as of July 31, 2011										$	85,439		$	(31,943	)	$	53,496

Net intangible assets consist of patents, trademarks and ~~tradenames~~trade names of ~~$23.9~~$20.0 million and ~~$23.5~~$20.5 million as of July 31, ~~2009~~2011 and ~~2008,~~2010, respectively, and Customer related intangibles of ~~$41.5~~$33.5 million and ~~$22.8~~$37.8 million as of July 31, ~~2009~~2011 and ~~2008,~~2010, respectively. ~~Amortization~~Expected amortization expense relating to existing intangible assets is expected to be approximately $6.1 million for the year ending July 31, 2010, $6.0 million for the year ending July 31, 2011, $5.9 million for the year ending July 31, 2012, $5.7 million for the year ending July 31, 2013 and $5.3 million for the year ending July 31, 2014.as follows (in thousands):


Fiscal Year
2012	$	5,863
2013	$	5,700
2014	$	5,327
2015	$	5,221
2016	$	5,206

NOTE C
Credit Facilities

The Company has a five-year, multi-currency revolving facility with a group of banks under which the Company may borrow up to $250 million. This facility matures on April 2, 2013. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Advances or Off Shore Rate Advances. 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 ~~$20.0~~nothing outstanding at July 31, 2011, and $50.0 million outstanding at July 31, ~~2009, and $70.0 million outstanding at~~2010. At July 31, ~~2008.~~2011 and 2010, $238.6 million and $180.0 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. ~~At July 31, 2009 and 2008, $210.0 million and $161.5 million, respectively, was available for further borrowing under such facilities.~~ The weighted average interest rate on these short-term borrowings outstanding at July 31, ~~2009~~2010 was 0.6 percent. Our multi-currency revolving facility contains debt covenants specifically related to maintaining a certain interest coverage ratio and ~~2008,~~a certain leverage ratio as well as other covenants that under certain circumstances can restrict our ability to incur additional indebtedness, make investments and other restricted payments, create liens, and sell assets. As of July 31, 2011, the Company was ~~0.56 percent~~in compliance with all such covenants.

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Certain note agreements contain debt covenants related to working capital levels and ~~2.73 percent, respectively.~~limitations on indebtedness. As of July 31, 2011, the Company was in compliance with all such covenants. The Company currently expects to remain in compliance with these covenants.

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~~respectively.~~nothing outstanding at July 31, 2010. The weighted average interest rate on these short-term borrowings outstanding at July 31, ~~2009 and 2008,~~2011 was ~~0.53 percent and 2.79 percent, respectively.~~0.9 percent.

The Company ~~also~~ has a €100 million program for issuing treasury notes for raising short, medium, and long-term financing for its European operations. There was nothing outstanding on this program at July 31, ~~2009 and 2008.~~2011 or 2010. Additionally, the Company’s European operations have lines of credit with an available limit of ~~€72.9~~€45.6 million. There was nothing outstanding on these lines of credit as of July 31, ~~2009. As of July 31, 2008, there was €23.5 million,~~2011 or ~~$36.9 million outstanding. The weighted average interest rate of these short-term borrowings outstanding at July 31, 2008, was 5.60 percent.~~2010.

Other international subsidiaries may borrow under various credit facilities. There was nothing outstanding under these credit facilities as of July 31, ~~2009. As of July 31, 2008, borrowings under these facilities were $4.5 million. The weighted average interest rate on these international borrowings outstanding at July 31, 2008, was 2.88 percent.~~2011 or 2010.

As discussed further in Note K,L, at July 31, ~~2009~~2011 and ~~2008,~~2010, the Company had outstanding standby letters of credit totaling ~~$20.0~~$11.4 million, ~~and $18.5 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 specified bond financing agreement and insurance contract terms as detailed in each letter of credit.

NOTE D
Long-Term Debt

Long-term debt consists of the following:


	2009		2008		2011		2010
	(thousands of dollars)				(thousands of dollars)
6.39% Unsecured senior notes due August 15, 2010, interest payable semi-annually, principal payments of $5.0 million, to be paid annually commencing August 16, 2006		9,981		14,942
4.85% Unsecured senior notes, interest payable semi-annually, principal payment of $30.0 million due December 17, 2011.		30,000		30,000
6.39% Unsecured senior notes due August 15, 2010, interest payable semi-annually. This note was repaid on August 16, 2010					$	—	$	4,999
4.85% Unsecured senior notes, interest payable semi-annually, principal payment of $30.0 million due December 17, 2011						30,000		30,000
6.59% Unsecured senior notes, interest payable semi-annually, principal payment of $80.0 million due November 14, 2013		80,000		—		80,000		80,000
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $50.0 million due June 1, 2017		50,000		50,000		50,000		50,000
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due September 28, 2017		25,000		25,000		25,000		25,000
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due November 30, 2017		25,000		25,000		25,000		25,000
1.418% Guaranteed senior notes, interest payable semi-annually, principal payment of ¥1.2 billion due January 31, 2012		12,679		11,123		15,595		13,884
2.019% Guaranteed senior note, interest payable semi-annually, principal payment of ¥1.65 billion due May 18, 2014		17,434		15,295		21,442		19,091
Variable Rate Commercial Property Loan, to a maximum of R37 million, interest rate of 13.75% as of July 31, 2008, repaid in 2009		—		1,882
Variable Rate Industrial Development Revenue Bonds (“Low Floaters”) interest payable monthly, principal payment of $7.755 million due September 1, 2024, and an interest rate of 0.67% as of July 31, 2009		7,755		7,755
Capitalized lease obligations and other, with various maturity dates and Interest rates		1,321		1,147
Variable Rate Industrial Development Revenue Bonds (“Low Floaters”) interest payable monthly, principal payment of $7.755 million due September 1, 2024, interest rate of 0.40% as of April 25, 2011. These bonds were repaid on April 25, 2011.						—		7,755
Capitalized lease obligations and other, with various maturity dates and interest rates						796		890
Terminated interest rate swap contracts						5,786		5,109
Total		259,170		182,144		253,619		261,728
Less current maturities		5,496		5,669		47,871		5,536
Total long-term debt	$	253,674	$	176,475	$	205,748	$	256,192

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Annual maturities of long-term debt are ~~$5.5 million in 2010, $5.4 million in 2011, $43.0~~$46.0 million in 2012, ~~$97.5~~$0.3 million in 2013, $101.5 million in 2014, and ~~$107.8~~$100.0 million thereafter. There are no maturities in ~~2013.~~2015 or 2016. As of July 31, ~~2009,~~2011, the estimated fair value of long-term debt with fixed interest rates was ~~$253.1~~$268.3 million compared to its carrying value of ~~$250.1~~$247.0 million.

On ~~November 14, 2008,~~April 25, 2011, the Company issued an $80 million senior unsecured note. The note is due on November 14, 2013. The debt was issued at face value and bears interest payable semi-annually at a rate of 6.59 percent. The proceeds from the note were used to refinance existing debt andpaid off its Variable Rate Industrial Development Revenue Bond for ~~general corporate purposes.~~

On June 1, 2007, the Company issued $100 million of senior unsecured notes. The first $50 million was funded on June 1, 2007, and the remaining two $25 million tranches were funded on September 28, 2007, and November 30, 2007. The three tranches are due on June 1, 2017, September 28, 2017, and November 30, 2017, respectively. The debt was issued at face value and bears interest payable semi-annually at a rate of 5.48 percent. The proceeds from the notes were used to refinance existing debt and for general corporate purposes.

Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, ~~2009,~~2011, the Company was in compliance with all such covenants. The Company currently expects to remain in compliance with these covenants.

NOTE E
~~Derivatives and Other~~ Financial Instruments

DerivativesThe Company uses ~~derivative instruments, primarily~~ forward exchange contracts ~~and interest rate swaps,~~ to manage its exposure to fluctuations in foreign exchange ~~rates and~~rates. The Company also uses interest ~~rates.~~rate swaps to manage its exposure to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. It is the Company’s policy to enter into derivative transactions only to the extent true exposures exist; the Company does not enter into derivative transactions for speculative or trading purposes. The Company enters into derivative transactions only with ~~highly rated counterparties.~~counterparties with high credit ratings. These transactions may expose the Company to credit risk to the extent that the instruments have a positive fair value, but the Company has not experienced any material losses, nor does the Company anticipate any material losses.

The Company enters into forward exchange contracts of generally less than one year to hedge forecasted transactions ~~amongst~~between its subsidiaries and to reduce potential exposure related to fluctuations in foreign exchange rates for existing recognized assets and liabilities. It also utilizes forward exchange contracts for anticipated intercompany and third-party transactions such as purchases, sales, and dividend payments denominated in local currencies. Forward exchange contracts are designated as cash flow hedges as they are designed to hedge the variability of cash flows associated with the underlying existing recognized or anticipated transactions. Changes in the value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) in shareholders’ equity until earnings are affected by the variability of the underlying cash flows. At that time, the applicable amount of gain or loss from the derivative instrument that is deferred in shareholders’ equity is reclassified to earnings. The Company expects to record $0.2 million of net deferred gains from these forward exchange contracts during the next twelve months. Effectiveness is measured using spot rates to value both the hedge contract and the hedged item. The excluded forward points, as well as any ineffective portions of hedges, are recorded in earnings through the same line as the underlying transaction. During Fiscal 2011, 2010, and 2009, $1.1 million, $0.2 million, and $0.4 million of losses were recorded due to the exclusion of forward points from the assessment of hedge effectiveness.

These unrealized losses and gains are reclassified, as appropriate, as earnings are affected by the variability of the underlying cash flows during the term of the hedges. The Company expects to record $0.6 million of net deferred losses from these forward exchange contracts during the next twelve months.

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The Company entered into and settled an interest rate lock in October 2008. The interest rate lock settlement resulted in a $0.5 million in gain, net of deferred taxes of $0.2 million, which will be amortized into income over the life of the related debt.

~~The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2009, and 2008, on the Consolidated Balance Sheets (thousands of dollars):~~

July 31,
2009

July 31,
2008

Asset derivatives recorded under the caption Prepaids and other current assets

Foreign exchange contracts

$
493

$
952

Liability derivatives recorded under the caption Other current liabilities

Foreign exchange contracts

$
2,366

$
1,252

The impact on ~~Other~~Accumulated other comprehensive income (loss) (OCI) and earnings from foreign exchange contracts that qualified as cash flow hedges for the twelve months ended July 31, ~~2009~~2011 and ~~2008,~~2010, was as follows (thousands of dollars):

July 31,
2009

July 31,
2008

Net carrying amount at beginning of year

$
188

$
(206
)
Cash flow hedges deferred in OCI

(1,826
)

2,628

Cash flow hedges reclassified to income (effective portion)

580

(2,211
)
Change in deferred taxes

408

(23
)
Net carrying amount at July 31

$
(650
)
$
188

The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at July 31, 2009, failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative instruments.


	July 31,
	2011			2010
Net carrying amount at beginning of year	$	(660	)	$	(650	)
Cash flow hedges deferred in OCI		(782	)		(3,789	)
Cash flow hedges reclassified to income (effective portion)		1,963			3,788
Change in deferred taxes		(280	)		(9	)
Net carrying amount at July 31	$	241		$	(660	)

Fair Value of Financial InstrumentsAt July 31, ~~2009~~2011 and ~~2008,~~2010, 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. Derivative contracts are reported at their fair values based on third-party quotes. As of July 31, ~~2009,~~2011, the estimated fair value of long-term debt with fixed interest rates was ~~$253.1~~$268.3 million compared to its carrying value of ~~$250.1~~$247.0 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed.

Credit RiskThe Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps and foreign exchange forward contracts. Collateral is generally not required of the counterparties or of the Company. In the unlikely event a counterparty fails to meet the contractual terms of an interest rate swap or foreign exchange forward contract, the Company’s risk is limited to the fair value of the instrument. ~~There were~~The Company had no interest rate swaps outstanding at July 31, ~~2009 or 2008.~~2011. There was one interest rate swap outstanding at July 31, 2010, which

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was subsequently terminated August 17, 2010. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by

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selecting major international banks and financial institutions as counterparties. The Company has not had any historical instances of non-performance by any counterparties, nor does it anticipate any future instances of non-performance.

NOTE F
Fair Value

The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2011, and 2010, on the Consolidated Balance Sheets (thousands of dollars):

At July 31,

2011

2010

Asset derivatives recorded under the caption Prepaids and other current assets Foreign exchange contracts

$
945

$
807

Asset derivatives recorded under the caption Other assets Interest rate swap asset

$
—

$
4,590

Liability derivatives recorded under the caption Other current liabilities Foreign exchange contracts

$
1,470

$
2,127

          The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at July 31, 2011, failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative instruments.
          The fair values of the Company’s financial assets and financial 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 financial 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.

Significant Other Observable Inputs
(Level 2)*

At July 31,

2011

2010

Forward exchange contracts – net liability position

$
(525
)
$
(1,320
)
Interest rate swaps – net asset position

—

4,590

          *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.

NOTE G Employee Benefit Plans

Pension PlansThe Company and certain of its international subsidiaries have defined benefit pension plans for many of ~~its~~their hourly and salaried employees. There are two types of U.S. plans. The first type of U.S. ~~plans include plans that provide~~plan is a traditional defined ~~benefits as well as~~benefit pension plan primarily for production employees. The second is a plan for salaried workers that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The international plans generally provide pension benefits based on years of service and compensation level. ~~During Fiscal 2009, the Company changed its measurement date to July 31, in accordance with the measurement date provisions~~

Table of ~~FAS 158, as discussed below. During Fiscal 2008, the Company used an April 30 measurement date for its pension plans.~~Contents

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


	2009			2008			2007			2011			2010			2009
	(thousands of dollars)									(thousands of dollars)
Net periodic cost:
Service cost	$	15,385		$	15,996		$	15,067		$	16,148		$	13,184		$	15,385
Interest cost		18,481			17,702			17,014			19,440			19,445			18,481
Expected return on assets		(29,143	)		(28,275	)		(24,955	)		(27,538	)		(28,390	)		(29,143	)
Transition amount amortization		193			164			523			225			226			193
Prior service cost amortization		438			380			314			449			293			438
Actuarial (gain)/loss amortization		1,088			(58	)		1,408
Actuarial loss amortization											3,962			2,864			1,088
Curtailment loss		910			—			408			—			—			910
Settlement gain		—			(35	)		(2,357	)
Net periodic benefit cost	$	7,352		$	5,874		$	7,422		$	12,686		$	7,622		$	7,352

~~Negotiations~~During Fiscal 2009, negotiations with one of our unions resulted in a freeze in pension benefits at one of our U.S. plants. In exchange for the freezing of the plan, participants ~~will be~~were made eligible for a ~~company~~Company match in a defined contribution plan. The freeze in the plan resulted in a curtailment loss of $0.9 million during Fiscal 2009.

In anticipation of Japanese defined benefit plan law changes, the Company terminated the defined benefit plan offered to its employees in Japan on December 31, 2006, which resulted in a net settlement gain of $1.9 million in Fiscal 2007. This plan was replaced with a defined contribution plan as of January 1, 2007. The Company incurred the cost of initial contributions to the defined contribution plan as well as other costs of converting participants to the new defined contribution plan resulting in a net pretax gain for the net settlement and transition to the defined contribution plan of approximately $0.6 million during Fiscal 2007.

~~Effective July 31, 2007, the Company adopted SFAS No. 158,~~~~Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)~~. This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position. This statement also requires that changes in the funded status are recognized in accumulated other comprehensive income in the year in which the adoption occurs and in other comprehensive income in the following years. SFAS 158’s provisions regarding the change in the measurement date of postretirement benefits plans required the Company to change its measurement date from April 30 to July 31 during Fiscal 2009. The adoption of the measurement date provisions resulted in an after-tax decrease to Retained earnings of $0.9 million, a decrease to Other assets of $0.5 million increase to Other long-term liabilities of $0.8 million and an increase to Deferred income taxes of $0.5 million.

~~Table of Contents~~

The obligations and funded status of the Company’s pension plans as of ~~2009~~2011 and ~~2008,~~2010, is as follows:


	2009			2008			2011			2010
	(thousands of dollars)						(thousands of dollars)
Change in benefit obligation:
Benefit obligation, beginning of year	$	330,258		$	312,514		$	377,903		$	338,154
Service cost		18,730			15,996			16,148			13,183
Interest cost		22,868			17,702			19,440			19,445
Plan amendments								1,639			—
Participant contributions		1,476			1,381			1,058			1,043
Plan amendments		—			1,221
Actuarial gain		(1,077	)		(2,410	)
Actuarial loss								1,034			31,918
Currency exchange rates		(13,338	)		3,610			6,936			(6,531	)
Settlement		—			(272	)
Benefits paid		(20,763	)		(19,484	)		(20,146	)		(19,309	)
Benefit obligation, end of year	$	338,154		$	330,258		$	404,012		$	377,903

Change in plan assets:
Fair value of plan assets, beginning of year	$	378,695		$	377,461		$	319,734		$	297,479
Actual return on plan assets		(62,057	)		5,389			38,758			31,013
Company contributions		13,356			11,316			27,655			15,064
Participant contributions		1,476			1,381			1,058			1,043
Currency exchange rates		(13,228	)		2,904			6,496			(5,556	)
Settlement		—			(272	)
Benefits paid		(20,763	)		(19,484	)		(20,146	)		(19,309	)
Fair value of plan assets, end of year	$	297,479		$	378,695		$	373,555		$	319,734

Funded status:
Over (under) funded status at July 31, 2009 and April 30, 2008	$	(40,675	)	$	48,437
Fourth quarter contributions		—			808
Over (under) funded status after fourth quarter contributions	$	(40,675	)	$	49,245
Underfunded status at July 31, 2011 and 2010							$	(30,457	)	$	(58,169	)

The net ~~under funded~~underfunded status of ~~$40.7~~$30.5 million at July 31, ~~2009,~~2011 is recognized in the accompanying Consolidated Balance Sheet as ~~$4.3~~$6.4 million within Other assets for the Company’s ~~over funded~~over-funded plans and ~~$45.0~~$36.9 million within Other long-term liabilities for the Company’s ~~under funded~~underfunded plans. Included in Accumulated other comprehensive ~~income~~loss at July 31, ~~2009,~~2011 are the following amounts that have not yet been recognized in net periodic pension expense: unrecognized actuarial losses of ~~$123.0~~$134.7 million, unrecognized prior service cost of ~~$4.2~~$5.1 million, and unrecognized transition obligations of ~~$3.4~~$3.0 million. The actuarial loss, prior service cost and unrecognized transition obligation are included in Accumulated other comprehensive ~~income,~~loss, net of tax. The amounts expected to be recognized in net periodic pension expense during Fiscal ~~2010~~2012 are ~~$1.4~~$5.8 million, ~~$0.3~~$0.5 million, and $0.2 million, respectively. The accumulated benefit obligation for all defined benefit pension plans was ~~$296.7~~$365.2 million and ~~$282.7~~$332.4 million at July 31, ~~2009,~~2011 and ~~April 30, 2008,~~2010, respectively.

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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 ~~$246.7~~$294.2 million, ~~$234.3~~$282.3 million, and ~~$213.3~~$262.4 million, respectively, as of July 31, ~~2009,~~2011, and ~~$16.4~~$282.7 million, ~~$13.8~~$266.0 million, and ~~$0.0~~$230.3 million, respectively, as of ~~April 30, 2008.~~July 31, 2010.

For the years ended July 31, ~~2009~~2011 and ~~2008,~~2010 the U.S. pension plans represented approximately 7271 percent and 7573 percent, respectively, of the Company’s total plan assets, and approximately 72 percent and 7074 percent, respectively, of the Company’s total projected benefit obligation.

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The weighted-average discount rates 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	2009			2008			2011			2010
All U.S. plans:
Discount rate		6.00	%		6.00	%		4.91	%		5.25	%
Rate of compensation increase		5.00	%		5.00	%		4.50	%		5.00	%
Non-U.S. plans:
Non - U.S. plans:
Discount rate		5.90	%		6.30	%		5.36	%		5.17	%
Rate of compensation increase		3.87	%		4.48	%		3.57	%		3.69	%

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	2009			2008			2007			2011			2010			2009
All U.S. plans:
Discount rate		6.00	%		6.00	%		6.25	%		5.25	%		6.00	%		6.00	%
Expected return on plan assets		8.50	%		8.50	%		8.50	%		8.00	%		8.50	%		8.50	%
Rate of compensation increase		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%
Non-U.S. plans:
Non - U.S. plans:
Discount rate		6.30	%		5.23	%		4.64	%		5.17	%		5.90	%		6.30	%
Expected return on plan assets		7.14	%		7.49	%		6.60	%		6.17	%		6.64	%		7.14	%
Rate of compensation increase		4.48	%		4.01	%		3.62	%		3.69	%		3.87	%		4.48	%

Expected Long-Term Rate of ReturnTo 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. ~~This resulted in~~As of our measurement date of July 31, 2011, the ~~selection of the 8.50 percent~~Company decreased its long-term rate of return ~~on assets assumption~~ for the ~~Company’s~~ U.S. pension ~~plans.~~plans to 7.75 percent from 8.0 percent as of July 31, 2010. The Company believes that based on the asset mix and the target asset allocation, the 7.75 percent rate is an appropriate rate. This is slightly below the Company’s twenty year average but above the five and ten year averages. Thus, the Company will use the 7.75 percent rate for the calculation of its Fiscal 2012 net periodic cost. The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. The expected long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based weighted average of all non-U.S. plans.

Discount RateThe 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 ~~for non-U.S. plans~~ 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, of all non-U.S. plans.~~obligations.

~~Plan Assets~~~~The Company’s pension plan weighted-average asset allocations by asset category are as follows:~~

Plan Assets at

Asset Category

2009

2008

All U.S. plans:

Equity securities

41
%

44
%
Alternative investments

42
%

36
%
Real assets

12
%

12
%
Fixed income

5
%

8
%
Total U.S. plans

100
%

100
%
Non U.S. plans:

Equity securities

44
%

64
%
Debt securities

56
%

36
%
Total Non U.S. plans

100
%

100
%

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


Asset Category	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
2011
Cash	$	0.3	$	—	$	—	$	0.3
Global Equity Securities		64.8		56.2		0.3		121.3
Fixed Income Securities		36.6		—		—		36.6
Private Equity		—		—		17.6		17.6
Absolute Return		—		20.1		31.4		51.5
Real Assets		—		—		38.0		38.0
Total U.S. Assets at July 31, 2011	$	101.7	$	76.3	$	87.3	$	265.3
2010
Cash	$	0.9	$	—	$	—	$	0.9
Global Equity Securities		48.7		50.2		2.4		101.3
Fixed Income Securities		17.1		—		—		17.1
Private Equity		—		—		14.8		14.8
Absolute Return		—		39.4		33.1		72.5
Real Assets		—		9.6		16.3		25.9
Total U.S. Assets at July 31, 2010	$	66.7	$	99.2	$	66.6	$	232.5

The 2010 information in the above table contains adjustments to the classifications within the fair value hierarchy from that reported in the prior year.

Global equity consists of publicly traded U.S. and non-U.S. equities, Australasia, Far East (EAFE) index funds, equity private placement funds, 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.

Fixed income consists primarily of investment grade debt securities, but may include up to 10% in high yield securities rated B or higher by Moody’s or S&P. It may also include up to 20% in securities denominated in foreign currencies. 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.

Private equity consists of interests in partnerships that invest in U.S. and non-U.S. debt and equity securities. The portfolio is a diversified mix of partnership interests including buyouts, distressed debt, growth equity, mezzanine, real estate, and venture capital investments. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interests’ cash flow.

Absolute return consists 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.

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 they are traded.

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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, 2011 and 2010 (in millions):


	Global Equity			Private Equity		Absolute Return			Real Assets		Total
Beginning balance at August 1, 2009	$	2.7		$	11.4	$	41.4		$	15.5	$	71.0
Unrealized gains		0.1			1.8		2.8			0.1		4.8
Realized gains		—			—		0.7			—		0.7
Purchases, sales, issuances and settlements, net		(0.4	)		1.6		(11.8	)		0.7		(9.9	)
Ending balance at July 31, 2010	$	2.4		$	14.8	$	33.1		$	16.3	$	66.6
Unrealized gains		—			1.5		2.1			3.4		7.0
Realized gains		—			1.0		—			—		1.0
Purchases, sales, issuances and settlements, net		(2.1	)		0.3		(3.8	)		18.3		12.7
Ending balance at July 31, 2011	$	0.3		$	17.6	$	31.4		$	38.0	$	87.3

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


Asset Category	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
2011
Global Equity Securities	$	33.5	$	—	$	—	$	33.5
Fixed Income Securities		—		26.5		—		26.5
Equity/Fixed Income		15.4		—		26.3		41.7
Real Assets		—		6.5		—		6.5
Total International Assets at July 31, 2011	$	48.9	$	33.0	$	26.3	$	108.2
2010
Global Equity Securities	$	26.8	$	—	$	—	$	26.8
Fixed Income Securities		—		20.7		—		20.7
Equity/Fixed Income		12.5		—		21.7		34.2
Real Assets		—		5.5		—		5.5
Total International Assets at July 31, 2010	$	39.3	$	26.2	$	21.7	$	87.2

Global equity consists of a fixed weights index fund, used to maintain a fixed 50/50 distribution between UK and overseas assets. Publicly traded equities are valued at the closing price reported in the active market in which the individual securities are traded.

Fixed income consists of corporate bond funds with the investment objective to achieve active corporate bond returns which are inflation linked and paid as a single payment in 2055. Corporate bonds and notes 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 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.

Equity/Fixed Income consists of Level 1 assets that are part of a unit linked fund with a strategic asset allocation of 40% fixed income products and 60% 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%-90% fixed income products and 20%-10% equity type products (including real estate).

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Real Assets consists of property funds. Property funds are valued using the most recent partnership statement of fair value, updated for any subsequent partnership interests’ cash flows.

The following table sets forth a summary of changes in the fair values of the International pension plans’ Level 3 assets for the year ended July 31, 2011 and 2010 (in millions):


	Equity/Fixed Income
Beginning balance at August 1, 2009	$	23.1
Unrealized gains		0.3
Foreign currency exchange		(1.9	)
Purchases, sales, issuances and settlements, net		0.2
Ending balance at July 31, 2010	$	21.7
Unrealized gains		0.9
Foreign currency exchange		2.5
Purchases, sales, issuances and settlements, net		1.2
Ending balance at July 31, 2011	$	26.3

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 a prudent level of risk for the purpose of meeting its retirement income commitments to employees. The plan’s investments are diversified to assist in managing risk. The Company’s asset allocation guidelines target an allocation of 45 percent equity securities, 30 percent alternative investments (funds of hedge funds), 10 percent real assets (investments into funds containing commodities and real estate), 10 percent fixed income, and 5 percent private equity. Within equity securities, the Company will target an allocation of 15 percent international, 15 percent equity ~~long /~~ long/short, 10 percent small cap and 5 percent large cap. 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. 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.

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

Estimated Contributions and Future Payments~~As a result of~~The Company’s general funding policy for its ~~past funding practices,~~pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company ~~does not have a minimum required contribution under~~may elect to make additional contributions up to the ~~Pension Benefit Guarantee Corporation requirements for~~maximum tax deductible contribution. As such, the Company made contributions of $20.6 million to its U.S. pension plans in Fiscal 2011. There is no minimum funding request for the Company’s U.S. plans for Fiscal ~~2010. As a result, there~~2012. The Company is ~~no current intention to make~~currently evaluating whether or not a U.S. pension contribution will be made in Fiscal ~~2010. For~~2012. The Company made contributions of $7.1 million to its non-U.S. pension plans ~~the Company~~in Fiscal 2011 and estimates that it will contribute approximately $5$4.7 million in Fiscal ~~2010,~~2012 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 2010

$
18,528

Fiscal year 2011

$
18,624

Fiscal year 2012

$
22,469

Fiscal year 2013

$
20,829

Fiscal year 2014

$
23,313

Fiscal years 2015-2019

$
125,346


Fiscal Year
2012	$	25,769
2013	$	23,314
2014	$	25,648
2015	$	26,242
2016	$	25,323
2017-2021	$	148,290

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Postemployment and Postretirement Benefit PlansThe 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 ~~$1.7~~$1.5 million and ~~$3.1~~$1.6 million as of July 31, ~~2009~~2011 and July 31, ~~2008,~~2010, respectively. The annual cost resulting from these benefits is not material. ~~Union negotiations have resulted in one U.S. plant freezing the plan. This change resulted in a curtailment gain of $1.4 million.~~ For measurement purposes, ~~an 8~~a 7.4 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for Fiscal ~~2009.~~2011. The Company has assumed that the long-term rate of increase will decrease gradually to an ultimate annual rate of 54.5 percent. A one-percentage point increase in the health care cost trend rate would increase the Fiscal ~~2009~~2011 and ~~2008~~2010 liability by $0.1 ~~million and $0.5 million, respectively.~~million.

Retirement Savings and Employee Stock Ownership PlanThe 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. ~~Through April 13, 2009, employee~~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 as well as a discretionary contribution based on performance of the Company. The Plan was amended effective April 13, 2009, to reduce Company fixed matching contributions to the Plan for salaried employees. After April 13, 2009, fixed matching contributions for salaried employees were calculated at 50 percent of up to 3 percent of compensation deferred by the participant and deposited into the Plan, and 25 percent of the next 2 percent of compensation deferred by

~~Table of Contents~~

~~the participant and deposited to the Plan. In addition, the Company fixed matching contribution was eliminated for Company Executive Officers and Vice Presidents.~~ Total contribution expense for these plans was ~~$5.1~~$9.1 million, ~~$8.3~~$4.5 million, and ~~$8.1~~$5.1 million for the years ended July 31, ~~2009, 2008~~2011, 2010, and ~~2007,~~2009, respectively. This plan also includes shares from an Employee Stock Ownership Plan (“ESOP”). As of July 31, ~~2009,~~2011, all shares of the ESOP have been allocated to participants. Total ESOP shares are considered to be shares outstanding for earnings per share calculations.

Deferred Compensation and Other Benefit PlansThe Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows these employees to defer the receipt of all of their bonus and other stock related compensation and up to 75 percent of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals which are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability in the amount of ~~$10.0~~$9.2 million and ~~$10.6~~$8.8 million as of the year ended July 31, ~~2009~~2011 and July 31, ~~2008,~~2010, respectively, related primarily to its deferred compensation plans.

NOTE G
H Shareholders’ Equity

Stock RightsOn 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 PlansThe 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 ~~2001~~2010 Master Stock Incentive Plan, as well as performance awards payable in common stock discussed further in Note H.I.

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Treasury StockThe Company believes that the share repurchase program is a way of providing return to its shareholders. The Board of Directors authorized the repurchase, at the Company’s discretion, of up to 8.0 million shares of common stock under the stock repurchase plan dated March ~~31, 2006.~~26, 2010. As of July 31, ~~2009,~~2011, the Company had remaining authorization to repurchase ~~0.9~~5.0 million shares under this plan. Following is a summary of treasury stock share activity for Fiscal ~~2009~~2011 and ~~2008:~~2010:


	2009			2008			2011			2010
Balance at beginning of year		11,021,619			9,500,372			12,222,381			11,295,409
Stock repurchases		802,000			2,245,790			1,956,648			1,651,600
Net issuance upon exercise of stock options		(355,491	)		(647,225	)		(862,981	)		(667,991	)
Issuance under compensation plans		(99,612	)		(67,822	)		(62,304	)		(46,197	)
Discretionary stock paid into 401(k) plan		(60,122	)		—
Other activity		(12,985	)		(9,496	)		(7,880	)		(10,440	)
Balance at end of year		11,295,409			11,021,619			13,245,864			12,222,381

~~Table of Contents~~

NOTE H
I Stock Option Plans

Employee Incentive PlansIn November ~~2001,~~2010 shareholders approved the ~~2001~~2010 Master Stock Incentive Plan (the “Plan”) that replaced the ~~1991~~2001 Plan that ~~expired~~was scheduled to expire on December 31, ~~2001,~~2010 and provided for similar awards. The Plan extends through ~~December 2011~~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, ~~dollar-denominated awards~~ and other stock-based awards. Options under the Plan are granted to key employees at market price at the date of grant. Options are 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, 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 $1.8 million in Fiscal 2011 and $0.5 million in Fiscal 2010. The Company recorded a net reversal of performance award expense in Fiscal 2009 of $3.1 ~~million. The net benefit is~~million due to the reversal of $3.6 million of Long-Term Compensation Plan expense recognized in prior ~~periods. This reversal reflects an adjustment in the expected payouts for the three-year cycles ending July 31, 2009, and July 31, 2010, to zero~~periods based upon actual and forecasted results. ~~Performance award expense under these plans totaled $4.2 million and $2.7 million in Fiscal 2008 and 2007, respectively.~~

Stock options issued from Fiscal ~~1999~~2001 to Fiscal ~~2009~~2011 become exercisable for non-executives in equal increments over three years. Stock options issued in Fiscal 2011 become exercisable for executives in equal increments over three years. Stock options issued from Fiscal ~~1999~~2001 to Fiscal ~~2009~~2010 became exercisable for most executives immediately upon the date of grant. Certain other stock options issued to executives during Fiscal 2004, 2006, and 2007 ~~become~~became exercisable in equal increments over three years. For Fiscal 2011, the Company recorded pretax compensation expense associated with stock options of $6.5 million and recorded $2.4 million of related tax benefit. For Fiscal 2010 and 2009, the Company recorded pretax compensation expense associated with stock options of $6.9 million and $4.1 million, respectively, and ~~recorded~~$2.5 million and $1.5 million, respectively, of related tax benefit.

Stock-based employee compensation cost is recognized using the fair-value based method for all new awards granted after August 1, 2005. Compensation costs for unvested stock options and awards that were outstanding at August 1, 2005, are recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under the pro-forma disclosures.method. The Company determined the fair value of these awards using the Black-Scholes option pricing model, with the following weighted average assumptions:

2009

2008

2007

2011

2010

2009

Risk-free interest rate

1.4 – 4.0%

2.1 - 4.2%

4.4 - 4.9%

Risk - free interest rate

<0.12 - 3.1

< 0.01 - 3.9

1.4 - 4.0

Expected volatility

21.6 – 25.5%

15.2 – 22.4%

18.3 - 23.6%

25.5 - 34.7

24.4 - 32.3

21.6 - 25.5

Expected dividend yield

1.0%

1.0

Expected life

Director original grants without reloads

8 years

7 years

8 years

Non-officer original grants

7 years

6 years

Non - officer original grants

8 years

7 - 8 years

7 years

Officer original grants with reloads

4 years

3 years

—

4 years

Reload grants

<5 years

<3 years

<1 year

<8 years

<5 years

Officer original grants without reloads

7 years

6 years

8 years

7 years

Officer original grants with reloads and vesting

—

5 years

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

Black-Scholes is a widely accepted stock option pricing model; however, the ultimate value of stock options granted will be determined by the actual lives of options granted and the actual future price levels of the Company’s common stock. The weighted average fair value for options granted during Fiscal 2011, 2010, and 2009 ~~2008~~is $17.26, $13.23, and ~~2007 is~~ $8.56 ~~$10.60 and $7.89~~ per share, respectively, using the Black-Scholes pricing model.

~~Table of Contents~~

The following table summarizes stock option activity:


	Options Outstanding			Weighted Average Exercise Price		Options Outstanding			Weighted Average Exercise Price
Outstanding at July 31, 2008		5,181,778		$	25.62		5,181,778		$	25.62
Granted		366,588			34.23		366,588			34.23
Exercised		(505,363	)		17.64		(505,363	)		17.64
Canceled		(44,878	)		39.04		(44,878	)		39.04
Outstanding at July 31, 2009		4,998,125			26.94		4,998,125			26.94
Granted							643,974			42.41
Exercised							(848,990	)		20.84
Canceled							(21,297	)		41.94
Outstanding at July 31, 2010							4,771,812			30.04
Granted							551,601			57.22
Exercised							(1,121,751	)		23.10
Canceled							(7,665	)		47.20
Outstanding at July 31, 2011							4,193,997			35.44

The total intrinsic value of options exercised during Fiscal 2011, 2010, and 2009 ~~2008 and 2007~~ was ~~$9.1~~$34.2 million, ~~$26.2~~$19.5 million, and ~~$20.6~~$9.1 million, respectively.

Shares reserved at July 31, ~~2009~~2011 for outstanding options and future grants were ~~11,521,192.~~8,307,431. Shares reserved consist of shares available for grant plus all outstanding options. ~~An amount is~~Upon shareholder approval of the 2010 Master Stock Incentive Plan, 4,600,000 shares were added to shares ~~reserved each year based on~~reserved. Remaining shares ~~outstanding adjusted~~available for ~~certain items as detailed in the Plan. The aggregate number of shares of common stock that may be issued under all awards~~grant under the ~~Plan in any calendar year may not exceed 1.5 percent of~~2001 plan were removed from the ~~sum of the Company’s outstanding~~ shares of common stock, the outstanding share equivalents, as determined by the Company in the calculation of earnings per share on a fully diluted basis, and shares held in treasury of the Company as reported for the Company’s most recent fiscal year that ends during such calendar year.reserved calculation.

The following table summarizes information concerning outstanding and exercisable options as of July 31, ~~2009:~~2011:

Range of Exercise Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price

$5 to $15

603,792

1.03

$
12.41

603,792

$
12.41

$15 to $25

1,281,872

2.84

18.02

1,281,872

18.02

$25 and $35

2,463,644

5.52

31.57

2,338,294

31.48

$35 and above

648,817

7.94

40.47

481,390

40.61

4,998,125

4.61

26.94

4,705,348

26.30


Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$12 to $22		658,066		1.19	$	17.89		658,066	$	17.89
$22 to $32		1,102,423		2.94		30.12		1,086,511		30.09
$32 to $42		1,121,686		5.67		34.95		1,101,164		34.96
$42 and above		1,311,822		8.23		49.15		655,381		44.34
		4,193,997		5.05		35.44		3,501,122		32.00

At July 31, ~~2009,~~2011, the aggregate intrinsic value of shares outstanding and exercisable was ~~$57.5~~$85.0 million and ~~$56.9~~$81.9 million, respectively.

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


	Options			Weighted Average Grant Date Fair Value		Options			Weighted Average Grant Date Fair Value
Non-vested at July 31, 2008		439,684		$	10.43
Non - vested at July 31, 2010							407,453		$	12.89
Granted		79,575			8.83		482,250			18.45
Vested		(207,390	)		10.16		(189,913	)		12.27
Canceled		(19,092	)		10.14		(6,915	)		15.42
Non-vested at July 31, 2009		292,777			10.21
Non - vested at July 31, 2011							692,875			16.90

The total fair value of shares vested during Fiscal 2011, 2010, and 2009 ~~2008 and 2007~~ was ~~$7.9~~$10.5 million, ~~$6.3~~$8.0 million, and ~~$2.8~~$7.9 million, respectively.

As of July 31, ~~2009~~2011, there was ~~$1.6~~$6.1 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 ~~2010,~~2012, Fiscal ~~2011~~2013, and Fiscal ~~2012.~~2014.

~~Table of Contents~~

NOTE I
J Income Taxes

The components of earnings before income taxes are as follows:


	2009		2008		2007		2011		2010		2009
	(thousands of dollars)						(thousands of dollars)
Earnings before income taxes:
United States	$	69,863	$	73,445	$	88,157	$	117,562	$	85,987	$	69,863
Foreign		91,562		162,718		116,704		194,701		144,189		91,562
Total	$	161,425	$	236,163	$	204,861	$	312,263	$	230,176	$	161,425

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


	2009			2008			2007			2011			2010			2009
	(thousands of dollars)									(thousands of dollars)
Income taxes:
Current:
Current
Federal	$	18,624		$	27,180		$	27,430		$	26,675		$	25,455		$	18,624
State		2,444			619			2,975			3,555			2,206			2,444
Foreign		13,176			37,616			28,140			54,785			33,327			13,176
		34,244			65,415			58,545			85,015			60,988			34,244
Deferred:
Deferred
Federal		(3,888	)		(4,712	)		(4,674	)		8,556			3,860			(3,888	)
State		90			2			(332	)		191			20			90
Foreign		(928	)		3,505			605			(6,790	)		(855	)		(928	)
		(4,726	)		(1,205	)		(4,401	)		1,957			3,025			(4,726	)
Total	$	29,518		$	64,210		$	54,144		$	86,972		$	64,013		$	29,518

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


	2009			2008			2007			2011			2010			2009
Statutory U.S. federal rate		35.0	%		35.0	%		35.0	%		35.0	%		35.0	%		35.0	%
State income taxes		1.3			0.3			0.8			1.0			0.8			1.3
Foreign taxes at lower rates		(7.5	)		(7.6	)		(5.9	)		(6.6	)		(8.2	)		(7.5	)
Export, manufacturing and research credits		(0.5	)		(0.6	)		(1.5	)		(1.6	)		(0.9	)		(0.5	)
Tax on repatriation of earnings		0.7			(0.6	)		(1.1	)
U.S. tax impact on repatriation of earnings											(0.3	)		0.1			0.7
Change in unrecognized tax benefits		(10.6	)		0.5			0.1			0.1			1.2			(10.6	)
Other		(0.1	)		0.2			(1.0	)		0.3			(0.2	)		(0.1	)
		18.3	%		27.2	%		26.4	%		27.9	%		27.8	%		18.3	%

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

2009

2008

(thousands of dollars)

Deferred tax assets:

Accrued expenses

$
8,438

$
11,146

Compensation and retirement plans

30,916

812

Tax credit and NOL carryforwards

1,439

6,625

Inventory reserves

10,183

8,588

Other

2,232

4,370

Deferred tax assets

53,208

31,541

Valuation allowance

(1,053
)

(2,472
)
Net deferred tax assets

52,155

29,069

Deferred tax liabilities:

Depreciation and amortization

(31,593
)

(28,636
)
Other

(2,923
)

(2,584
)
Deferred tax liabilities

(34,516
)

(31,220
)
Net deferred tax asset (liability)

$
17,639

$
(2,151
)

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	2011			2010
	(thousands of dollars)
Deferred tax assets:
Accrued expenses	$	12,243		$	9,130
Compensation and retirement plans		33,298			39,438
Tax credit and NOL carryforwards		1,173			954
Inventory reserves		9,545			8,324
Other		3,311			1,846
Deferred tax assets:		59,570			59,692
Valuation allowance		(692	)		(604	)
Net deferred tax assets		58,878			59,088
Deferred tax liabilities:
Depreciation and amortization		(37,112	)		(30,248	)
Other		(1,119	)		(1,420	)
Deferred tax liabilities		(38,231	)		(31,668	)
Net deferred tax asset	$	20,647		$	27,420

The effective tax rate for Fiscal ~~2009~~2011 was ~~18.3~~27.9 percent compared ~~27.2~~to 27.8 percent in Fiscal ~~2008.~~2010. The ~~decrease in effective~~average underlying tax rate isremained at 29.7 percent, while discrete items were also a consistent percentage of pre-tax profits. Fiscal 2010 contained $4.3 million of discrete tax benefits from the expiration of the statute of limitations at foreign subsidiaries and other discrete items. Fiscal 2011 contained $5.8 million of discrete tax benefits primarily ~~due to~~from the ~~settlements~~release of ~~long-standing court cases and examinations~~reserves after the favorable conclusions of foreign tax audits, the expiration of statutes in various jurisdictions, for tax years 2003 through 2006, the reassessment of the corresponding unrecognized tax benefits for the subsequent open years and a favorable resolution of a foreign tax matter. Partially offsetting these effects, the Company’s Fiscal 2009 tax rate was unfavorably impacted by an increased expense from the repatriation of foreign earnings. Absent these items, the underlying tax rate for the Fiscal 2009 has decreased from Fiscal 2008 by 1.2 points to 30.4 percent. The reinstatement of the U.S. Research and Experimentation credit, changes in current year unrecognized tax benefits, reduced statutory tax rates and the ~~mix~~favorable impact of ~~earnings between~~dividends from some foreign ~~jurisdictions all contributed to the reduction in the underlying rate.~~subsidiaries.

The Company has not provided for U.S. income taxes on additional undistributed earnings of non-U.S. subsidiaries of approximately ~~$483.4~~$623.0 million. The Company currently ~~plans~~intends to permanently reinvest these undistributed earnings ~~in its non-U.S. subsidiaries.~~overseas as there are significant investment opportunities there, and the Company does not intend to incur a tax cost to repatriate these funds. 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.

~~While non-US operations have been profitable overall, the~~The Company has cumulative pre-tax loss carryforwards of ~~$6.7~~$4.8 million, which ~~are carried as net operating losses~~exist in ~~certain~~various international subsidiaries. If fully realized, the unexpired net operating losses may be carried forward to offset future local income tax payments of $1.2 million, at current rates of ~~tax, of $1.4 million.~~tax. Approximately 3712 percent of these net operating losses expire within the next three years, while the majority of the remaining net operating loss carryforwards expire more than 5 years out or have no statutory expiration under current local laws. However, as it is ~~more likely than not~~more-likely-than-not that certain of these losses will not be realized, a valuation allowance of ~~$1.1~~$0.7 million exists as of July 31, ~~2009.~~2011.

The Company ~~adopted the provisions of FIN 48,~~~~Accounting~~maintains a reserve for ~~Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,~~~~on August 1, 2007.~~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

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50 percent likely to be realized. As a result of the implementation of FIN 48, the Company recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the August 1, 2007, balance of retained earnings. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as ~~follows (thousands of dollars):~~follows:


	2009			2008			2011			2010			2009
	(thousands of dollars)						(thousands of dollars)
Gross unrecognized tax benefits at beginning of fiscal year	$	32,002		$	28,209		$	18,994		$	16,928		$	32,002
Additions for tax positions of the current year		3,527			8,221			7,406			3,122			3,527
Additions for tax positions of prior years		772			2,322			668			470			772
Reductions for tax positions of prior years		(8,258	)		(540	)		(164	)		(179	)		(8,258	)
Settlements		(10,092	)		—			(3,895	)		—			(10,092	)
Reductions due to lapse of applicable statute of limitations		(1,023	)		(6,210	)		(3,004	)		(1,347	)		(1,023	)
Gross unrecognized tax benefits at end of fiscal year	$	16,928		$	32,002		$	20,005		$	18,994		$	16,928

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, ~~2009,~~2011, the Company recognized interest expense, net of tax benefit, of approximately ~~$0.7~~$0.3 million. At July 31, ~~2009~~2011 and ~~2008,~~July 31, 2010, accrued interest and penalties on a gross basis were ~~$1.8~~$1.5 million and ~~$5.7~~$2.5 million, respectively.

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


Major Jurisdictions		Open Tax Years
Belgium		~~2005 through 2008~~2010
China		~~2000~~2001 through ~~2008~~2010
France		~~2006~~2008 through ~~2008~~2010
Germany		~~2004~~2009 through ~~2008~~2010
Italy		2003 through ~~2008~~2010
Japan		2009 through 2010
Mexico		~~2004~~2006 through ~~2008~~2010
Thailand		2005 through 2010
United Kingdom		~~2007 through 2008~~2010
United States		~~2007~~2008 through ~~2008~~2010

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 ~~$1.4~~$3.0 million of the unrecognized tax benefits could potentially ~~be realized~~expire in the next 12 month period, unless extended by audit.

~~In accordance with SFAS No. 123R,~~~~Share Based Payment – Revised 2004~~~~, SFAS No. 109,~~~~Accounting for Income Taxes~~ It is possible that quicker than expected settlement of either current or future audits and ~~EITF Topic D-32,~~~~Intra-period Tax Allocation~~disputes would cause additional reversals of previously recorded reserves in the ~~Effect of Pretax Income from Continuing Operations~~,next 12 month period. Currently, the Company has ~~elected to use the “with-and-without” intra-period~~approximately $0.2 million of unrecognized tax ~~allocation rules. Under these rules, the windfall tax benefit is calculated based on the incremental tax benefit received from deductions~~benefits that are in dispute with various taxing authorities related to ~~stock-based compensation.~~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

~~NOTE J~~
~~Segment Reporting~~

Consistent with ~~SFAS No. 131,~~~~Disclosures about Segments of an Enterprise and Related Information~~,FASB guidance related to segment reporting, the Company identified two reportable segments: Engine Products and Industrial Products. Segment selection was based on the internal organizational structure, management of operations, and performance evaluation by management and the Company’s Board of Directors.

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

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

Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, ~~and~~ interest income, and interest expense. Assets included in Corporate and Unallocated principally are cash and cash equivalents,

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inventory reserves, certain prepaids, certain investments, other assets, and assets allocated to general corporate purposes.

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

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

~~Table of Contents~~

differences between segment reporting and the consolidated, external reporting as well as internal allocation methodologies.

The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations, and sharing of assets. Therefore, we do not represent that these segments, if operated independently, would report the operating profit and other financial information shown below. In the following table, reclassifications have been made in prior periods as a result of an internal reorganization of Industrial Hydraulics from Industrial Products to Engine Products, which became effective August 1, 2010.

Segment detail is summarized as follows:


	Engine Products		Industrial Products			Corporate & Unallocated			Total Company		Engine Products		Industrial Products		Corporate & Unallocated			Total Company
											(thousands of dollars)
2011
Net sales											$	1,440,495	$	853,534	$	—		$	2,294,029
Depreciation and amortization												36,338		19,396		4,757			60,491
Equity earnings in unconsolidated affiliates												3,302		803		—			4,105
Earnings before income taxes												211,255		123,871		(22,863	)		312,263
Assets												888,080		519,730		318,283			1,726,093
Equity investments in unconsolidated affiliates												16,619		2,558		—			19,177
Capital expenditures, net of acquired businesses												36,423		19,442		4,768			60,633

2010
Net sales											$	1,126,007	$	751,057	$	—		$	1,877,064
Depreciation and amortization												33,433		20,935		4,864			59,232
Equity earnings in unconsolidated affiliates												1,859		160		—			2,019
Earnings before income taxes												155,833		91,084		(16,741	)		230,176
Assets												702,300		477,154		320,052			1,499,506
Equity investments in unconsolidated affiliates												14,860		625		—			15,485
Capital expenditures, net of acquired businesses												24,355		15,250		3,544			43,149
	(thousands of dollars)
2009
Net sales	$	1,001,961	$	866,668		$	—		$	1,868,629	$	1,027,685	$	840,944	$	—		$	1,868,629
Depreciation and amortization		31,517		21,156			5,924			58,597		32,287		20,386		5,924			58,597
Equity earnings in unconsolidated affiliates		2,172		94			—			2,266		2,172		94		—			2,266
Earnings before income taxes		83,797		89,526			(11,898	)		161,425		85,896		87,427		(11,898	)		161,425
Assets		610,341		495,228			228,427			1,333,996		631,278		474,291		228,427			1,333,996
Equity investments in unconsolidated affiliates		15,474		517			—			15,991		15,474		517		—			15,991
Capital expenditures, net of acquired businesses		24,785		16,637			4,658			46,080		25,390		16,032		4,658			46,080
2008
Net sales	$	1,229,171	$	1,003,350		$	—		$	2,232,521
Depreciation and amortization		27,386		19,314			10,032			56,732
Equity earnings in unconsolidated affiliates		1,876		34			—			1,910
Earnings before income taxes		158,931		102,420			(25,188	)		236,163
Assets		628,444		590,273			329,905			1,548,622
Equity investments in unconsolidated affiliates		15,190		506			—			15,696
Capital expenditures, net of acquired businesses		34,830		24,564			12,758			72,152
2007								��
Net sales	$	1,084,262	$	834,566		$	—		$	1,918,828
Depreciation and amortization		23,735		16,512			9,319			49,566
Equity earnings in unconsolidated affiliates		6,128		(225	)		—			5,903
Earnings before income taxes		140,762		80,321			(16,222	)		204,861
Assets		540,510		510,817			267,690			1,319,017
Equity investments in unconsolidated affiliates		14,968		2,445			—			17,413
Capital expenditures, net of acquired businesses		37,083		25,798			14,559			77,440

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


	2009		2008		2007		2011		2010		2009
	(thousands of dollars)						(thousands of dollars)
Engine Products segment:
Off-Road Products*	$	362,785	$	448,681	$	352,065
Off-Road Products							$	327,557	$	222,329	$	243,691
Aerospace and Defense Products								104,883		111,977		119,094
On-Road Products		71,958		123,146		166,370		127,107		81,874		71,958
Aftermarket Products**		567,218		657,344		565,827
Aftermarket Products*								861,393		691,899		561,846
Retrofit Emissions Products								19,555		17,928		31,096
Total Engine Products segment		1,001,961		1,229,171		1,084,262		1,440,495		1,126,007		1,027,685

Industrial Products segment:
Industrial Filtration Solutions Products		503,611		600,526		515,022		507,646		423,050		477,908
Gas Turbine Products		206,760		213,138		158,025		154,726		150,131		206,760
Special Applications Products		156,297		189,686		161,519		191,162		177,876		156,276
Total Industrial Products segment		866,668		1,003,350		834,566		853,534		751,057		840,944

Total Company	$	1,868,629	$	2,232,521	$	1,918,828	$	2,294,029	$	1,877,064	$	1,868,629




*	~~Includes Aerospace and Defense products.~~

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

Geographic sales by origination and property, plant and equipment:


	Net Sales		Property, Plant & Equipment — Net		Net Sales		Property, Plant & Equipment - Net
					(thousands of dollars)
2011
United States					$	941,218	$	141,584
Europe						653,275		131,739
Asia - Pacific						540,874		81,035
Other						158,662		37,144
Total					$	2,294,029	$	391,502

2010
United States					$	745,400	$	139,717
Europe						545,803		122,646
Asia - Pacific						460,470		72,950
Other						125,391		30,579
Total					$	1,877,064	$	365,892
	(thousands of dollars)
2009
United States	$	778,979	$	141,052	$	778,979	$	141,052
Europe		567,117		138,350		567,117		138,350
Asia-Pacific		419,423		71,686
Asia - Pacific						419,423		71,686
Other		103,110		29,980		103,110		29,980
Total	$	1,868,629	$	381,068	$	1,868,629	$	381,068
2008
United States	$	888,658	$	144,429
Europe		766,797		166,195
Asia-Pacific		471,275		65,829
Other		105,791		38,706
Total	$	2,232,521	$	415,159
2007
United States	$	827,648	$	142,511
Europe		615,049		129,564
Asia-Pacific		397,080		61,057
Other		79,051		31,301
Total	$	1,918,828	$	364,433

ConcentrationsThere were no Customers over 10 percent of net sales during Fiscal ~~2009. Sales to one Customer accounted for 10 percent of net sales in Fiscal 2008~~2011, 2010, and ~~2007.~~2009. There were no Customers over 10 percent of gross accounts receivable in Fiscal ~~2009~~2011 and ~~2008.~~

~~Table of Contents~~

~~NOTE K~~
~~Commitments and Contingencies~~2010.

NOTE L Guarantees ~~to Related Party~~

The Company and ~~its partner,~~ Caterpillar Inc. equally own the shares of Advanced Filtration Systems Inc. (AFSI), in an unconsolidated joint venture, ~~Advanced Filtration Systems Inc.,~~and guarantee certain debt of the joint venture. As of July 31, ~~2009,~~2011, the joint venture had ~~$27.7~~$24.6 million of outstanding ~~debt.~~debt, of which the Company guarantees half. In addition, during Fiscal 2011, 2010, and

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2009, ~~2008 and 2007,~~ the Company recorded its equity in earnings of this equity method investment of ~~$1.0~~$1.6 million, ~~$0.6~~$0.4 million, and ~~$5.0~~$1.0 million and royalty income of ~~$5.1~~$6.2 million, $5.4 million, and ~~$0.4~~$5.1 million, ~~respectively.~~respectively, related to AFSI.

At July 31, 2011 and 2010, the Company had a contingent liability for standby letters of credit totaling $11.4 million and $20.0 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, 2011 and 2010, 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 August 1, 2007	$	8,545
Balance at July 31, 2009				$	9,215
Accruals for warranties issued during the reporting period		3,634			12,389
Accruals related to pre-existing warranties (including changes in estimates)		3,982			(1,244	)
Less settlements made during the period		(4,638	)		(4,653	)
Balance at July 31, 2008	$	11,523
Balance at July 31, 2010				$	15,707
Accruals for warranties issued during the reporting period		2,942			8,406
Accruals related to pre-existing warranties (including changes in estimates)		(2,141	)		7,735
Less settlements made during the period		(3,109	)		(12,128	)
Balance at July 31, 2009	$	9,215
Balance at July 31, 2011				$	19,720

~~At July 31, 2009~~During Fiscal 2011, the increase in warranty accruals was primarily due to three specific warranty matters: one in the Company’s Retrofit Emissions Product group for $3.6 million, one in the Company’s Off-Road Products group for $1.8 million, and ~~2008,~~one in the On-Road Product group for $4.1 million. These warranty accruals were partially offset by supplier and insurance recoveries of $4.2 million. During Fiscal 2010, the Company ~~had~~increased warranty accruals due to a ~~contingent liability~~specific warranty matter in our Retrofit Emissions Products group and recorded an expense of $6.2 million for ~~standby letters of credit totaling $20.0 million~~this matter.

NOTE N Commitments and $18.5 million, respectively, which have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At July 31, 2009 and 2008, there were no amounts drawn upon these letters of credit.Contingencies

~~In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the~~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 operation ~~and~~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 operation ~~and~~or liquidity.

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NOTE L
O Restructuring

The following is a reconciliation of restructuring reserves (in thousands of dollars):


Balance at July 31, 2008	$	—		$	—
Accruals for restructuring during the reporting period		17,755			17,755
Less settlements made during the period		(13,915	)		(13,915	)
Balance at July 31, 2009	$	3,840		$	3,840
Accruals for restructuring during the reporting period					8,023
Less settlements made during the period					(7,724	)
Balance at July 31, 2010				$	4,139
Accruals for restructuring during the reporting period					759
Less settlements made during the period					(4,898	)
Balance at July 31, 2011				$	—

~~The~~Certain restructuring actions commenced in Fiscal 2009 in response to the dramatic downturn in the worldwide economy ~~made signification cost reduction~~and these actions ~~necessary during~~and related costs carried over into Fiscal ~~2009. As a result, costs incurred~~2010 and ~~shown in~~Fiscal 2011. In Fiscal 2011, the table above are primarily associated with workforce reductions of 2,800 since the beginning of the fiscal year. Gross margin and operating expenses include $10.1 million and $7.7 million of restructuring expenses, respectively. The Engine Products segment incurred minimal restructuring expenses and Industrial Products segment ~~and Corporate and Unallocated~~ incurred ~~$7.2~~$0.7 million ~~$10.1~~in restructuring expenses. The restructuring expenses in Fiscal 2011 include employee severance costs for approximately five employees related to the completion of the Company’s planned restructuring activities. The Company did not previously anticipate these additional charges in Fiscal 2011.

The fiscal 2010 costs were employee severance costs related to the reduction in workforce of approximately 550 employees. In addition to these restructuring costs, the Company recorded $2.1 million ~~and~~in asset impairment costs related to the downsizing of a plant in Germany. Fiscal 2009 included $17.3 million in employee severance costs related to the reduction in workforce of approximately 2,800 employees. In addition, $0.5 million ~~respectively.~~was incurred primarily for distribution center consolidation and production line transfers.

~~The Company expects to settle its remaining liability during Fiscal 2010.~~Restructuring and asset impairment expense detail is summarized as follows (in thousands):


	Fiscal Year
	2011		2010		2009
Gross Margin	$	20	$	7,488	$	10,109
Operating expenses		739		2,677		7,646
Total restructuring and asset impairment expenses	$	759	$	10,165	$	17,755

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NOTE M
~~Subsequent Events~~

The Company has evaluated and reviewed for subsequent events that would impact the financial statements for the 12 months ended July 31, 2009, through the issuance date of the financials, September 25, 2009.

~~NOTE N~~
P Quarterly Financial Information (Unaudited)


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(thousands of dollars, except per share amounts)								(In thousands)
2009
2011
Net sales	$	573,260	$	460,601	$	413,447	$	421,321	$	536,909	$	537,105	$	594,565	$	625,450
Gross margin		186,703		134,012		130,782		138,209		188,090		189,543		209,158		227,005
Net earnings		47,962		33,793		26,598		23,554		53,134		44,579		61,811		65,767
Basic earnings per share		.62		.43		.34		.30		0.69		0.57		0.80		0.86
Diluted earnings per share		.60		.43		.34		.30		0.68		0.56		0.79		0.84
Dividends declared per share		—		.230		—		.230		—		0.260		—		0.300
Dividends paid per share		.110		.115		.115		.115		0.125		0.130		0.130		0.150

2008
2010
Net sales	$	525,576	$	511,763	$	587,760	$	607,422	$	428,080	$	436,122	$	497,619	$	515,243
Gross margin		172,864		163,185		188,266		201,547		148,400		145,947		177,371		187,030
Net earnings		43,323		34,070		45,987		48,573		34,569		30,966		49,458		51,170
Basic earnings per share		.54		.43		.58		.62		0.44		0.40		0.64		0.66
Diluted earnings per share		.53		.42		.57		.60		0.44		0.39		0.62		0.65
Dividends declared per share		—		.210		—		.220		—		0.115		0.120		0.245
Dividends paid per share		.100		.100		.110		.110		0.115		0.115		0.120		0.120

The quarter ended October 31, 2010 included restructuring charges after-tax of $0.6 million or $0.01 per share. The quarters ended October 31, 2009, January 31, ~~2009,~~2010, April 30, ~~2009,~~2010, and July 31, ~~2009,~~2010, include restructuring charges after-tax of ~~$2.9~~$0.9 million or ~~$0.04~~$0.01 per share, ~~$4.7 million or $0.06 per share and $4.5~~$3.6 million or $0.05 per share, $2.7 million or $0.03 per share, and less than $0.1 million, respectively.

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.

~~Table of Contents~~

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, ~~2009,~~2011, has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.~~25.

Report of Independent Registered Public Accounting Firm

See Report of Independent Registered Public Accounting Firm under Item 8 on page ~~28.~~26.

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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 ~~2009~~2011 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 76 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 ~~“Compensation Committee Report,”~~ “Executive Compensation” and ~~‘Director~~“Director Compensation” of the ~~Company’s proxy statement for the 2009 annual shareholders meeting~~2011 Proxy Statement is incorporated herein by reference.

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

The information under the caption “Security Ownership” of the ~~Company’s proxy statement for the 2009 annual shareholders meeting~~2011 Proxy Statement is incorporated herein by reference.

Table of Contents

The following table sets forth information as of July 31, ~~2009,~~2011 regarding the Company’s equity compensation plans:


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category							Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted - average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)		(a)		(b)		(c)
Equity compensation plans approved by security holders
Equity compensation plans approved by security holders:
1980 Master Stock Compensation Plan:
Stock Options		—		—		—		—		—		—
Deferred Stock Gain Plan		54,667	$	13.2261		—		42,057	$	13.9878		—

1991 Master Stock Compensation Plan:
Stock Options		1,350,821	$	18.2605		—		114,744	$	19.3523		—
Deferred Stock Option Gain Plan		326,612	$	30.6203		—		342,685	$	34.4576		—
Deferred LTC/Restricted Stock		156,304	$	21.6543		—		134,158	$	22.7091		—

2001 Master Stock Incentive Plan:
Stock Options		3,112,012	$	30.3412		See Note 1		3,164,380	$	32.6285		—
Deferred Stock Option Gain Plan								21,600	$	59.9872		—
Deferred LTC/Restricted Stock		158,437	$	30.7006		See Note 1		152,118	$	30.3986		—
Long Term Compensation		12,334	$	43.9300		See Note 1
Subtotal for plans approved by security holders:		5,171,187	$	26.8030
Equity compensation plans not approved by security holders
Nonqualified Stock Option Program for Non-Employee Directors		535,292	$	29.0432		See Note 2
Long-Term Compensation								71,059	$	40.8296		—

2010 Master Stock Incentive Plan:
Stock Options								407,500	$	58.1400		See Note 1
Deferred LTC/Restricted Stock								—	$	—		—
Long-Term Compensation								—	$	—		—
Subtotal for plans approved by security holders								4,450,301	$	34.4754

Equity compensation plans not approved by security holders:
Non-qualified Stock Option Program for Non - Employee Directors								507,373	$	38.4163		See Note 2
ESOP Restoration		30,878	$	12.2894		See Note 3		25,016	$	13.0282		See Note 3
Subtotal for plans not approved by security holders:		556,170	$	28.1294
Total:		5,737,357	$	26.9339
Subtotal for plans not approved by security holders								532,389	$	37.2234
Total								4,982,690	$	34.769

Note 1: ~~Shares~~The 2010 Master Stock Incentive Plan limits the number of shares authorized for issuance to 4,600,000 during the 10-year term ~~are limited in each plan year to 1.5%~~ of the ~~Company’s “outstanding shares” (as defined in~~plan. There are currently 4,112,369 shares of the ~~2001 Master Stock Incentive Plan).~~authorization remaining.

Note 2: The stock option program for non-employee directors (filed as exhibit ~~10-N~~10-H to Form 10-Q report filed for the ~~Company’s 1998 Form 10-K report)~~first quarter ended October 31, 2008) provides for each non-employee director to receive annual option grants of 7,200 shares. The ~~2001~~2010 Master Stock Incentive Plan, which was approved by the Company’s stockholders on November ~~16, 2001, also~~19, 2010 provides for the issuance of stock options to non-employee ~~directors.~~directors, and the stock option program for non-employee directors has been adopted as a sub-plan under the 2010 Master Stock Incentive Plan and shares issued to directors after December 10, 2010 will be issued under the 2010 Master Stock Incentive Plan.

Note 3: The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990 (filed as exhibit ~~10-E~~10-D to the Company’s 2009 Form ~~10-Q for the quarter ended January 31, 1998)~~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.

~~Table of Contents~~


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

The information under the ~~caption~~captions “Policy and Procedures Regarding Transactions with Related Persons” and “Board Oversight and Director Independence” of the ~~Company’s proxy statement for the 2009 annual shareholders meeting~~2011 Proxy Statement is incorporated ~~here~~herein by reference.

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Item 14. Principal Accounting Fees and Services	~~Principal Accounting Fees and Services~~

The information under the captions “Independent Auditor Fees” and “Audit ~~Committee Report”~~committee Pre-Approval Policies and Procedures” of the ~~Company’s proxy statement for the 2009 annual shareholders meeting~~2011 Proxy Statement is incorporated herein by reference.

PART IV


Item 15. Exhibits, Financial Statement Schedules	~~Exhibits, Financial Statement Schedules~~

Documents filed with this report:


	(1)	Financial Statements

		Consolidated Statements of Earnings — years ended July 31, ~~2009, 2008~~2011, 2010 and ~~2007~~2009

		Consolidated Balance Sheets — July 31, ~~2009~~2011 and ~~2008~~2010

		Consolidated Statements of Cash Flows — years ended July 31, ~~2009, 2008~~2011, 2010 and ~~2007~~2009

		Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, ~~2009, 2008~~2011, 2010 and ~~2007~~2009

		Notes to Consolidated Financial Statements

		Report of Independent Registered Public Accounting Firm

	(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.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



DONALDSON COMPANY, INC.

Date:	September ~~25, 2009~~	23, 2011	By: /s/ William M. Cook

		~~William M. Cook~~
	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 ~~25, 2009.~~23, 2011.


/s/ William M. Cook		President, Chief Executive Officer and Chairman ~~(principal executive officer)~~

William M. Cook		(principal executive officer)

/s/ Thomas R. VerHage		Vice President and Chief Financial Officer ~~(principal financial officer)~~

Thomas R. VerHage		(principal financial officer)

/s/ James F. Shaw		Controller ~~(principal accounting officer)~~

James F. Shaw		(principal accounting officer)

*		Director
F. Guillaume Bastiaens

*		Director
Janet M. Dolan

*		Director
Jack W. Eugster

*		Director
John F. Grundhofer

*		Director
Michael J. Hoffman

*		Director
Paul David Miller

*		Director
Jeffrey Noddle

*		Director
Willard D. Oberton

*		Director
Ajita G. Rajendra

*		Director
John P. Wiehoff

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

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SCHEDULE II —- VALUATION AND QUALIFYING ACCOUNTS

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

Additions

Description

Balance at
Beginning
of Period

Charged to
Costs and
Expenses

Charged to
Other Accounts
(A)

Deductions
(B)

Balance at
End of
Period

Year ended July 31, 2009:

Allowance for doubtful accounts deducted from accounts receivable

$
7,509

$
1,240

$
(534
)
$
(828
)
$
7,387

Year ended July 31, 2008:

Allowance for doubtful accounts deducted from accounts receivable

$
6,768

$
1,126

$
537

$
(922
)
$
7,509

Year ended July 31, 2007:

Allowance for doubtful accounts deducted from accounts receivable

$
8,398

$
914

$
358

$
(2,902
)
$
6,768


			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts (A)			Deductions (B)			Balance at End of Period
Year ended July 31, 2011:
Allowance for doubtful accounts deducted from accounts receivable	$	6,315	$	482	$	481		$	(370	)	$	6,908

Year ended July 31, 2010:
Allowance for doubtful accounts deducted from accounts receivable	$	7,387	$	1,063	$	(293	)	$	(1,842	)	$	6,315

Year ended July 31, 2009:
Allowance for doubtful accounts deducted from accounts receivable	$	7,509	$	1,240	$	(534	)	$	(828	)	$	7,387

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.

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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 2010 Form ~~10-Q Report for the First Quarter ended October 31, 2004)~~10-K Report)

* 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 Form 10-Q Report filed for the first quarter ended October 31, 2006)~~

* 3-C	—	Amended and Restated Bylaws of Registrant (as of January 30, 2009) (Filed as Exhibit 3-C to Form ~~10-Q~~10- Q Report for the ~~second quarter~~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 4.1 to Form 8-K Report filed February 1, 2006)~~

*10-A	—	Officer Annual Cash Incentive Plan (Filed as Exhibit 10-A to 2006 Form 10-K Report)Plan**

*10-B	—	1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-A to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

*10-C	—	Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-B to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

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

*10-E	—	Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit 10-C to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

*10-F	—	Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-D to Form 10-Q Report filed for the first quarter ended October 31, 2008)***

10-G	—	~~Excess Pension Plan (2003 Restatement)~~

~~10-H~~	—	~~Supplementary~~Supplemental Executive Retirement Plan ~~(2003~~(2008 Restatement) ***

*~~10-I~~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-J~~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-K~~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-L~~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-M~~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-N~~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-A~~10-N to 2010 Form ~~10-Q Report for the Second Quarter ended January 31, 2005)~~10-K Report)

~~10-O~~*10-N	—	2001 Master Stock Incentive Plan (Filed as Exhibit 10-O to 2009 Form 10-K Report)***

~~Table of Contents~~


*~~10-P~~10-O	—	Form of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit ~~10-A~~10-P to 2010 Form ~~10-Q Report for the First Quarter ended October 31, 2004)~~10-K Report)***

*~~10-Q~~10-P	—	Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit ~~10-B~~10-Q to Form 10-Q Report for the First Quarter ended October 31, 2004)***

*10-R	—	Agreement dated August 29, 2005, by and between Donaldson Company, Inc. and William G. Van Dyke (Filed as Exhibit 99.1 to Form 8-K Report filed August 29, 2005)***

*10-S	—	Restated Compensation Plan for Non-Employee Directors dated July 28, 2006 (Filed as Exhibit 99.1 to Form 8-K Report filed August 4, 2006)***

*10-T	—	Restated Long-Term Compensation Plan dated May 23, 2006 (Filed as Exhibit 99.2 to Form 8-K Report filed August 4, 2006)***

*10-U	—	~~Qualified Performance-Based Compensation Plan (Filed as Exhibit 10-DD to 2006~~2010 Form 10-K Report)***

10-Q	—	Restated Compensation Plan for Non-Employee Directors dated July 28, 2006 ***~~10-V~~

10-R	—	Restated Long-Term Compensation Plan dated May 23, 2006 ***

10-S	—	Qualified Performance-Based Compensation Plan ***

10-T	—	Deferred Compensation and 401(k) Excess Plan ~~(2005~~(2008 Restatement) ~~(Filed as Exhibit 10-EE to 2006 Form 10-K Report)~~***

10-U	—	Deferred Stock Option Gain Plan (2008 Restatement)***

10-V	—	Excess Pension Plan (2008 Restatement)***

*10-W	—	Deferred Stock Option Gain Plan (2005 Restatement) (Filed as Exhibit 10-FF to 2006 Form 10-K Report)***

*10-X	—	Excess Pension Plan (2005 Restatement) (Filed as Exhibit 10-GG to 2006 Form 10-K Report)***

*10-Y	—	Supplemental Executive Retirement Plan (2005 Restatement) (Filed as Exhibit 10-HH to 2006 Form 10-K Report)***

*10-Z	—	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) ***

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

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 ~~33)~~31)

21	—	Subsidiaries

23	—	Consent of PricewaterhouseCoopers LLP

24	—	Powers of Attorney

31-A	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31-B	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	—	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	—	The following financial information from the Donaldson Company, Inc. Annual Report on Form 10-K for the fiscal year ended July 31, 2011 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.~~

62Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request.


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
May 1-May 31, 2009		—		—		—		930,210
June 1-June 30, 2009		18,972	$	36.12		—		930,210
July 1-July 31, 2009		—		—		—		930,210
Total		18,972	$	36.12		—		930,210


	July 31, 2009		July 31, 2008
Asset derivatives recorded under the caption Prepaids and other current assets
Foreign exchange contracts	$	493	$	952

Liability derivatives recorded under the caption Other current liabilities
Foreign exchange contracts	$	2,366	$	1,252


	Significant Other Observable Inputs (Level 2)*
	At July 31,
	2011			2010
Forward exchange contracts – net liability position	$	(525	)	$	(1,320	)
Interest rate swaps – net asset position		—			4,590


	Plan Assets at
Asset Category	2009			2008
All U.S. plans:
Equity securities		41	%		44	%
Alternative investments		42	%		36	%
Real assets		12	%		12	%
Fixed income		5	%		8	%
Total U.S. plans		100	%		100	%
Non U.S. plans:
Equity securities		44	%		64	%
Debt securities		56	%		36	%
Total Non U.S. plans		100	%		100	%


Fiscal year 2010	$	18,528
Fiscal year 2011	$	18,624
Fiscal year 2012	$	22,469
Fiscal year 2013	$	20,829
Fiscal year 2014	$	23,313
Fiscal years 2015-2019	$	125,346

Title of each class

Name of each exchange
on which registered

Common Stock, $5 Par Value

New York Stock Exchange

Preferred Stock Purchase Rights

~~New York Stock Exchange~~
New York Stock Exchange