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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 2013 or

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

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 31, 2016 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________
Commission File Number: 1-7891

DONALDSON COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware41-0222640
Delaware41-0222640
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
  
1400 West 94th Street, Minneapolis, Minnesota55431
(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:

Title of each className of each exchange
on which registered
Common Stock, $5 Par ValueNew York Stock Exchange
Preferred Stock Purchase RightsNew York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes     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     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     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 shortshorter period that the registrant was required to submit and post such files).      Yes     No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

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

Large accelerated filer   Accelerated filer   
Non-accelerated filer    (Do(Do not check if a smaller reporting company) Smaller reporting company   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No

As of January 31, 2013,2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $5,466,451,890$3,714,825,006 (based on the closing price of $37.61$28.18 as reported on the New York Stock Exchange as of that date).

As of August 31, 2013,September 21, 2016, there were approximately 146,109,145132,675,711 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for its 20132016 annual meeting of stockholders (the “2013“2016 Proxy Statement”) are incorporated by reference in Part III, as specifically set forth in Part III.



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DONALDSON COMPANY, INC.

ANNUAL REPORT ON FORM 10-K

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 Schedule II – Valuation and Qualifying Accounts61
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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 aircore strengths are leading filtration technology, strong customer relationships and liquid filtration systems and exhaust and emission control products.its global presence. Products are manufactured at 3942 plants around the world and through 3three joint ventures.
The Company has two reporting segments: Engine Products and Industrial Products. Products in the Engine Products segment consist of air filtration systems, exhaust and emissions systems, liquid filtration systems including hydraulics, fuel, and lube systems as well as replacement filters. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture, aerospace, defense and truck markets, and to independent distributors, OEM dealer networks, independent distributors, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFEpolytetrafluoroethylene (PTFE) membrane-based products and specialized air and gas filtration systems for applications including computer hard disk drives and semi-conductor manufacturing. The Industrial Products segment sells to various industrial dealers, distributors, and end-users, OEMs of gas-fired turbines and OEMs and end-users requiring clean air.

filtration solutions and replacement filters.

The discussion below should be read in conjunction with the risk factors discussed in Part I, Item  1A, “Risk Factors” in this Annual Report on Form 10-K (Annual Report).
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, 
  2013  2012  2011 
Engine Products segment            
Off-Road Products  15%   15%   14% 
On-Road Products  5%   7%   5% 
Aftermarket Products*  37%   36%   38% 
Retrofit Emissions Products  1%   1%   1% 
Aerospace and Defense Products  4%   4%   5% 
*includes replacement part sales to the Company’s OEM Customers            
Industrial Products segment            
Industrial Filtration Solutions Products  22%   22%   22% 
Gas Turbine Products  9%   7%   7% 
Special Applications Products  7%   8%   8% 

years ended July 31, 2016, 2015 and 2014:

  Year Ended July 31,
  2016 2015 2014
Engine Products segment      
Off-Road Products 10% 11% 14%
On-Road Products 6% 6% 5%
Aftermarket Products* 43% 41% 41%
Aerospace and Defense Products 4% 5% 4%
       
Industrial Products segment      
Industrial Filtration Solutions Products 23% 22% 23%
Gas Turbine Products 7% 8% 6%
Special Applications Products 7% 7% 7%
       
* Includes replacement part sales to the Company’s OEM customers      
Total net sales contributed by the principal classes of similar products and financial information about segment operations and geographic regions appear in Note L18 in the Notes to Consolidated Financial Statements on page 53.

included in Item 8 of this Annual Report.

The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, proxy statements and other information (including amendments to those reports,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 codeCode of business conductBusiness Conduct and ethics, corporate governance guidelines,Ethics, Corporate Governance Guidelines, Audit Committee charter, Human Resources Committee charter and Corporate Governance Committee charter. These documents are also available in print, free of charge, to any shareholderperson who requests them.them in writing to the attention of Investor Relations, MS 102, Donaldson Company, Inc., 1400 West 94th Street, Bloomington, Minnesota 55431. The information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Form 10-K.

report.


Seasonality

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

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Competition

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

Raw Materials

The principal raw materials that the Company uses are steel, filter media, and petroleum-based products.products including plastics, rubber, and adhesives. Purchased raw materials represent approximately 6060% to 65 percent65% of the Company’s cost of goods sold. Of that amount, steel, including fabricated parts, represents approximately 25 percent.20%. Filter media represents approximately 15 to 20 percent20% and the remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2016 varied by grade, but in aggregate, decreased during the fiscal year. The steel costs decrease was largely related to the decline in market prices but was also affected by continuous improvement efforts. The Company’s cost of filter media also varies by type and decreased slightly year over year. The cost of petroleum-based products was also down in relation to lower costs for petrochemicals and continuous improvement efforts. The Company typically has multiple sourcesanticipates a moderately favorable impact from commodity prices in fiscal 2017, as compared to fiscal 2016, specifically for petroleum-based products. On an ongoing basis, the Company enters into selective supply arrangements with certain of supply forits suppliers that allow the raw materials essentialCompany to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its business, but does rely primarily on two media suppliers. The Company is not required to carry significant amounts of rawcustomers and the Company’s cost reduction initiatives, which include material inventory to secure supplier allotments. However, the Company does stock finished goods inventory at its regional distribution centers in order to meet anticipated Customer demand. The Company has not experienced significant supply problems in the purchase of its major raw materials.

substitution, process improvement, and product redesigns.

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, itthe Company does not regard the validity of any one patent or trademark as being of material importance.

Major Customers

There were

The Company had no Customerscustomers that accounted for over 10 percent10% of net sales in Fiscal 2013, 2012, or 2011. There werethe years ended July 31, 2016, 2015 and 2014. The Company had no Customerscustomers that accounted for over 10 percent10% of gross accounts receivable in Fiscal 2013 and one Customer over 10 percent of gross accounts receivable in Fiscal 2012.

at July 31, 2016 or July 31, 2015.

Backlog

At August 31, 2013,2016, the backlog of orders expected to be delivered within 90 days was $351.7$323.0 million. This entire backlog is expected to be shipped during Fiscal 2014. The 90-day backlog at August 31, 2012,2015, was $403.7$331.0 million. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses and the timing of orders in many of the Company’s Engine Products OEM and Industrial Products markets.

Research and Development

During Fiscal 2013,the years ended July 31, 2016, 2015 and 2014, the Company spent $62.6$55.5 million, $60.2 million and $61.8 million, respectively, on research and development activities. Research and development expenses include basic scientific research and the application of scientific advances to the development of new and improved products and their uses. The Company spent $59.6 million and $55.3 million in Fiscal 2012 and Fiscal 2011, respectively, on research and development activities. Substantially all commercial research and development is performed in-house.

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Environmental Matters

The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position during Fiscal 2014fiscal 2017 due to compliance with government regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.


Employees

The Company employed over 12,400 personsapproximately 11,700 people in its worldwide operations as of AugustJuly 31, 2013.

2016.

Geographic Areas

Both of the Company's segments serve customers in all geographic regions worldwide. The United States represents the largest current individual market for the Company's products. Germany is the single largest market outside the United States. Financial information aboutby geographic areas appears in Note L of18 in the Notes to Consolidated Financial Statements on page 53.

included in Item 8 in this Annual Report.

Item 1A. Risk Factors

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

Operating internationally carries risks which

Economic Environment - the demand for our products relies on economic and industrial conditions worldwide.
Changes in economic or industrial conditions could negatively affectimpact our results or financial performance.

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

·political and military events,
·legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws, and foreign exchange controls,
·tariffs and trade barriers,
·potential difficulties in staffing and managing local operations,
·credit risk of local Customers and distributors,
·difficulties in protecting intellectual property,
·local economic, political, and social conditions, specifically in the Middle East, China, Thailand, and other emerging markets where we do business,
·potential global health outbreaks, and
·natural disasters.
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can be sensitive to varying conditions in all major geographies and markets.

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

MaintainingProducts - maintaining a competitive advantage requires continuing investment with uncertain returns.

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

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

We In addition, we may be adversely impacted by changes in technology that could reduce or eliminate the demand for our products. These risks include:

·breakthroughs in technology which provide a viable alternative to diesel engines
·reduced demand for disk drive products by flash memory or a similar technology, which would reduce the use of disk drives and therefore eliminate the need for our filtration solutions in disk drives
·other breakthroughs in filtration technologies that could displace our products

Difficultiesinclude wider adoption of technologies providing alternatives to diesel engines.

Competition - we participate in highly competitive markets with pricing pressure.
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 price, technology, geographic coverage, product performance, and customer service. Our customers continue to seek productivity gains and lower prices from us and their other suppliers. If we are not able to compete effectively, our margins and results of operations could be adversely affected.
Intellectual Property - demand for our products may be affected by new entrants who copy our products and/or infringe on our intellectual property.
The ability to protect and enforce intellectual property rights varies across jurisdictions. An inability to preserve our intellectual property rights may adversely affect our financial performance.
Competitors and others may also initiate litigation to challenge the validity of our intellectual property or allege that we infringe their intellectual property. We may be required to pay substantial damages if it is determined our products infringe on their intellectual property. We may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license on terms that are not favorable to us.
Protecting or defending against such claims could significantly increase our costs, divert management’s time and attention away from other business matters, and otherwise adversely affect our results of operations and financial condition.
Global Operations - operating globally carries risks which could negatively affect our financial performance.
We have sales and manufacturing operations throughout the world, with the heaviest concentrations in the Americas, Europe, and Asia. Our stability, growth, and profitability are subject to a number of risks of doing business globally that could harm our business, including:
political and military events,

legal and regulatory requirements, including import, export, defense regulations, anti-corruption laws, and foreign exchange controls,
tariffs, trade barriers and other trade restrictions,
potential difficulties in staffing and managing local operations,
credit risk of local customers and distributors,
difficulties in protecting our intellectual property, and
local economic, political, and social conditions, including in the Middle East, Ukraine, China, Thailand, and other emerging markets where we do business.
Due to the international scope of our operations, we are subject to a complex system of import- and export-related laws and regulations. Any alleged or actual violations may subject us to government scrutiny, investigation, and civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States (U.S.).
The enforcement of bribery, corruption and trade laws and regulations is increasing in frequency and complexity on a global basis. The continued geographic expansion of our business increases our exposure to, and cost of complying with, these laws and regulations. If our compliance programs do not adequately prevent or deter our employees, agents, distributors, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions.
Customer Concentration - a number of our customers operate in similar cyclical industries. Economic conditions in these industries could have a negative impact on our financial performance.
No customer accounted for ten percent or more of our net sales in fiscal 2016, 2015 or 2014. However, a number of our customers are concentrated in similar cyclical industries (construction, agriculture, and mining), resulting in additional risk based on industrial conditions in those sectors. A decline in the economic conditions of these industries could result in reduced demand for our products and difficulty in collecting amounts due from our customers.
Supply Chain - unavailable or higher cost materials could impact our financial performance.
We obtain raw materials including steel, filter media, petroleum-based products, and other components from third-party suppliers and tend to carry limited raw material inventories. An unanticipated delay in delivery by our suppliers could result in the inability to deliver on-time and meet the expectations of our customers. An increase in commodity prices could also result in lower operating margins.
Technology Investments and Security Risks - difficulties with our information technology systems and security could adversely affect our results.

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

4

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

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

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

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

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

Changes in our product mix impacts our financial performance.

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

Unavailable or higher cost materials could impact our financial performance.

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

Unfavorable fluctuationsunfavorable fluctuation in foreign currency exchange rates could negativelyadversely impact our results and financial position.

result of operations.

We have operations in many countries.countries, with more than one-half of our annual revenue coming from countries outside of the U.S. Each of our subsidiaries reports its results of operations and financial position in its relevant functional currency, which is then translated into U.S. dollars. This translated financial information is included in our consolidated financial statements. The strengtheningStrengthening of the U.S. dollar in comparison to the foreign currencies of our subsidiaries could havehas a negative impact on our results and financial position.

Acquisitions In addition, decreased value of local currency may have an impact onmake it difficult for some of our results.

We have madecustomers, distributors and continueend users to pursue acquisitions. We cannot guarantee that these acquisitions will have a positive impact onpurchase our results. These acquisitions could negatively impact our profitability due to operatingproducts.


Legal 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.

CostsRegulatory - costs associated with lawsuits, investigations or investigationscomplying with laws and regulations may have an adverse effect on our results of operations.

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

5

AdditionalIncome Tax - changes in our effective tax expense or tax exposurerate could adversely impact our financial performance.

net income.

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

Compliance

Personnel - our success may be affected if we are not able to attract, develop and retain qualified personnel.
Our success depends in large part on our ability to identify, recruit, develop and retain qualified personnel worldwide. If we are unable to meet this challenge, it may be difficult for us to execute our strategic objectives and grow our business, which could adversely affect our results of operations and financial condition.
Liquidity - changes in the capital and credit markets may negatively affect our ability to access financing.
Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. During fiscal 2016, credit in the global credit markets was accessible and market interest rates remained low. We believe that our current financial resources, together with environmental and product laws and regulationscash generated by operations, are sufficient to continue financing our operations for the next twelve months. There can be costly.

Weno assurance, however, that the cost or availability of future borrowings will not be impacted by future capital market disruptions.

The majority of our cash and cash equivalents are held by our foreign subsidiaries as over half of our earnings occur outside the U.S. Most of these funds are considered permanently reinvested outside the U.S., as the cash generated from U.S. operations plus our short-term debt facilities are anticipated to be sufficient for our U.S operation’s cash needs. If additional cash is required for our operations in the U.S., it may be subject to many environmentaladditional U.S. taxes if funds are repatriated from certain foreign subsidiaries.
Acquisitions - the execution of our acquisition strategy may not provide the desired return on investment.
We have made and product lawscontinue to pursue acquisitions, including our acquisitions of Industrias Partmo S.A. (Partmo) in August 2016, Engineered Products Company in fiscal 2016 and regulationsNorthern Technical L.L.C. (Northern Technical) and IFIL USA L.L.C. (IFIL USA) in fiscal 2015. 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 including the potential loss of key customers, difficulties in assimilating the acquired operations, the loss of key employees and the diversion of management’s time and attention away from other business matters.
Impairment - if our operating units do not meet performance expectations, assets could be subject to impairment.
Our total assets reflect goodwill and identifiable intangibles from acquisitions. We test annually whether goodwill has been impaired, or more frequently if events or changes in circumstances indicate the goodwill may be impaired. If future operating performance at one or more of our operating units were to fall significantly below forecast levels or if market conditions for one or more of our acquired businesses were to decline, we could be required to incur a non-cash charge to operating income for impairment. Any impairment in the jurisdictionvalue of our goodwill or other intangibles would have an adverse non-cash impact on our results of operations and reduce our net worth.
Restructuring - if we operate. We routinely incur costs in order to comply with these lawsdo not successfully execute our restructuring plans and regulations. Werealize the expected benefits, our financial performance may be adversely impacted by newaffected.
From time to time we have initiated restructuring programs related to our business strategy to, among other things, reduce operating expenses and align manufacturing capacity to demand. We may not be able to realize the expected benefits and cost

savings if we do not successfully execute these plans. If difficulties are encountered or changing lawssuch cost savings are otherwise not realized, it could adversely impact our results of operations.
Internal Controls - if we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results and regulationsprevent material fraud, which could adversely affect the value of our common stock. Failure to maintain an effective system of internal control over financial reporting resulted in a material weakness during fiscal 2015.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and effectively prevent and detect material fraud. If we cannot provide reliable financial reports or prevent or detect material fraud, our operating results could be misstated. Failure to maintain an effective system of internal control over financial reporting resulted in a material weakness during fiscal 2015. Although we completed our remedial actions in response to this matter, there can be no assurances that affect bothwe will be able to prevent future control deficiencies from occurring and which could cause us to incur unforeseen costs, negatively impact our results of operations, andcause the market price of our abilitycommon stock to develop and sell products that meet our Customers’ requirements.

decline, or have other potential adverse consequences.

Item 1B. Unresolved Staff Comments

None.


Item 2. Properties

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

and Latin America regions.

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

Company as of July 31, 2016.
Americas
Europe /
AmericasEurope/Africa/Middle East / Africa
Auburn, Alabama (E)Kadan, Czech Republic (I)
Riverbank, California (I)*Klasterec, Czech Republic
Valencia, California (E)*Domjean, France (E)
Dixon, IllinoisParis, France (E)*
Frankfort, IndianaDulmen, Germany (E)
Cresco, IowaHaan, Germany (I)
Grinnell,Waterloo, Iowa (E)Ostiglia, Italy (E)
Nicholasville, KentuckyCape Town, South AfricaSkarbimierz, Poland
Bloomington, MinnesotaJohannesburg,Cape Town, South Africa*Africa
Chesterfield, Missouri (E)*Johannesburg, South Africa*
Chillicothe, Missouri (E)Abu Dhabi, United Arab Emirates
Harrisonville, Missouri (I)Hull, United Kingdom
Chillicothe, Missouri (E)Philadelphia, Pennsylvania (I)Leicester, United Kingdom (I)
Philadelphia, Pennsylvania (I)
Greeneville, TennesseeAustralia
Baldwin, WisconsinWyong, AustraliaAsia/Pacific
Stevens Point, Wisconsin Wyong, Australia
Sao Paulo, Brazil (E)*AsiaWuxi, China
Brockville, Canada (E)*Wuxi, China
Aguascalientes, MexicoNew Delhi, India
Monterrey,Aguascalientes, Mexico (I)Gunma, Japan
Monterrey, Mexico (I) Rayong, Thailand (I)

Distribution CentersThird-Party Logistics Providers
Wyong, AustraliaSantiago, Chile
Brugge, BelgiumWuxi, China
Sao Paulo, Brazil*Bogotá, Colombia
Rensselaer, IndianaCartagena, Colombia
Jakarta, IndonesiaMumbai, India
Aguascalientes, MexicoChennai, India
Lozorno, SlovakiaPlainfield, Indiana (I)
Johannesburg, South AfricaGunma, Japan
Seoul, South Korea*Auckland, New Zealand
Lima, Peru
Singapore
Greeneville, Tennessee (I)
Laredo, Texas
Joint Venture FacilitiesThird-Party Logistics Providers
Most, Czech RepublicJakarta, Indonesia
Champaign, Illinois (E)Santiago, Chile
Jakarta, IndonesiaWuxi, China
Dammam, Saudi Arabia (I)Mumbai, India
Chennai, India
Distribution CentersPlainfield, Indiana (I)
Wyong, AustraliaGunma, Japan
Brugge, BelgiumSingapore
Sao Paulo, Brazil*Greeneville, Tennessee (I)
Rensselaer, Indiana
Jakarta, Indonesia
Aguascalientes, Mexico

6

The Company’s properties are utilized for both the Engine and Industrial Products segments except as indicated with an (E) for Engine or (I) for Industrial. The Company leases certain of its facilities, primarily under long-term leases. The facilities denoted


with an asterisk (*) are leased facilities. In Wuxi, China, and Bloomington, Minnesota, a portion of the activities are conducted in leased facilities. The Company uses third-party logistics providers for some of its product distribution and neither leases nor owns the facilities. The Company considers its properties to be suitable for their present purposes, well-maintained, and in good operating condition.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

Executive Officers of the Registrant

Current information as of August 31, 2016, regarding executive officers is presented below. All terms ofofficers hold office until their successors are for one year.elected and qualify, or their earlier death, resignation or removal. 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 Fiscal Year
Appointed as an
Executive Officer
Tod E. Carpenter 54 Senior Vice President, Engine Products 2008
William M. Cook 60 Chairman, President and Chief Executive Officer 1994
Sandra N. Joppa 48 Vice President, Human Resources 2006
Norman C. Linnell 54 Vice President, General Counsel and Secretary 1996
Charles J. McMurray 59 Senior Vice President, Chief Administrative Officer 2003
Mary Lynne Perushek 55 Vice President and Chief Information Officer 2007
James F. Shaw 44 Vice President and Chief Financial Officer 2012
Wim Vermeersch 47 Vice President, Europe and Middle East 2012
Jay L. Ward 49 Senior Vice President, Industrial Products 2006
Eugene X. Wu 45 Vice President, Asia Pacific 2012

Name Age Positions and Offices Held 
First Fiscal Year
Appointed as an
Executive Officer
Amy C. Becker 51 Vice President, General Counsel and Secretary 2014
Tod E. Carpenter 57 President and Chief Executive Officer 2008
Sheila G. Kramer 57 Vice President, Human Resources 2015
Scott J. Robinson 49 Vice President and Chief Financial Officer 2015
Thomas R. Scalf 50 Senior Vice President, Engine Products 2014
Jeffrey E. Spethmann 51 Senior Vice President, Industrial Products 2016
Wim Vermeersch 50 Vice President, Europe, Middle East and Africa 2012
Ms. Becker joined the Company in 1998 as Senior Counsel and Assistant Corporate Secretary and was appointed to Vice President, General Counsel and Secretary in August 2014. Prior to joining the Company, Ms. Becker was an attorney for Dorsey and Whitney, LLP from 1991 to 1995 and was a Project Manager and Corporate Counsel for Harmon, Ltd. from 1995 to 1998.
Mr. Carpenter joined the Company in 1996 and has held various positions, including Gas Turbine Systems (GTS) General Manager from 2002 to 2004; General Manager, Industrial Filtration Systems (IFS) Sales from 2004 to 2006; General Manager, IFS Americas in 2006; Vice President, Global IFS from 2006 to 2008; and Vice President, Europe and Middle East from 2008 to 2011.2011; and Senior Vice President, Engine Products from 2011 to 2014. In October 2011,April 2014, Mr. Carpenter was appointed Senior Vice President, Engine Products.

Chief Operating Officer. On April 1, 2015, Mr. Cook joined the Company in 1980 and has held various positions, including CFO and Senior Vice President, International from 2001 to 2004 andCarpenter was appointed President and CEO from 2004 to 2005. Mr. Cook was appointed Chairman, President and CEO in July 2005.

Chief Executive Officer.

Ms. JoppaKramer was appointed Vice President, Human Resources in November 2005.October 2015. Prior to that time,joining the Company, Ms. Joppa held various positions at General Mills, a consumer food products company, from 1989 to 2005, including service as Director ofKramer was Vice President, Human Resources for several different operating divisionsTaylor Corporation, a print and graphics media company, from 19992013 until September 2015. From 1991 to 2005.

Mr. Linnell joined the Company in 1996 as General Counsel and Secretary and2013, Ms. Kramer was appointed Vice President, General Counsel and Secretary in 2000.

7

Mr. McMurray joined the Company in 1980 and haswith Lifetouch, Inc., a photography company, where she held various positions,human resources roles including Director, Global Information Technology from 2001 to 2003;Corporate Vice President, Human Resources from 20042009 to 2005; Vice President, Information Technology, Europe, South Africa, and Mexico from 2005 to 2006; and Senior Vice President Industrial Products from 2006 to 2011. In 2011, 2013.

Mr. McMurray was appointed Senior Vice President and Chief Administrative Officer.

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

Mr. ShawRobinson joined the Company in 2004 and has held various positions, including Director, Corporate Compliance/Internal Audit, and Corporate Controller and Principal Accounting Officer from 2004 to 2011. Mr. Shaw was appointed Vice President and Chief Financial Officer effective November 2011.in December 2015. Prior to joining Donaldson,the Company, Mr. ShawRobinson was the Chief Financial Officer for Imation Corp. a global scalable storage and data security company, a position he held since August 2014. During his 11 years with Imation, he also served as the Investor Relations Officer, Corporate Controller and Chief Accounting Officer. Prior to that, he held positions at Deluxe Corporation and PricewaterhouseCoopers LLP. 

Mr. Scalf joined the Company in 1989 and has held various positions, at Deloitteincluding Director of Global Operations from 2003 to 2006; General Manager of Exhaust & Touche, LLPEmissions from 2006 to 2008; General Manager of Industrial Filtration Solutions from 2008 to 2012; and Arthur Andersen, LLP.

Vice President of Global Industrial Air Filtration from 2012 to 2014. Mr. Scalf was appointed Senior Vice President, Engine Products, in April 2014.

Mr. Spethmann joined the Company in 2013 and has held various positions, including Vice President of the Exhaust & Emissions business unit from 2013 to 2014 and Vice President, Global Industrial Air Filtration from 2014 to 2016. Mr. Spethmann

was appointed Senior Vice President of Industrial Products in April 2016. Prior to joining the Company, from 1999 to 2012, Mr. Spethmann held positions of General Manager and President of Blow Molded Specialties, Inc., a manufacturing company focused on the extrusion of blow molded parts and assemblies.
Mr. Vermeersch joined the Company in 1992 and has held various positions, including Director, Gas Turbine Systems,GTS, Asia Pacific from 2000 to 2005; Manager, Aftermarket and Service IFS,Industrial Filtration Solutions, Belgium from 2005 to 2006; Manager, IFS,Industrial Filtration Solutions, Belgium from 2006 to 2007; Director, Gas Turbine Systems,GTS, Europe, Middle East and North Africa, from 2007 to 2010; and Director, Engine, Europe, Middle East and North Africa from 2010 to 2011. Mr. Vermeersch was appointed Vice President, Europe and Middle East in January 2012.

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

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

8
Table of Contents

PART II

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

The Company's common shares of the Company arestock, par value $5.00 per share, is traded on the New York Stock Exchange under the symbol DCI. The amount and frequency of all cash dividends declared on the Company’s common stock for Fiscal 2013 and 2012 appear in Note Q of the Notes to Consolidated Financial Statements on page 56."DCI." The Company’s dividend payout ratio target is approximately 30 percent35% to 40 percent45% of the average earnings per share of the last three years. This is a change from the previous target of 25 percent to 30 percent of the average earnings per share offor the last three years. This guidance is expected to be used for future dividend payouts. As of September 25, 2013,21, 2016, there were 1,8621,615 shareholders of record of common stock.

The lowhigh and highlow sales prices for the Company’s common stock for each full quarterly period during Fiscal 2013the years ended July 31, 2016 and 20122015 were as follows:

First Quarter
Year Ended July 31, SecondFirst Quarter ThirdSecond Quarter Third QuarterFourth Quarter
Fiscal 2013$30.90 - 38.182016 $31.8334.38 - 38.3026.36 $34.2631.88 - 38.0825.21 $34.3533.57 - 39.36
Fiscal 2012$23.19 - 33.3327.33 $30.4837.08 - 36.5231.52
2015 $34.0242.63 - 38.8936.47 $30.5143.31 - 36.8236.04$38.46 - 36.16$37.79 - 31.62

The quarterly dividends paid for the years ended July 31, 2016 and 2015 were as follows:
Year Ended July 31, First Quarter Second Quarter Third Quarter Fourth Quarter
2016 $0.170
 $0.170
 $0.170
 $0.175
2015 $0.165
 $0.165
 $0.165
 $0.170
The following table sets forthsummarizes 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 periodthree months ended July 31, 2013.

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, 2013     $      3,737,155 
June 1 - June 30, 2013   1,037,194  $35.69   1,031,318   2,705,837 
July 1 -  July 31, 2013   152,067  $35.53   135,034   2,570,803 
      Total   1,189,261  $35.67   1,166,352   2,570,803 

_________________

2016.
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, 2016 
 $
 
 10,974,199
June 1 - June 30, 2016 290,877
 $35.07
 270,000
 10,704,199
July 1 - July 31, 2016 200,000
 $34.23
 200,000
 10,504,199
Total 490,877
 $34.73
 470,000
 10,504,199

(1)On March 26, 2010, the Company announced thatMay 29, 2015, the Board of Directors authorized the repurchase of up to 16.014.0 million shares of the Company's common stock. This repurchase authorization is effective until terminated by the Board of Directors. There were no470,000 repurchases of common stock made outside of the Company’sCompany's current repurchase authorization during the quarterthree months ended July 31, 2013.2016. However, the “Total"Total Number of Shares Purchased”Purchased" column of the table above includes 22,90920,877 shares of previously owned shares tendered by option holders in payment of the exercise price of options during the quarter. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding of taxes due as a result of exercising stock options or payment of equity-based awards.

On January 27, 2012, the Company announced that its Board

The table set forth in Part III, Item 12, “Security Ownership of Directors declared a two-for-one stock split effected in the formCertain Beneficial Owners and Management and Related Stockholder Matters,” of a 100 percent stock dividend. The stock split was distributed March 23, 2012, to stockholders of record as of March 2, 2012. Earnings and dividends per share and weighted average shares outstanding are presented in this Form 10-K after the effect of the 100 percent stock dividend. The two-for-one stock splitAnnual Report is reflected in the share amounts in all periods presented in the table above and elsewhere in this annual Form 10-K.

9
also incorporated herein by reference.
Table of Contents

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

 

  Year Ended July 31, 
  2013  2012  2011  2010  2009  2008 
Donaldson Company, Inc. $170.03  $158.25  $127.12  $107.86  $85.39  $100.00 
S&P500  148.71   118.97   109.02   91.11   80.04   100.00 
S&P Industrial Machinery  179.57   127.98   121.59   100.84   76.83   100.00 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Donaldson Company, Inc., the S&P 500 Index and the S&P Industrial Machinery Index
  Year Ended July 31,
  2011 2012 2013 2014 2015 2016
Donaldson Company, Inc. $100.00
 $124.48
 $133.75
 $145.16
 $127.96
 $140.61
S&P 500 100.00
 109.13
 136.41
 159.52
 177.40
 187.36
S&P Industrial Machinery 100.00
 105.26
 147.68
 173.36
 184.07
 213.16

Item 6. Selected Financial Data

The following table sets forthsummarizes selected financial data for each of the fiscal years in the five-year period ended July 31, 20132016 (in millions, except per share data):

  Year Ended July 31, 
  2013  2012  2011  2010  2009 
Net sales $2,436.9  $2,493.2  $2,294.0  $1,877.1  $1,868.6 
Net earnings  247.4   264.3   225.3   166.2   131.9 
Diluted earnings per share  1.64   1.73   1.43   1.05   0.83 
Total assets  1,743.6   1,730.1   1,726.1   1,499.5   1,334.0 
Long-term obligations  102.8   203.5   205.7   256.2   253.7 
Cash dividends declared per share  0.450   0.335   0.280   0.240   0.230 
Cash dividends paid per share  0.410   0.320   0.268   0.235   0.228 
10
  Year Ended July 31,
  2016 2015 2014 2013 2012
Net sales $2,220.3
 $2,371.2
 $2,473.5
 $2,436.9
 $2,493.3
Net earnings 190.8
 208.1
 260.2
 247.4
 264.3
Basic earnings per share 1.43
 1.51
 1.79
 1.67
 1.76
Diluted earnings per share 1.42
 1.49
 1.76
 1.64
 1.73
Total assets 1,788.6
 1,809.5
 1,942.4
 1,743.6
 1,730.1
Long-term obligations 351.8
 389.2
 243.7
 102.8
 203.5
Cash dividends declared per share 0.690
 0.670
 0.610
 0.450
 0.335
Cash dividends paid per share 0.685
 0.665
 0.575
 0.410
 0.320

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion (MD&A) is intended to help the reader understand the Company's results of the Company’soperations and financial condition and results of operationsfor the three years ended July 31, 2016. The MD&A should be read in conjunction with the Company's Consolidated Financial Statements and Notes theretoincluded in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and other financial information includeduncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this report.

Annual Report, particularly Item 1A. Risk Factors and in the Safe Harbor Statement under the Securities Reform Act of 1995 statement below.

Throughout this MD&A, the Company refers to measures used by management to evaluate performance, including a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (GAAP). Net sales and net earnings excluding foreign currency translation are not measures of financial performance under GAAP, however the Company believes they are useful in understanding its financial results and provide comparable measures for understanding the operating results of the Company between different fiscal periods. Reconciliations within this MD&A provide more details on the use and derivation of these measures.
Overview

The Company

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

The Company reported

Net sales in Fiscal 2013 of $2,436.9for the year ended July 31, 2016 were $2,220.3 million down 2.3 percent from $2,493.2as compared to $2,371.2 million in the prior year. The Company’s resultsyear, a decrease of $150.9 million or 6.4%. Net sales were negatively impacted by foreign currency translation which decreased sales by $32.2$74.2 million. Excluding the current year impact of foreignOn a constant currency translation, worldwide sales decreased 1.0 percent.

Althoughbasis, net sales excluding foreign currency translation is not a measure of financial performance under generally accepted accounting principles infor the United States of America (U.S.) (U.S. GAAP),year ended July 31, 2016 decreased 3.2% from the Company believes it is useful in understanding its financial results and provides a comparable measureprior fiscal year.

Net earnings for understanding the operating results of the Company between different fiscal periods excluding the impact of foreign currency translation. The following is a reconciliation to the most comparable U.S. GAAP financial measure of this non-GAAP financial measure (in millions):

  Net Sales  Percent
Change in
Net Sales
 
Year ended July 31, 2011 $2,294.0   NA 
Net sales change, excluding foreign currency translation impact  237.9   10.4%
Foreign currency translation impact  (38.7)  (1.7)%
Year ended July 31, 2012 $2,493.2   8.7%
Net sales change, excluding foreign currency translation impact  (24.1)  (1.0)%
Foreign currency translation impact  (32.2)  (1.3)%
Year ended July 31, 2013 $2,436.9   (2.3)%

The Company also reported net earnings in Fiscal 2013 of $247.4year ended July 31, 2016 were $190.8 million, a decrease of 6.4 percent$17.3 million or 8.3%, from $264.3$208.1 million in the prior year.fiscal 2015. The Company’s net earnings were negatively impacted by foreign currency translation, which decreased net earnings by $2.1approximately $7.9 million. Excluding the current year impact of foreign currency translation, net earnings decreased 5.6 percent.

11
4.5%
Table of Contents
Diluted earnings per share were $1.42 for the year ended July 31, 2016, a 4.7% decrease from $1.49 in the prior year.

Outlook
The Company forecasts its fiscal 2017 diluted earnings per share to be between $1.50 and $1.66.
The Company forecasts its total fiscal 2017 net sales to be between 2% decline and 2% increase compared with fiscal 2016, and the impact on total sales from foreign currency translation is expected to be immaterial.
The Company’s fiscal 2017 operating margin is forecast to be 13.3% to 13.9%.

The Company’s fiscal 2017 tax rate is anticipated to be between 26.7% and 28.7%.
The Company expects to repurchase between 2.0% and 3.0% of its outstanding shares in fiscal 2017.
Consolidated Results of Operations
The following table summarizes consolidated results of operations for each of the three fiscal years ended July 31, 2016 (in millions, except per share data):
  Year Ended July 31, Percent of Net Sales
  2016 2015 2014 2016 2015 2014
Net sales $2,220.3
 $2,371.2
 $2,473.5
 100.0 % 100.0 % 100.0 %
Cost of sales 1,465.5
 1,562.6
 1,595.7
 66.0 % 65.9 % 64.5 %
Gross profit 754.8
 808.6
 877.8
 34.0 % 34.1 % 35.5 %
Selling, general and administrative 425.1
 460.1
 460.3
 19.1 % 19.4 % 18.6 %
Research and development 55.5
 60.2
 61.8
 2.5 % 2.5 % 2.5 %
Operating income 274.2
 288.3
 355.7
 12.3 % 12.2 % 14.4 %
Other income, net (3.9) (15.5) (15.2) (0.2)% (0.7)% (0.6)%
Interest expense 20.7
 15.2
 10.2
 0.9 % 0.6 % 0.4 %
Earnings before income taxes 257.4
 288.6
 360.7
 11.6 % 12.2 % 14.6 %
Income taxes 66.6
 80.5
 100.5
 3.0 % 3.4 % 4.1 %
Net earnings $190.8
 $208.1
 $260.2
 8.6 % 8.8 % 10.5 %
             
Net earnings per share – diluted $1.42
 $1.49
 $1.76
      
Net Sales
Consolidated net sales for the years ended July 31, 2016, 2015 and 2014 were $2,220.3 million, $2,371.2 million and $2,473.5 million, respectively. Net sales by operating segment are as follows (in millions):
  Year Ended July 31, Percent of Net Sales
  2016 2015 2014 2016 2015 2014
Engine Products $1,391.3
 $1,484.1
 $1,584.0
 62.7% 62.6% 64.0%
Industrial Products 829.0
 887.1
 889.5
 37.3% 37.4% 36.0%
Net sales $2,220.3
 $2,371.2
 $2,473.5
 100.0% 100.0% 100.0%
Consolidated net sales by geographical region for the years ended July 31, 2016, 2015 and 2014 are as follows (in millions):
  Year Ended July 31, Percent of Net Sales
  2016 2015 2014 2016 2015 2014
United States $937.3
 $1,007.3
 $1,019.9
 42.2% 42.5% 41.2%
Europe 632.7
 671.3
 728.6
 28.5% 28.3% 29.5%
Asia Pacific 449.9
 470.7
 517.3
 20.3% 19.9% 20.9%
Other 200.4
 221.9
 207.7
 9.0% 9.3% 8.4%
Total $2,220.3
 $2,371.2
 $2,473.5
 100.0% 100.0% 100.0%

Although net earningssales excluding foreign currency translation is not a measure of financial performance under U.S. GAAP, the Company believes that it is useful in understanding its financial results and provides aprovide comparable measuremeasures for understanding the operating results of the Company between different fiscal periods excluding the impact of foreign currency translation.periods. The following is a reconciliation to the most comparable U.S. GAAP financial measure of this non-U.S. GAAPnon-GAAP financial measure for the years ended July 31, 2016, 2015 and 2014 (in millions):

  Net Earnings  Percent
Change in
Net Earnings
 
Year ended July 31, 2011 $225.3   NA 
Net earnings change, excluding foreign currency translation impact  43.0   19.1%
Foreign currency translation impact  (4.0)  (1.8)%
Year ended July 31, 2012 $264.3   17.3%
Net earnings change, excluding foreign currency translation impact  (14.8)  (5.6)%
Foreign currency translation impact  (2.1)  (0.8)%
Year ended July 31, 2013 $247.4   (6.4)%

  Year Ended July 31,
  2016 2015 2014
Prior year net sales $2,371.2
 $2,473.5
 $2,436.9
Change in net sales excluding translation (76.7) 32.5
 48.0
Impact of foreign currency translation (1) (74.2) (134.8) (11.4)
Current year net sales $2,220.3
 $2,371.2
 $2,473.5
(1)The impact of foreign currency translation is calculated by translating current period foreign currency revenue into U.S. dollars using the average foreign currency exchange rates for the prior fiscal year period rather than actual current period foreign currency exchange rates.
The Company reported diluted earnings per sharefiscal 2016 sales decrease of $1.64,$150.9 million compared to fiscal 2015 was primarily driven by a 5.2 percent decrease from $1.73$74.2 million impact of foreign currency translation and a decline in the prior year.

Following are netCompany's first-fit portions of the Engine and Industrial segments. Fiscal 2016 sales by product withindecreased $92.8 million in the Company’s Engine Products segment and $58.1 million in the Industrial Products segment. Unfavorable foreign currency exchange rates decreased sales in the Engine Products and Industrial Products segments by $43.4 million and a comparison of earnings before income taxes. Corporate and Unallocated includes corporate expenses determined to be non-allocable$30.8 million, respectively. In addition to the segments and interest income and expense. See further discussionimpacts of segment information in Note L of the Company’s Notes to Consolidated Financial Statements.

  2013  2012  2011 
  (thousands of dollars) 
Engine Products segment:            
Off-Road Products $358,834  $376,870  $327,557 
On-Road Products  128,446   163,934   127,107 
Aftermarket Products*  900,419   907,306   861,393 
Retrofit Emissions Products  12,298   15,354   19,555 
Aerospace and Defense Products  104,191   106,676   104,883 
Total Engine Products segment  1,504,188   1,570,140   1,440,495 
Industrial Products segment:            
Industrial Filtration Solutions Products  529,751   553,453   507,646 
Gas Turbine Products  232,922   180,669   154,726 
Special Applications Products  170,087   188,986   191,162 
Total Industrial Products segment  932,760   923,108   853,534 
Total Company $2,436,948  $2,493,248  $2,294,029 

_________________

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

  Engine  Industrial  Corporate &  Total 
  Products  Products  Unallocated  Company 
  (thousands of dollars) 
2013            
Net sales $1,504,188  $932,760  $  $2,436,948 
Earnings before income taxes  220,892   139,108   (11,819)  348,181 
2012                
Net sales $1,570,140  $923,108  $  $2,493,248 
Earnings before income taxes  227,941   149,249   (6,410)  370,780 
2011                
Net sales $1,440,495  $853,534  $  $2,294,029 
Earnings before income taxes  211,255   123,871   (22,863)  312,263 

12

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

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

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

Outlook

·The Company forecasts its total Fiscal 2014 sales to be between $2.45 and $2.55 billion, or an increase of 1 to 5 percent from Fiscal 2013. Foreign currency translation is based on the Company’s forecasted rates for the Euro at US$1.32 and 97 Yen to the US$.
·The Company’s full year Fiscal 2014 operating margin is forecasted to be 14.1 to 14.9 percent. Included in this forecast is approximately $30 million in expense increases for our Strategic Business Systems project and incentive compensation.
·The Company’s full year Fiscal 2014 tax rate is projected to be between 28 and 31 percent.
·The Company forecasts its full year Fiscal 2014 EPS to be between $1.65 and $1.85.
·The Company projects that cash generated by operating activities will be between $275 and $305 million. Capital spending is estimated to be approximately $90 million. The Company anticipates repurchasing between 2 and 4 percent of its diluted outstanding shares in FY14.
13

Fiscal 2013 Compared to Fiscal 2012

Engine Products 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 including hydraulics, fuel, lube, and replacement filters.

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

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

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

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

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

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

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

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

14

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

Worldwide sales of Gas Turbine Products were $232.9 million, an increase of 28.9 percent from $180.7 million in the prior year. Gas Turbine Products sales are typically large systems and, as a result, the Company’sCompany's shipments and revenues fluctuatefluctuated from period to period. SalesBeginning in fiscal 2016, the Company made a strategic shift in the GTS business to be more selective in bidding of large Gas Turbine Products were strong dueprojects and shifting the strategy to high demandgrow the GTS replacement part business. In contrast to fiscal 2015, the Company experienced more typical seasonality in fiscal 2016 with sales improving the second half of the year.

Backlog
At August 31, 2016, the backlog of orders expected to be delivered within 90 days was $323.0 million. The 90-day backlog at August 31, 2015, was $331.0 million. The backlog of orders expected to be delivered within 90 was increased 3.0% for the large systems used in power generation primarily in the Middle East and Asia. The Company also experienced moderate demand for its smaller systems used in oil and gas applicationsEngine Products segment and increased sales of replacement filters for systems previously installed. The Company anticipates its Gas Turbine Products’ sales will decrease 18 to 24 percent from record sales of in Fiscal 2013 due to the forecasted slowdown in large turbine power generation projects by its Customers in Fiscal 2014.

Worldwide sales of Special Applications Products were $170.1 million, a 10.0 percent decrease from $189.0 million in the prior year. Sales decreased 13.0 percent and 11.7 percent in Europe and Asia, respectively, from the prior year, partially offset by a sales increase in the Americas of 1.0 percent. The sales decline was primarily due to a global decline in computer sales which resulted in lower demand1.6% for the Company’s hard disk drive filters. This lower demand for hard disk drive filters is forecasted to continue in Fiscal 2014. According to the International Data Corporation, the number of disk drives produced in Fiscal 2013 declined 9.2 percent from the prior year period. In addition, weakness in industrial end markets resulted in lower sales of the Company’s membrane products. Capital spending trends have been weak due to the recession in Europe, declines in Asia, and a slowdown in the U.S.

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

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

  2013  2012  2011 
Engine Products  60.8%  59.1%  64.1%
Industrial Products  39.7%  40.3%  38.7%
Corporate and Unallocated  (0.5)%  0.6%  (2.8)%
Total Company  100.0%  100.0%  100.0%

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

  2013  2012  2011 
United States  26.0%  30.3%  19.8%
Europe  31.6%  29.9%  31.0%
Asia - Pacific  30.3%  31.1%  39.6%
Other  12.1%  8.7%  9.6%
Total Company  100.0%  100.0%  100.0%

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

15

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

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

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

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

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

Total backlog at July 31, 2013, was $715.8 million, down 10.4 percent from the same period in the prior year.Industrial Products segment. 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

Cost of Sales
The principal raw materials that the Engine Products segment, total open order backlogCompany uses are steel, filter media, and petroleum-based products including plastics, rubber, and adhesives. Purchased raw materials represent approximately 60% to 65% of the Company’s cost of goods sold. Of that amount, steel, including fabricated parts, represents approximately 20%. Filter media represents approximately 20% and the remainder is primarily made up of petroleum-based products and other raw material components.
The cost the Company paid for steel during fiscal 2016 varied by grade, but in aggregate, decreased 6.7 percentduring the fiscal year. The steel costs decrease was largely related to the decline in market prices but was also affected by continuous improvement efforts. The Company’s cost of filter media also varies by type and decreased slightly year over year. The cost of petroleum-based products were also down in relation to lower costs for petrochemicals and continuous improvement efforts. The Company anticipates a moderately favorable impact from commodity prices in fiscal 2017, as compared to fiscal 2016, specifically for petroleum-based products. On an ongoing basis, the Company enters into selective supply arrangements with certain of its suppliers that allow the Company to reduce volatility in its costs. The Company strives to recover or offset all material cost increases through selective price increases to its customers and the Company’s continuous improvement cost reduction initiatives, which include material substitution, process improvement, and product redesigns.
Gross Margin
Gross margin for the year ended July 31, 2016 was 34.0%, or a 0.1 point decrease from 34.1% in the prior year. The gross margin percentage was flat year over year with favorable impacts from restructuring actions offset by lower fixed cost absorption due to a decrease in sales.
Gross margin for fiscal 2015 was 34.1%, or a 1.4 point decrease from 35.5% in the year ended July 31, 2014. The decrease in gross margin was driven primarily by lower fixed cost absorption due to a decrease in sales and the negative mix impacts from

more GTS and IFS project shipments. Restructuring and asset impairment charges of $8.4 million also negatively impacted gross margin in fiscal 2015.
Operating Expenses
Operating expenses for the year ended July 31, 2016 were $480.6 million or 21.6% of net sales, as compared to $520.3 million or 21.9% in the prior fiscal year. The decrease in operating expenses as a percentage of sales was primarily driven by expense savings from previous restructuring actions combined with the Company's efforts to control expenses in fiscal 2016 compared to fiscal 2015. Restructuring and asset impairment charges included in operating expenses were $10.4 million in fiscal 2016.
Operating expenses for fiscal 2015 were $520.3 million or 21.9% of net sales, as compared to $522.1 million or 21.1% in the year ended July 31, 2014. The decrease in operating expenses was primarily due to a reduction in incentive compensation expense accruals. Restructuring included in operating expenses were $8.5 million and included severance costs related to a reduction in workforce of $4.6 million and the Company recorded a $3.9 million lump sum pension settlement.
Non-Operating Items
Interest expense for the year ended July 31, 2016 was $20.7 million, an increase of $5.5 million from $15.2 million in fiscal 2015. The increase was due to $150.0 million of debt issued in April 2015 that was outstanding for all of fiscal 2016. Other income, net was $3.9 million in fiscal 2016 compared to $15.5 million in the prior fiscal year. The decrease in other income, net for fiscal 2016 was primarily driven by $6.8 million of higher losses on foreign exchange compared to fiscal 2015.
Interest expense was $15.2 million for fiscal 2015, an increase of $5.0 million from $10.2 million in the prior year. The increase was due to $150.0 million debt issued in April 2015, as well as higher balances on the Company’s revolving line of credit. Other income, net totaled $15.5 million in fiscal 2015, up from $15.2 million in the prior year.
Income Taxes
The effective tax rate for fiscal 2016 was 25.9% compared to 27.9% during the year ended July 31, 2015. The effective tax rate in the current year was favorably impacted by the settlement of tax audits and the mix of earnings between tax jurisdictions.
The effective tax rate for the year ended July 31, 2015 was 27.9%, unchanged from the prior fiscal year. InThe effective tax rate in fiscal 2015 was favorably impacted by the Industrial Products segment, total open order backlog decreased 18.4 percent fromreinstatement of the Research and Experimentation Credit in the U.S. for calendar year 2014, non-recurring tax costs associated with foreign dividend distributions recorded during the prior year. Because someyear and an increase in tax benefits from international operations. The effective tax rate in fiscal 2014 was favorably impacted by the settlement of a tax audit and the change in backlog can be attributedremeasurement of certain deferred tax assets due to a change in tax rates in certain foreign jurisdictions.
Net Earnings
For the ordering patternsyear ended July 31, 2016, net earnings was $190.8 million as compared to $208.1 million in fiscal 2015, a decrease of $17.3 million or 8.3%. Diluted net earnings was $1.42 per share, a decrease of 4.7% from diluted net earnings of $1.49 for the year ended July 31, 2015.
Net earnings for the year ended July 31, 2015 was $208.1 million, a decrease of $52.1 million or 20.0%, from fiscal 2014 net earnings of $260.2 million. Diluted net earnings per share in fiscal 2015 was $1.49 compared to $1.76 for the year ended July 31, 2014, a decrease of 15.3%.
Although net earnings excluding foreign currency translation is not a measure of financial performance under GAAP, the Company believes that it is useful in understanding its financial results and provides a comparable measure for understanding the operating results of the Company’s Customers and/Company between different fiscal periods. The following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure for the years ended July 31, 2016, 2015 and 2014 (in millions):
  Year Ended July 31,
  2016 2015 2014
Prior year net earnings $208.1
 $260.2
 $247.4
Change in net earnings excluding translation (9.4) (37.8) 13.8
Impact of foreign currency translation (7.9) (14.3) (1.0)
Current year net earnings $190.8
 $208.1
 $260.2

Restructuring Activities
The Company has taken numerous actions to align its operating and manufacturing cost structure with current and projected customer and end-market demand.
Fiscal 2016 Actions
In the first quarter of fiscal 2016, the Company took actions to further align its operating and manufacturing cost structure with current and projected customer and end-market demand. These actions consisted of one-time termination benefits from restructuring the salaried and production workforce in all geographic regions and in both reportable segments. Total charges related to this action were initially expected to be $7.2 million. These actions have been completed and resulted in a total pre-tax charge of $6.2 million during the year ended July 31, 2016.
In the third quarter of fiscal 2016, the Company took additional actions consistent with the purpose of the first quarter actions discussed above. Total charges related to this action were initially expected to be $5.5 million. These actions have been completed and resulted in a total pre-tax charge of $4.1 million during the year ended July 31, 2016.
In the fourth quarter of fiscal 2016, the Company took additional actions including the closure of the Company's Hong Kong location. These actions, consisting of lease termination costs and one-time termination benefits have been completed and resulted in a total pre-tax charge of $3.5 million during the year ended July 31, 2016, which was in line with expectations.
Fiscal 2015 Actions
In fiscal 2015, actions taken by the Company included: rebalancing and reducing the current salaried and production workforce globally, closing a production facility in Grinnell, Iowa and the write-off of a partially completed facility in Xuzhou, China. For these actions, the Company recorded pre-tax restructuring and impairment charges of $13.0 million for the year ended July 31, 2015. In addition, during the year ended July 31, 2015, the Company recorded a $3.9 million charge related to a lump-sum settlement of its U.S. Pension Plan. The Company recorded an additional $2.3 million related to these actions during the year ended July 31, 2016.
Restructuring charges for the above actions are summarized as follows (in millions):
  Year Ended July 31,
  2016 2015
Fiscal 2016 fourth quarter actions $3.5
 $
Fiscal 2016 third quarter actions 4.1
 
Fiscal 2016 first quarter actions 6.2
 
Fiscal 2015 actions (1) 2.3
 16.9
Total $16.1
 $16.9
(1)Expenses span both fiscal years due to shutdown of Grinnell, Iowa facility.
Restructuring charges for the above actions by segment are summarized as follows (in millions):
  Year Ended July 31,
  2016 2015
Engine Products segment $8.8
 $9.2
Industrial Products segment 7.3
 3.8
Corporate & Unallocated 
 3.9
Total $16.1
 $16.9
Restructuring charges are summarized in the table below by statement of earnings line item (in millions):
  Year Ended July 31,
  2016 2015
Cost of sales $5.7
 $8.4
Selling, general and administrative 10.4
 8.5
Total $16.1
 $16.9

As the restructuring charges were mainly incurred and paid in the same period, there was no material liability balance as of July 31, 2016 or 2015.
Total savings from the impactfiscal 2016 actions are estimated to result in approximately $40 million of foreign exchange translation rates, it may not necessarily correspondannual pre-tax savings. The savings are a result of reduction in workforce and therefore, the savings are expected to future sales.

Fiscal 2012 Comparedcommence immediately and will allow the Company to Fiscal 2011

address its level of profitability and also invest in other strategic initiatives.

Segment Results of Operation
Net sales and earnings before income taxes by operating segment for each of the three years ended July 31, 2016, 2015 and 2014 are summarized as follows (in millions):
  Year Ended July 31, Increase (Decrease)
  2016 2015 2014 2016 vs 2015 2015 vs 2014
Net sales          
Engine Products segment $1,391.3
 $1,484.1
 $1,584.0
 $(92.8) $(99.9)
Industrial Products segment 829.0
 887.1
 889.5
 (58.1) (2.4)
Total $2,220.3
 $2,371.2
 $2,473.5
 $(150.9) $(102.3)
           
Earnings before income taxes          
Engine Products segment $163.5
 $186.3
 $233.9
 $(22.8) $(47.6)
Industrial Products segment 119.0
 123.3
 134.0
 (4.3) (10.7)
Corporate and Unallocated (1) (25.1) (21.0) (7.2) (4.1) (13.8)
Total $257.4
 $288.6
 $360.7
 $(31.2) $(72.1)
(1)Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments such as interest income and interest expense. The Corporate and Unallocated results were determined on a consistent basis for all periods presented. The change in Corporate and Unallocated from fiscal 2014 to fiscal 2016 was driven by higher interest expense and foreign exchange losses.
Engine Products Segment
The following is a summary of net sales by product within the Company’s Engine Products segment for the years ended July 31, 2016, 2015 and 2014 (in millions):
  Year Ended July 31, Increase (Decrease)
  2016 2015 2014 2016 vs 2015 2015 vs 2014
Engine Products Segment          
Off-Road Products $216.6
 $261.1
 $342.2
 $(44.5) $(81.1)
On-Road Products 127.2
 138.4
 130.0
 (11.2) 8.4
Aftermarket Products* 951.5
 980.7
 1,012.2
 (29.2) (31.5)
Aerospace and Defense Products 96.0
 103.9
 99.6
 (7.9) 4.3
Total Engine Products segment $1,391.3
 $1,484.1
 $1,584.0
 $(92.8) $(99.9)
      * Includes replacement part sales to the Company’s OEM customers      
The Engine Products segment sells to OEMsOEM customers in the construction, mining, agriculture, aerospace, defense, and truck marketsend-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 includingfor hydraulics, fuel and lube application, and replacement filters.

16
Table of Contents
Fiscal 2016 compared to Fiscal 2015

Sales

Net sales for the Engine Products segment for the year ended July 31, 2016 were $1,570.1$1,391.3 million an increase of 9.0 percent from $1,440.5as compared to $1,484.1 million in the prior year. Engine Products salesyear period, a decrease of $92.8 million or 6.3%. The decrease was driven by declines in all product groups and the U.S. increased by 11.3 percent in Fiscal 2012 compared to Fiscal 2011. International Engine Products sales increased 6.9 percent from the prior year.impact of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased totalEngine Products sales by $24.3$43.4 million, or 1.7 percent. Earnings before income taxes as a percentage of2.9%. In constant currency fiscal 2016 Engine Products segment sales of 14.5 percent decreased from 14.7 percent in the prior year. The percentage earnings decrease for the twelve months ended July 31, 2012, was driven by a shift in product mix from replacement parts to first fit products, which carry a lower margin, partially offset by ongoing Continuous Improvement initiatives.

$49.4 million, or 3.3%.

Worldwide sales of Off-Road Products were $376.9$216.6 million, an increasea decrease of 15.1 percent17.0% from $327.6fiscal 2015. In constant currency, sales decreased $37.3 million, in the prior year. Sales in the U.S. increased 17.4 percent over the prior fiscal year. Internationally, sales of Off-Road Products were up 13.5 percent from the prior year, with sales increasing in Europe and Asia by 12.9 percent and 12.3 percent, respectively. The sales increasesor 14.3%. These decreases were driven by higher demand for agriculturea continued weakness in the global agricultural, mining and miningconstruction equipment markets with decreased build rates in all regions and improved salesthe negative impacts of heavy construction equipment.

foreign currency translation.


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

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

Worldwide sales of Retrofit Emissions Products were $15.4$127.2 million, a decrease of 21.5 percent8.1% from $19.6fiscal 2015. In constant currency, sales decreased $8.5 million, or 6.1%. Growth in APAC and continued strength of medium-duty production was not enough to offset the prior year. The Company’s Retrofit Emissions Products sales are solelyrevenue decreases associated with the slowing production of Class 8 trucks in the U.S. TheNorth America, resulting in a steeper-than-expected decline in this business.

Worldwide sales of these products are highly dependent on government regulations andAftermarket Products were $951.5 million, a lackdecrease of funding availability throughout Fiscal 2012.

3.0% from fiscal 2015. In constant currency, sales increased $2.7 million, or 0.3%. The primary driver of the sales decrease from fiscal 2015 was foreign currency with sales in local currency remaining relatively flat compared to prior year.

Worldwide sales of Aerospace and Defense Products were $106.7$96.0 million, a 1.7 percent increasedecrease of 7.6% from $104.9fiscal 2015. In constant currency, sales decreased $6.3 million, or 6.1%. These decreases were due to Aerospace commercial slow down while Defense ground vehicle has remained relatively flat. The decline in commercial aerospace is primarily in rotary-wing aircraft reflecting a slowdown in oil exploration resulting in fewer flight hours. Many Defense platforms have been delayed due to funding.
Fiscal 2016 Engine Product's earnings before income taxes were $163.5 million, or 11.8% of Engine Products' sales, a decrease from 12.6% of sales in fiscal 2015. The percentage earnings decrease was driven by lower cost absorption due to a decrease in production volumes and the impact of foreign currency translation.
Fiscal 2015 compared to Fiscal 2014
For the year ended July 31, 2015, net sales for the Engine Products segment were $1,484.1 million, a decrease of 6.3% from $1,584.0 million in the fiscal prior year. The impact of the changes in foreign currency decreased sales by $82.0 million, or 5.5%.
Worldwide sales of Off-Road Products were $261.1 million, a decrease of 23.7% from $342.2 million in the prior year. SalesThe sales decrease was driven by continued weakness in the U.S. increased 1.4 percentmining and internationalagricultural equipment markets. These decreases were partially offset by an improving construction equipment end-market, particularly in North America, and new program wins in Europe.
Worldwide sales increased 2.7 percent overof On-Road Products were $138.4 million, an increase of 6.4% from $130.0 million in the prior year. The sales increase wasoverall is due to improvementsan increase in Aerospacecustomer new Class 8 truck build rates in North America.
Worldwide sales of Aftermarket Products demand which was mostlywere $980.7 million, a decrease of 3.1% from $1,012.2 million in the prior year. The overall sales decreases were primarily driven by the impact of the change in foreign currency exchange rates, partially offset by increases in the utilization rates of equipment fleets, increased sales of the Company’s proprietary replacement filters and expansion of the Company’s product portfolio and distribution capabilities. Net of foreign currency fluctuations, Aftermarket products sales increased 2.1% with sales in the Americas increasing by 1.6%, Europe by 3.1% and Asia by 0.8%.
Worldwide sales of Aerospace and Defense Products were $103.9 million, an increase of 4.2% from $99.6 million in the prior year.
Fiscal 2015 Engine Product's earnings before income taxes were $186.3 million, or 12.6% of Engine Products' sales, a continued slowdowndecrease from 14.8% of sales in U.S. military activity.

fiscal 2014. The percentage earnings decrease was driven by lower fixed cost absorption due to a decrease in sales volumes.

Industrial Products Segment
The following is a summary of net sales by product within the Company’s Industrial Products segment for the years ended July 31, 2016, 2015 and 2014 (in millions):
  Year Ended July 31, Increase (Decrease)
  2016 2015 2014 2016 vs 2015 2015 vs 2014
Industrial Products segment:          
Industrial Filtration Solutions Products $517.9
 $529.0
 $553.4
 $(11.1) $(24.4)
Gas Turbine Products 149.6
 186.9
 156.9
 (37.3) 30.0
Special Applications Products 161.5
 171.2
 179.2
 (9.7) (8.0)
Total Industrial Products segment $829.0
 $887.1
 $889.5
 $(58.1) $(2.4)
The Industrial Products segment sells to various industrial distributors, dealers, distributors, and end-users, OEMsOEM customers of gas-fired turbines and OEMs and end-users requiring clean air. Products include dust, fume, and mist collectors, compressed air purification systems, air filtration systems for gas turbines and compressors, PTFE membrane-based products, and specialized air and gas filtration systems for various applications including computer hard disk drives and semi-conductor manufacturing.

Salesother electronic equipment.


Fiscal 2016 compared to Fiscal 2015
Net sales for the Industrial Products segment for the year ended July 31, 2016 were $923.1$829.0 million an increase of 8.2 percent from $853.5as compared to $887.1 million in the prior year. International Industrial Productsyear period, a decrease of $58.1 million or 6.5%. This decrease was driven by a 20.0% decrease in GTS sales increased 3.9 percent and sales in the U.S. increased 17.8 percent from the prior year.impact of foreign currency translation. The impact of foreign currency translation during fiscal 2016 decreased Industrial Products sales by $14.4$30.8 million, or 1.8 percent. Earnings before income taxes as a percentage of3.5%. In constant currency fiscal 2016 Industrial Products segment sales of 16.2 percent increased from 14.5 percent in the prior year. The improvement in earnings as a percentage of sales over the prior year was driven by better leverage of fixed operating costs and the continued successful execution on larger projects, both of which were partially offset by the impact of the flood in Thailand. In addition, the Industrial Products segment did not incur any restructuring expenses as compared to $0.7decreased $27.3 million, in the prior year.

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or 3.1%.

Worldwide sales of Industrial Filtration Solutions Productswere $517.9 million, a 2.1% decrease from fiscal 2015. In constant currency, fiscal 2016 sales increased $7.7 million, or 1.5%. Sales of $553.5 million increased 9.0 percent from $507.6 million in the prior year. Sales in the U.S., Asiaboth aftermarket and Europe increased 16.8 percent, 7.8 percent, and 2.4 percent, respectively. The Company continued to experience strong market conditions, especially in the U.S., for its Industrial Filtration Solutions resulting in continued strong demand for the Company’s industrial dust collectors and replacement parts. The externally published durable goods index in the U.S. increased 8.4 percent during Fiscal 2012 as compared to last year.

equipment are consistent with fiscal 2015.

Worldwide sales of Gas Turbine ProductsGTS were $180.7$149.6 million, an increase of 16.8 percenta 20.0% decrease from $154.7fiscal 2015. In constant currency, fiscal 2016 sales decreased $33.9 million, in the prior year. Gas Turbine Productsor 18.1%. GTS sales are typically large systems and, as a result, the Company’sCompany's shipments and revenues fluctuate from period to period.
Worldwide sales of Special Application Products were $161.5 million, a 5.7% decrease from fiscal 2015. In constant currency, fiscal 2016 sales decreased $1.1 million, or 0.6%. These decreases were driven by weakness in disk drive product sales as the business is in a secular decline as solid-state memory replaces traditional hard disk drives.
Fiscal 2016 Industrial Products' earnings before income taxes were $119.0 million, or 14.4% of Industrial Products' sales, an increase from 13.9% in fiscal 2015. The fiscal 2016 earnings before income taxes percentage increase was driven by the benefits from previous restructuring actions and favorable product mix partially offset by a $3.5 million increase in restructuring charges.
Fiscal 2015 compared to Fiscal 2014
Sales for the Industrial Products segment were $887.1 million, a decrease of large0.3% from $889.5 million in the prior year. This result was driven by a 4.4% decline in Industrial Filtration Solutions Products and a 4.5% decline in Special Applications Products, partially offset by a 19.2% sales increase in Gas Turbine Products. The impact of foreign currency decreased net sales by $52.1 million, or 5.9%.
Worldwide sales of Industrial Filtration Solutions Products were $529.0 million, a 4.4% decrease from $553.4 million in the prior year. The Company continued to experience soft new equipment sales due to a continued weak global capital investment environment, partially offset by strong replacement air filter sales due to improved utilization of the equipment already installed in the field.
Worldwide sales of Gas Turbine Products for power generation were stable for the first six months$186.9 million, an increase of Fiscal 2012 before increasing19.2% from $156.9 million in the second halfprior year. Sales of the fiscal year. The Company also experienced additional demand for its smallerGas Turbine Products systems were due to increased shipments of large filtration systems used in oil and gas applications and for replacement filters.

power generation as well as the benefit of the acquisition of Northern Technical, which generated sales of $16.3 million.

Worldwide sales of Special Applications Products were $189.0$171.2 million, a 1.1 percent4.5% decrease from $191.2$179.2 million in the prior year. Domestic Special Application Products sales increased 9.6 percent. International sales of Special Application Products decreased 2.8 percent over the prior year, primarily in Asia which decreased 3.6 percent. The sales decline was due tothe result of a decrease in demand for the Company’s products serving the electronics industry which was affected by the flooding in Thailand in the second halfmembrane products.
Fiscal 2016 Industrial Products' earnings before income taxes were $123.3 million, or 13.9% of calendar 2011.

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

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

  2012  2011  2010 
Engine Products  59.1%  64.1%  63.1%
Industrial Products  40.3%  38.7%  37.8%
Corporate and Unallocated  0.6%  (2.8)%  (0.9)%
Total Company  100.0%  100.0%  100.0%

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

  2012  2011  2010 
United States  30.3%  19.8%  19.7%
Europe  29.9%  31.0%  24.6%
Asia - Pacific  31.1%  39.6%  45.3%
Other  8.7%  9.6%  10.4%
Total Company  100.0%  100.0%  100.0%

Gross margin for Fiscal 2012 was 35.0 percent,Industrial Products' sales, a decrease from 35.5 percent15.1% in the prior year.fiscal 2014. The fiscal 2015 percentage earnings decrease in gross margin is attributable to the combination of the higher level of first fit and project sales which generally carry a lower margin, the Company’s planned ramp-up for its newest plant in Mexico,was driven by lower fixed cost absorption due to a decrease in Asia,sales volumes and increased purchased commodity coststhe negative mix impacts from higher prices during the first half of the year and unfavorable foreign exchange rateslarger projects in the second half of the year. These decreases were partially offset by the benefits from the Company’s ongoing Continuous Improvement initiatives. Within gross profit, the Company incurred minimal restructuringGas Turbine Systems and asset impairment charges during Fiscal 2011.

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Industrial Filtration Solutions businesses.
Table of Contents
Liquidity and Capital Resources

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

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

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

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

Total backlogCompany's long-term capital structure at July 31, 2012, was $798.6 million, down 0.5 percent from the same period in the prior year. Backlog is one of many indicators of business conditions in the Company’s markets. However, it is not always indicative of future results for a number of reasons, including short lead times in the Company’s replacement parts businesses2016 and the timing of the receipt of orders in many of the Company’s Engine OEM and Industrial markets. In the Engine Products segment, total open order backlog decreased 5.9 percent from the prior year. In the Industrial Products segment, total open order backlog increased 13.9 percent from the prior year. Because some of the change in backlog can be attributed to a change in the ordering patterns of the Company’s Customers and/or the impact of foreign exchange translation rates, it may not necessarily correspond to future sales.

Liquidity and Capital Resources

Financial ConditionAt July 31, 2013, the Company’s capital structure was comprised2015 is summarized as follows (in millions):

  July 31,
  2016 2015
Long-term debt $351.8
 $389.2
Shareholders' equity 771.4
 778.7
Total long-term capital $1,123.2
 $1,167.9
     
Ratio of long-term debt to total long-term capital 31.3% 33.3%
As of $107.9 million of current debt, $102.8 million ofJuly 31, 2016, long-term debt and $1,085.2 millionrepresented 31.3% of total long-term capital, defined as long-term debt plus total shareholders’ equity. The Company had cash and cash equivalents of $224.1 million and short-term investments of $99.8 millionequity, compared to 33.3% at July 31, 2013. The ratio of2015.

Total long-term debt to total capital was 8.7 percent and 18.3 percent at July 31, 2013 and 2012, respectively.

Total debt outstanding decreased $90.4 million during the year to $210.6 million outstanding at July 31, 2013 as a result of reductions in short-term borrowings. Short-term borrowings outstanding2016 was $351.8 million compared to $389.2 million at the prior year end, a decrease of the year decreased $86.0 million as the Company used cash on hand to pay off its short-term borrowings.

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$37.4 million.

The following table summarizes the Company’s cash obligations as of July 31, 2013, for the years indicated (thousands of dollars):

     Payments Due by Period 
Contractual Obligations Total  Less than
1 year
  1 - 3
years
 3 - 5
years
  More than
5 years
 
Long-term debt obligations $196,848  $96,848  $ $100,000  $ 
Capital lease obligations  2,520   981  1,393  146    
Interest on long-term debt obligations  26,309   8,449   11,009  6,851    
Operating lease obligations  26,698   11,431   12,270  2,872   125 
Purchase obligations (1)  195,976   178,649   16,189  1,138    
Pension and deferred compensation (2)  115,517   15,415   14,418  14,239   71,445 
Total (3) $563,868  $311,773  $55,279 $125,246  $71,570 

_________________

(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 bond rate as defined by the plan (10-year treasury bond STRIP rate plus two percent for deferrals prior to January 1, 2011 and 10-year treasury bond rates for deferrals after December 31, 2010) and approved by the Human Resources Committee of the Board of Directors, and are payable at the election of the participants.
(3)In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of $19.5 million for potential tax obligations, including accrued interest and penalties. The payment and timing of any such payments are affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities. Therefore, quantification of an estimated range and timing of future payments cannot be made at this time.

On December 7, 2012,October 28, 2014, the Company entered into a new five-year,First Amendment (Amendment) to its 5 year, multi-currency revolving credit facility with a group of banks under whichbanks. The Amendment increased the Company may borrowCompany's borrowing availability up to $250.0$400.0 million. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Loans or LIBOR Rate Loans.Loans, as defined in the Amendment. The interest rate on each advance is based on certain market interest rates and leverage ratios. Facility fees and other fees on the entire loan commitment are payable over the duration of this facility. This new facility replaced the previous five-year, $250.0There was $130.0 million multicurrency revolving credit facility that was terminated upon entering the new facility. There were no outstanding amounts at July 31, 2013 and $80.0 million was outstanding at July 31, 2012 under these facilities.2016, and $160.0 million outstanding at July 31, 2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. At July 31, 20132016 and 2012, $237.82015, $262.7 million and $159.1$232.2 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.in Note 6. The Company’s multi-currency revolving facility contains debtfinancial covenants specifically related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets. As

On April 16, 2015, the Company entered into a First Supplement to Note Purchase Agreement (First Supplement) with a group of institutional investors which supplements a Note Purchase Agreement, dated March 27, 2014. Pursuant to the First Supplement, the Company issued $25.0 million of senior unsecured notes due April 16, 2025, and $125.0 million of senior unsecured notes due June 17, 2030. The debt was issued at face value and bears interest payable semi-annually at an annual rate of interest of 2.93% and 3.18%, respectively. The proceeds from the notes were primarily used to refinance existing debt and for general corporate purposes. The notes contain covenants specifically related to maintaining a certain leverage ratio and other covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets.
On July 22, 2016, a Japanese Subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company. The debt was issued at face value of ¥1.0 billion (approximately $9.7 million at July 31, 2016) is due July 15, 2021 and bears interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2013, the Company was in compliance with all such covenants.

2016.

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate purposes. At July 31, 2013 and 2012, thereThere was $50.0$26.8 million and $41.3 million available for use, respectively, under these two facilities. There were no amounts outstanding at July 31, 20132016, and $8.7$15.3 million was outstanding at July 31, 2012.

2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. The weighted average interest rate on the short-term borrowings outstanding at July 31, 2016, was 1.25%. At July 31, 2016 and 2015, there was $38.2 million and $49.7 million, respectively, available under these two credit facilities.

The Company has a €100€100.0 million (approximately $111.1 million at July 31, 2016) program for issuing treasury notes for raising short, medium,short-, medium- and long-term financing for its European operations. There were no amounts outstanding amounts onunder this program at July 31, 20132016 or 2012.2015. Additionally, the Company’s European operations have lines of credit with an available limit of €44.9€44.0 million or $59.8 million.(approximately $48.9 million at July 31, 2016). There werewas no amountsamount outstanding at July 31, 2016, and there was $10.4 million outstanding on these lines of credit as ofat July 31, 2013 or 2012.

2015, which had a maturity date of less than twelve months.

Other international subsidiaries may borrow under various credit facilities. There was $9.2approximately $8.7 million outstanding under these credit facilities as of July 31, 20132016, and $6.4$1.6 million outstanding as of July 31, 2012.

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Also,2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. At July 31, 2016 and 2015, there was approximately $45.5 million and $47.2 million available for use, respectively, under these facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 20132016 and 2012,July 31, 2015, was 0.32% and 0.41%, respectively.

At July 31, 2016 and 2015, the Company had outstandinga contingent liability for standby letters of credit totaling $12.2$7.3 million and $10.9$7.8 million, respectively, upon which no amounts hadhave been drawn.issued and are outstanding. The letters of credit guarantee payment to third parties in the event the Company is in breach of insurance contract terms as detailed in each letter of credit.

At July 31, 2016 and 2015, there were no amounts drawn upon these letters of credit.

During Fiscal 2013,fiscal 2016, credit in the global credit markets was accessible and market interest rates remained low. The Company believes that its current financial resources, together with cash generated by operations, are sufficient to continue financing its operations for the next twelve months. There can be no assurance, however, that the cost or availability of future borrowings will not be impacted by future capital market disruptions.

Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, 2013,2016, the Company was in compliance with all such covenants.

Shareholders’

Shareholders' equity increased by $175.2decreased $7.3 million from $910.0to $771.4 million at July 31, 2012 to $1,085.2 million at July 31, 2013. The increase was primarily due to current year earnings of $247.4 million, $46.9 million (net of tax) of favorable adjustments related to the pension liability, favorable foreign currency translation of $17.4 million, $13.5 million in tax reductions related to employee plans, $12.4 million of stock options exercised, and $8.3 million of the equity impact of stock option expense. These increases were partially offset by the repurchase2016 as purchases of treasury stock for $102.6 million and $66.0 millionpayments of dividends declared.

The Company’s inventory balance was $234.8 million as ofpaid were offset by net earnings for the year ended July 31, 2013, compared to $256.1 million as of July 31, 2012. Excluding the impact of foreign exchange fluctuations, inventories decreased $20.2 million. 2016.


Cash Flow Summary
The Company decreased inventory levelsassesses its liquidity in terms of its ability to match the decrease in Customer demand experienced during the year. Additionally, as of July 31, 2012 several large gas turbine projects were being constructed that were not ready for shipment. Those units have since shipped resulting in decreases in our inventory balances. The Company’s accounts receivable balance was $430.8 million as of July 31, 2013, comparedgenerate cash to $438.8 million as of July 31, 2012. Excluding the impact of foreign exchange fluctuations, accounts receivable decreased $3.4 million.

Cash FlowsDuring Fiscal 2013, $315.9 million offund its operating, investing, and financing activities. Significant factors affecting liquidity are: cash wasflows generated from operating activities, capital expenditures, acquisitions, dispositions, dividends, repurchase of outstanding shares, adequacy of available bank lines of credit and the ability to attract long-term capital with satisfactory terms. The Company generates substantial cash from the operation of its businesses and remains in a strong financial position, with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions.

Cash flows for the years ended July 31, 2016, 2015 and 2014 are summarized as follows (in millions):
  July 31,
  2016 2015 2014
Net cash provided by (used in):      
Operating activities $286.1
 $212.8
 $317.8
Investing activities (55.6) (111.7) (124.1)
Financing activities (175.0) (179.0) (120.8)
Effect of exchange rate changes on cash (2.2) (28.6) (0.6)
Increase (decrease) in cash and cash equivalents $53.3
 $(106.5) $72.3
Operating Activities
Cash provided by operating activities for the year ended July 31, 2016 was $286.1 million compared with $259.7to $212.8 million in Fiscal 2012.during the prior fiscal year, an increase of $73.3 million. The increase in cash generated by operating activities resulted from a $99.6 million higher cash inflows from working capital relative to the prior fiscal year, partially offset by lower net earnings of $17.3 million. The higher cash inflows from working capital was primarily attributable to improvements in inventories and accounts receivable of $55.3 million and $29.2 million, compared to fiscal 2015 driven by active working capital management.
Cash provided by operating activities for fiscal 2015 was $212.8 million, a decrease of $105.0 million from fiscal 2014. The decrease in cash generated from operating activities of $56.2$105.0 million was primarily attributable to changesa decrease in net income of $52.1 million combined with higher cash outflows from working capital needs resultingrelative to fiscal 2014. The higher cash outflow from working capital was primarily attributable to $76.9 million increase in lowercash used for trade accounts payable and accrued expenses compared to fiscal 2014.
Accounts receivable at July 31, 2016 was $452.4 million, a decrease of $7.6 million from the balance of $460.0 million at July 31, 2015. Days sales outstanding was 67.5 days as of July 31, 2016, compared to 64.1 days as of July 31, 2015. The increase in days sales outstanding reflects delayed payments and longer payment terms associated with some large GTS projects during fiscal 2016. The Company’s days sales outstanding is also impacted by the mix of foreign sales, particularly in countries where extended payment terms are customary. Days sales outstanding is calculated using the count back method, which calculates the number of days of most recent revenue that is reflected in the net accounts receivable balance.
Inventory was $234.1 million at July 31, 2016 as compared to $265.0 million at July 31, 2015. The $30.9 million decrease in inventory was the result of increased sales in the fourth quarter of fiscal 2016 and an effort to reduce inventory levels versusin line with demand. Inventory turns were 4.0 times per year as of July 31, 2016, compared to 4.3 times per year as of July 31, 2015. Inventory turns are calculated by taking the inventoriable portion of cost of goods sold for the trailing twelve month period divided by the average gross inventory value over the prior thirteen month period.
Investing Activities
Cash utilized for investing activities for the year ended July 31, 2016 was $55.6 million, a decrease of $56.1 million from the cash used in fiscal 2015 of $111.7 million. Cash used in investing activities are cash outflows for capital expenditures and acquisitions, partially offset by proceeds from sales of short-term investments. Capital expenditures for property, plant and equipment during fiscal 2016 totaled $72.9 million compared to $93.8 million during fiscal 2015, a decrease of $20.9 million. Fiscal 2016 and fiscal 2015 expenditures primarily related to the Company’s Global ERP Project, global plant capacity additions, information and lab technology equipment, productivity-enhancing investments at manufacturing sites and tooling to manufacture new products.
Capital spending in accounts payable duefiscal 2017 is estimated to a reduction in purchasing activity. Operating cash flowsbe between $70 and $80 million. It is anticipated that fiscal 2017 capital expenditures will be financed primarily by cash on hand, cash generated from operations, and lines of credit.

Cash utilized for acquisitions in fiscal 2016 was $12.9 million compared to $105.6 million during the year ended July 31, 2015. The Company acquired Engineered Products Company (EPC), a leading designer and manufacturer of indicators, gauges, switches and sensors for engine air and liquid filtration systems in fiscal 2016.
Financing Activities
Cash used for financing activities was $175.0 million, $179.0 million and $120.8 million for the years ended July 31, 2016, 2015 and 2014, respectively. Cash flows used in financing activities generally relate to the use of cash for repurchases of the Company's common stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options.
The Company’s dividend policy is to maintain a payout ratio which allows dividends to increase with the long-term growth of earnings per share. The Company’s dividend payout ratio target is 35% to 45% of the prior three years average earnings per share. Dividends paid for the years ended July 31, 2016, 2015 and 2014 were used$91.2 million, $91.2 million and $83.1 million, respectively.
The Board of Directors authorized the repurchase of 14.0 million shares of common stock under the stock repurchase plan dated May 29, 2015. This repurchase authorization, which is effective until terminated by the Board of Directors, replaced the Company’s previous stock repurchase plan dated September 27, 2013 that authorized the repurchase of 15.0 million shares of common stock. The September 27, 2013 authorization replaced a March 26, 2010 authorization for the purchase of 16.0 million shares. Under the various authorizations, shares repurchased were 2.5 million, 6.7 million and 6.8 million shares for the years ended July 31, 2016, 2015 and 2014, respectively. As of July 31, 2016, the Company had remaining authorization to support $94.3repurchase 10.5 million shares under the current authorization.
During the year ended July 31, 2016, the Company reduced short-term borrowings and long-term debt, including current maturities, by $15.4 million as debt repayments exceeded proceeds from long-term debt of $9.6 million. Short-term borrowings at July 31, 2016 were reduced by $23.6 million from July 31, 2015.
As of July 31, 2015, short-term borrowings and long-term debt, including current maturities, were $578.3 million, an increase of $147.6 million from the prior fiscal year end. This increase is primarily due to the issuance of $150.0 million of net capital expenditures, $102.6 million of stock repurchases, $60.3 million of dividend payments,senior unsecured notes during in April 2015.
Cash and $87.0 million of short-term debt repayments. Cash Equivalents
At July 31, 2016 and 2015, cash and cash equivalents decreased $1.7were $243.2 million during Fiscal 2013.

and $189.9 million, respectively. The Company did not hold any short-term investments at July 31, 2016. Short-term investments may change year to year based on maturity dates of existing investments, the Company’s outlook for cash requirements and available access to other sources of liquidity.

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

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

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

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The Company expects that cash generated by operating activities will be between $275$260.0 million and $305$300.0 million in Fiscal 2014.fiscal 2017. At July 31, 2013,2016, the Company had cash and cash equivalents of $224.1$243.2 million and short-term investments of $99.8 million. The Company also had $287.8$506.4 million available under existing credit facilities in the U.S., €144.9 million or $192.8 million, available under existing credit facilities in Europe, and $50.4 million available under various credit facilities and currencies in Asia and the restlines of the world.credit. The Company believes that the combination of existing cash, available credit under existing credit facilities and the expected cash generated by operating activities will be adequate to meet cash requirements for Fiscal 2014,fiscal 2017, including debt repayment, issuancerepayments, payment of anticipated dividends, possible share repurchase activity, potential acquisitions and capital expenditures.

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

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

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 approximately 30 percent to 40 percent of the prior three years average earnings per share. Including the Company’s declaration on July 26, 2013, of a $0.13 per share dividend to be paid, the dividend payout ratio was 33.7 percent of the prior three years average diluted earnings per share on July 31, 2013.

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

Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50 percent50% of certain debt of its joint venture with Caterpillar, Advanced Filtration Systems Inc. (AFSI), as further discussed in Note M of the Company’s Notes to Consolidated Financial Statements.. As of July 31, 2013,2016, the joint venture had $29.1$24.8 million of outstanding debt.debt, of which the Company guarantees half. The Company does not believe that this guarantee will have a current or future effect on its financial condition, results of operations, liquidity, or capital resources.

New Accounting Standards In February 2013,


Contractual Obligations
The following table summarizes the Financial Accounting Standards Board (FASB) updated the disclosure requirements for accumulated other comprehensive income. The updated guidance requires companies to disclose amounts reclassified outCompany’s contractual obligations as of accumulated other comprehensive income by component. The updated guidance does not affect how net income or other comprehensive income are calculated or presented. The updated guidance is effectiveJuly 31, 2016, for the Company beginning in the first quarteryears indicated (in millions):
  Payments Due by Period
  Total 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
More than
5 years
Long-term debt obligations $400.6
 $50.0
 $65.9
 $9.7
 $275.0
Capital lease obligations 2.0
 0.8
 1.0
 0.2
 
Interest on long-term debt obligations 106.8
 13.6
 21.7
 18.7
 52.8
Operating lease obligations 25.4
��10.0
 12.6
 2.6
 0.2
Purchase obligations (1) 126.2
 120.2
 5.2
 0.2
 0.6
Pension and deferred compensation (2) 91.3
 15.8
 11.9
 11.4
 52.2
Total (3) $752.3
 $210.4
 $118.3
 $42.8
 $380.8
__________________
(1)Purchase obligations consist primarily of fiscal year 2014.inventory, tooling, and capital expenditures. The adoptionCompany’s purchase orders for inventory are based on expected customer demand, and as a result quantities and dollar volumes are subject to change.
(2)Pension and deferred compensation consists of this standard is not expected to have a material impact onlong-term pension liabilities and salary and bonus deferrals elected by certain executives under the Company’s consolidated financial statements.

In February 2013,Deferred Compensation Plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the FASB issued guidance relatedplan (10-year treasury bond STRIP rate plus two percent for deferrals prior to obligations resulting from jointJanuary 1, 2011 and several liability arrangements10-year treasury bond rates for whichdeferrals after December 31, 2010) are approved by the total amountHuman Resources Committee of the obligation is fixedBoard of Directors, and are payable at the reporting date. This guidance is effective for the Company beginning the first quarter of Fiscal 2015. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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Market Risk

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

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

It is not possible to determine the true impact of foreign currency translation changes. However, the direct effect on reported net sales and net earnings can be estimated. For the year ended July 31, 2013, the impact of foreign currency translation resulted in an overall decrease in reported net sales of $32.2 million, an increase in operating expenses of $8.0 million, and a decrease in reported net earnings of $2.1 million. Foreign currency translation had a negative impact in many regions around the world. The stronger U.S. dollar relativeparticipants.

(3)In addition to the yen resulted in a total decrease of $17.9 million in reported net sales. In Europe,above contractual obligations, the stronger U.S. dollar relative to the euro and British pound resulted in a total decrease of $9.3 million in reported net sales. The stronger U.S. dollar relative to the South African rand, the Brazilian real, and the Indian rupee had a negative impact on foreign currency translation with a decrease in reported net sales of $8.1 million, $2.6 million, and $1.6 million, respectively. The weaker U.S. dollar relative to the Mexican peso and Chinese renminbi had a positive impact on foreign currency translation, with an increase in reported net sales of $4.3 million and $3.1 million, respectively.

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

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

The Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigateobligated for additional cash outflows of $17.5 million for potential tax obligations, including accrued interest and penalties. The payment and timing of any such adverse trends, the Company, from time to time, enters into forward exchange contracts and other hedging activities. Additionally, foreign currency positions are partially offsetting and are netted against one another to reduce exposure.

Some products made in the U.S. are sold abroad. As a result, sales of such products arepayments is affected by the valueultimate resolution of the U.S. dollar relativetax years that are under audit or remain subject to other currencies. Any long-term strengtheningexamination by the relevant taxing authorities. Therefore, quantification of the U.S. dollar could depress these sales. Also, competitive conditions in the Company’s markets may limit its ability to increase product pricing in the facean estimated range and timing 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, 2013, the estimated fair value of long-term debt with fixed interest rates was $112.3 million compared to its carrying value of $100.0 million. The fair value is estimated by discounting the projected cash flows using the rate of which similar amounts of debt could currentlyfuture payments cannot be borrowed. As of July 31, 2013, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $9.2 million of short-term debt outstanding. Assuming a hypothetical increase of one-half percent in short-term interest rates, with all other variables remaining constant, interest expense would have increased $0.3 million and interest income would have increased $1.5 million in Fiscal 2013.

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made at this time.

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

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management bases these estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recorded values of certain assets and liabilities. The Company believes its use of estimates and underlying accounting assumptions adheres to U.S. GAAP and is consistently applied. Valuations based on estimates and underlying accounting assumptions are reviewed for reasonableness on a consistent basis throughout the Company. Management believes theThe Company’s critical accounting policiesCritical Accounting Policies are those that require more significant judgments and estimates used in the preparation of its consolidated financial statements and that are the most important to aid in fully understanding its financial resultsresults. The Company's Critical Accounting Policies are the following:

Revenue recognition warranty, and allowance for doubtful accounts The Company sells a wide range of filtration solutions into many industries around the globe. Revenue is recognized when both product ownership and the risk of loss have transferred to the Customer andcustomer, the Company has no remaining obligations.obligations, the selling price is fixed and determinable, and collectability is reasonably assured. The vast majority of the Company’s sales agreements are for standard products with product ownership and risk of loss transferring to the customer when the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales agreements with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms, the Company defers revenue on these product sales until the product has been delivered.
For the Company’s GTS sales, which typically consist of multiple shipments of components that will comprise the entire GTS project, it must carefully monitor the transfer of title related to each portion of a system sale. The Company defers revenue recognition until product ownership and risk of loss has transferred to the customer for all components and when all terms specified in the contract are met which may include requirements such as the requirement for the Company to deliver technical documentation to the customer or a quality inspection which may be required to be approved by the customer.
In limited circumstances, the Company enters into sales agreements that involve multiple elements (such as equipment, replacement filter elements, and installation services). In these instances, the Company determines if the multiple elements in the arrangement represent separate units of accounting. If separate units of accounting exist, the price of the entire arrangement is allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was

sold separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same period revenue is recognized. For the Company’s Gas Turbine Systems sales, it must carefully monitor the shipment of each part that comprises the entirety of the GTS project and may only recognize revenue when the last element of the entire GTS project is shipped or according to particular Incoterms terms. Accruals for warranties on products sold are recorded based on historical return percentages and specific product campaigns. Allowances for doubtful accounts are estimated by management based on evaluation of potential losses related to Customer receivable balances. The Company determines the allowance based on historical write-off experience in the industry, regional economic data, and evaluation of specific Customer accounts for risk of loss. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its Customers. The establishment of this reserve requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though management considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have an effect on reserve balances required.

recognized

Goodwill and other intangible assetsGoodwill is assessed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset mightmay be impaired. The Company performs impairment assessments for its reporting units and uses a discounted cash flow model based on management’s judgments and assumptions to determine the estimated fair value. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company performed an impairment assessment during the third quarter of Fiscal 2013 to satisfy its annual impairment requirement.fiscal 2016. The impairmentresults of this assessment in the third quarter indicatedshowed that the estimated fair values of the reporting units to which goodwill is assigned continued to significantly exceed the corresponding carrying values of the respective reporting units including recordedresulting in no goodwill and, as such, no impairment existed atimpairment. Of the Company's five reporting units that time. Other intangible assets with definite lives continue to be amortized over their estimated useful lives. Definite lived intangible assets are also subject to impairment assessments. A considerable amount of management judgment and assumptions are required in performing the impairment assessments, principally in determining the fair value of each reporting unit. The important assumptions utilized in these assessments include the (i) discount rate; (ii) projected revenue, gross margin, operating income; and (iii) terminal value. While the Company believes its judgments and assumptions are reasonable, different assumptions could changecontain goodwill, the estimated fair values during the Company's annual third quarter fiscal 2016 impairment tests exceeded the respective carrying values by at least 34%.
During the second quarter of fiscal 2016, the Company revised its forecast associated with its GTS reporting unit. While the previous forecast for this reporting unit called for a year-over-year decline in sales, the Company continued to face deferrals and therefore,softening demand for large-turbine projects. Given the challenges facing this business, the Company revisited its strategic focus and priorities. The Company will continue to focus on innovative products while growing the aftermarket business but will be more selective in taking on large-turbine projects, which resulted in the revised forecast associated with its GTS reporting unit.
As a result of the strategic shift and actions taken in the second quarter of fiscal 2016, the Company concluded that an interim goodwill triggering event had occurred for the GTS reporting unit. Goodwill associated with the GTS reporting unit was $60.2 million as of January 31, 2016 and is included in the Industrial Products segment. The Company completed its goodwill impairment chargesassessment using a discounted cash flow model based on management's judgments and assumptions to determine the estimated fair value of the reporting unit. Based on the results of this assessment, the Company concluded the estimated fair value of the GTS reporting unit exceeded the respective carrying amount of the reporting unit by approximately 38%. Therefore, the second step of the impairment test was not necessary for this reporting unit.
In determining the estimated fair value of the reporting unit, the Company used the income approach, a valuation technique using an estimate of future cash flows from the reporting unit's financial forecast. A terminal growth rate of 3.0% and a discount rate of 12.0% were used reflecting the relative risk of achieving cash flows as well as any other specific risks or factors related to the GTS reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimate of the reporting unit's fair value. The Company performed a sensitivity analysis to determine how the assumptions made impact the results of the impairment test. Holding all other assumptions constant, an unfavorable change in projected cash flows of 25.0% or more would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate of 4.5 percentage points or more or an increase in the discount rate of 1.2 percentage points or more would potentially result in an indication of impairment. While these projections supported no impairment of this reporting unit as of January 31, 2016, given that the Company's second quarter 2016 results fell below expectations and the sensitivities to the assumptions used in the calculations of the estimated cash flows, it is possible that an impairment could be required.

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incurred in the future. The Company will continue to monitor results and expected cash flows in the future to assess whether goodwill impairment in the GTS reporting unit may be necessary.

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 differences result in deferred tax assets and liabilities, which are included within the Company’s Consolidated Balance Sheet. These assets and liabilities are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance is established. To the extent that a valuation allowance is established or increased, an expense within the tax provision is included in the statement of operations. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it was properly reserved at July 31, 2013. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates, and the Company’s future taxable income levels.2016. As of July 31, 2013,2016, the liability for unrecognized tax benefits, accrued interest, and penalties was $19.5 million.

Employee$17.5 million.

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

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

Reflecting the relatively long-term nature of the U.S. plans’ obligations, approximately 60 percent65% of the plansplans’ assets are invested in equity securities, 25 percent30% in fixed income, and 15 percent5% in real assets (investments into funds containing commodities and real estate).

In fiscal 2016, the Company plans to continue investing in liability-driven investment funds, which will change the asset allocations for the U.S. plans. The Company


selected a 6.90% long-term rate of return on assets as of July 31, 2016, which will also be used to develop the fiscal 2017 expense for the Company’s U.S. pension plans and selected a long-term rate of return on assets for its non-U.S. plans of 3.98%. A one percent change in the expected long-term rate of return on U.S. plan assets from 7.50 percent, would have changed the Fiscal 2013fiscal 2016 annual pension expense by approximately $4.1$4.6 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 the rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits. This process includes assessing the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans. As of the measurement date of July 31, 2013, the Company increased itsThis resulted in a weighted average discount rate for the U.S. pension plans to 4.58 percentof 3.65% down from 3.59 percent as of July 31, 2011. The increase of 99 basis points is consistent with published bond indices. The change4.33% in the prior year and decreased the Company’sweighted average discount rate used for its non-U.S. plans from 3.14% to 2.08%. Effective August 1, 2016, the Company changed to the split/spot rate method to estimate the service and interest costs for its U.S. projected, United Kingdom, and Belgium plans. The new method utilizes a full yield curve approach to estimate service and interests costs by applying specific spot rates along the yield curve used to determine the benefit obligation as of July 31, 2013, by approximately $36.5 million and is expected to decreaserelevant projected cash outflows.
In fiscal 2016, the Company’s global pension expense in fiscal year 2014 by approximately $3.3was $17.8 million. The rates discussed above are weighted average rates as the Company has multiple plans bothEffective August 1, 2016, participants in the U.S. and internationally.

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The Company expects that global pension expenses will decrease approximately $3.7 million in Fiscal 2014 as compared to Fiscal 2013, which is driven primarily by the changes in assumptions. In July 2013, the Company announced that effective August 1, 2013, thesalaried plan will be frozen to any Employees hired on or after August 1, 2013. Then effective, August 1, 2016, Employees hired prior to August 1, 2013 would no longer continue to accrue Company contribution credits under the plan. Additionally, in July 2013, the Company announced that Employees hired on or after August 1, 2013 will beplan but are eligible for a 3 percent3.0% annual Company retirement contribution in addition to the Company’s match to their 401(k) match. Effective Augustaccounts.

While changes to the Company’s pension assumptions would not be expected to impact its annual pension expense by a material amount, such changes could significantly impact the Company’s pension liability.
New Accounting Standards Not Yet Adopted
For new accounting standards not yet adopted refer to Note 1 2016, Employees hired prior to August 1, 2013 will be eligible for the 3 percent annual Company retirement contribution.

Summary of Significant Accounting Policies included in Item 8 of this Annual Report.

Safe Harbor Statement under the Securities Reform Act of 1995

The Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and financial performance. These forward-looking statements, which may be included in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A Risk Factors of this Form 10-K,Annual Report, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “will allow,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,”“forecast” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (PSLRA). In particular, the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Annual Report, on Form 10-K, including those contained in the “Outlook” section of Item 7.7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. All statements other than statements of historical fact are forward-looking statements. These statements do not guarantee future performance.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the Company wishes to advise readers that the factors listed in Item 1A Risk Factors of this Form 10-K,Annual Report, 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 industrial market conditions; the ongoing economic uncertainty,Company's ability to maintain certain competitive advantages over competitors; pricing pressures; the reduced demand for hard disk drive products withCompany's ability to protect and enforce its intellectual property rights; the increased useCompany's dependence on global operations; customer concentration in certain cyclical industries; commodity availability and pricing; the continued implementation of flash memory, the potential for some Customers to increase their reliance on their own filtration capabilities,Company's global ERP information technology system and other new information technology systems; information security and data breaches; foreign currency fluctuations, commodity prices, political factors, the Company’s international operations, highly competitive markets,fluctuations; governmental laws and regulations; changes in tax laws, regulations includingand results of examinations; the impactCompany's ability to attract and retain key personnel; changes in capital and credit markets; execution of the various economic stimulus andCompany's acquisition strategy; the possibility of goodwill or intangible asset impairment; execution of restructuring plans; the Company's ability to maintain an effective system of internal control over financial reform measures, the implementation of our new information technology systems, failure or breach of information technology and trade secret security, potential global events resulting in market instability including financial bailouts and defaults of sovereign nations, military and terrorist activities, health outbreaks, natural disasters,reporting and other factors included in Item 1A Risk Factors of this Report on Form 10-K.Annual Report. 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

The Company’s market risk disclosure appearsincludes the potential loss arising from adverse changes in Management’s Discussionforeign currency exchange rates and Analysisinterest 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 speculative trading purposes. Rather, the Company’s objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The Company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value resulting from existing recognized foreign currency denominated asset and liability balances and also for anticipated foreign currency transactions. The Company also naturally hedges foreign currency through its production in the countries in which it sells its products. The Company’s market risk on page 23 under “Market Risk.”

26
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.
Table of Contents
Foreign Currency During fiscal 2016, the U.S. dollar was generally stronger than in fiscal 2015 compared to many of the currencies of the foreign countries in which the Company operates. The overall strength of the dollar had a negative impact on the Company’s international net sales results because the foreign denominated revenues translated into fewer U.S. dollars.
It is not possible to determine the exact 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, 2016, the estimated impact of foreign currency translation resulted in an overall decrease in reported net sales of $74.2 million and a decrease in reported net earnings of approximately $7.9 million. Foreign currency translation had a negative impact in many regions around the world.
The Company maintains significant assets and operations in Europe, Asia-Pacific, Latin America, and South Africa, resulting in exposure to foreign currency gains and losses. A portion of the Company’s foreign currency exposure is naturally hedged by incurring liabilities, including bank debt, denominated in the local currency in which the Company’s foreign subsidiaries are located.
The foreign subsidiaries of the Company generally purchase the majority of their input costs and then sell to many of their customers in the same local currency. However, the Company still 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 by the Company in the U.S. are sold internationally. As a result, sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Also, competitive conditions in the Company’s markets may limit its ability to increase product pricing in the face of adverse currency movements.
Interest The Company’s exposure to market risks for changes in interest rates relates primarily to its short-term investments, short-term borrowings, and interest rate swap agreements, as well as the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. The Company has limited earnings or cash flow exposure due to market risks on its long-term debt obligations as a result of the majority of the debt being fixed-rate. However, interest rate changes would affect the fair market value of the debt. As of July 31, 2016, the estimated fair value of debt with fixed interest rates was $394.4 million compared to its carrying value of $375.0 million. The fair value is estimated by discounting the projected cash flows using the rate of which similar amounts of debt could currently be borrowed. As of July 31, 2016, the Company’s financial liabilities with exposure to changes in interest rates consisted mainly of $165.5 million of short-term debt outstanding and a total of ¥ 2.65 billion, or $25.7 million, of variable rate long-term debt. Assuming a hypothetical increase of one-half percent in short-term interest rates, with all other variables remaining constant, interest expense would have increased $1.3 million and interest income would have increased $1.2 million in fiscal 2016.
Pensions The Company is exposed to market return fluctuations on its qualified defined benefit pension plans. In fiscal 2016, the Company reduced its long-term rate of return from 6.99% to 6.90% on its U.S. plans and reduced its rate from 4.83% to 3.98% on its non-U.S. plans, to reflect its future expectation for returns. Consistent with published bond indices, the Company reduced its discount rate from 4.33% to 3.65% on its U.S. plans and reduced its rates from 3.14% to 2.08% for its non-U.S. plans. The plans were underfunded by $81.8 million at July 31, 2016, since the projected benefit obligation exceeded the fair value of the plan assets.


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.as such term is defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the Company has assessed the effectiveness of the Company’s internal control over financial reporting based onas of July 31, 2016. In making its assessment of internal control financial reporting, management used the frameworkcriteria described inInternal Control - Integrated Framework - version 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of July 31, 2013.2016 based on criteria in Internal Control-Integrated Framework issued by the COSO. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of July 31, 2013,2016, as stated in thistheir report which follows in Item 8 of this Form 10-K.

appears herein.

/s/ William M. CookTod E. Carpenter/s/ James F. ShawScott J. Robinson
  
William M. CookJames F. Shaw
Tod E. CarpenterScott J. Robinson
President and Chief Executive OfficerChief Financial Officer
September 27, 201323, 2016September 27, 2013

2723, 2016

Report of Independent Registered Public Accounting Firm


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


In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Donaldson Company, Inc. and its subsidiariesat July 31, 2013 2016and July 31, 2012,2015, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2013 2016in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2013,2016, based on criteria established inInternal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in accompanying Management’s Report on Internal Control over Financial Reporting.Reporting appearing under Item 8A. Our responsibility is to express opinions on these financial statements on the financial statement schedule and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


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


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





/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
September 27, 2013

28
23, 2016

Consolidated Statements of Earnings


Donaldson Company, Inc. and Subsidiaries

  Year ended July 31, 
  2013  2012  2011 
  (thousands of dollars, except share and per share amounts) 
Net sales $2,436,948  $2,493,248  $2,294,029 
Cost of sales  1,589,821   1,619,485   1,480,233 
Gross profit  847,127   873,763   813,796 
Selling, general, and administrative  441,168   451,158   443,227 
Research and development  62,630   59,589   55,286 
Operating income  343,329   363,016   315,283 
Other income, net  (15,762)  (19,253)  (9,505)
Interest expense  10,910   11,489   12,525 
Earnings before income taxes  348,181   370,780   312,263 
Income taxes  100,804   106,479   86,972 
Net earnings $247,377  $264,301  $225,291 
Weighted average shares - basic  148,273,904   150,286,403   154,392,740 
Weighted average shares - diluted  150,455,193   152,940,605   157,196,918 
Net earnings per share - basic $1.67  $1.76  $1.46 
Net earnings per share - diluted $1.64  $1.73  $1.43 

Consolidated Statements of Earnings
(In millions, except per share amounts)

  Year ended July 31,
  2016 2015 2014
Net sales $2,220.3
 $2,371.2
 $2,473.5
Cost of sales 1,465.5
 1,562.6
 1,595.7
Gross profit 754.8
 808.6
 877.8
Selling, general and administrative 425.1
 460.1
 460.3
Research and development 55.5
 60.2
 61.8
Operating income 274.2
 288.3
 355.7
Other income, net (3.9) (15.5) (15.2)
Interest expense 20.7
 15.2
 10.2
Earnings before income taxes 257.4
 288.6
 360.7
Income taxes 66.6
 80.5
 100.5
Net earnings $190.8
 $208.1
 $260.2
       
Weighted average shares – basic 133.8
 137.8
 145.6
Weighted average shares – diluted 134.8
 139.4
 147.6
Net earnings per share – basic $1.43
 $1.51
 $1.79
Net earnings per share – diluted $1.42
 $1.49
 $1.76
       
Cash dividends declared per share $0.690
 $0.670
 $0.610


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

29

Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions)

Donaldson Company, Inc. and Subsidiaries

  At July 31, 
  2013  2012  2011 
  (thousands of dollars, except share amounts) 
Net earnings $247,377  $264,301  $225,291 
Foreign currency translation gain (loss)  17,435   (98,723)  72,505 
Gain (loss) on hedging derivatives, net of deferred taxes of            
($196), $117, and ($280), respectively  120   (672)  842 
Pension and postretirement liability adjustment, net of deferred            
   taxes of ($25,656), $23,527, and ($4,021), respectively  46,860   (42,520)  7,166 
Total comprehensive income $311,792  $122,386  $305,804 

  Year ended July 31,
  2016 2015 2014
Net earnings $190.8
 $208.1
 $260.2
Other comprehensive income (loss)      
Foreign currency translation loss (18.5) (119.1) (2.1)
Pension and postretirement liability adjustment, net of deferred taxes of $14.4, $(0.2) and $1.3, respectively (25.2) 3.4
 (6.3)
Gain (loss) on hedging derivatives, net of deferred taxes of $(0.1), $0.4 and $(0.1), respectively 0.1
 (0.5) 0.1
Net other comprehensive loss (43.6) (116.2) (8.3)
Total comprehensive income $147.2
 $91.9
 $251.9


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

30

Consolidated Balance Sheets

Donaldson Company, Inc. and Subsidiaries

  At July 31, 
  2013  2012 
  (thousands of dollars, except share amounts) 
Assets        
Current assets        
Cash and cash equivalents $224,138  $225,789 
Short-term investments  99,750   92,362 
Accounts receivable, less allowance of $7,040 and $6,418  430,766   438,796 
Inventories, net  234,820   256,116 
Deferred income taxes  26,464   25,158 
Prepaids and other current assets  39,724   47,441 
Total current assets $1,055,662  $1,085,662 
Property, plant, and equipment, net  419,280   384,909 
Goodwill  165,568   162,949 
Intangible assets, net  41,307   46,200 
Other assets  61,739   50,362 
Total assets $1,743,556  $1,730,082 
Liabilities and shareholders’ equity        
Current liabilities        
Short-term borrowings $9,190  $95,147 
Current maturities of long-term debt  98,664   2,346 
Trade accounts payable  186,460   199,182 
Accrued employee compensation and related taxes  68,954   80,550 
Accrued liabilities  38,527   49,242 
Other current liabilities  74,640   72,056 
Total current liabilities  476,435   498,523 
Long-term debt  102,774   203,483 
Deferred income taxes  23,604   4,611 
Other long-term liabilities  55,556   113,451 
Total liabilities  658,369   820,068 
Commitments and contingencies (Note M and Note O)        
Shareholders’ equity        
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued      
Common stock, $5.00 par value, 240,000,000 shares authorized,        
151,643,194 shares issued in both 2013 and 2012  758,216   758,216 
Retained earnings  532,307   366,788 
Stock compensation plans  21,745   24,948 
Accumulated other comprehensive income (loss)  (37,473)  (101,888)
Treasury stock, 5,490,725 and 3,980,832 shares in 2013 and 2012, at cost  (189,608)  (138,050)
Total shareholders’ equity  1,085,187   910,014 
Total liabilities and shareholders’ equity $1,743,556  $1,730,082 

Consolidated Balance Sheets
(In millions, except share amounts)

 As of July 31,
 2016 2015
ASSETS   
Current assets:   
Cash and cash equivalents$243.2
 $189.9
Short-term investments
 27.5
Accounts receivable, less allowance of $8.6 and $6.7452.4
 460.0
Inventories, net234.1
 265.0
Deferred income taxes29.0
 28.2
Prepaids and other current assets51.0
 60.1
Total current assets1,009.7
 1,030.7
Property, plant and equipment, net469.8
 470.6
Goodwill229.3
 223.7
Intangible assets, net38.5
 37.9
Other long-term assets41.3
 46.6
Total assets$1,788.6
 $1,809.5
    
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current liabilities:   
Short-term borrowings$165.5
 $187.3
Current maturities of long-term debt51.2
 1.8
Trade accounts payable143.3
 179.2
Accrued employee compensation and related taxes61.0
 66.5
Accrued liabilities37.5
 42.9
Other current liabilities85.3
 82.9
Total current liabilities543.8
 560.6
Long-term debt351.8
 389.2
Deferred income taxes3.1
 12.5
Other long-term liabilities118.5
 68.5
Total liabilities1,017.2
 1,030.8
    
Commitments and contingencies (Note 17)

 

    
Shareholders’ equity:   
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued
 
Common stock, $5.00 par value, 240,000,000 shares authorized, 151,643,194 shares issued758.2
 758.2
Retained earnings905.1
 815.2
Non-controlling interest4.0
 3.9
Stock compensation plans16.7
 17.9
Accumulated other comprehensive income (loss)(205.6) (162.0)
Treasury stock, 18,750,503 and 17,044,950 shares, at cost(707.0) (654.5)
Total shareholders’ equity771.4
 778.7
Total liabilities and shareholders’ equity$1,788.6
 $1,809.5

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

31

Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)

Donaldson Company, Inc. and Subsidiaries

  Year ended July 31, 
  2013  2012  2011 
  (thousands of dollars) 
Operating Activities            
Net earnings $247,377  $264,301  $225,291 
Adjustments to reconcile net earnings to net cash provided by            
operating activities            
Depreciation and amortization  64,290   61,165   60,491 
Equity in losses (earnings) of affiliates, net of distributions  1,637   (2,380)  (2,585)
Deferred income taxes  8,347   6,344   1,957 
Tax benefit of equity plans  (11,191)  (10,316)  (9,873)
Stock compensation plan expense  9,148   10,553   9,234 
Other, net  (6,175)  (24,346)  (11,991)
Changes in operating assets and liabilities, net of acquired businesses            
Accounts receivable  3,705   (17,877)  (62,274)
Inventories  20,142   (4,149)  (52,999)
Prepaids and other current assets  13,495   (17,378)  7,233 
Trade accounts payable and other accrued expenses  (34,852)  (6,205)  81,571 
Net cash provided by operating activities  315,923   259,712   246,055 
Investing Activities            
Purchases of property, plant, and equipment  (94,895)  (78,139)  (60,633)
Proceeds from sale of property, plant, and equipment  558   969   782 
Purchases of short-term investments  (99,339)  (187,575)  (64,482)
Proceeds from sale of short-term investments  97,365   88,277   64,482 
Acquisitions and divestitures of affiliates        3,493 
Net cash used in investing activities  (96,311)  (176,468)  (56,358)
Financing Activities            
Proceeds from long-term debt        6,774 
Repayments of long-term debt  (1,353)  (46,205)  (13,353)
Change in short-term borrowings  (86,957)  96,715   (36,603)
Purchase of treasury stock  (102,572)  (130,233)  (108,929)
Dividends paid  (60,320)  (47,684)  (41,013)
Tax benefit of equity plans  11,191   10,316   9,873 
Exercise of stock options  16,043   13,691   15,899 
Net cash used in financing activities  (223,968)  (103,400)  (167,352)
Effect of exchange rate changes on cash  2,705   (27,549)  19,149 
Increase (decrease) in cash and cash equivalents  (1,651)  (47,705)  41,494 
Cash and cash equivalents, beginning of year  225,789   273,494   232,000 
Cash and cash equivalents, end of year $224,138  $225,789  $273,494 
Supplemental Cash Flow Information            
Cash paid during the year for:            
Income taxes $84,898  $91,915  $57,688 
Interest  13,531   13,410   12,852 

  Year ended July 31,
  2016 2015 2014
Operating Activities      
Net earnings $190.8
 $208.1
 $260.2
Adjustments to reconcile net earnings to net cash provided by operating activities      
Depreciation and amortization 74.9
 74.3
 67.2
Equity in earnings of affiliates, net of distributions (0.3) (1.1) (3.4)
Deferred income taxes (3.3) (5.6) (7.8)
Tax benefit of equity plans (2.7) (6.8) (8.8)
Stock compensation plan expense 7.3
 10.7
 11.6
Loss on sale of business 
 
 0.9
Other, net 11.7
 25.1
 10.1
Changes in operating assets and liabilities, net of acquired businesses      
Accounts receivable 8.5
 (20.7) (44.8)
Inventories 29.1
 (26.2) (19.3)
Prepaids and other current assets 0.8
 (27.8) (7.8)
Trade accounts payable and other accrued expenses (30.7) (17.2) 59.7
Net cash provided by operating activities 286.1
 212.8
 317.8
Investing Activities      
Purchases of property, plant and equipment (72.9) (93.8) (97.2)
Proceeds from sale of property, plant and equipment 2.2
 0.2
 0.4
Purchases of short-term investments 
 (27.0) (108.8)
Proceeds from sale of short-term investments 28.0
 114.5
 81.5
Acquisitions, net of cash acquired (12.9) (105.6) 
Net cash used in investing activities (55.6) (111.7) (124.1)
Financing Activities      
Proceeds from long-term debt 9.6
 150.0
 125.0
Repayments of long-term debt (1.4) (4.2) (81.9)
Change in short-term borrowings (23.6) 2.8
 175.4
Purchase of treasury stock (84.3) (256.3) (279.4)
Dividends paid (91.2) (91.2) (83.1)
Tax benefit of equity plans 2.7
 6.8
 8.8
Exercise of stock options 13.2
 13.1
 14.4
Net cash used in financing activities (175.0) (179.0) (120.8)
Effect of exchange rate changes on cash (2.2) (28.6) (0.6)
Increase (decrease) in cash and cash equivalents 53.3
 (106.5) 72.3
Cash and cash equivalents, beginning of year 189.9
 296.4
 224.1
Cash and cash equivalents, end of year $243.2
 $189.9
 $296.4
       
Supplemental Cash Flow Information      
Cash paid during the year for:      
Income taxes $67.8
 $85.6
 $93.1
Interest $19.7
 $14.7
 $11.1


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

32

Donaldson Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(In millions, except per share amounts)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Non-
Controlling
Interest
 
Stock
Compensation
Plans
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 Total
Balance July 31, 2013$758.2
 $
 $532.3
 $
 $21.8
 $(37.5) $(189.6) $1,085.2
Comprehensive income               
Net earnings    260.2
         260.2
Foreign currency translation          (2.1)   (2.1)
Pension liability adjustment, net of deferred taxes          (6.3)   (6.3)
Net gain on cash flow hedging derivatives, net of deferred taxes          0.1
   0.1
Comprehensive income              251.9
Treasury stock acquired            (279.4) (279.4)
Stock options exercised  (7.0) (10.5)       30.5
 13.0
Deferred stock and other activity  (3.1) (1.8)   (0.5)   4.9
 (0.5)
Performance awards  (0.4) (0.5)   (1.7)   1.6
 (1.0)
Stock option expense    9.9
         9.9
Tax reduction - employee plans  10.5
           10.5
Dividends ($0.61 per share)    (87.2)         (87.2)
Balance July 31, 2014758.2
 
 702.4
 
 19.6
 (45.8) (432.0) 1,002.4
Comprehensive income               
Net earnings    208.1
         208.1
Foreign currency translation          (119.1)   (119.1)
Pension liability adjustment, net of deferred taxes          3.4
   3.4
Net gain on cash flow hedging derivatives, net of deferred taxes          (0.5)   (0.5)
Comprehensive income              91.9
Purchase of IFIL      3.9
       3.9
Treasury stock acquired            (256.3) (256.3)
Stock options exercised  (5.7) (13.1)       30.2
 11.4
Deferred stock and other activity  (1.9) (0.7)   (1.1)   3.0
 (0.7)
Performance awards  (0.1) (0.1)   (0.6)   0.6
 (0.2)
Stock option expense    9.5
         9.5
Tax reduction - employee plans  7.7
           7.7
Dividends ($0.67 per share)    (90.9)         (90.9)
Balance July 31, 2015758.2
 
 815.2
 3.9
 17.9
 (162.0) (654.5) 778.7
Comprehensive income               
Net earnings    190.8
         190.8
Foreign currency translation          (18.5)   (18.5)
Pension liability adjustment, net of deferred taxes          (25.2)   (25.2)
Net gain on cash flow hedging derivatives, net of deferred taxes          0.1
   0.1
Comprehensive income              147.2
Treasury stock acquired            (84.3) (84.3)
Stock options exercised  (1.4) (14.7)       29.0
 12.9
Deferred stock and other activity  (1.3) (1.4) 0.1
 (0.7)   2.5
 (0.8)
Performance awards  

 

   (0.5)   0.3
 (0.2)
Stock option expense    6.7
   

   

 6.7
Tax reduction - employee plans  2.7
           2.7
Dividends ($0.69 per share)    (91.5)         (91.5)
Balance July 31, 2016$758.2
 $
 $905.1
 $4.0
 $16.7
 $(205.6) $(707.0) $771.4

Donaldson Company, Inc. and Subsidiaries

     Additional     Stock  Accumulated Other       
  Common  Paid-in  Retained  Compensation  Comprehensive  Treasury    
  Stock  Capital  Earnings  Plans  Income (Loss)  Stock  Total 
  (thousands of dollars, except per share amounts) 
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                  842       842 
Comprehensive income                          305,804 
Treasury stock acquired                      (108,929)  (108,929)
Stock options exercised      (10,792)  (7,854)  1,862       30,604   13,820 
Deferred stock and other activity      (1,418)  174   548       2,185   1,489 
Performance awards      (7)  7                
Stock option expense          6,462               6,462 
Tax reduction - employee plans      12,217                   12,217 
Dividends ($0.280 per share)          (42,785)              (42,785)
Balance July 31, 2011  443,216      925,542   24,736   40,027   (498,810)  934,711 
Comprehensive income                            
Net earnings          264,301               264,301 
Foreign currency translation                  (98,723)      (98,723)
Pension liability adjustment, net of deferred taxes                  (42,520)      (42,520)
Net gain on cash flow hedging derivatives                  (672)      (672)
Comprehensive income                          122,386 
Treasury stock acquired                      (130,233)  (130,233)
Stock options exercised      (9,834)  (5,116)          27,698   12,748 
Deferred stock and other activity      (2,158)  312   213       1,926   293 
Performance awards          (9)  (1)          (10)
Stock option expense          7,800               7,800 
Tax reduction - employee plans      11,992                   11,992 
Two-for-one Stock split  315,000       (776,369)          461,369    
Dividends ($0.335 per share)          (49,673)              (49,673)
Balance July 31, 2012  758,216      366,788   24,948   (101,888)  (138,050)  910,014 
Comprehensive income                            
Net earnings          247,377               247,377 
Foreign currency translation                  17,435       17,435 
Pension liability adjustment, net of deferred taxes                  46,860       46,860 
Net gain on cash flow hedging derivatives                  120       120 
Comprehensive income                          311,792 
Treasury stock acquired                      (102,572)  (102,572)
Stock options exercised      (10,836)  (21,256)          44,463   12,371 
Deferred stock and other activity      (2,125)  (1,677)  (1,586)      4,496   (892)
Performance awards      (573)  (1,161)  (1,617)      2,055   (1,296)
Stock option expense          8,300               8,300 
Tax reduction - employee plans      13,534                   13,534 
Dividends ($0.450 per share)          (66,064)              (66,064)
Balance July 31, 2013 $758,216  $  $532,307  $21,745  $(37,473) $(189,608) $1,085,187 

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

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Donaldson Company, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
NOTE A1. Summary of Significant Accounting Policies

Description of BusinessDonaldson Company, Inc. (Donaldson or the Company), is a worldwide manufacturer of filtration systems and replacement parts. The Company’s product mix includes aircore strengths are leading filtration technology, strong customer relationships and liquid filtration systems and exhaust and emission control products.its global presence. Products are manufactured at 3942 plants around the world and through 3three joint ventures. Products are sold to original equipment manufacturers (OEMs),OEMs, distributors, dealers and directly to end-users.

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

Use of EstimatesThe preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America (U.S.) (U.S. GAAP)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 substantially all foreign operations, local currencies are considered the functional currency. Assets and liabilities of non-U.S. dollar functional currency entities are translated to U.S. dollars at year-end exchange rates and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as a cumulative translation adjustment, a component of Accumulated other comprehensive income (loss) (AOCI)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,Income, net in the Consolidated Statements of Earnings. Foreign currency translationtransaction gains (losses) of $0.2$(4.7) million, $2.1 million, and $1.8 million, and a loss of $4.5$1.7 million are included in Other income,Income, net in the Consolidated Statements of Earnings in Fiscal 2013, 2012,the years ended July 31, 2016, 2015 and 2011,2014, respectively.

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

Short-Term Investments The Company’s short-term investments consist exclusively of time deposits with durations longer than 3 months, but less than one year. These investments are carried at cost, which approximates their estimated fair value. Classification of the Company’s investments as current or non-current is dependent upon management’s intended holding period, the investment’s maturity date and liquidity considerations based on market conditions. If management intends to hold the investments for longer than one year as of the balance sheet date, they are classified as non-current. See Note B for disclosures related to the Company’s short-term investments.

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

customers.

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 non-U.S. inventories are valued using the first-in, first-out (FIFO) method. Inventories valued at LIFO were approximately 33 percent29.0% and 30 percent34.2% of total inventories at July 31, 20132016 and 2012,2015, respectively. For inventories valued under the LIFO method, the FIFO cost exceeded the LIFO carrying values by $37.8$39.8 million and $37.4$41.6 million at July 31, 20132016 and 2012,2015, respectively. Results of operations for all periods presented were not materially affected by the liquidation of LIFO inventory. The components of inventory are as follows (thousands of dollars):

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  At July 31, 
  2013  2012 
Raw materials $99,814  $111,808 
Work in process  29,097   30,767 
Finished products  105,909   113,541 
Total inventories $234,820  $256,116 

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 expense as incurred. Depreciation is computed underusing the straight-line method. Depreciation expense was $58.8$68.8 million, $66.9 million and $62.0 million in Fiscal 2013, $55.3 million in Fiscal 2012,the years ended July 31, 2016, 2015 and $54.5 million in Fiscal 2011.2014, respectively. The estimated useful lives of property, plant and equipment are 10ten to 40forty years for buildings, including building improvements and 3three to 10ten years for machinery and equipment. The components of property, plant, and equipment are as follows (thousands of dollars):

  At July 31, 
  2013  2012 
Land $21,116  $21,062 
Buildings  270,022   258,082 
Machinery and equipment  687,797   643,199 
Construction in progress  46,078   27,276 
Less accumulated depreciation  (605,733)  (564,710)
Total property, plant, and equipment, net $419,280  $384,909 

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 to seven 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 Customercustomer relationships and lists, are recorded at cost and are amortized on a straight-line basis over their

estimated useful lives of 3three to 20twenty 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 businessoperating segment level but can be combined when reporting units within the same operating segment have similar economic characteristics. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its annual impairment assessment in the third quarters of Fiscal 2013 and 2012, 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. The Company recorded an impairment charge of $2.9 million in fiscal 2015 for a partially completed facility in Xuzhou, China. There were no significant impairment charges recorded in Fiscal 2013fiscal 2016 or Fiscal 2012.

fiscal 2014.

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

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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 AOCI are as follows (thousands of dollars):

  At July 31, 
  2013  2012  2011 
Foreign currency translation adjustment $50,411  $32,976  $131,699 
Net gain (loss) on cash flow hedging derivatives, net of deferred taxes  (172)  (292)  380 
Pension and postretirement liability adjustment, net of deferred taxes  (87,712)  (134,572)  (92,052)
Total accumulated other comprehensive income (loss) $(37,473) $(101,888) $40,027 

Cumulative foreign currency translation is not adjusted for income taxes.

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

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

  2013  2012  2011 
  (thousands, except per share amounts) 
Weighted average shares - basic  148,274   150,286   154,393 
Diluted share equivalents  2,181   2,655   2,804 
Weighted average shares - diluted  150,455   152,941   157,197 
Net earnings for basic and diluted earnings per share computation $247,377  $264,301  $225,291 
Net earnings per share - basic $1.67  $1.76  $1.46 
Net earnings per share - diluted $1.64  $1.73  $1.43 

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

Treasury StockRepurchased common stock is stated at cost (determined on an average cost basis) and is presented as a reduction of shareholders’ equity.

Research and Development Expense Research and development costsexpenses are charged against earnings in the year incurred. Research and development expensescosts 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 J.10. Stock-based employee compensation cost iscosts are recognized using the fair-value based method.

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Revenue RecognitionThe Company sells a wide range of filtration solutions into many industries around the globe. Revenue is recognized when all the following criteria are satisfied:(a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably assured; and (d) delivery has occurred.At that time, both product ownership and the risk of loss have transferred to the Customer andcustomer, the Company has no remaining obligations.obligations, the selling price is fixed and determinable, and collectability is reasonably assured. The vast majority of the Company’s sales agreements are for standard products with product ownership and risk of loss transferring to the customer when the product has shipped, at which point revenue is recognized. Although less common, the Company does have sales agreements with customers requiring product ownership and risk of loss to transfer at the customer’s location. For these non-standard terms, the Company defers revenue on these product sales until the product has been delivered.

For the Company’s Gas Turbine Systems (GTS) sales, which typically consist of multiple shipments of components that will comprise the entire GTS project, it must carefully monitor the transfer of title related to each portion of a system sale. The Company defers revenue recognition until product ownership and risk of loss has transferred to the customer for all components and when all terms specified in the contract are met which may include requirements such as the requirement for the Company to deliver technical documentation to the customer or a quality inspection which may be required to be approved by the customer.
In limited circumstances, the Company enters into sales agreements that involve multiple elements (such as equipment, replacement filter elements, and installation services). In these instances, the Company determines if the multiple elements in the arrangement represent separate units of accounting. If separate units of accounting exist, the price of the entire arrangement is allocated to the separate units of account using the Company’s best estimate of relative selling price if the unit of account was sold separately. Revenue is then recognized separately for each unit of account when the criteria for revenue recognition have been met.
Additionally, the Company records estimated discounts and rebates offered to customers as a reduction of sales in the same period revenue is recognized. Shipping and handling costs for Fiscal 2013, 2012, and 2011 totaling $66.2of $56.3 million, $67.0$63.2 million and $61.9$64.2 million respectively, are classified as a component of selling, general and administrative expenses.

expenses for the years ended July 31, 2016, 2015 and 2014, respectively.

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 Customercustomer warranty issues. For a reconciliation of warranty reserve reconciliationreserves, see Note N.

8.

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

comprehensive income until the hedged item is recognized. Gains or losses related to the ineffective portion of any hedge are recognized through earnings in the current period.

Exit or Disposal ActivitiesThe Company accounts for costs relating to exit or disposal activities based on

New Accounting Standards Not Yet Adopted In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12 to clarify, among other things, the implementation guidance related to exitprincipal versus agent considerations, identifying performance obligations, and accounting for licenses of intellectual property. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2019. Early application is not permitted. The amendments in this update are to be applied on a retrospective basis, either to each prior reporting period presented or disposal cost obligations. Thisby presenting the cumulative effect of applying the update recognized at the date of initial application. The Company is evaluating the impact that this will have on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which amended guidance addresses recognition, measurement, and reporting of costs associated with exit and disposal activities including restructuring.

GuaranteesUponrequiring the issuance of debt costs related to a guarantee,recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. This accounting guidance is effective for the Company recognizesbeginning in the first quarter of fiscal 2017. The adoption of ASU 2015-03 will only result in a liabilityreclassification of debt issuance costs on the balance sheet.

In May 2015, FASB issued ASU 2015-07, Fair Value Measurement (Topic 850): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (ASU 2015-07), which amended guidance requiring a company to categorize investments for which fair values are measured using the net asset value (NAV) per share practical expedient. ASU 2015-07 also limits the disclosures to investments for which the entity has elected to measure the fair value of an obligation assumed under a guarantee. See Note M for disclosures related to guarantees.

New Accounting Standards In February 2013,using the FASB updated the disclosure requirements for AOCI. The updated guidance requires companies to disclose amounts reclassified out of AOCI by component. The updated guidance does not affect how net income or other comprehensive income are calculated or presented. The updatedpractical expedient. This accounting guidance is effective for the Company beginning in the first quarter of Fiscal 2014. The adoption of this standard is not expected to have a material impact on2017. ASU 2015-07 will only affect the Company’s consolidated financial statements.

Company's disclosures.

In February 2013,July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which amended the guidance relatedrequiring companies not using the last-in, first-out (LIFO) method to obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixedmeasure inventory at the reporting date.lower of cost and net realizable rather than the lower of cost or market. This accounting guidance is effective for the Company beginning in the first quarter of Fiscal 2015.fiscal 2018. Early adoption is permitted. The adoptionCompany does not expect the application of this standard is not expectedASU 2015-11 to have a materialsignificant impact on the Company’sits consolidated financial statements.

NOTE B  Short-Term Investments

All short-term investments

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends (Topic 805) Business Combinations. This ASU requires that acquiring entities recognize measurement period adjustments in the reporting period the amounts are time depositsdetermined, including earnings adjustments that would have been recorded in previous periods if the adjustments were known at the acquisition date. Acquiring entities are no longer required to retrospectively adjust amounts in comparative periods. The adjustment amounts and reasons are still disclosed. The Company does not expect the application of ASU 2015-16 to have original maturitiesa significant impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which amended the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in excessa classified statement of three months but notfinancial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is permitted. The Company is adopting this accounting guidance beginning in the first quarter for fiscal 2017.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which amends the guidance requiring companies to recognize assets and liabilities for leases with lease terms of more than twelve months. The new guidance will require companies to record both capital and operating leases on the balance sheet. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2020 on a modified retrospective basis and early adoption is permitted. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning in the first quarter of fiscal 2018. Early application is permitted. If early adopted, an entity must adopt all of the amendments during the same period. The Company is evaluating the impact of the adoption of ASU 2016-09 on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method.
NOTE 2. Acquisitions
On August 31, 2016, the Company acquired the net assets of Partmo in Colombia. Partmo is a leading manufacturer of replacement air, lube and fuel filters in Colombia. The acquisition of Partmo reinforces the Company’s commitment to growth with a company that is an excellent strategic fit with its existing engine aftermarket business. The acquisition allows the Company to leverage Partmo’s well-recognized replacement filters brand in South America.
On August 31, 2015, the Company acquired 100% of the shares of Engineered Products Company (EPC), a leading designer and manufacturer of indicators, gauges, switches and sensors for engine air and liquid filtration systems. The acquisition of EPC supports the Company’s strategy of maintaining its technical leadership in filtration products for both OEM customers and end users.
On June 30, 2015, the Company acquired a majority stake in IFIL USA, a manufacturer of pleated bag filters for industrial dust collection.
On September 30, 2014, the Company acquired 100% of the voting interest of Northern Technical, a manufacturer of gas turbine inlet air filtration systems and replacement filters. Total consideration for the transaction was $97.1 million after recording a working capital adjustment in accordance with the share purchase agreement during the three months ended January 31, 2015. The Company received cash for this adjustment which reduced the purchase price and goodwill. Including the impact of the working capital adjustment, the Company acquired $6.2 million of intangible assets that had $99.8estimated useful lives ranging from six months to seven years at the time of acquisition, $32.2 million of net tangible assets and $60.3 million of goodwill. The acquired goodwill is not deductible for tax purposes. Northern Technical’s results of operations are reported as part of the Gas Turbine Products operating segment in short-term investmentsthe Industrial Products reporting segment.
Proforma results of operations for these acquisitions have not been presented because they are not material to the Company's consolidated results of operations.
NOTE 3. Supplemental Balance Sheet Information
The components of inventory are as follows (in millions):
  July 31,
  2016 2015
Raw materials $92.5
 $113.4
Work in process 18.4
 22.6
Finished products 123.2
 129.0
Total inventories $234.1
 $265.0
The components of property, plant and equipment are as follows (in millions):
  July 31,
  2016 2015
Land $20.0
 $20.0
Buildings 280.4
 272.6
Machinery and equipment 810.9
 783.1
Construction in progress 39.3
 52.4
Less: accumulated depreciation (680.8) (657.5)
Net property, plant and equipment $469.8
 $470.6
NOTE 4. Earnings Per Share
The Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding and common share equivalents related to stock options and stock incentive plans. Certain outstanding options are excluded from the diluted net earnings per share calculations because their exercise prices are greater than the average market price of the Company’s common stock during those periods. There were 3,164,159 options, 977,824 options,

and 884,138 options excluded from the diluted net earnings per share calculation for the years ended July 31, 20132016, 2015 and $92.4 million as of July 31, 2012.

2014, respectively.

The following table presents the information necessary to calculate basic and diluted earnings per share (in millions, except per share amounts):
  Year Ended July 31,
  2016 2015 2014
Weighted average common shares – basic 133.8
 137.8
 145.6
Diluted share equivalents 1.0
 1.6
 2.0
Weighted average common shares – diluted 134.8
 139.4
 147.6
       
Net earnings for basic and diluted earnings per share computation $190.8
 $208.1
 $260.2
Net earnings per share:      
Basic $1.43
 $1.51
 $1.79
Diluted $1.42
 $1.49
 $1.76
NOTE C5. Goodwill and Other Intangible Assets

The Company has allocated goodwill to reporting units within its Engine Products and Industrial Products segments. The Company acquired EPC on August 31, 2015, Northern Technical on September 30, 2014 and Engine Products segments.IFIL.USA on June 30, 2015. See Note 2 for additional discussion of acquisitions completed during the years ended July 31, 2016 and 2015. There was no acquisition or disposition activity during Fiscal 2013the years ended July 31, 2016 and 2015.
Goodwill is assessed for impairment annually, or 2012.more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company completed its annualperformed an impairment assessments inassessment during the third quartersquarter of Fiscal 2013 and 2012.fiscal 2016. The results of this assessment showed that the estimated fair values of the reporting units to which goodwill is assigned continuecontinued to exceed the bookcorresponding carrying values of the respective reporting units resulting in no goodwill impairment.

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Of the Company's five reporting units that contain goodwill, the estimated fair values during its annual third quarter fiscal 2016 impairment tests exceeded the respective carrying values by at least 34%.
Table of Contents
During the second quarter of fiscal 2016, the Company revised its forecast associated with its GTS reporting unit. While the previous forecast for this reporting unit called for a year-over-year decline in sales, the Company continued to face deferrals and softening demand for large-turbine projects. Given the short-term challenges facing this business, the Company revisited its strategic focus and priorities. The Company will continue to focus on innovative products while growing the aftermarket business but will be more selective in taking on large-turbine projects, which resulted in the revised forecast associated with its GTS reporting unit.

Following

As a result of the strategic shift and actions taken in the second quarter of fiscal 2016, the Company concluded that an interim goodwill triggering event had occurred for the GTS reporting unit. Goodwill associated with the GTS reporting unit was $60.2 million as of January 31, 2016 and is included in the Industrial Products segment. The Company completed its goodwill impairment assessment using a discounted cash flow model based on management's judgments and assumptions to determine the estimated fair value of the reporting unit. Based on the results of this assessment, the Company concluded the estimated fair value of the GTS reporting unit exceeded the respective carrying amount of the reporting unit by approximately 38%. Therefore, the second step of the impairment test was not necessary for this reporting unit.
In determining the estimated fair value of the reporting unit, the Company used the income approach, a valuation technique using an estimate of future cash flows from the reporting unit's financial forecast. A terminal growth rate of 3.0% and a discount rate of 12.0% were used reflecting the relative risk of achieving cash flows as well as any other specific risks or factors related to the GTS reporting unit. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimate of the reporting unit's fair value. The Company performed a sensitivity analysis to determine how the assumptions made impact the results of the impairment test. Holding all other assumptions constant, an unfavorable change in projected cash flows of 25.0% or more would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate of 4.5% or more or an increase in the discount rate of 1.2% or more would potentially result in an indication of impairment. While these projections supported no impairment of this reporting unit as of January 31, 2016, given that the Company's second quarter 2016 results fell below expectations and the sensitivities to the assumptions used in the calculations of the estimated cash flows, it is possible that an impairment could be incurred in the future. The Company will continue to monitor results and expected cash flows in the future to assess whether goodwill impairment in the GTS reporting unit may be necessary.

The following is a reconciliation of goodwill for the years ended July 31, 20132016 and 2012:

  Engine  Industrial  Total 
  Products  Products  Goodwill 
  (thousands of dollars) 
Balance as of July 31, 2011 $72,966  $98,775  $171,741 
Foreign exchange translation  (1,219)  (7,573)  (8,792)
Balance as of July 31, 2012 $71,747  $91,202  $162,949 
Foreign exchange translation  574   2,045   2,619 
Balance as of July 31, 2013 $72,321  $93,247  $165,568 

2015 (in millions):

  
Engine
Products
 
Industrial
Products
 
Total
Goodwill
Balance as of July 31, 2014 $72.4
 $94.0
 $166.4
Goodwill acquired 
 66.8
 66.8
Foreign exchange translation (1.4) (8.1) (9.5)
Balance as of July 31, 2015 71.0
 152.7
 223.7
Goodwill acquired 6.3
 
 6.3
Foreign exchange translation 
 (0.7) (0.7)
Balance as of July 31, 2016 $77.3
 $152.0
 $229.3
Intangible assets are comprised of patents, trademarks and Customercustomer relationships and lists. FollowingThe following is a reconciliation of intangible assets for the years ended July 31, 20132016 and 2012:

  Gross     Net 
  Carrying  Accumulated  Intangible 
  Amount  Amortization  Assets 
  (thousands of dollars) 
Balance as of July 31, 2011 $85,439  $(31,943) $53,496 
Amortization expense     (5,778)  (5,778)
Retirements  (1,530)  1,530    
Foreign exchange translation  (3,834)  2,316   (1,518)
Balance as of July 31, 2012 $80,075  $(33,875) $46,200 
Amortization expense     (5,503)  (5,503)
Foreign exchange translation  1,807   (1,197)  610 
Balance as of July 31, 2013 $81,882  $(40,575) $41,307 

2015 (in millions):

  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangible
Assets
Balance as of July 31, 2014 $81.3
 $(45.3) $36.0
Intangibles acquired 10.0
 
 10.0
Amortization expense 
 (6.8) (6.8)
Foreign exchange translation (4.2) 2.9
 (1.3)
Balance as of July 31, 2015 87.1
 (49.2) 37.9
Intangibles acquired 6.6
 
 6.6
Amortization expense 
 (6.1) (6.1)
Foreign exchange translation 3.1
 (3.0) 0.1
Balance as of July 31, 2016 $96.8
 $(58.3) $38.5
Net intangible assets consist of patents, trademarks and trade names of $13.3$7.8 million and $16.1$8.8 million and customer related intangibles of $30.7 million and $29.1 million as of July 31, 20132016 and 2012, respectively, and Customer related intangibles of $28.0 million and $30.1 million as of July 31, 2013 and 2012,2015, respectively. As of July 31, 2013,2016, patents, trademarks, and trade names had a weighted average remaining life of 9.337.4 years and Customercustomer related intangibles had a weighted average remaining life of 11.7812.4 years. Expected amortization expense relating to existing intangible assets is as follows (in thousands)millions):

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

Year Ending July 31, Amount
2017 $6.0
2018 4.8
2019 4.5
2020 4.2
2021 4.0
Thereafter 15.0
Total expected amortization expense $38.5
NOTE D6. Credit Facilities

On December 7, 2012,October 28, 2014, the Company entered into a new five-year,an Amendment to its 5 year, multi-currency revolving credit facility with a group of banks under whichbanks. The Amendment increased the Company may borrowCompany's borrowing availability up to $250.0$400.0 million. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Loans or LIBOR Rate Loans.Loans, as defined in the Amendment. The interest rate on each advance is based on certain market interest rates and leverage ratios. Facility fees and other fees on the entire loan commitment are payable over the duration of this facility. This new facility replaced the previous five-year, $250.0 million multicurrency revolving credit facility thatThere was terminated upon entering the new facility. There were no amounts outstanding at July 31, 2013 and $80.0$130.0 million outstanding at July 31, 2012 under these facilities.2016, and $160.0 million outstanding at July 31, 2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. At July 31, 20132016 and 2012, $237.82015, $262.7 million and $159.1$232.2 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.in Note 16. The Company’s multi-currency revolving facility contains financial covenants

specifically related to maintaining a certain interest coverage ratio and a certain leverage ratio as well as other covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets. As of July 31, 2013,2016, the Company was in compliance with all such covenants. The Company expects to remain in compliance with these covenants.

38

The Company has two uncommitted credit facilities in the U.S., which provide unsecured borrowings for general corporate purposes. At July 31, 2013 and 2012, thereThere was $50.0 million and $41.3 million available for use, respectively. There were no amounts outstanding at July 31, 2013 and $8.7$26.8 million outstanding at July 31, 2012.2016, and $15.3 million outstanding at July 31, 2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. The weighted average interest rate on the short-term borrowings outstanding at July 31, 20122016, was 1.0 percent.

1.25%. At July 31, 2016 and 2015, there was $38.2 million and $49.7 million, respectively, available for under these two credit facilities.

The Company has a €100.0 million or $133.0(approximately $111.1 million at July 31, 2016) program for issuing treasury notes for raising short-, medium-, and long-term financing for its European operations. There were no amounts outstanding onunder this program at July 31, 20132016 or 2012.2015. Additionally, the Company’s European operations have lines of credit with an available limit of €44.9€44.0 million or $59.8 million.(approximately $48.9 million at July 31, 2016). There were no amounts outstanding at July 31, 2016, and there was nothing$10.4 million amount outstanding on these lines of credit as of July 31, 2013 or 2012.

2015, which had a maturity date of less than twelve months.

Other international subsidiaries may borrow under various credit facilities. There was $9.2approximately $8.7 million outstanding under these credit facilities as of July 31, 2013,2016, and $6.4$1.6 million as of July 31, 2012.2015 and all borrowings which were outstanding on those dates had maturities which were less than twelve months. At July 31, 2016 and 2015, there was approximately $45.5 million and $47.2 million available for use, respectively, under these facilities. The weighted average interest rate on these short-term borrowings outstanding at July 31, 20132016 and July 31, 2012,2015, was 0.4 percent0.32% and 0.5 percent,0.41%, respectively.

NOTE E  Long-Term7. Debt

Long-term debt consists of the following:

  2013  2012 
  (thousands of dollars) 
6.59% Unsecured senior notes, interest payable semi-annually, principal payment of $80.0 million due November 14, 2013 $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 
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due September 28, 2017  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 
2.019% Guaranteed senior note, interest payable semi-annually, principal payment of ¥1.65 billion due May 18, 2014  16,848   21,117 
Capitalized lease obligations and other, with various maturity dates and interest rates  2,520   774 
Terminated interest rate swap contracts  2,070   3,938 
Total  201,438   205,829 
Less current maturities  98,664   2,346 
Total long-term debt $102,774  $203,483 

Annualfollowing (in millions):

  July 31,
  2016 2015
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $50.0 million due June 1, 2017 $50.0
 $50.0
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due September 28, 2017 25.0
 25.0
5.48% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due November 30, 2017 25.0
 25.0
3.72% Unsecured senior notes, interest payable semi-annually, principal payment of $125.0 million due March 27, 2024 125.0
 125.0
2.93% Unsecured senior notes, interest payable semi-annually, principal payment of $25.0 million due April 16, 2025 25.0
 25.0
3.18% Unsecured senior notes, interest payable semi-annually, principal payment of $125.0 million due June 17, 2030 125.0
 125.0
Variable Rate Guaranteed senior note, interest payable quarterly, principal payment of ¥1.65 billion due May 19, 2019 and an interest rate of 0.41% as of July 31, 2016 16.0
 13.3
Variable Rate Guaranteed senior note, interest payable quarterly, principal payment of ¥1.00 billion due July 15, 2021 and an interest rate of 0.25% as of July 31, 2016 9.7
 
Capitalized lease obligations and other, with various maturity dates and interest rates 1.9
 1.9
Terminated interest rate swap contracts 0.4
 0.8
Total 403.0
 391.0
Less current maturities 51.2
 1.8
Total long-term debt $351.8
 $389.2

The estimated future maturities of the Company's long-term debt as of July 31, 2016 are $98.7 million in 2014, $1.1 million in 2015, $1.1 million in 2016, $50.5 million in 2017, and $50.0 million thereafter. as follows (in millions):
Year Ended July 31, Amount
2017 $51.2
2018 50.4
2019 16.5
2020 0.2
2021 9.7
Thereafter 275.0
Total estimated future maturities $403.0
Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of July 31, 2013,2016, the Company was in compliance with all such covenants.

On April 16, 2015, the Company entered into a First Supplement with a group of institutional investors which supplements a Note Purchase Agreement, dated March 27, 2014. Pursuant to the First Supplement, the Company issued $25.0 million of senior unsecured notes due April 16, 2025, and $125.0 million of senior unsecured notes due June 17, 2030. The debt was issued at face value and bears interest payable semi-annually at an annual rate of interest of 2.93% and 3.18%, respectively. The proceeds from the notes were primarily used to refinance existing debt and for general corporate purposes. The notes contain covenants specifically related to maintaining a certain leverage ratio and other covenants that, under certain circumstances, can restrict the Company’s ability to incur additional indebtedness, make investments and other restricted payments, create liens and sell assets. As of July 31, 2016, the Company was in compliance with all such covenants.
On July 22, 2016, a Japanese Subsidiary of the Company issued a ¥1.0 billion note that was guaranteed by the Company. The debt was issued at face value of ¥1.0 billion (approximately $9.7 million at July 31, 2016), is due July 15, 2021 and bears interest payable quarterly at a variable interest rate. The interest rate was 0.25% as of July 31, 2016.
NOTE F  Financial Instruments

Derivatives8. Warranty

The Company uses forward exchange contractsprovides for warranties on certain products. The following is a reconciliation of warranty reserves for the years ended July 31, 2016 and 2015 (in millions):
  Year Ended July 31,
  2016 2015
Balance at beginning of period $8.6
 $9.0
Accruals for warranties issued during the reporting period 4.6
 3.7
Accruals related to pre-existing warranties (including changes in estimates) 2.9
 0.4
Less settlements made during the period (4.2) (4.5)
Balance at end of period $11.9
 $8.6
There were no significant specific warranty matters accrued for during the years ended July 31, 2016 and 2015. These warranty matters are not expected to managehave a material impact on the Company’s results of operations, liquidity or financial position. There were no significant settlements made during the years ended July 31, 2016 and 2015.
NOTE 9. Restructuring Charges
The Company has taken numerous actions to align its exposureoperating and manufacturing cost structure with current and projected customer and end-market demand.
Fiscal 2016 Actions
In the first quarter of fiscal 2016, the Company took actions to fluctuationsfurther align its operating and manufacturing cost structure with current and projected customer and end-market demand. These actions consisted of one-time termination benefits from restructuring the salaried and production workforce in foreign exchange rates.all geographic regions and in both reportable segments. Total charges related to this action were initially expected to be $7.2 million. These actions have been completed and resulted in a total pre-tax charge of $6.2 million during the year ended July 31, 2016.
In the third quarter of fiscal 2016, the Company took additional actions consistent with the purpose of the first quarter actions discussed above. Total charges related to this action were initially expected to be $5.5 million. These actions have been completed and resulted in a total pre-tax charge of $4.1 million during the year ended July 31, 2016.

In the fourth quarter of fiscal 2016, the Company took additional actions including the closure of the Company's Hong Kong location. These actions, consisting of lease termination costs and one-time termination benefits have been completed and resulted in a total pre-tax charge of $3.5 million during the year ended July 31, 2016, which was in line with expectations.
Fiscal 2015 Actions
In fiscal 2015, actions taken by the Company included: rebalancing and reducing the current salaried and production workforce globally, closing a production facility in Grinnell, Iowa and the write-off of a partially completed facility in Xuzhou, China. For these actions, the Company recorded pre-tax restructuring and impairment charges of $13.0 million for the year ended July 31, 2015. In addition, during the year ended July 31, 2015, the Company recorded a $3.9 million charge related to a lump-sum settlement of its U.S. Pension Plan. The Company recorded an additional $2.3 million related to these actions during the year ended July 31, 2016.
Restructuring charges for the above actions are summarized as follows (in millions):
  Year Ended July 31,
  2016 2015
Fiscal 2016 fourth quarter actions $3.5
 $
Fiscal 2016 third quarter actions 4.1
 
Fiscal 2016 first quarter actions 6.2
 
Fiscal 2015 actions (1) 2.3
 16.9
Total $16.1
 $16.9
(1)Expenses span both fiscal years due to shutdown of Grinnell, Iowa facility.
Restructuring charges for the above actions by segment are summarized as follows (in millions):
  Year Ended July 31,
  2016 2015
Engine Products segment $8.8
 $9.2
Industrial Products segment 7.3
 3.8
Corporate & Unallocated 
 3.9
Total $16.1
 $16.9
Restructuring charges are summarized in the table below by statement of earnings line item (in millions):
  Year Ended July 31,
  2016 2015
Cost of sales $5.7
 $8.4
Selling, general and administrative 10.4
 8.5
Total $16.1
 $16.9
As the restructuring charges were mainly incurred and paid in the same period, there was no material liability balance as of July 31, 2016 or 2015.
NOTE 10. Equity Based Compensation
Employee Incentive Plans In November 2010, the shareholders approved the 2010 Master Stock Incentive Plan (the Plan). The Plan extends through September 2020 and allows for the granting of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. Options under the Plan are granted to key employees whereby the option exercise price is equivalent to the market price of the Company's common stock at the date of grant. Options are generally exercisable for up to 10 years from the date of grant. The Plan also allows for the granting of performance awards to a limited number of key executives. As administered by the Human Resources Committee of the Company’s Board of Directors to date, these performance awards are payable in common stock and are based on a formula which measures performance of the Company over a three-year period. Performance award expense under these plans totaled $0.3 million, $0.1 million and $0.7 million in the years ended July 31, 2016, 2015 and 2014, respectively.

Stock options for non-executives are exercisable in equal increments over three years. Stock options issued after fiscal 2010 become exercisable for executives in equal increments over three years. For the years ended July 31, 2016, 2015 and 2014, the Company recorded pre-tax compensation expense associated with stock options of $6.7 million, $9.5 million and $9.9 million, respectively. The Company also usesrecorded tax benefit associated with this compensation expense of $2.1 million, $3.1 million and $3.2 million for the years ended July 31, 2016, 2015 and 2014, respectively.
Stock-based employee compensation cost is recognized using the fair-value based method. The Company determined the fair value of these awards using the Black-Scholes option pricing model with the following assumptions:
  Year Ended July 31,
  2016 2015 2014
Risk-free interest rate 1.6 - 2.3%
 0.05 - 2.3%
 0.31 - 2.8%
Expected volatility 21.8 - 25.9%
 18.6 - 26.7%
 18.2 - 28.0%
Expected dividend yield 1.7% 1.6% 1.4 - 1.6%
       
Expected life:      
Director and officer grants 8 years
 8 years
 8 years
Non - officer original grants 7 years
 7 years
 7 years
Reload grants (1) N/A
 ≤4 years
 ≤6 years
(1) grants made to officers or directors who exercised a reloadable option during the fiscal year and made payment of the purchase price using shares of previously owned Company stock. The reload grant is for the number of shares equal to the shares used in payment of the purchase price and/or withheld for minimum tax withholding. Options with a reload provision were no longer issued to officers with more than five years of service, and all directors beginning in fiscal 2006. The Company continued to issue options with a reload provision to officers with less than five years of service until fiscal 2011 when this provision was discontinued.
The weighted average fair value for options granted during the years ended July 31, 2016, 2015 and 2014 was $7.10, $9.94, and $11.44 per share, respectively, using the Black-Scholes pricing model.
The following table summarizes stock option activity for the years ended July 31, 2016, 2015 and 2014:
  
Options
Outstanding
 
Weighted
Average Exercise
Price
Outstanding at July 31, 2013 7,329,820
 $23.88
Granted 900,073
 42.17
Exercised (1,008,848) 18.80
Canceled (23,163) 34.02
Outstanding at July 31, 2014 7,197,882
 26.84
Granted 1,023,836
 38.58
Exercised (916,566) 18.54
Canceled (113,710) 38.67
Outstanding at July 31, 2015 7,191,442
 29.38
Granted 969,450
 28.19
Exercised (916,789) 19.39
Canceled (421,713) 36.95
Outstanding at July 31, 2016 6,822,390
 30.09
The total intrinsic value of options exercised during the years ended July 31, 2016, 2015 and 2014 was $11.6 million, $18.8 million, and $21.5 million, respectively.
The number of shares reserved at July 31, 2016 for outstanding options and future grants was 10,731,623. Shares reserved consist of shares available for grant plus all outstanding options.

The following table summarizes information concerning outstanding and exercisable options as of July 31, 2016:
Range of Exercise Prices 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Weighted
Average
Exercise
Price
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
$0.00 to $17.69 701,940
 1.85 $17.14
 701,940
 $17.14
$17.70 to $23.69 1,296,206
 2.59 21.45
 1,296,206
 21.45
$23.70 to $29.69 1,656,585
 7.11 28.55
 746,735
 29.13
$29.70 to $35.69 1,533,036
 5.85 34.23
 1,506,269
 34.27
$35.70 and above 1,634,623
 7.85 40.19
 808,384
 40.78
  6,822,390
 5.60 30.09
 5,059,534
 28.89
At July 31, 2016, the aggregate intrinsic value of shares outstanding and exercisable was $47.8 million and $40.4 million, respectively.
The following table summarizes the status of options which contain vesting provisions:
  Options 
Weighted
Average Grant
Date Fair
Value
Non - vested at July 31, 2015 1,757,140
 $10.36
Granted 969,450
 7.10
Vested (829,409) 10.19
Canceled (134,325) 9.64
Non - vested at July 31, 2016 1,762,856
 8.70
The total fair value of shares vested during years ended July 31, 2016, 2015 and 2014, was $30.0 million, $29.3 million, and $35.5 million, respectively.
As of July 31, 2016, there was $6.2 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 2017, fiscal 2018 and fiscal 2019.
NOTE 11. Employee Benefit Plans
Defined Benefit Pension Plans
The Company and certain of its international subsidiaries have defined benefit pension plans for many of their hourly and salaried employees. There are two types of U.S. plans. The first type of U.S. plan (Hourly Pension Plan) is a traditional defined benefit pension plan for union production employees. The second is a plan (Salaried Pension Plan) for some salaried and non-union production employees that provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The non-U.S. plans generally provide pension benefits based on years of service and compensation level.
On July 31, 2013, the Company adopted a sunset freeze on its U.S. Salaried Pension Plan. Effective August 1, 2013, there are no longer any new entrants into the plan. Then, effective August 1, 2016, employees hired prior to August 1, 2013, no longer continued to accrue Company contribution credits under the plan. The freeze of the plan resulted in the participants no longer being active. As a result, actuarial losses will be amortized over the estimated average remaining life expectancy of the inactive participants, rather than the estimated average remaining service period of the active participants. 

Net periodic pension costs and amounts recognized in other comprehensive income for the Company’s pension plans include the following components (in millions):
  Year Ended July 31,
  2016 2015 2014
Service cost $18.4
 $20.4
 $18.8
Interest cost 18.9
 19.1
 19.5
Expected return on assets (28.8) (29.5) (30.8)
Prior service cost and transition amortization 0.8
 0.6
 0.6
Actuarial loss amortization 8.5
 7.1
 7.4
Settlement loss 
 3.9
 
Net periodic benefit cost 17.8
 21.6
 15.5
Other changes recognized in other comprehensive income      
Net actuarial loss 53.6
 3.5
 15.2
Amortization of asset obligations (0.4) (0.2) (0.2)
Amortization of prior service cost (0.4) (0.4) (0.4)
Amortization of net actuarial loss (8.5) (11.0) (7.4)
Total recognized in other comprehensive income 44.3
 (8.1) 7.2
Total recognized in net periodic benefit costs and other comprehensive income $62.1
 $13.5
 $22.7

The changes in projected benefit obligations, fair value of plan assets and funded status of the Company’s pension plans for the years ended July 31, 2016 and 2015 are summarized as follows (in millions):
  Year Ended July 31,
  2016 2015
Change in projected benefit obligation:    
Projected benefit obligation, beginning of year $498.7
 $498.7
Service cost 18.4
 20.4
Interest cost 18.9
 19.1
Participant contributions 1.0
 1.2
Actuarial loss 50.0
 13.1
Currency exchange rates (17.2) (18.2)
Settlement 
 (9.2)
Benefits paid (32.5) (26.4)
Projected benefit obligation, end of year $537.3
 $498.7
Change in fair value of plan assets:    
Fair value of plan assets, beginning of year $478.5
 $489.9
Actual return on plan assets 22.2
 35.0
Company contributions 4.2
 5.5
Participant contributions 1.0
 1.2
Currency exchange rates (17.9) (17.5)
Settlement 
 (9.2)
Benefits paid (32.5) (26.4)
Fair value of plan assets, end of year $455.5
 $478.5
Funded status:    
Projected benefit obligation in excess of plan assets at end of fiscal year $(81.8) $(20.2)
     
Amounts recognized on the consolidated balance sheets consist of:    
Other long-term assets $1.4
 $10.3
Other current liabilities (1.5) (2.9)
Other long-term liabilities (81.7) (27.6)
Net recognized liability $(81.8) $(20.2)
The net underfunded status of $81.8 million and $20.2 million at July 31, 2016 and 2015, respectively, is recognized in the accompanying Consolidated Balance Sheets. The pension-related accumulated other comprehensive loss at July 31, 2016 and 2015 (prior to the consideration of income taxes) was $179.6 million and $135.4 million, respectively, and consisted primarily of unrecognized actuarial losses. The loss expected to be recognized in net periodic pension expense during the year ending July 31, 2017 is $7.3 million. The accumulated benefit obligation for all defined benefit pension plans was $519.0 million and $484.2 million at July 31, 2016 and 2015, respectively.
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $433.1 million and $350.0 million, respectively, as of July 31, 2016, and $290.0 million and $259.5 million, respectively, as of July 31, 2015.
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 $375.5 million, $377.4 million, and $304.4 million, respectively, as of July 31, 2016, and $242.3 million, $241.9 million, and $216.0 million, respectively, as of July 31, 2015.
For the years ended July 31, 2016 and 2015, the two U.S. pension plans represented approximately 65% and 67%, respectively, of the Company’s total plan assets and approximately 69% of the Company’s total projected benefit obligation and approximately 81% of the Company’s total pension expense for both years.

Assumptions
The weighted-average discount rate swapsand rates of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation are as follows:
Projected Benefit Obligation Year Ended July 31,
Weighted average actuarial assumptions 2016 2015
All U.S. plans:  
  
Discount rate 3.65% 4.33%
Rate of compensation increase 2.56% 2.56%
Non - U.S. plans:  
  
Discount rate 2.08% 3.14%
Rate of compensation increase 2.69% 2.68%
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:
Net Periodic Benefit Cost Year Ended July 31,
Weighted average actuarial assumptions 2016 2015 2014
All U.S. plans:  
  
  
Discount rate 4.33% 4.33% 4.58%
Expected return on plan assets 6.99% 7.14% 7.50%
Rate of compensation increase 2.56% 2.61% 2.61%
Non - U.S. plans:  
  
  
Discount rate 3.14% 3.64% 4.04%
Expected return on plan assets 4.83% 5.41% 5.48%
Rate of compensation increase 2.68% 2.79% 2.92%
Discount Rates The Company’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date, taking into account the nature and duration of the benefit obligations of the plan. In making this best estimate, the Company looks at rates of return on high-quality, fixed-income investments currently available, and expected to be available, during the period to maturity of the benefits. This process includes looking at the universe of bonds available on the measurement date with a quality rating of Aa or better. Similar appropriate benchmarks are used to determine the discount rate for the non-U.S. plans.
Beginning with its July 31, 2016 measurement date, the Company changed the method used to estimate the service and interest costs for pension and postretirement benefits. The new method utilizes a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. Historically, the Company utilized a single weighted average discount rate applied to projected cash outflows. The Company made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plan's liability cash flows to the corresponding spot rate on the yield curve. The change does not impact the measurement of the plan's obligations but will impact the Company's pension expense beginning in fiscal 2017. The Company has accounted for this change as a change in accounting estimate.
Expected Long-Term Rate of Return To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. In fiscal 2014, the Company adopted a plan to adjust the target asset allocation for all U.S. plans and to employ differing allocation strategies for each plan. These investment changes, which were implemented in the second quarter of fiscal 2015, enabled the Company to manage or reduce the risk to income statement volatility while continuing to ensure an appropriate funded status in each plan. Based on portfolio performance, as of the measurement date of July 31, 2016, the Company reduced its exposurelong-term rate of return for the U.S. pension plans to changesan asset-based weighted average of 6.90%. 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.

Fair Value of Plan Assets
The estimated fair value of U.S. Pension Plan assets and their respective levels in the fair value hierarchy at July 31, 2016, 2015 and 2014 by asset category are as follows (in millions):
  U.S Pension Plans
Asset Category 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
July 31, 2016        
Cash $1.2
 $
 $
 $1.2
Global Equity Securities 62.2
 83.1
 17.1
 162.4
Fixed Income Securities 72.2
 
 47.3
 119.5
Real Assets 5.9
 
 7.9
 13.8
Total U.S. Assets $141.5
 $83.1
 $72.3
 $296.9
         
July 31, 2015        
Cash $1.9
 $
 $
 $1.9
Global Equity Securities 76.6
 84.6
 19.5
 180.7
Fixed Income Securities 0.9
 64.1
 54.7
 119.7
Real Assets 6.0
 
 13.0
 19.0
Total U.S. Assets $85.4
 $148.7
 $87.2
 $321.3
         
July 31, 2014        
Cash $14.2
 $
 $
 $14.2
Global Equity Securities 107.3
 87.3
 21.1
 215.7
Fixed Income Securities 27.0
 
 58.7
 85.7
Real Assets 7.1
 
 13.5
 20.6
Total U.S. Assets $155.6
 $87.3
 $93.3
 $336.2
Global Equity Securities consists primarily of its fixed-rate debt resulting from interest rate fluctuations. It ispublicly traded U.S. and non-U.S. equities, Europe, Australasia, Far East (EAFE) index funds, equity private placement funds, private equity investments and some cash and cash equivalents. Publicly traded equities are valued at the Company’s policy to enter into derivative transactions only to the extent true exposures exist; the Company does not enter into derivative transactions for speculative or trading purposes. The Company enters into derivative transactions only with counterparties with high credit ratings.

39

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

The impactbased on OCI and earnings from foreign exchange contracts that qualified as cash flow hedges for the twelve months ended July 31, 2013 and 2012, was as follows (thousands of dollars):

  July 31, 
  2013  2012 
Net carrying amount at beginning of year $(373) $241 
Cash flow hedges deferred in OCI  672   2,229 
Cash flow hedges reclassified to income (effective portion)  81   (2,960)
Change in deferred taxes  (196)  117 
Net carrying amount at July 31 $(184) $(373)

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. underlying assets owned by the fund less its liabilities then divided by the number of units outstanding. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. equity and debt securities. This may include a diversified mix of partnership interests including buyouts, restructured/distressed debt, growth equity, mezzanine/subordinated debt, real estate, special situation partnerships and venture capital investments. Partnership interest is valued using the most recent general partner statement of fair value updated for any subsequent partnership interests’ cash flow.

The Company had notarget allocation for global equity securities investments was 65% and 35% in the Salaried and Hourly Pension Plans, respectively. The underlying global equity investment managers within the plan will invest primarily in equity securities spanning across market capitalization, geography, style (e.g. value, growth, etc.) and other diversifying characteristics. Managers may invest in common stocks or American Depository Receipts (ADRs), mutual funds, bank or trust company pooled funds, international stocks, stock options for hedging purposes, stock index futures, financial futures for purposes of replicating a major market index and private equity partnerships. The Long/short equity managers within global equity may take long or short positions in equity securities and have the ability to shift exposure from net long to net short. Long/short equity managers made up about 15% of the global equity portfolio at year-end, and are considered less liquid, as the funds can be partially liquidated on a quarterly basis. Long-only managers are considered liquid. The long-only investments are typically valued daily, while long/short equity is valued on a monthly basis. Private equity is considered illiquid and performance is typically valued on a quarterly basis. The underlying assets, however, may be valued less frequently, such as annually or if and when a potential buyer is identified and has submitted a bid to similar types of investments.
Fixed Income Securities consists primarily of investment and non-investment grade debt securities and alternative fixed income-like investments. Corporate and other bonds and notes are valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit

and liquidity risks. Alternative fixed income-like investments consist primarily of private partnership interests in hedge funds of funds. Partnership interests are valued using the NAV as determined by the administrator or custodian of the fund.
The target allocation for fixed income securities was 30% and 60% in the Salaried and Hourly Pension Plans respectively. The Fixed Income class may invest in debt securities issued or guaranteed by the U.S., its agencies or instrumentalities (including U.S. Government Agency mortgage backed securities), or other investment grade rated debt issued by foreign governments; corporate bonds, debentures and other forms of corporate debt obligations, including equipment trust certificates; indexed notes, floaters and other variable rate obligations; bank collective funds; mutual funds; insurance company pooled funds and guaranteed investments; futures and options for the purpose of yield curve management; and private debt investments. Fixed income risk is driven by various factors including, but not limited to, interest rate swaps outstandinglevels and changes, credit risk and duration. Current fixed income securities are considered liquid, with daily pricing and liquidity. The fixed income class is also invested in a variety of alternative investments. Alternative investments cover a variety of traditional and non-traditional investments and investment strategies, spanning various levels of risk and return. These investments can be made in a broad array of non-traditional investment strategies (including, but not limited to, commodities and futures, distressed securities, short/long—or both—fixed income, international opportunities and relative value) with multiple hedge fund managers. Alternative investments are considered less liquid to illiquid. The liquidity ranges from quarterly to semi-annually and illiquid. Alternative investments are typically valued on a quarterly basis.
Real Assets consists of commodity funds, Real Estate Investment Trusts (REITS) and interests in partnerships that invest in private real estate, commodities and timber investments. Private investments are valued using the most recent partnership statement of fair value, updated for any subsequent partnership interests’ cash flows. Commodity funds and REITS are valued at the closing price reported in the active market in which it is traded.
The target allocation for real assets was 5% for both the Salaried and Hourly Pension Plans. The fund invests in real assets to provide a hedge against unexpected inflation, to capture unique sources of returns and to provide diversification benefits. The fund pursues a real asset strategy through a fund of funds, private investments and/or a direct investment program that may invest long, short or both, in assets including, but not limited to, domestic and international properties, buildings and developments, timber and/or commodities. Real assets range from less liquid to illiquid, with about two-thirds of the real asset allocation having monthly liquidity and one-third illiquid. Real asset manager performance is typically reported quarterly, though underlying assets may be valued less frequently.
The following table summarizes the changes in the fair values of the U.S. pension plans’ Level 3 assets for the years ended July 31, 2016, 2015 and 2014 (in millions):
  U.S. Pension Plans
  Global Equity Fixed Income Real Assets Total
Ending balance at July 31, 2013 $19.4
 $60.8
 $22.1
 $102.3
Unrealized gains (losses) 1.7
 (2.0) 
 (0.3)
Realized gains 2.4
 8.9
 0.8
 12.1
Purchases 2.0
 20.0
 2.7
 24.7
Sales (4.4) (29.0) (12.1) (45.5)
Ending balance at July 31, 2014 $21.1
 $58.7
 $13.5
 $93.3
Unrealized gains (losses) (0.3) (3.7) 0.7
 (3.3)
Realized gains 2.8
 5.1
 0.6
 8.5
Purchases 1.8
 
 0.8
 2.6
Sales (5.9) (5.4) (2.6) (13.9)
Ending balance at July 31, 2015 $19.5
 $54.7
 $13.0
 $87.2
Unrealized gains (losses) (1.3) (2.5) (2.4) (6.2)
Realized gains 2.5
 0.8
 0.4
 3.7
Purchases 0.6
 
 0.1
 0.7
Sales (4.2) (5.7) (3.2) (13.1)
Ending balance at July 31, 2016 $17.1
 $47.3
 $7.9
 $72.3

The following table summarizes the U.S. pension plans’ assets valued at NAV at July 31, 20132016 (in millions):
  Fair Value 
Unfunded
Commitments
 
Redemption Frequency
(If Currently Eligible)
 
Redemption
Notice Period
Global Equity $162.4
 $2.7
 Daily, Monthly, Quarterly, Annually 10 - 100 days
Fixed Income 47.3
 
 Daily, Quarterly, Semi-Annually 60 - 120 days
Real Assets 13.8
 2.2
 Daily, Quarterly 95 days
Total $223.5
 $4.9
    
The estimated fair values of Non-U.S. Pension Plan assets and their respective levels in the fair value hierarchy at July 31, 2016, 2015 and 2014 by asset category are as follows (in millions):
  Non-U.S. Pension Plans
Asset Category 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
July 31, 2016        
Cash $0.5
 $
 $
 $0.5
Global Equity Securities 69.2
 
 
 69.2
Fixed Income Securities 4.6
 35.8
 
 40.4
Equity/Fixed Income 16.7
 
 31.8
 48.5
Total Non-U.S. Assets $91.0
 $35.8
 $31.8
 $158.6
         
July 31, 2015        
Global Equity Securities $71.7
 $
 $
 $71.7
Fixed Income Securities 4.2
 35.9
 
 40.1
Equity/Fixed Income 17.2
 
 28.2
 45.4
Total Non-U.S. Assets $93.1
 $35.9
 $28.2
 $157.2
         
July 31, 2014        
Cash $5.7
 $
 $
 $5.7
Global Equity Securities 71.3
 
 
 71.3
Fixed Income Securities 4.8
 23.3
 
 28.1
Equity/Fixed Income 18.0
 
 30.5
 48.5
Total Non-U.S. Assets $99.8
 $23.3
 $30.5
 $153.6
Global Equity Securities consists of publicly traded diversified growth funds invested across a broad range of traditional and alternative asset classes which may include, but are not limited to: equities, investment grade and high yield bonds, property, private equity, infrastructure, commodities and currencies. They may invest directly or 2012.hold up to 100% of the fund in other collective investment vehicles and may use exchange traded and over the counter financial derivatives, such as currency forwards or futures, for both investment as well as hedging purposes.
Fixed Income Securities consists primarily of investment grade debt securities. Corporate bonds and notes are valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but can include adjustments for certain risks that may not be observable such as credit and liquidity risks. These funds may also aim to provide liability hedging by offering interest rate and inflation protections which replicates the liability profile of a typical defined benefit pension scheme.
Equity/Fixed Income consists of Level 1 assets that are part of a unit linked fund with a strategic asset allocation of 40% 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 actively monitorsdoes 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% to 90% fixed income products and 10% to 20% equity type products (including real estate).
The following table summarizes the changes in the fair values of the non-U.S. pension plans’ Level 3 assets for the years ended July 31, 2016, 2015 and 2014 (in millions):
  Non-U.S. Pension Plans
  
Equity/Fixed
Income
Ending balance at July 31, 2013 $26.3
Unrealized gains 4.3
Realized gains 0.1
Foreign currency exchange 0.1
Purchases 3.1
Sales (3.4)
Ending balance at July 31, 2014 $30.5
Unrealized gains 1.3
Realized gains 
Foreign currency exchange (5.5)
Purchases 2.7
Sales (0.8)
Ending balance at July 31, 2015 $28.2
Unrealized gains 2.7
Realized gains 
Foreign currency exchange 0.3
Purchases 2.7
Sales (2.1)
Ending balance at July 31, 2016 $31.8
The following table summarizes the non-U.S. pension plans’ assets valued at NAV as of July 31, 2016 (in millions):
  Fair Value 
Unfunded
Commitments
 
Redemption Frequency
(If Currently Eligible)
 
Redemption
Notice Period
Fixed Income $35.8
 $
 Weekly 7 days
Equity/Fixed Income 31.8
 
 Yearly 90 days
Total $67.6
 $
    
Investment Policies and Strategies
For the Company’s U.S. Pension Plans, the Company uses a total return investment approach to achieve a long-term return on plan assets, with what the Company believes to be a prudent level of risk for the purpose of meeting its exposureretirement income commitments to credit riskemployees. The plans’ investments are diversified to assist in managing risk. During the year ended July 31, 2016, the Company’s asset allocation guidelines targeted an allocation of 65% global equity securities, 30% fixed income, and 5% real assets (investments into funds containing commodities and real estate) for the Salaried Pension Plan and 35% global equity securities, 60% fixed income, and 5% real assets (investments in funds containing commodities and real estate) for the Hourly Pension Plan. 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.
For the Company’s non-U.S. plans, the general investment objectives are to maintain a suitably diversified portfolio of secure assets of appropriate liquidity which will generate income and capital growth to meet, together with any new contributions from members and the Company, the cost of current and future benefits. Investment policy and performance is measured and monitored on an ongoing basis by the Company’s Investment Committee through its use of an investment consultant and through quarterly investment portfolio reviews.

Estimated Contributions and Future Payments
The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum tax deductible contribution. The Company made contributions of $0.9 million to its U.S. pension plans during the year ended July 31, 2016. The estimated minimum funding requirement for the Company’s U.S. plans for the year ending July 31, 2017 is $9.7 million. In accordance with the Pension Protection Act of 2006, this contribution obligation may be met with existing credit approvalsbalances that resulted from payments above the minimum obligation in prior years. As a result, the Company does not anticipate making a contribution in fiscal 2017 to its U.S. pension plans. The Company made contributions of $3.3 million to its non-U.S. pension plans during the year ended July 31, 2016 and credit limits,estimates that it will contribute approximately $3.4 million in fiscal 2017 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 estimated future benefit payments for the Company’s U.S. and non-U.S. plans are as follows (in millions):
Year Ending July 31, Estimated Future Benefit Payments
2017 $26.6
2018 25.1
2019 27.4
2020 25.7
2021 27.6
2022-2026 137.6
Retirement Savings and Employee Stock Ownership Plan
The Company provides a contributory employee savings plan to U.S. Employees that permits participants to make contributions by selecting major international bankssalary reduction pursuant to section 401(k) of the Internal Revenue Code. Employee contributions of up to 25% of compensation are matched at a rate equaling 100% of the first 3% contributed and financial institutions50% of the next 2% contributed. In addition, the Company contributes 3.0% of compensation annually. Total contribution expense for these plans was $8.2 million, $8.6 million, and $8.1 million for the years ended July 31, 2016, 2015 and 2014, respectively. This plan also includes shares from an Employee Stock Ownership Plan (ESOP). As of July 31, 2016, all shares of the ESOP have been allocated to participants. Total ESOP shares are considered to be shares outstanding for diluted earnings per share calculations.
Deferred Compensation and Other Benefit Plans
The Company provides various deferred compensation and other benefit plans to certain executives. The deferred compensation plan allows these employees to defer the receipt of all of their bonus and other stock related compensation and up to 75% of their salary to future periods. Other benefit plans are provided to supplement the benefits for a select group of highly compensated individuals which are reduced because of compensation limitations set by the Internal Revenue Code. The Company has recorded a liability of $8.6 million and $9.1 million as counterparties. of July 31, 2016 and 2015, respectively, related primarily to its deferred compensation plans.
NOTE 12. Income Taxes
The components of earnings before income taxes are as follows (in millions):
  Year Ended July 31,
  2016 2015 2014
Earnings before income taxes:      
United States $90.7
 $92.4
 $131.4
Foreign 166.7
 196.2
 229.3
Total $257.4
 $288.6
 $360.7


The components of the provision for income taxes are as follows (in millions):
  Year Ended July 31,
  2016 2015 2014
Income tax provision (benefit):      
Current      
Federal $19.9
 $28.5
 $49.0
State 3.1
 2.9
 4.7
Foreign 46.9
 54.7
 54.6
  69.9
 86.1
 108.3
Deferred      
Federal (0.3) (4.2) (9.5)
State (0.2) 0.1
 0.4
Foreign (2.8) (1.5) 1.3
  (3.3) (5.6) (7.8)
Total $66.6
 $80.5
 $100.5

The following table reconciles the U.S. statutory income tax rate with the effective income tax rate:
  Year Ended July 31,
  2016 2015 2014
Statutory U.S. federal rate 35.0 % 35.0 % 35.0 %
State income taxes 0.8 % 0.9 % 1.1 %
Foreign operations (8.1)% (7.9)% (6.1)%
Export, manufacturing, and research credits (1.6)% (1.1)% (0.8)%
Change in unrecognized tax benefits (1.0)% 1.3 % (1.1)%
Other 0.8 % (0.3)% (0.2)%
Effective income tax rate 25.9 % 27.9 % 27.9 %

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in millions):
  July 31,
  2016 2015
Deferred tax assets:    
Accrued expenses $12.1
 $10.6
Compensation and retirement plans 59.5
 39.1
NOL and tax credit carryforwards 6.5
 4.3
LIFO and inventory reserves 5.4
 6.9
Other 4.0
 5.0
Gross deferred tax assets 87.5
 65.9
Valuation allowance (3.3) (2.7)
Net deferred tax assets 84.2
 63.2
Deferred tax liabilities:    
Depreciation and amortization (57.5) (50.6)
Other (1.2) (2.4)
Deferred tax liabilities (58.7) (53.0)
Prepaid tax assets 4.2
 4.4
Net tax asset $29.7
 $14.6
As of July 31, 2016 and 2015, deferred income taxes on the consolidated balance sheets include $4.2 million and $4.4 million, respectively, of prepaid tax assets related to intercompany transfers of inventory.

The effective tax rate for fiscal 2016 was 25.9%, compared to 27.9% in fiscal 2015. The effective tax rate in the current year was favorably impacted by the settlement of tax audits and the mix of earnings between tax jurisdictions.
The Company has not hadprovided for U.S. income taxes on additional undistributed earnings of its non-U.S. subsidiaries of approximately $982.0 million. The Company currently intends to indefinitely reinvest these undistributed earnings as there are significant investment opportunities outside the U.S. If any historical instancesportion 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 non-performancethe unrecognized deferred tax liability related to these undistributed earnings is not practicable. In fiscal 2016, the Company repatriated $83.0 million of cash held by any counterparties, nor does it anticipate any future instancesits foreign subsidiaries in the form of non-performance.

NOTE G  Fair Value

Fair Valuea cash dividend which represented total planned dividends for the current year and which consisted entirely of Financial Instrumentscurrent year earnings.

The Company maintains a reserve for uncertain tax benefits. The accounting standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that in the Company’s judgment is greater than 50% likely to be realized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
  Year Ended July 31,
  2016 2015 2014
Gross unrecognized tax benefits at beginning of fiscal year $18.2
 $15.0
 $18.4
Additions for tax positions of the current year 3.4
 4.7
 2.9
Additions for tax positions of prior years 0.1
 0.1
 1.7
Reductions for tax positions of prior years (4.9) (0.6) (7.1)
Settlements (0.1) 
 (0.2)
Reductions due to lapse of applicable statute of limitations (1.0) (1.0) (0.7)
Gross unrecognized tax benefits at end of fiscal year $15.7
 $18.2
 $15.0
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended July 31, 2016, the Company recognized interest expense, net of tax benefit, of approximately $0.4 million. At July 31, 20132016 and 2012,2015, accrued interest and penalties on a gross basis were $1.8 million.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2008. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2013.
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 approximately 5 years, up to $1.1 million of the unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is possible that quicker than expected settlement of either current or future audits and disputes would cause additional reversals of previously recorded reserves in the next 12 month period. Quantification of an estimated range and timing of future audit settlements cannot be made at this time.
NOTE 13. Fair Value Measurements
Fair value measurements of financial instruments included cashare reported in one of three levels based on the lowest level of significant input used as follows:
Level 1Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.
Level 2Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3Inputs to the fair value measurement are unobservable inputs or valuation techniques.

At July 31, 2016 and cash equivalents, accounts receivable, accounts payable, short-term investments, short-term borrowings, long-term debt, and derivative contracts. The fair2015, the carrying values of cash and cash equivalents, short-term investments, accounts receivable,receivables, short-term borrowings and trade accounts payable and short-term borrowings approximated carrying valuesapproximate fair value because of the short-term nature of these instruments. Derivative contractsinstruments and are reported at theirclassified as Level 1 in the fair values based on third-party quotes.value hierarchy. As of July 31, 2013,2016, the estimated fair value of long-term debt with fixed interest rates was $112.3$394.4 million compared to its carrying value of $100.0 million and the estimated fair value of short-term debt with fixed interest rates was $98.2 million compared to the carrying value of $96.8$375.0 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts of debt could currently be borrowed, which is classified as Level 2 in the fair value hierarchy.


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

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The following summarizes the Company’s fair value of outstanding derivatives at July 31, 2013,2016 and 2012, on2015, included in the accompanying Consolidated Balance Sheets:

  Significant Other Observable Inputs 
  (Level 2)* 
  At July 31, 
  2013  2012 
  (thousands of dollars) 
Asset derivatives recorded under the caption Prepaids and other current assets        
Foreign exchange contracts $734  $526 
Liability derivatives recorded under the caption Other current liabilities        
Foreign exchange contracts  (845)  (1,424)
Forward exchange contracts - net liablity position $(111) $(898)

_________________

Sheets (in millions):
  
Significant Other Observable Inputs
(Level 2)*
  July 31,
  2016 2015
Assets    
Prepaids and other current assets    
Foreign exchange contracts $1.1
 $3.6
Liabilities    
Other current liabilities    
Foreign exchange contracts (2.4) (2.2)
Forward exchange contracts - net asset (liability) position $(1.3) $1.4
__________________
*Inputs to the valuation methodology of levelLevel 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;liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

The Company holds equity method investments which are classified in other long-term assets in the consolidated balance sheets and held at cost.accompanying Consolidated Balance Sheets. The aggregate carrying amount of these investments was $18.8$18.7 million and $20.1$18.3 million as of July 31, 20132016 and 2012,2015, respectively. These equity method investments are measured at fair value on a nonrecurring basis. The fair value of the Company’s equity method investments has not been estimated as there have been no identified events or changes in circumstance that would have had an adverse impact on the value of these investments. In the event that these investments were required to be measured, these investments would fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value, as the investments are in privately-held entities or divisions of public companies without quoted market prices.

Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. AsThe Company’s goodwill and intangible assets are not recorded at fair value as there have been no events or circumstances that would have had an adverse impact on the value of these assets, the Company has not been required to record an impairment and therefore these assets are not recorded at fair value.assets. In the event that an impairment was recognized, the fair value would be classified within Level 3 of the fair value hierarchy. Definite lived intangible assets are subject to impairment assessments as triggering events occur which could indicate that the asset might be impaired. Refer to Note C5 for further discussion of the annual goodwill impairment analysis and carrying values of goodwill and other intangible assets.

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

NOTE H  Employee Benefit Plans

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

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

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

  2013  2012  2011 
  (thousands of dollars) 
Service cost $19,439  $15,464  $16,148 
Interest cost  16,953   19,436   19,440 
Expected return on assets  (28,111)  (28,114)  (27,538)
Prior service cost amortization  591   725   674 
Actuarial loss amortization  10,362   5,696   3,962 
Net periodic benefit cost $19,234  $13,207  $12,686 

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

  2013  2012 
  (thousands of dollars) 
Change in benefit obligation:        
Benefit obligation, beginning of year $461,492  $404,012 
Service cost  19,439   15,464 
Interest cost  16,953   19,436 
Plan amendments  (9)  (781)
Participant contributions  1,207   1,130 
Actuarial loss/(gain)  (27,176)  51,914 
Currency exchange rates  1,225   (9,689)
Curtailment  (11,692)   
Benefits paid  (16,496)  (19,994)
Benefit obligation, end of year $444,943  $461,492 
         
Change in plan assets:        
Fair value of plan assets, beginning of year $387,576  $373,555 
Actual return on plan assets  51,524   4,442 
Company contributions  28,186   37,915 
Participant contributions  1,207   1,130 
Currency exchange rates  727   (9,472)
Benefits paid  (16,496)  (19,994)
Fair value of plan assets, end of year $452,724  $387,576 
         
Funded status:        
Funded/(Underfunded) status at July 31, 2013 and 2012 $7,781  $(73,916)

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

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

For the years ended July 31, 20132016, 2015 and 2012 the U.S. pension plans represented approximately 70 percent and 71 percent, respectively, of the Company’s total plan assets, approximately 71 percent and 74 percent, respectively, of the Company’s total projected benefit obligation, and approximately 75 percent and 71 percent, respectively, of the Company’s total pension expense.

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2014.

The weighted-average discount rate and rates of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation are as follows:

Weighted average actuarial assumptions 2013  2012 
All U.S. plans:        
Discount rate  4.58%  3.59%
Rate of compensation increase  2.61%  2.61%
Non - U.S. plans:        
Discount rate  4.04%  4.13%
Rate of compensation increase  2.92%  2.86%

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 2013  2012  2011 
All U.S. plans:            
Discount rate  3.59%  4.91%  5.25%
Expected return on plan assets  7.50%  7.75%  8.00%
Rate of compensation increase  2.61%  4.50%  5.00%
Non - U.S. plans:            
Discount rate  4.13%  5.36%  5.17%
Expected return on plan assets  5.20%  6.03%  6.17%
Rate of compensation increase  2.86%  3.57%  3.69%

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. As of our measurement date of July 31, 2013, the Company maintained its long-term rate of return for the U.S. pension plans at 7.50 percent. The expected long-term rate of return on assets assumption for the plans outside the U.S. reflects the investment allocation and expected total portfolio returns specific to each plan and country. The expected long-term rate of return on assets shown in the pension benefit disclosure for non-U.S. plans is an asset-based weighted average of all non-U.S. plans.

Discount 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 disclosed in the assumptions used to determine net periodic benefit cost and to determine benefit obligations is based upon a weighted average, using year-end projected benefit obligations.

Plan Assets The Company used the following definitions to classify pension assets into either Level 1, Level 2, or Level 3:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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

Level 3 – Unobservable inputs for the asset or liability.

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

  Quoted Prices in          
  Active Markets  Significant  Significant    
  for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
Asset Category (Level 1)  (Level 2)  (Level 3)  Total 
2013                
Cash $18.5  $  $  $18.5 
Global Equity Securities  82.5   50.2   19.4   152.1 
Fixed Income Securities  42.9   20.8   60.8   124.5 
Real Assets        22.1   22.1 
Total U.S. Assets at July 31, 2013 $143.9  $71.0  $102.3  $317.2 
2012                
Cash $0.9  $  $  $0.9 
Global Equity Securities  61.5   57.3   19.4   138.2 
Fixed Income Securities  29.2   19.5   55.0   103.7 
Real Assets        31.4   31.4 
Total U.S. Assets at July 31, 2012 $91.6  $76.8  $105.8  $274.2 
2011                
Cash $0.3  $  $  $0.3 
Global Equity Securities  64.8   56.2   17.9   138.9 
Fixed Income Securities  36.6   20.1   31.4   88.1 
Real Assets        38.0   38.0 
Total U.S. Assets at July 31, 2011 $101.7  $76.3  $87.3  $265.3 

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

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

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

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

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

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

The following table sets forth a summary of changes in the fair values of the U.S. pension plans’ Level 3 assets for the years ended July 31, 2013, 2012, and 2011 (in millions):

  Global Equity  Fixed Income  Real Assets  Total 
Beginning balance at August 1, 2010 $17.3  $33.1  $16.2  $66.6 
Unrealized gains  1.5   2.1   3.4   7.0 
Realized gains  1.0         1.0 
Purchases  2.3      30.4   32.7 
Sales  (4.2)  (3.8)  (12.0)  (20.0)
Ending balance at July 31, 2011 $17.9  $31.4  $38.0  $87.3 
Unrealized gains  0.1   0.6   (2.1)  (1.4)
Realized gains  1.5   0.4      1.9 
Purchases  1.0   17.0   2.8   20.8 
Sales  (1.1)  (1.7)     (2.8)
Net transfers into (out of) level 3     7.3   (7.3)   
Ending balance at July 31, 2012 $19.4  $55.0  $31.4  $105.8 
Unrealized gains  (0.8)  6.4   1.1   6.7 
Realized gains  1.7   0.7      2.4 
Purchases  2.1      1.0   3.1 
Sales  (3.0)  (1.3)  (11.4)  (15.7)
Ending balance at July 31, 2013 $19.4  $60.8  $22.1  $102.3 
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The following table sets forth a summary of the U.S. pension plans’ assets valued at NAV for the year ended July 31, 2013 (in millions):

  Fair Value Unfunded
Commitments
 Redemption Frequency
(If Currently Eligible)
 Redemption
Notice Period
Global Equity $ 100.4  $ 7.3  Daily, Quarterly, Annually 10 - 100 days
Fixed Income   124.5    — Daily, Quarterly, Semi-Annually 65 - 120 days
Real Assets   22.1    9.4  Monthly, Quarterly 30 - 95 days
Total $ 247.0  $ 16.7     

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

  Quoted Prices in          
  Active Markets  Significant  Significant    
  for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
Asset Category (Level 1)  (Level 2)  (Level 3)  Total 
2013                
Cash $0.6  $  $  $0.6 
Global Equity Securities  63.8         63.8 
Fixed Income Securities  6.9   21.0      27.9 
Equity/Fixed Income  16.9      26.3   43.2 
Total International Assets at July 31, 2013 $88.2  $21.0  $26.3  $135.5 
2012                
Global Equity Securities $37.1  $  $  $37.1 
Fixed Income Securities  5.9   28.4      34.3 
Equity/Fixed Income  13.3      21.8   35.1 
Real Assets     6.8      6.8 
Total International Assets at July 31, 2012 $56.3  $35.2  $21.8  $113.3 
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 

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

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

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

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

The following table sets forth a summary of changes in the fair values of the International pension plans’ Level 3 assets for the years ended July 31, 2013, 2012, and 2011 (in millions):

  Equity/Fixed 
  Income 
Beginning balance at August 1, 2010 $21.7 
Unrealized gains  0.9 
Foreign currency exchange  2.5 
Purchases  6.2 
Sales  (5.0)
Ending balance at July 31, 2011 $26.3 
Unrealized gains  1.4 
Foreign currency exchange  (3.8)
Purchases  2.6 
Sales  (4.6)
Net transfers into (out of) Level 3  (0.1)
Ending balance at July 31, 2012 $21.8 
Unrealized gains  1.1 
Foreign currency exchange  1.7 
Purchases  2.6 
Sales  (0.9)
Net transfers into (out of) Level 3   
Ending balance at July 31, 2013 $26.3 

The following table sets forth a summary of the International pension plans’ assets valued at NAV for the year ended July 31, 2013 (in millions):

Fair Value Unfunded
Commitments

Commitments Redemption Frequency
(If Currently Eligible)
Redemption
Notice Period
Fixed Income$ 13.8 $ —WeeklyN/A
Equity/Fixed Income 32.6  —Daily, Yearly90 days
Total$ 46.4 $ —

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

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

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

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

Postemployment and Postretirement Benefit 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 $1.3 million and $1.5 million as of July 31, 2013 and July 31, 2012, respectively. The annual cost resulting from these benefits is not material. For measurement purposes, a 7.2 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for Fiscal 2013. The Company has assumed that the long-term rate of increase will decrease gradually to an ultimate annual rate of 4.5 percent. A one-percentage point increase in the health care cost trend rate would increase the Fiscal 2013 and 2012 liability by $0.1 million.

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

Deferred Compensation and Other Benefit 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 $9.5 million for both of the years ended July 31, 2013 and July 31, 2012, related primarily to its deferred compensation plans.

48

NOTE I14. 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 2010 Master Stock Incentive Plan, as well as performance awards payable in common stock discussed further in Note J.

10.


Treasury Stock The Company believes that the share repurchase program is a way of providing return to its shareholders. The Board of Directors authorized the repurchase, at the Company’s discretion, of up to 16.014.0 million shares of common stock under the Company’s stock repurchase plan dated March 26, 2010.May 29, 2015. This repurchase authorization, which is effective until terminated by the Board of Directors, replaced the Company’s previous stock repurchase plan dated September 27, 2013. As of July 31, 2013,2016, the Company had remaining authorization to repurchase 2.610.5 million shares under this plan. Following is a summary of treasuryTreasury stock share activity for Fiscal 2013 and 2012:

  2013  2012 
Beginning balance at August 1, 2012  3,980,832   13,245,864 
Stock repurchases  2,986,794   4,503,587 
Net issuance upon exercise of stock options  (1,288,560)  (1,270,526)
Issuance under compensation plans  (174,408)  (89,528)
Stock split and other activity  (13,933)  (12,408,565)
Ending balance at July 31, 2013  5,490,725   3,980,832 

NOTE J  Stock Option Plans

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

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

49

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

 2013 2012 2011
Risk - free interest rate<0.03 - 1.7% <0.11 - 1.8% <0.12 - 3.1%
Expected volatility22.5 - 29.7% 25.8 - 31.9% 25.5 - 34.7%
Expected dividend yield1.0 - 1.4% 1.0% 1.0%
Expected life     
Director original grants without reloads8 years 8 years 8 years
Non - officer original grants7 years 7 years 8 years
Reload grants<5 years <8 years <8 years
Officer original grants without reloads8 years 8 years 8 years

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

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

The following table summarizes stock option activity:

      Weighted 
   Options  Average Exercise 
   Outstanding  Price 
 Outstanding at July 31, 2010   9,543,624  $15.02 
 Granted   1,103,202   28.61 
 Exercised   (2,243,502)  11.55 
 Canceled   (15,330)  23.60 
 Outstanding at July 31, 2011   8,387,994   17.72 
 Granted   1,082,979   34.76 
 Exercised   (1,379,827)  11.90 
 Canceled   (34,819)  27.45 
 Outstanding at July 31, 2012   8,056,327   20.97 
 Granted   965,050   33.91 
 Exercised   (1,607,081)  14.79 
 Canceled   (84,476)  33.94 
 Outstanding at July 31, 2013   7,329,820   23.88 

The total intrinsic value of options exercised during Fiscal 2013, 2012, and 2011 was $33.7 million, $29.5 million, and $34.2 million, respectively.

Shares reserved at July 31, 2013 for outstanding options and future grants were 13,656,154. Shares reserved consist of shares available for grant plus all outstanding options.

The following table summarizes information concerning outstanding and exercisable options as of July 31, 2013:

     Weighted          
     Average  Weighted     Weighted 
     Remaining  Average     Average 
  Number  Contractual  Exercise  Number  Exercise 
Range of Exercise Prices Outstanding  Life (Years)  Price  Exercisable  Price 
$0.00 to $15.89  1,156,373   1.26  $15.29   1,156,373  $15.29 
$15.90 to $20.89  1,935,678   3.79   17.44   1,935,678   17.44 
$20.90 to $25.89  1,375,689   5.73   21.79   1,375,689   21.79 
$25.90 to $30.89  909,199   7.36   29.15   599,727   29.16 
$30.90 and above  1,952,881   8.36   34.35   456,550   34.88 
   7,329,820   5.42   23.88   5,524,017   20.79 
50

At July 31, 2013, the aggregate intrinsic value of shares outstanding and exercisable was $90.7 million and $85.4 million, respectively.

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

      Weighted 
      Average Grant 
      Date Fair 
   Options  Value 
 Non - vested at July 31, 2012   1,805,397  $9.22 
 Granted   850,500   8.80 
 Vested   (822,350)  8.90 
 Canceled   (27,744)  8.98 
 Non - vested at July 31, 2013   1,805,803   9.18 

The total fair value of shares vested during Fiscal 2013, 2012, and 2011 was $29.8 million, $19.5 million, and $10.5 million, respectively.

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

NOTE K  Income Taxes

The components of earnings before income taxes are as follows:

  2013  2012  2011 
  (thousands of dollars) 
Earnings before income taxes:            
United States $147,317  $171,101  $117,562 
Foreign  200,864   199,679   194,701 
Total $348,181  $370,780  $312,263 

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

  2013  2012  2011 
  (thousands of dollars) 
Income taxes:            
Current            
Federal $35,820  $45,468  $26,675 
State  4,337   4,012   3,555 
Foreign  52,300   50,655   54,785 
   92,457   100,351   85,015 
Deferred            
Federal  7,071   7,391   8,556 
State  312   722   191 
Foreign  964   (1,769)  (6,790)
   8,347   6,344   1,957 
Total $100,804  $106,479  $86,972 

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

  2013  2012  2011 
Statutory U.S. federal rate  35.0%  35.0%  35.0%
State income taxes  1.2%  1.2%  1.0%
Foreign taxes at lower rates  (6.1)%  (6.0)%  (6.6)%
Export, manufacturing, and research credits  (1.5)%  (1.0)%  (1.6)%
U.S. tax impact on repatriation of earnings  (0.2)%  0.8%  (0.3)%
Change in unrecognized tax benefits  0.5%  (1.0)%  0.1%
Other  0.1%  (0.3)%  0.3%
   29.0%  28.7%  27.9%
51

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

  2013  2012 
  (thousands of dollars) 
Deferred tax assets:        
Accrued expenses $11,580  $10,666 
Compensation and retirement plans  23,578   52,986 
NOL carryforwards  3,279   3,146 
LIFO and inventory reserves  5,037   2,796 
Other  3,890   3,697 
Deferred tax assets, gross  47,364   73,291 
Valuation allowance  (3,228)  (2,945)
Net deferred tax assets  44,136   70,346 
Deferred tax liabilities:        
Depreciation and amortization  (45,737)  (38,796)
Other  (663)  (394)
Deferred tax liabilities  (46,400)  (39,190)
Prepaid tax assets  4,015   4,251 
Net tax asset $1,751  $35,407 

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

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

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

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

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

  2013  2012  2011 
  (thousands of dollars) 
Gross unrecognized tax benefits at beginning of fiscal year $16,514  $20,005  $18,994 
Additions for tax positions of the current year  5,453   3,323   7,406 
Additions for tax positions of prior years  407   261   668 
Reductions for tax positions of prior years  (1,640)  (4,462)  (4,059)
Settlements  (277)      
Reductions due to lapse of applicable statute of limitations  (2,038)  (2,613)  (3,004)
Gross unrecognized tax benefits at end of fiscal year $18,419  $16,514  $20,005 
52

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal year ended July 31, 2013, the Company recognized interest expense, net of tax benefit, of approximately $0.3 million. At July 31, 20132016 and July 31, 2012, accrued interest and penalties on a gross basis were $1.1 million and $1.3 million, respectively.

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

Major JurisdictionsOpen Tax Years
Belgium2011 through 2012
China2003 through 2012
France2010 through 2012
Germany2009 through 2012
Italy2003 through 2012
Japan2012
Mexico2008 through 2012
Thailand2005 through 2012
United Kingdom2012
United States2011 through 2012

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

NOTE L  Segment Reporting

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

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

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

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

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

53

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

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

Segment detail2015 is summarized as follows:

  Engine  Industrial  Corporate &  Total 
  Products  Products  Unallocated  Company 
  (thousands of dollars) 
2013            
Net sales $1,504,188  $932,760  $  $2,436,948 
Depreciation and amortization  35,815   22,447   6,028   64,290 
Equity earnings in unconsolidated affiliates  4,000   693      4,693 
Earnings before income taxes  220,892   139,108   (11,819)  348,181 
Assets  826,151   527,416   389,989   1,743,556 
Equity investments in unconsolidated affiliates  15,563   3,277      18,840 
Capital expenditures, net of acquired businesses  52,864   33,134   8,897   94,895 
2012                
Net sales $1,570,140  $923,108  $  $2,493,248 
Depreciation and amortization  36,646   18,852   5,667   61,165 
Equity earnings in unconsolidated affiliates  3,966   769      4,735 
Earnings before income taxes  227,941   149,249   (6,410)  370,780 
Assets  845,176   520,739   364,167   1,730,082 
Equity investments in unconsolidated affiliates  17,304   2,822      20,126 
Capital expenditures, net of acquired businesses  46,816   24,083   7,240   78,139 
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 

Following

  Year Ended July 31,
  2016 2015
Beginning balance 17,044,950
 11,237,522
Stock repurchases 2,540,000
 6,675,147
Net issuance upon exercise of stock options (764,756) (773,385)
Issuance under compensation plans (59,787) (85,611)
Other activity (9,904) (8,723)
Ending balance 18,750,503
 17,044,950
NOTE 15. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component for the years ended July 31, 2016 and 2015 are net sales by product within the Engine Products segment and Industrial Products segment:

  2013  2012  2011 
  (thousands of dollars) 
Engine Products segment:            
Off-Road Products $358,834  $376,870  $327,557 
On-Road Products  128,446   163,934   127,107 
Aftermarket Products*  900,419   907,306   861,393 
Retrofit Emissions Products  12,298   15,354   19,555 
Aerospace and Defense Products  104,191   106,676   104,883 
Total Engine Products segment  1,504,188   1,570,140   1,440,495 
Industrial Products segment:            
Industrial Filtration Solutions Products  529,751   553,453   507,646 
Gas Turbine Products  232,922   180,669   154,726 
Special Applications Products  170,087   188,986   191,162 
Total Industrial Products segment  932,760   923,108   853,534 
Total Company $2,436,948  $2,493,248  $2,294,029 

_________________

as follows (in millions):
  
Foreign
currency
translation
adjustment
(a)
 
Pension
benefits
 
Derivative
financial
instruments
 Total 
Balance as of July 31, 2015, net of tax $(70.8) $(90.6) $(0.6) $(162.0) 
Other comprehensive loss before reclassifications and tax (18.5) (55.4) (0.4) (74.3) 
Tax benefit 
 19.4
 0.1
 19.5
 
Other comprehensive loss before reclassifications, net of tax (18.5) (36.0) (0.3) (54.8) 
Reclassifications, before tax 
 15.8
 0.6
 16.4

Tax expense 
 (5.0) (0.2) (5.2) 
Reclassifications, net of tax 
 10.8
 0.4
(b)11.2
 
Other comprehensive (loss) income, net of tax (18.5) (25.2) 0.1
 (43.6) 
Balance as of July 31, 2016, net of tax $(89.3) $(115.8) $(0.5) $(205.6) 
          
Balance as of July 31, 2014, net of tax $48.3
 $(94.0) $(0.1) $(45.8) 
Other comprehensive loss before reclassifications and tax (119.1) (5.2) (1.9) (126.2) 
Tax benefit 
 2.0
 0.7
 2.7
 
Other comprehensive loss before reclassifications, net of tax (119.1) (3.2) (1.2) (123.5) 
Reclassifications, before tax 
 8.7
 1.0
 9.7

Tax expense 
 (2.1) (0.3) (2.4) 
Reclassifications, net of tax 
 6.6
 0.7
(b)7.3
 
Other comprehensive (loss) income, net of tax (119.1) 3.4
 (0.5) (116.2) 
Balance as of July 31, 2015, net of tax $(70.8) $(90.6) $(0.6) $(162.0) 
__________________
*
(a)Includes replacement part salesTaxes are not provided on cumulative translation adjustments as substantially all translation adjustments relate to earnings that are intended to be indefinitely reinvested outside the Company’s OEM Customers.U.S.
(b)Relates to foreign currency cash flow hedges that were reclassified from accumulated other comprehensive loss to other income, net (see Note 13).
54

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

     Property, Plant, & 
  Net Sales  Equipment - Net 
  (thousands of dollars) 
2013      
United States $1,010,934  $166,614 
Europe  678,996   123,710 
Asia - Pacific  546,406   75,206 
Other  200,612   53,750 
Total $2,436,948  $419,280 
         
2012        
United States $1,064,474  $146,328 
Europe  678,619   114,266 
Asia - Pacific  572,163   80,200 
Other  177,992   44,115 
Total $2,493,248  $384,909 
         
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 

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

NOTE M16. Guarantees

The Company and Caterpillar Inc. equally own the shares of Advanced Filtration Systems Inc. (AFSI),AFSI, an unconsolidated joint venture, and guarantee certain debt of the joint venture. As of July 31, 2013,2016, the joint venture had $29.1$24.8 million of outstanding debt, of which the Company

guarantees half. In addition, during Fiscal 2013, 2012,years ended July 31, 2016, 2015 and 2011,2014, the Company recorded its equity in earnings (loss) of this equity method investment of $(0.7) million, $2.3 million, $2.0 million, and $1.6$3.7 million and royalty income of $6.0$5.1 million, $6.2$5.8 million, and $6.2$6.8 million, respectively, related to AFSI.

At July 31, 20132016 and 2012,2015, the Company had a contingent liability for standby letters of credit totaling $12.2$7.3 million and $10.9$7.8 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, 20132016 and 2012,2015, there were no amounts drawn upon these letters of credit.

NOTE N  Warranty

The Company provides for warranties on certain products. In addition, the Company may incur specific Customer warranty issues. Following is a reconciliation of warranty reserves (in thousands of dollars):

Balance at July 31, 2011 $19,720 
Accruals for warranties issued during the reporting period  5,002 
Accruals related to pre-existing warranties (including changes in estimates)  (2,956)
Less settlements made during the period  (10,861)
Balance at July 31, 2012 $10,905 
Accruals for warranties issued during the reporting period  5,940 
Accruals related to pre-existing warranties (including changes in estimates)  (1,081)
Less settlements made during the period  (5,238)
Balance at July 31, 2013 $10,526 
55

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

NOTE O17. Commitments and Contingencies

Operating LeasesThe Company enters into operating leases primarily for office and warehouse facilities, production and non-production equipment, automobiles and computer equipment. Total expense recorded under operating leases for the periodsyears ended July 31, 20132016, 2015 and 2012 were $27.52014, was $25.4 million, $28.1 million, and $26.8$28.0 million, respectively. Future commitments
As of July 31, 2016, the estimated future minimum lease payments under operating leases are: $11.4 million in Fiscal 2014, $8.0 million in Fiscal 2015, $4.3 million in Fiscal 2016, $1.9 million in Fiscal 2017, $1.0 million in Fiscal 2018, and $0.1 million thereafter.

are as follows (in millions):

Year Ending July 31, Operating Leases
2017 $10.0
2018 8.1
2019 4.5
2020 1.8
2021 0.8
Thereafter 0.2
Total future minimum lease payments $25.4
LitigationThe 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 reservesestimated liability in its consolidated financial statements areis adequate in light of the probable and estimable outcomes. The recorded liabilities were not material to the Company’s financial position, results of operations, liquidity or liquidityfinancial position and the Company does not believe that any of the currently identified claims or litigation will materially affect its financial position, results of operations, or liquidity.

NOTE P  Quarterly Financial Information (Unaudited)

  First  Second  Third  Fourth 
  Quarter  Quarter  Quarter  Quarter 
  (thousands of dollars) 
2013                
Net sales $588,947  $596,036  $619,371  $632,594 
Gross margin  198,293   198,977   221,501   228,356 
Net earnings  54,113   50,813   69,842   72,609 
Basic earnings per share  0.36   0.34   0.47   0.49 
Diluted earnings per share  0.36   0.34   0.46   0.48 
Dividends declared per share  0.090   0.100   0.130   0.130 
Dividends paid per share  0.090   0.090   0.100   0.130 
                 
2012                
Net sales $608,295  $580,883  $647,237  $656,833 
Gross margin  214,934   200,817   228,229   229,783 
Net earnings  68,553   53,821   70,946   70,981 
Basic earnings per share  0.46   0.36   0.47   0.47 
Diluted earnings per share  0.45   0.35   0.46   0.47 
Dividends declared per share  0.075   0.080   0.090   0.090 
Dividends paid per share  0.075   0.075   0.080   0.090 

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

NOTE Q  Subsequent Events

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

NOTE 18. Segment Reporting
The Company has identified two reportable segments: Engine Products and Industrial Products. Segment determination 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 end-markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products include air filtration systems, exhaust and emissions systems and liquid filtration systems including hydraulics, fuel, lube and replacement filters.
The Industrial Products segment sells to various industrial dealers, distributors, OEMs of gas-fired turbines and OEMs and end-users requiring clean air. Products include dust, fume and mist collectors, compressed air purification systems, air filtration systems for gas turbines, PTFE membrane-based products and specialized air and gas filtration systems for applications including computer hard disk drives and semi-conductor manufacturing.
Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, such as interest income and interest expense. Assets included in Corporate and Unallocated are principally cash and cash equivalents, inventory reserves, certain prepaids, certain investments, other assets and assets allocated to general corporate purposes.
The Company has an internal measurement system to evaluate performance and allocate resources based on earnings before income taxes. The Company’s manufacturing facilities serve both reporting segments. Therefore, the Company uses an allocation methodology to assign costs and assets to the segments. A certain amount of costs and assets relate to general corporate purposes and are not assigned to either segment. The accounting policy applied to inventory for the reportable segments differs from that described in the summary of significant accounting policies. The reportable segments account for inventory on a standard cost basis, which is consistent with the Company's internal reporting.

Segment allocated assets are primarily accounts receivable, inventories, property, plant and equipment and goodwill. Reconciling items included in Corporate and Unallocated are created based on accounting differences between segment reporting and the consolidated external reporting as well as internal allocation methodologies.
The Company is an integrated enterprise, characterized by substantial intersegment cooperation, cost allocations and sharing of assets. Therefore, the Company does not represent that these segments, if operated independently, would report the operating profit and other financial information shown below.
Segment detail is summarized as follows (in millions):
  
Engine
Products
 
Industrial
Products
 
Corporate and
Unallocated
 
Total
Company
Fiscal 2016        
Net sales $1,391.3
 $829.0
 $
 $2,220.3
Depreciation and amortization 38.5
 28.1
 8.3
 74.9
Equity earnings in unconsolidated affiliates 1.0
 1.2
 
 2.2
Earnings (loss) before income taxes 163.5
 119.0
 (25.1) 257.4
Assets 841.4
 646.9
 300.3
 1,788.6
Equity investments in unconsolidated affiliates 14.3
 4.4
 
 18.7
Capital expenditures 37.5
 27.3
 8.1
 72.9
Fiscal 2015  
  
  
  
Net sales $1,484.1
 $887.1
 $
 $2,371.2
Depreciation and amortization 43.3
 26.4
 4.6
 74.3
Equity earnings in unconsolidated affiliates 4.1
 1.0
 
 5.1
Earnings (loss) before income taxes 186.3
 123.3
 (21.0) 288.6
Assets 887.7
 634.0
 287.8
 1,809.5
Equity investments in unconsolidated affiliates 15.1
 3.2
 
 18.3
Capital expenditures 54.6
 33.4
 5.8
 93.8
Fiscal 2014  
  
  
  
Net sales $1,584.0
 $889.5
 $
 $2,473.5
Depreciation and amortization 38.9
 24.0
 4.3
 67.2
Equity earnings in unconsolidated affiliates 5.6
 0.9
 
 6.5
Earnings (loss) before income taxes 233.9
 134.0
 (7.2) 360.7
Assets��900.1
 572.0
 470.3
 1,942.4
Equity investments in unconsolidated affiliates 17.4
 4.0
 
 21.4
Capital expenditures 56.3
 34.7
 6.2
 97.2

Net sales by product within the Engine Products segment and Industrial Products segment is summarized as follows (in millions):
  Year Ended July 31,
  2016 2015 2014
Engine Products segment:      
Off-Road Products $216.6
 $261.1
 $342.2
On-Road Products 127.2
 138.4
 130.0
Aftermarket Products* 951.5
 980.7
 1,012.2
Aerospace and Defense Products 96.0
 103.9
 99.6
Total Engine Products segment 1,391.3
 1,484.1
 1,584.0
Industrial Products segment:      
Industrial Filtration Solutions Products 517.9
 529.0
 553.4
Gas Turbine Products 149.6
 186.9
 156.9
Special Applications Products 161.5
 171.2
 179.2
Total Industrial Products segment 829.0
 887.1
 889.5
Total Company $2,220.3
 $2,371.2
 $2,473.5
__________________
56
*Includes replacement part sales to the Company’s OEM customers.
Table of Contents
Net sales by origination and property, plant and equipment by geographic region are summarized as follows (in millions):
  Net Sales (1) Property, Plant and Equipment, Net
2016    
United States $937.3
 $192.9
Europe 632.7
 148.1
Asia Pacific 449.9
 60.1
Other 200.4
 68.7
Total $2,220.3
 $469.8
     
2015   
   
United States $1,007.3
 $209.0
Europe 671.3
 141.7
Asia Pacific 470.7
 63.8
Other 221.9
 56.1
Total $2,371.2
 $470.6
     
2014   
   
United States $1,019.9
 $196.7
Europe 728.6
 128.9
Asia Pacific 517.3
 72.1
Other 207.7
 54.0
Total $2,473.5
 $451.7
(1)Net sales by origination is based on the country of the Company's legal entity where the customer's order was placed.
Concentrations There were no customers with over 10% of net sales during the years ended July 31, 2016, 2015 and 2014, respectively. There were no customers over 10% of gross accounts receivable at July 31, 2016 or July 31, 2015.

NOTE 19. Quarterly Financial Information (Unaudited)
Unaudited consolidated quarterly financial information for the years ended July 31, 2016 and 2015 is as follows (in millions, except per share amounts):
  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Fiscal 2016        
Net sales $538.0
 $517.2
 $571.3
 $593.8
Gross profit 178.1
 170.8
 196.6
 209.3
Net earnings 38.5
 38.0
 54.8
 59.5
Basic earnings per share 0.29
 0.28
 0.41
 0.44
Diluted earnings per share 0.29
 0.28
 0.41
 0.44
Dividends declared per share 0.170
 0.170
 0.175
 0.175
Dividends paid per share 0.170
 0.170
 0.170
 0.175
         
Fiscal 2015        
Net sales $596.5
 $588.5
 $575.6
 $610.6
Gross profit 209.1
 203.1
 194.1
 202.3
Net earnings 55.9
 48.0
 47.8
 56.4
Basic earnings per share 0.40
 0.35
 0.35
 0.41
Diluted earnings per share 0.40
 0.34
 0.34
 0.41
Dividends declared per share 
 0.330
 
 0.340
Dividends paid per share 0.165
 0.165
 0.165
 0.170

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

Management 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 theits Chief Executive Officer and the Chief Financial Officer, ofevaluated the effectiveness of the designCompany’s disclosure controls and operationprocedures as of the end of the period. Based on their evaluation, as of the end of the period covered the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that,1934, as of the Evaluation Date, theamended) were effective. The Company’s disclosure controls and procedures were effective to ensureare designed so that information required to be disclosed by the Companyissuer in the reports that it files or submits under the Security Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in applicablethe Commission’s rules and forms, and (ii)that such information is accumulated and communicated to our management including ourof the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change

During the quarter that ended on July 31, 2016, the Company completed its remediation efforts related to the Company’s controls over the timing of revenue recognition in the Company’s European Gas Turbine Products business. As a result of the completed remediation efforts noted below, there were improvements in internal control over financial reporting during the year ended July 31, 2016. Except the remediation in the Company’s European Gas Turbine Products business and the Global ERP Project noted below, there were no other changes in internal control over financial reporting (as defined in Ruleby Rules 13a-15(f) ofunder the Exchange Act) identified in connection with such evaluationthat occurred during the fiscal quarter ended July 31, 2013,2016 that has materially affected, or is reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.

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


Remediation Actions
In the Company’s Annual Report on Form 10-K for the year ended July 31, 2015, the Company identified a material weakness in the Company’s internal control over financial reporting. The material weakness was identified through the Company’s Compliance Committee’s receipt of reports from two former employees that revenue for a project in the European Gas Turbine Products business was improperly recognized in the second quarter of fiscal 2015. The Company initiated an internal investigation which verified the substance of the reports and identified additional revenue transactions within the European Gas Turbine Products business involving the same improper practice.
The Audit Committee of the Board subsequently engaged independent external counsel and independent forensic accountants to complete the investigation. Based on the investigation findings, the Company’s conclusions are as follows:
Documents were altered with the intent to inappropriately recognize revenue for certain European Gas Turbine Products business projects transactions in periods earlier than would be allowable under generally accepted accounting principles.
The revenue transactions were all valid, but revenue was inappropriately recognized in an accelerated manner during the fourth quarter of fiscal 2014 and the second and third quarters of fiscal 2015. Due to the inappropriate acceleration of revenue in the aforementioned periods, revenue was also misstated in the first and fourth quarters of 2015.
In response to the material weakness, management developed remediation plans to address the control deficiencies identified in fiscal 2015. The Company has implemented the following remediation actions during fiscal 2016:
Termination of certain employees.
A training program on the Company’s policies and procedures for proper revenue recognition.
A newly designed control protocol over the evaluation of revenue recognition that includes:
Review and approval by management of all delivery terms on gas turbine projects.
Expanded use of third party documents for support of the decision as to when recognition of revenue is appropriate.
The utilization of standard forms for determining and documenting the revenue recognition decision.
Management has determined that the remediation actions discussed above were effectively designed and demonstrated effective operation for a sufficient period of time to enable the Company to conclude that the material weakness regarding its internal controls associated with the timing of revenue recognition in the Company’s European Gas Turbine Products business has been remediated as of July 31, 2016.
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.

of this Annual Report.

Report of Independent Registered Public Accounting Firm

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

of this Annual Report.

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 20132016 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 7in Part I of this Annual Report on Form 10-K.

Report.

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,Principal Executive Officer, its principal financial officerPrincipal Financial Officer and its principal accounting officerPrincipal Accounting Officer or controller,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.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,Principal Executive Officer, Principal Financial Officer and principal accounting officerPrincipal Accounting Officer on the Company’s website.

57

Item 11. Executive Compensation

The information under the captions “Executive Compensation” and “Director Compensation” of the 20132016 Proxy Statement is incorporated herein by reference.

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

The information under the caption “Security Ownership” of the 2013 Proxy Statement is incorporated herein by reference.

The following table sets forth information as of July 31, 20132016, 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))
 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders:            
1980 Master Stock Compensation Plan:            
Deferred Stock Gain Plan  57,775  $7.6108    
1991 Master Stock Compensation Plan:            
Deferred Stock Option Gain Plan  572,991  $18.3960    
Deferred LTC/Restricted Stock  220,008  $12.1824    
2001 Master Stock Incentive Plan:            
Stock Options  3,999,220  $18.5604    
Deferred Stock Option Gain Plan  3,511  $29.0143    
Deferred LTC/Restricted Stock  270,002  $18.1362    
Long-Term Compensation  74,773  $23.7350    
2010 Master Stock Incentive Plan:            
Stock Options  2,304,260  $32.5917   See Note 1 
Stock Options for Non-Employee Directors  409,200   32.6111     
Long-Term Compensation  32,641  $31.6252    
Subtotal for plans approved by security holders  7,944,381  $23.1784     
Equity compensation plans not approved by security holders:            
Non-qualified Stock Option Program for Non-Employee Directors  617,140  $19.9868   See Note 2 
ESOP Restoration  39,259  $7.0989   See Note 3 
Subtotal for plans not approved by security holders  656,399   19.2160     
Total  8,600,780   22.8760     

Note 1:

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)
Equity compensation plans approved by
security holders:
  
  
  
1980 Master Stock Compensation Plan:  
  
  
Deferred Stock Gain Plan 34,720
 $6.10
 
1991 Master Stock Compensation Plan:  
  
  
Deferred Stock Option Gain Plan 497,365
 $2.09
 
Deferred LTC/Restricted Stock 186,270
 $13.68
 
2001 Master Stock Incentive Plan:  
  
  
Stock Options 1,632,355
 $20.23
 
Deferred LTC/Restricted Stock 120,620
 $19.99
 
2010 Master Stock Incentive Plan:  
  
  
Stock Options 3,977,849
 $34.30
 See Note 1
Deferred LTC/Restricted Stock 68
 41.15
  
Stock Options for Non-Employee Directors 815,500
 34.20
  
Long-Term Compensation 24,272
 $36.59
 
Subtotal for plans approved by
security holders
 7,289,019
 $28.05
  
Equity compensation plans not
approved by security holders:
  
  
  
Non-qualified Stock Option Program
for Non-Employee Directors
 396,686
 $19.97
 See Note 2
ESOP Restoration 27,783
 $8.60
 See Note 3
Subtotal for plans not approved by
security holders
 424,469
 19.23
  
Total 7,713,488
 27.56
  
Note 1:The 2010 Master Stock Incentive Plan limits the number of shares authorized for issuance to 9,200,000 during the 10-year term of the plan in addition to any shares forfeited under the 2001 plan. The plan allows for the granting of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, SAR, dividend equivalents, and other stock-based awards. There are currently 3,909,233 shares of the authorization remaining.
Note 2:The stock option program for non-Employee Directors provides for each non-Employee Director to receive annual option grants of 14,400 shares. The 2010 Master Stock Incentive Plan, which was approved by the Company’s stockholders on November 19, 2010, provides for the issuance of stock options to non-Employee Directors, and the stock option program for non-Employee Directors has been adopted as a sub-plan under the 2010 Master Stock Incentive Plan and shares issued to Directors after December 10, 2010, are issued under the 2010 Master Stock Incentive Plan. Based on Mercer’s Director compensation review, the Committee approved changing the annual stock option grant from a fixed number of shares to a fixed value. The annual stock option grant will be based on a $140,000 fixed value. This change is designed to maintain a stable value of equity grant for the Company's Director compensation. The number of options granted will be determined by dividing the fixed value

of $140,000 by the Black-Scholes value as of the plan in additiondate of the grant (the shares will be rounded to any shares forfeited under the 2001 plan. The Plan allowsnearest 100 shares). This change was effective for the granting of nonqualified stock options incentive stock options, restricted stock, restricted stock units, SAR, dividend equivalents, and other stock-based awards. There are currently 6,326,334 shares of the authorization remaining.

granted beginning in January 2014.
58
Note 3:The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990, 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.

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

Note 3: The Company has a non-qualified ESOP Restoration Plan established on August 1, 1990 (filed as exhibit 10-D to the Company’s 2009 Form 10-K report), to supplement the benefits for executive employees under the Company’s Employee Stock Ownership Plan that would otherwise be reduced because of the compensation limitations under the Internal Revenue Code. The ESOP’s 10-year term was completed on July 31, 1997 and the only ongoing benefits under the ESOP Restoration Plan are the accrual of dividend equivalent rights to the participants in the Plan.

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

The information under the captions “Policy and Procedures Regarding Transactions with Related Persons” and “Board Oversight and Director Independence” of the 20132016 Proxy Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information under the captions “Independent Auditor Fees” and “Audit Committee Pre-Approval Policies and Procedures” of the 20132016 Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

Documents filed with this report:

(1) Financial Statements

Report of Independent Registered Public Accounting Firm

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

Consolidated Balance Sheets — July 31, 2013 and 2012

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

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

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

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules —

Schedule II Valuation and qualifying accounts

All other schedules (Schedules I, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted.

(3) Exhibits

(1)Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings — years ended July 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income — years ended July 31, 2016, 2015 and 2014
Consolidated Balance Sheets — July 31, 2016 and 2015
Consolidated Statements of Cash Flows — years ended July 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Shareholders’ Equity — years ended July 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2)Financial Statement Schedules
All other schedules (Schedules I, II, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted.
(3)Exhibits
The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein.

59


SIGNATURES

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

 DONALDSON COMPANY, INC.
   
Date:September 27, 201323, 2016By:/s/ William M. CookTod E. Carpenter
  William M. Cook
Tod E. Carpenter
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 27, 2013.

23, 2016.
/s/ William M. CookTod E. Carpenter President, Chief Executive Officer and Chairman
William M. CookTod E. Carpenter (Principal Executive Officer)
/s/ James F. ShawScott J. Robinson Vice President and Chief Financial Officer
James F. ShawScott J. Robinson (Principal Financial Officer)
/s/ Melissa A. Osland Controller
Melissa A. Osland (Principal Accounting Officer)
* DirectorChairman of the Board
F. Guillaume Bastiaens
Jeffrey Noddle  
* Director
Andrew J. Cecere
*Director
Janet M. Dolan
  
* Director
Michael J. Hoffman  
* Director
Paul David Miller
*Director
Jeffrey Noddle
Douglas A. Milroy  
* Director
Willard D. Oberton  
* Director
James J. Owens
  
* Director
Ajita G. Rajendra  
*Director
Trudy A. Rautio  
* Director
John P. Wiehoff  
*By:/s/ Amy C. Becker  
*By:  /s/ NormanAmy C. Linnell
Norman C. LinnellBecker  
As attorney-in-fact  

60

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

DONALDSON COMPANY, INC. AND SUBSIDIARIES

(thousands of dollars)

     Additions       
  Balance at  Charged to  Charged to     Balance at 
  Beginning of  Costs and  Other Accounts  Deductions  End of 
Description Period  Expenses  (A)  (B)  Period 
Year ended July 31, 2013:                    
Allowance for doubtful accounts deducted                    
      from accounts receivable $6,418  $1,241  $230  $(849) $7,040 
Year ended July 31, 2012:                    
Allowance for doubtful accounts deducted                    
      from accounts receivable $6,908  $1,151  $(676) $(965) $6,418 
Year ended July 31, 2011:                    
Allowance for doubtful accounts deducted                    
      from accounts receivable $6,315  $482  $481  $(370) $6,908 

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

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

61

EXHIBIT INDEX

ANNUAL REPORT ON FORM 10-K

*3-ARestated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q Report for the Second Quarter ended January 31, 2012)
 *3-B*3-BCertificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Registrant, dated as of March 3, 2006 (Filed as Exhibit 3-B to 2011 Form 10-K Report)
*3-CAmended and Restated Bylaws of Registrant (as of January 30, 2009)July 29, 2016) (Filed as Exhibit 3-C to  Form 10-Q8-K Report for the Second Quarter ended January 31, 2009)filed on July 29, 2016
*4**
*4-APreferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo Bank, N.A., as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4-A to 2011 Form 10-K Report)
*10-AOfficer Annual Cash Incentive Plan (Filed as Exhibit 10-A to 2011 Form 10-K Report)***
*10-B1980 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-CForm 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-DESOP Restoration Plan (2003 Restatement) (Filed as Exhibit 10-D to 2009 Form 10-K Report)***
*10-EDeferred Compensation Plan for Non-employeeNon-Employee Directors as amended (Filed as Exhibit 10-C to Form 10-Q Report filed for the first quarter ended October 31, 2008)***
*10-FIndependent Director Retirement and Death Benefit Plan as amended (Filed as Exhibit 10-D to Form 10-Q Report filed for the first quarter ended October 31, 2008)***
*10-GSupplemental Executive Retirement Plan (2008 Restatement) (Filed as Exhibit 10-G to 2011 Form 10-K Report)***
*10-H1991 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-IForm 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-JForm 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-KStock 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-LNote 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-MSecond Supplement and First Amendment to Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of September 30, 2004 (Filed as Exhibit 10-N to 2010 Form 10-K Report)
*10-N2001 Master Stock Incentive Plan (Filed as Exhibit 10-O to 2009 Form 10-K Report)***
*10-OForm of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit 10-P to 2010 Form 10-K Report)***
*10-PForm of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master Stock Incentive Plan (Filed as Exhibit 10-Q to 2010 Form 10-K Report)***
*10-QRestated Compensation Plan for Non-Employee Directors dated July 28, 2006 (Filed as Exhibit 10-Q to 2011 Form 10-K Report)***
*10-RRestated Long-Term Compensation Plan dated May 23, 2006 (Filed as Exhibit 10-R to 2011  Form 10-K Report)***
*10-SQualified Performance-Based Compensation Plan (Filed as Exhibit 10-S to 2011 Form 10-K Report)***
*10-T
Deferred Compensation and 401(k) Excess Plan (2008 Restatement) (Filed as Exhibit 10-T to 2011 form
Form 10-K Report)***
*10-UDeferred Stock Option Gain Plan (2008 Restatement) (Filed as Exhibit 10-U to 2011 Form 10-K  Report) ***
*10-VExcess Pension Plan (2008 Restatement) (Filed as Exhibit 10-V to 2011 Form 10-K Report) ***

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*10-WForm 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-X2010 Master Stock Incentive Plan (Filed as Exhibit 4.5 to Registration Statement on Form S-*S-8 (File No. 333-170729) filed on November 19, 2010)***

*10-YForm 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-ZForm of Restricted Stock Award Agreement under the 2010 Master Stock Incentive Plan (Filed as Exhibit 10.2 to Form 8-K Report filed on December 16, 2010) ***
*10-AANon-Employee Director Automatic Stock Option Grant Program (Filed as Exhibit 10-AA to 2011
Form 10-K Report)***
*10-BBForm of Indemnification Agreement for Directors (Filed as Exhibit 10.1 to Form 8-K Report filed on April 2, 2012)***
*10-CCForm of EmployeeNon-Employee Director Non-Qualified Stock Option Agreement under the 2010 Master Stock Incentive Plan (Filed as Exhibit 10-CC to 2012 Form 10-K Report)***
*10-DDForm of Management Severance Agreement for Executive Officers (Filed as Exhibit 10.1 to Form 8-K Report filed March 7, 2013)October 4, 2012)***
*10-EECompensation Plan for Non-Employee Directors (Filed as Exhibit 10-B to Form 10-Q Report filed March 7, 2013)December 6, 2012)***
*10-FFNon-Employee Director Automatic Stock Option Grant Program*Program (Filed as Exhibit 10-FF to 2013 Form 10-K Report)***
*10-GGCredit Agreement among Donaldson Company, Inc. and certain listed lending parties dated as of December 7, 2012 (Filed as Exhibit 10.1 to Form 8-K Report filed December 13, 2012)*
*10-HHNote Purchase Agreement, dated as of March 27, 2014, by and among Donaldson Company, Inc. and the purchasers named therein (Filed as Exhibit 10.1 to Form 8-K filed April 2, 2014)
*10-IIForm of Employment Agreement for Director Level Employees in Belgium (unofficial English translation) (Filed as Exhibit 10-II to 2014 Form 10-K Report)***
*10-JJFirst Amendment, dated as of March 9, 2015, to Note Purchase Agreement dated as of March 27, 2014, by and among Donaldson Company, Inc. and the purchasers named therein (Filed as Exhibit 10.1 to Form 8-K on March 12, 2015)
*10-KKFirst Supplement, dated as of April 15, 2015, to Note Purchase Agreement, dates as of March 27, 2014, by and among Donaldson Company, Inc. and the purchasers named therein (as amended)(Filed as Exhibit 10.1 to Form 8-K report on April 21, 2015)
10-LLForm of Separation and General Release Agreement, dated as of February 12, 2016, by and between James F. Shaw and Donaldson Company, Inc. ***
10-MMForm of Separation and General Release Agreement, dated as of March 1, 2016, by and between Jay L. Ward and Donaldson Company, Inc. ***
*10-1First Amendment, dated as of October 28, 2014, to Credit Agreement, dated as of December 7, 2012, among Donaldson Company Inc., each of the lenders from time to time parties to the Credit Agreement (the “Lenders”) and Wells Fargo National Association, as administrative agent for the Lenders and issuer of letter of credit (Filed as Exhibit 10.1 on Form 8-K filed October 29, 2014)
11Computation of net earnings per share (See “Earnings Per Share” in “Summary of Significant Accounting Policies” in Note A in the Notes to Consolidated Financial Statements on page 34)included in Item 8)
21Subsidiaries
23Consent of PricewaterhouseCoopers LLP
24Powers of Attorney
31-ACertification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31-BCertification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32Certifications 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
101The following financial information from the Donaldson Company, Inc. Annual Report on Form 10-K
for the fiscal year ended July 31, 20132016 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:

***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.

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