united states district court district of ...donaldson’s reports to the sec, press releases and...

CLASS ACTION COMPLAINT

UNITED STATES DISTRICT COURTDISTRICT OF MINNESOTA

PLAINTIFF, Individually and on Behalf ofAll Others Similarly Situated,

Plaintiff,

v.

DONALDSON COMPANY, INC,WILLIAM M. COOK, TOD E.CARPENTER, JAMES F. SHAW, andMELISSA A. OSLAND,

Defendants.

Case No.: DRAFT

CLASS ACTION COMPLAINT FORVIOLATIONS OF THE FEDERALSECURITIES LAWS

JURY TRIAL DEMANDED

CLASS ACTION COMPLAINT1

Plaintiff ____________ (“Plaintiff”), by and through his attorneys, alleges the following

upon information and belief, except as to those allegations concerning Plaintiff, which are

alleged upon personal knowledge. Plaintiff’s information and belief is based upon, among other

things, his counsel’s investigation, which includes without limitation: (a) review and analysis of

regulatory filings made by DONALDSON COMPANY, INC. (“Donaldson” or the “Company”),

with the United States (“U.S.”) Securities and Exchange Commission (“SEC”); (b) review and

analysis of press releases and media reports issued by and disseminated by Donaldson; and (c)

review of other publicly available information concerning Donaldson.

NATURE OF THE ACTION AND OVERVIEW

1. This is a class action on behalf of purchasers of Donaldson securities between

August 27, 2014 and September 29, 2015, inclusive (the “Class Period”), seeking to pursue

remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Donaldson manufactures filtration systems and replacement parts. The

Company’s products are manufactured at 39 plants around the world and through three joint

ventures. The Company has two reporting segments: Engine Products and Industrial Products.

The Engine Products segment sells to original equipment manufacturers (“OEMs”) in the

construction, mining, agriculture, aerospace, defense, and truck markets, and to independent

distributors, OEM dealer networks, private label accounts, and large equipment fleets. The

Industrial Products segment sells to various industrial dealers, distributors, OEMs of gas-fired

turbines, and OEMs and end-users requiring filtration solutions and replacement filters.

3. On September 29, 2015, after the close of the trading session, the Company

disclosed that it was delaying filing of its annual report because the Company’s Compliance

Committee “received 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 also disclosed that further investigation revealed that “documents

were altered with the intent to inappropriately recognize revenue for certain transactions in

periods earlier than would be allowable under generally accepted accounting principles,” there is

indication that there may have been “purposeful deferring of certain charges from suppliers to

later time periods than appropriate,” and that “revenue was inappropriately recognized in an

accelerated manner during the fourth quarter of fiscal 2014 and the second and third quarters of

fiscal 2015.” The Company also announced that it had “begun taking remedial actions in

response to the discovery of these practices.”

4. On this news, the Company’s stock fell approximately $2.85, or over 10%, to

close at $24.55 on September 30, 2015, on unusually high volume.

5. Throughout the Class Period, Defendants made false and/or misleading

statements, as well as failed to disclose material adverse facts about the Company’s business,

operations, and prospects. Specifically, Defendants made false and/or misleading statements

and/or failed to disclose: (1) that the Company improperly recognized revenue in relation to a

project in the European Gas Turbine Products business; (2) that the Company engaged in

improper early revenue recognition in relation to certain transactions; (3) that the Company

improperly and purposefully deferred certain charges from suppliers; (4) that the Company

improperly recognized revenue in an accelerated manner during the fourth quarter of fiscal 2014

and the second and third quarters of fiscal 2015; (5) that, as such, the Company’s financial

statements were not prepared in accordance with Generally Accepted Accounting Principles

(“GAAP”); (6) that the Company lacked adequate internal controls; and (7) that, as a result of the


foregoing, the Company’s financial statements, and Defendants’ statements about Donaldson’s

business, operations, and prospects, were false and misleading and/or lacked a reasonable basis.

6. As a result of Defendants’ wrongful acts and omissions, and the precipitous

decline in the market value of the Company’s securities, Plaintiff and other Class members have

suffered significant losses and damages.

JURISDICTION AND VENUE

7. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange

Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17

C.F.R. § 240.10b-5).

8. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §1331 and Section 27 of the Exchange Act (15 U.S.C. §78aa).

9. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b) and

Section 27 of the Exchange Act (15 U.S.C. §78aa(c)). Substantial acts in furtherance of the

alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the acts

charged herein, including the preparation and dissemination of materially false and/or misleading

information, occurred in substantial part in this Judicial District. Additionally, the Company’s

principal executive offices are located within this Judicial District.

10. In connection with the acts, transactions, and conduct alleged herein, Defendants

directly and indirectly used the means and instrumentalities of interstate commerce, including the

United States mail, interstate telephone communications, and the facilities of a national securities

exchange.


PARTIES

11. Plaintiff, as set forth in the accompanying certification, incorporated by reference

herein, purchased Donaldson common stock during the Class Period, and suffered damages as a

result of the federal securities law violations and false and/or misleading statements and/or

material omissions alleged herein.

12. Defendant Donaldson is a Delaware corporation with its principal executive

offices located at 1400 West 94th Street, Minneapolis, MN 55431.

13. Defendant William M. Cook (“Cook”) was, at all relevant times, President and

Chief Executive Officer (“CEO”) of Donaldson until April 1, 2015. Cook was also, at all

relevant times, Chairman of Donaldson.

14. Defendant Tod E. Carpenter (“Carpenter”) was, at all relevant times, President

and Chief Executive Officer (“CEO”) of Donaldson beginning April 1, 2015.

15. Defendant James F. Shaw (“Shaw”) was at all relevant times Vice President, and

Chief Financial Officer (“CFO”) of Donaldson.

16. Defendant Melissa A. Osland (“Osland”) was at all relevant times Corporate

Controller of Donaldson.

17. Defendants Cook, Carpenter, Shaw, and Osland are collectively referred to

hereinafter as the “Individual Defendants.” The Individual Defendants, because of their

positions with the Company, possessed the power and authority to control the contents of

Donaldson’s reports to the SEC, press releases and presentations to securities analysts, money

and portfolio managers and institutional investors, i.e., the market. Each defendant was provided

with copies of the Company’s reports and press releases alleged herein to be misleading prior to,

or shortly after, their issuance and had the ability and opportunity to prevent their issuance or


cause them to be corrected. Because of their positions and access to material non-public

information available to them, each of these defendants knew that the adverse facts specified

herein had not been disclosed to, and were being concealed from, the public, and that the positive

representations which were being made were then materially false and/or misleading. The

Individual Defendants are liable for the false statements pleaded herein, as those statements were

each “group-published” information, the result of the collective actions of the Individual

Defendants.

SUBSTANTIVE ALLEGATIONS

Background

18. Donaldson manufactures filtration systems and replacement parts. The

Company’s products are manufactured at 39 plants around the world and through three joint

ventures. The Company has two reporting segments: Engine Products and Industrial Products.

The Engine Products segment sells to original equipment manufacturers (“OEMs”) in the

construction, mining, agriculture, aerospace, defense, and truck markets, and to independent

distributors, OEM dealer networks, private label accounts, and large equipment fleets. The

Industrial Products segment sells to various industrial dealers, distributors, OEMs of gas-fired

turbines, and OEMs and end-users requiring filtration solutions and replacement filters.

Materially False and MisleadingStatements Issued During the Class Period

19. The Class Period begins on August 27, 2014. On that day, Donaldson issued a

press release entitled, “DONALDSON REPORTS RECORD FOURTH QUARTER SALES

AND EARNINGS.” Therein, the Company, in relevant part, stated:

MINNEAPOLIS (August 27, 2014) — Donaldson Company, Inc. (NYSE: DCI)announced its financial results for its fiscal 2014 fourth quarter. Summarizedfinancial results are as follows (dollars in millions, except per share data):


“We are very pleased to report a strong finish to our FY14, with record sales, netearnings, and EPS in our fourth quarter, and also record EPS for the full year,”said Bill Cook, Donaldson’s CEO. “Our replacement filter sales were strong againthis quarter, with double-digit percent growth in both our Engine and Industrialsegments. Our Engine Products’ sales increased 6 percent in local currency fromlast year, driven by increases in Engine Aftermarket and On-Road sales of 16 and8 percent, respectively. Our Industrial Products’ sales increased 3 percent in localcurrency, with increases in Special Applications and in Industrial FiltrationSolutions of 11 and 4 percent, respectively, offsetting a 9 percent decline in ourGas Turbine shipments. Internationally, our local currency sales were strong, withAsia Pacific up 7 percent, Europe up 8 percent, and Latin America up 20percent.”

“Looking forward to FY15, we are forecasting 4 to 8 percent sales growth. Weexpect sales of our replacement filters to remain strong and a continuingimprovement in our OEM first-fit end markets for construction equipment, on-road trucks, and gas turbine systems. We will maintain our focus onour Continuous Improvement initiatives to help deliver a higher operating marginin FY15, while also continuing our strategic investments in our Global ERPProject and our targeted revenue growth initiatives. The combination of our top-line growth forecast and our continued emphasis on operational excellence resultsin our FY15 EPS forecast of between $1.81 and $2.01 per share.”

Financial Statement Discussion

The impact of foreign currency translation increased sales by $4.8 million, or 0.8percent, during the quarter and decreased sales by $11.4 million, or 0.5 percent,for the year. The foreign currency translation impact increased net earnings by$0.4 million, or 0.5 percent, during the quarter and decreased net earnings by $1.0million, or 0.4 percent, for the year.

Gross margin was 35.7 percent for the quarter versus 36.1 percent in the prioryear quarter due to higher compensation expenses and an increase in ourpurchased material costs. These offset the positive impact from a higherpercentage of replacement filter sales and the benefits from our ContinuousImprovement initiatives. For the full year, our gross margin increased to 35.5percent versus 34.8 percent last year.


Operating expenses for the quarter were $139.2 million, up 8.4 percent from theprior year. The increase was driven primarily by our Global ERP Project andincentive compensation. Operating expenses for the year were $522.1 million, up3.6 percent from the prior year total of $503.8 million.

Our operating margin for the quarter was 14.8 percent, down 100 basis pointsfrom the prior year. For the year, our operating margin was 14.4 percent, up 30basis points from last year.

Our effective tax rate for the quarter was 27.7 percent, compared to the prior yearrate of 28.2 percent. Compared to the prior year this decrease was primarily due tochanges in the mix of earnings between tax jurisdictions. For the year, theeffective tax rate was 27.9 percent, compared to the prior year rate of 29.0percent.

As part of our ongoing share repurchase program, we repurchased 2,757,000shares for $114 million during the quarter. For the year, we repurchased6,796,000 shares, or 4.6 percent of our diluted outstanding shares, for $279million.

FY15 Outlook

This outlook excludes the impact from our pending acquisition of NorthernTechnical L.L.C., which is expected to close in September.

We project our Company’s sales to be between $2.57 and $2.67 billion, or anincrease of 4 to 8 percent.

Our full-year operating margin forecast is 14.1 to 14.9 percent. Included inthis forecast is approximately $10 million in incremental operating expensesfor our Global ERP Project and our targeted sales growth initiatives.

Our FY15 tax rate is anticipated to be between 27 and 30 percent. We forecast our full-year FY15 EPS to be between $1.81 and $2.01. Cash generated by operating activities is projected to be between $260 and

$300 million. Our capital spending is estimated to be between $90 and $100million. We plan to repurchase between 2 to 4 percent of our dilutedoutstanding shares in FY15.

Engine Products: We forecast our FY15 sales to increase 3 to 7 percent,including the impact of foreign currency.

Our On-Road OEM Customers are expecting to increase production of heavy-and medium-duty trucks in 2015.

Demand from our global Off-Road OEM Customers is anticipated to bemixed: build rates of construction equipment are expected to improve withNorth America forecasted to be the strongest region, build rates of agriculture


equipment are forecasted to decrease in all regions, and build rates of miningequipment are expected to remain stable at their current low levels.

We are anticipating strong growth globally for our Engine Aftermarketbusiness. Utilization rates for off-road equipment and on-road heavy truckfleets are expected to continue improving. We should also benefit from ourcontinued expansion into emerging economies, the increasing number of first-fit systems installed in the field with our proprietary first-fit filter systems, andthrough continued expansion of our product portfolio.

We forecast a mid-single digit percent sales increase for our Aerospace andDefense business as the continued slowdown in U.S. military activity shouldbe offset by growth from our commercial aerospace sales.

Industrial Products: We forecast sales to increase 5 to 9 percent, including theimpact of foreign currency. However, our Industrial Products’ forecast excludesthe impact from our pending acquisition of Northern Technical L.L.C., which isexpected to close in September.

Our Industrial Filtration Solutions’ sales are projected to increase 1 to 7percent. We assume our replacement filter sales will remain strong due toimproving general manufacturing conditions, while our new filtration systemsales are forecasted to grow due to improvements in manufacturing capitalspending and from our new product introductions.

We anticipate our Gas Turbine sales will increase 20 to 26 percent due to aforecasted improvement in the large turbine power generation market.

We forecast our Special Applications’ sales to increase 1 to 5 percent due toimproved demand for our membrane, semiconductor, and venting products.

20. September 26, 2014, Donaldson filed its Annual Report with the SEC on Form

10-K for the 2014 fiscal year ended July 31 2014. The Company’s Form 10-K was signed by

Defendant Cook, and reaffirmed the Company’s financial results previously announced on

August 27, 2014.

21. The Form 10-K contained certifications pursuant to the Sarbanes-Oxley Act of

2002 (“SOX”), signed by defendants Cook and Shaw, who certified the following:

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

2. Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:

a) Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is beingprepared;

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

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

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

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

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


b) Any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant’s internal controlover financial reporting.

22. On November 20, 2014 Donaldson issued a press release entitled,

“DONALDSON REPORTS FIRST QUARTER RESULTS.” Therein, the Company, in relevant

part, stated:

MINNEAPOLIS (November 20, 2014) — Donaldson Company, Inc. (NYSE:DCI) announced its financial results for its fiscal 2015 first quarter. Summarizedfinancial results are as follows (dollars in millions, except per share data):

“We had solid growth from our Engine Aftermarket and On-Road businesseswhich increased in local currencies by 9 and 17 percent, respectively. However,these strong sales increases were partially offset by a 16 percent local currencydecrease from Off-Road Products, as a result of weaker conditions in the globalagriculture and Asia Pacific construction and mining markets. In addition, ourfirst quarter sales were challenged by a 2 percent translation impact from thestronger U.S. dollar against most other major currencies and also as some largeGas Turbine projects originally planned to ship were rescheduled by ourCustomers to ship in our second quarter,” said Bill Cook, Donaldson’s CEO.

“We are excited to have completed the acquisition of Northern Technical duringour first quarter. Due to the timing of this acquisition closing, NorthernTechnical’s sales were less than $1 million in our quarter. Within this fiscal year,we anticipate Northern Technical sales to be $17 to $20 million and for it to beaccretive to earnings.”

“We have updated our outlook for FY15 to include Northern Technical but to alsoreflect current weak conditions in our Off-Road Products and an ongoingtranslation impact from the stronger U.S. dollar. Overall, we are expecting our fullyear sales to increase between 1 and 5 percent and to achieve record sales of over$2.5 billion. The combination of this sales record and our ongoing focus onoperational performance should deliver record FY15 EPS of between $1.77 and$1.97 per share, excluding restructuring and pension lump sum settlementexpenses.”


“While current conditions in some of our end markets remain mixed, we willcontinue to make our key long-term investments and utilize our well diversifiedportfolio of global filter businesses as we execute our plan to grow to $5 billion inrevenues by FY21.”


The impact of foreign currency translation decreased sales by $11.1 million, or1.9 percent, during the first quarter. The impact of foreign currency translationdecreased reported net earnings by $1.2 million, or 1.9 percent.

Gross margin was 35.0 percent versus 35.8 percent in last year’s first quarter. Theyear-over-year decrease is primarily attributable to the negative impact of lowerfixed cost absorption due to a decrease in our production volumes, primarilyoutside the U.S. These decreases were partially offset by benefits from ourongoing Continuous Improvementinitiatives and the positive mix impacts fromour higher aftermarket sales.

Operating expenses for the quarter were $132.1 million, up 7.7 percent from theprior year’s $122.6 million. The increase was primarily attributable to highercompensation expenses, employee benefit costs in the U.S., and our Global ERPProject. Amortization and integration expenses related to our acquisition ofNorthern Technical were approximately $1 million in the quarter.

Our operating margin for the quarter was 12.9 percent, down 240 basis pointsfrom the prior year.

Our effective tax rate for the quarter was 27.6 percent, compared to a prior yearrate of 32.2 percent. Last year’s first quarter included $2.1 million of tax expenseprimarily related to an intercompany dividend, while we had a favorable shift inthe mix of earnings between tax jurisdictions in this year’s first quarter.

As part of our ongoing share repurchase program we repurchased 3,342,000shares, or 2.3 percent of our diluted outstanding shares, for $134.3 million duringthe quarter.

FY15 Outlook

We now project our Company’s sales to be between $2.50 and $2.60 billion,or an increase of 1 to 5 percent. Our forecast is based on the Euro at US$1.25and 112 Yen to the US$.

Our full-year operating margin forecast is 13.9 to 14.7 percent. Included inthis forecast is approximately $10 million in operating expense increases forour Global ERP Project and targeted sales growth initiatives. This excludesapproximately $5 million of forecasted restructuring charges as a result of theannounced closing of our Grinnell, Iowa, muffler plant and approximately $4


million in our second quarter related to lump sum settlements accepted bycertain participants of our U.S. pension plans.

Our FY15 tax rate is anticipated to be between 27 and 30 percent. We forecast our full year FY15 EPS to be between $1.77 and $1.97, excluding

the restructuring and pension lump sum settlements discussed above. The Company projects that cash generated by its operating activities will be

between $275 and $315 million. Capital spending is estimated to be between$90 and $100 million.

Engine Products: We forecast our FY15 sales growth rate to be between 0 and 3percent, including the impact of foreign currency translation.


Demand from our Off-Road OEM Customers is anticipated to be mixed: buildrates of construction equipment are expected to improve with North Americaforecasted to be the strongest region, build rates of agriculture equipment areforecasted to decrease in all regions, and build rates of mining equipment areexpected to remain weak.

We are anticipating continued strong growth for our Engine Aftermarketbusiness. Utilization rates for off-road equipment and on-road heavy truckfleets are expected to continue improving. We should also benefit from ourcontinued expansion into emerging economies, the increasing number of first-fit systems installed in the field with our proprietary filters, and throughcontinued expansion of our product portfolio.

We forecast a mid-single digit sales increase for our Aerospace and Defensebusiness compared to last year as the continued slowdown in U.S. militaryactivity should be offset by growth from our commercial aerospace sales.

Industrial Products: We forecast sales to increase 5 to 9 percent, including theimpact of foreign currency translation and the addition of the Northern Technicalacquisition into our Gas Turbine business.

Our Industrial Filtration Solutions’ sales are projected to increase 1 to 5percent. We anticipate our replacement filter sales will remain strong due toimproving general manufacturing conditions, while our new filtration systemsales are forecasted to grow due to an improvement in new manufacturingcapital spending and from our recent new product introductions.

We anticipate our Gas Turbine sales will increase 25 to 30 percent due to anexpected improvement in the large turbine power generation market. Thisforecast includes $17 to $20 million from the Northern Technical acquisition,which was completed in September.

We forecast our Special Applications’ sales to be steady with improveddemand for our semiconductor and venting products being offset by slightlylower membrane and hard disk drive filter sales.


23. On December 5, 2014, Donaldson filed its Quarterly Report with the SEC on

Form 10-Q for the quarterly period ended October 31, 2014. The Company’s Form 10-Q was

signed by Defendants Cook, Shaw, and Osland, and reaffirmed the Company’s financial results

previously announced on November 20, 2014. The Form 10-Q contained certifications pursuant

to SOX, signed by Defendants Cook and Shaw, substantially similar to the certifications

described in ¶21, supra.

24. On February 24, 2015, Donaldson issued a press release entitled, “DONALDSON

REPORTS SECOND QUARTER EARNINGS.” Therein, the Company, in relevant part, stated:

Quarterly Sales up 7% in Constant Currencies

MINNEAPOLIS (February 24, 2015) — Donaldson Company, Inc. (NYSE: DCI)announced its financial results for its Fiscal 2015 second quarter. Summarizedfinancial results are as follows (dollars in millions, except per share data):

The following table adjusts our reported quarterly net earnings and dilutedearnings per share (EPS) for the impact of the strengthened U.S. dollar, a $3.9million charge associated with the previously announced lump sum settlement ofour U.S. pension plan, $0.7 million of costs associated with the closing of ourGrinnell, Iowa, facility, and removes the impact of the $6.4 million, or $0.04, intax benefits related to the favorable settlement of an audit in the prior yearquarter:


“We achieved solid constant currency sales growth of 7 percent in the quarter.The following are the drivers of our sales stated in constant currencies. Our GasTurbine Products doubled over last year. Our Aerospace and Defense and On-Road businesses grew 16 and 12 percent, respectively. These increases and amodest sales increase in our Engine Aftermarket business were partially offset byan 18 percent decline in Off-Road Products, as a result of continued weakconditions in the global agriculture market and in the construction and miningmarkets in Asia Pacific. Overall, the currency headwinds were significant in thequarter and decreased our reported sales by $28 million compared to the prioryear,” said Bill Cook, Donaldson’s CEO.

“Our reported operating margin decreased from the prior year quarter butincluded a $3.9 million charge for the previously announced lump sum settlementof our U.S. pension plan. We also incurred $0.7 million of costs associated withthe closing of our Grinnell, Iowa, facility. The effect of these two items was a$0.02 reduction to our reported diluted EPS of $0.35. Also as a reminder, the prioryear quarter included $6.4 million, or $0.04, in tax benefits related to thefavorable settlement of a tax audit.”

“We expect global economic conditions to improve only slightly over the nextyear. In addition to the negative impact of the stronger U.S. dollar, the slowgrowth of the global economy combined with ongoing weak commodity prices isprojected to have a negative impact on most of our OEM Customers’ sales, and asa result, ours. The slow global capital investment environment also negativelyimpacts our first-fit Dust Collector equipment sales. We have updated our outlookfor Fiscal 2015 to reflect these conditions and an ongoing negative translationimpact from the stronger U.S. dollar. Overall, we now expect our full-year salesto be flat to down 3 percent, which should result in Fiscal 2015 diluted EPS ofbetween $1.65 and $1.85 per share, excluding restructuring and pension lump sumsettlement expenses.”

“Since current conditions in many of our end markets remain weak, we willimplement additional productivity improvement and restructuring actions duringthe balance of this fiscal year. This will allow us to continue to invest in our keygrowth initiatives as we execute our plan to grow to $5 billion in revenues byFiscal 2021.”


The impact of foreign currency translation decreased sales by $27.5 million, or4.8 percent, during the quarter and decreased sales by $38.6 million, or 3.3percent, year-to-date. The impact of foreign currency translation decreasedreported net earnings by $2.7 million, or 4.7 percent, during the quarter anddecreased net earnings by $3.9 million, or 3.3 percent, year-to-date. Thepercentage change in revenue in each of our businesses and the percentage changeexcluding the impact of foreign currency is as follows:


Gross margin was 34.4 percent for the quarter and 34.7 percent year-to-date,compared to prior year margins of 34.7 percent and 35.2 percent, respectively.The decreases are primarily attributable to the negative impact of lower fixed costabsorption due to reductions in our OEM Customer production volumes, anegative mix impact from the increase in large Gas Turbine project shipments,and the costs associated with the closing of our Grinnell, Iowa, facility. Thesedecreases were partially offset by benefits from our ContinuousImprovementinitiatives.

Operating expenses for the quarter were $137.2 million, up 6.0 percent from lastyear. As a percent of sales, operating expenses were 23.0 percent compared to lastyear’s 22.3 percent. Operating expenses year-to-date were $269.3 million, or 22.6percent of sales, compared to $252.2 million, or 21.4 percent of sales, last year.The increase for both periods was primarily attributable to our lump sum pensionsettlement and our sales growth related initiatives.

Our effective tax rate for the quarter was 27.0 percent, compared to the prior yearrate of 22.1 percent. The prior year quarter included $6.4 million in tax benefitsrelated to the favorable settlement of a tax audit. The year-to-date effective taxrate was 27.3 percent, compared to the prior year rate of 27.6 percent.

Our operating margin for the quarter was 11.4 percent, which includes the $4.6million of pension settlement and restructuring charges, down 100 basis pointsfrom the prior year. Year-to-date operating margin was 12.2 percent, down 170basis points from Fiscal 2014.


As part of our ongoing share repurchase program we repurchased 1,045,000shares for $39.9 million during the quarter. Year-to-date we have repurchased4,387,000 shares, or 3.1 percent of our diluted outstanding shares, for $174.2million.

FY15 Outlook

We now project our Company’s sales to be between $2.40 and $2.50 billion.Our forecast is based on the Euro at US$1.13 and 117 Yen to the US$.

Our full-year operating margin forecast is 13.6 to 14.4 percent. Included inthis forecast is approximately $10 million in operating expense increases forour Global ERP project and specific sales growth initiatives. This excludes the$3.9 million charge associated with the lump sum settlement of our U.S.pension plan recorded in the second quarter and our forecasted full-yearrestructuring charges.

Our FY15 tax rate is anticipated to be between 27 and 29 percent. We forecast our full-year Fiscal 2015 adjusted diluted EPS to be between

$1.65 and $1.85, excluding restructuring and pension lump sum settlementexpenses.

We project that cash generated by our operating activities will be between$245 and $285 million. Capital spending is estimated to be between $90 and$100 million.

Engine Products: We now forecast our FY15 sales growth to be down 0 to 3percent, including the impact of foreign currency translation. In local currency,sales are forecasted to increase 1 percent to 5 percent.


Demand from our Off-Road OEM Customers is anticipated to be mixed: buildrates of construction equipment are expected to continue improvingmoderately in North America, remain stable in Europe and continued weak inAsia, build rates of agriculture equipment are forecasted to decrease in allregions, and build rates of mining equipment are expected to remain weak.

We are anticipating continued strong growth for our Engine Aftermarketbusiness globally. Utilization rates for off-road equipment and on-road heavytruck fleets are expected to continue improving. We should also benefit fromour continued expansion into emerging economies, the increasing number offirst-fit systems installed in the field with our proprietary filters, and throughcontinued expansion of our product portfolio.

We forecast a mid-single digit sales increase for our Aerospace and Defensebusiness compared to last year as the continued slowdown in U.S. militaryactivity should be mostly offset by growth from our commercial aerospacesales.


Industrial Products: We forecast sales to increase 0 to 3 percent, including theimpact of foreign currency translation. In local currency, sales are forecasted toincrease 5 to 8 percent.

Our Industrial Filtration Solutions’ sales are projected to be flat to 4 percentdown. We anticipate our replacement filter sales will remain strong due toimproving general manufacturing conditions but not strong enough to offsetcurrency headwinds.

We anticipate our Gas Turbine sales will increase 20 to 26 percent due toawarded large turbine power generation projects and stronger aftermarketsales. This forecast includes $15 to $18 million from the Northern Technicalacquisition, which was completed last September.

We forecast our Special Applications’ sales to be slightly down withimproved demand for our semiconductor and venting products being offset bylower membrane sales and currency headwinds.

25. On March 10, 2015, Donaldson filed its Quarterly Report with the SEC on Form

10-Q for the quarterly period ended January 31, 2015. The Company’s Form 10-Q was signed

by Defendants Cook, Shaw, and Osland, and reaffirmed the Company’s financial results

previously announced on February 24, 2015. The Form 10-Q contained certifications pursuant

to SOX, signed by Defendants Cook and Shaw, substantially similar to the certifications


26. On May 21, 2015, Donaldson issued a press release entitled, “DONALDSON

REPORTS THIRD QUARTER 2015 EARNINGS.” Therein, the Company, in relevant part,

stated:

Third quarter adjusted EPS of 36 cents was in line with guidance

MINNEAPOLIS (May 21, 2015) — Donaldson Company, Inc. (NYSE: DCI)today reported third quarter 2015 net earnings of $46.4 million, or 33 cents pershare, which includes restructuring charges of $5.2 million, or 3 cents per share.Foreign currency translation negatively impacted third quarter net earnings by$2.0 million, or 3.0 percent. Adjusted earnings per share1 were 36 cents in thirdquarter, compared with 46 cents in the third quarter of 2014. The tables attachedto this press release provide a reconciliation of non-GAAP to GAAP measures.

“Our third quarter results, and our full-year sales and earnings forecast, are in linewith the guidance provided earlier this month, which reflects a slowdown of the


Aftermarket business combined with continued pressure from Off-Road endmarkets and the strong U.S. dollar,” said Tod Carpenter, Donaldson’s CEO.

“Our Engine Aftermarket sales, in local currencies, increased 2 percent in thirdquarter, a modest pace compared with the 7 percent increase during the first halfof fiscal 2015. Additionally, our first-fit Off-Road end markets remainedchallenged, with our local-currency sales declining at a pace consistent with year-to-date trends. In China, the pace of decline in our year-over-year salesaccelerated in third quarter, with particular pressure on both Aftermarket and Off-Road Products.”

“Although the end-market pressures we saw are reflective of our Customers’orders, we are taking further actions to improve our performance until businessconditions rebound. Over the past several weeks, we identified additionalrestructuring initiatives that we expect will provide a similar level of annualsavings as those we completed during our third quarter.”

“While we continue to aggressively manage our expenses and margins, we arealso investing for future sales growth. For example, we added new distributioncapabilities in Latin America, where we have achieved local-currency salesgrowth of roughly 17 percent year-to-date. We are also accelerating our expansionof liquid filtration in Europe with an additional investment in our new Polandfacility. These investments, and others across the Company, are critical elementsof how we will deliver our Strategic Growth Plans.”


Third quarter 2015 net sales decreased 9.0 percent versus the prior year, reflectingsales declines in Engine Products and Industrial Products segments of 8.5 percentand 10.0 percent, respectively.

Excluding the impact of foreign currency translation, third quarter sales declined1.9 percent compared with the prior year, reflecting local-currency sales declinesof 1.3 percent in Engine Products and 2.9 percent in Industrial Products.

Compared with last year, the impact of foreign currency translation reduced thirdquarter sales by approximately $44.4 million, or 7.1 percent, and year-to-datesales by approximately $83.0 million, or 4.6 percent. The table below outlines theyear-over-year percentage change for each business segment, with and withoutthe impact of foreign currency translation.


Third quarter operating margin of 11.4 percent compares with 14.9 percent lastyear. Excluding the 0.9 percentage point impact from restructuring, adjustedoperating margin was 12.3 percent.

Third quarter gross margin was 33.8 percent, or 2.0 percentage points below theprior-year rate of 35.8 percent. The decrease was driven primarily by lower fixed-cost absorption and restructuring actions, which decreased gross margin by 1.5percentage points and 0.4 percentage points, respectively.Donaldson’s Continuous Improvement initiatives partially offset other grossmargin pressures.

As a percent of sales, third quarter operating expenses increased 1.5 percentagepoints to 22.4 percent from 20.9 percent last year, primarily driven by lack ofleverage on lower sales combined with a 0.5 percentage point increase due torestructuring actions.

Fiscal 2015 year-to-date operating margin was 11.9 percent, which includes 0.6percentage points related to restructuring charges and the lump-sum pensionsettlement recorded in second quarter. Year-to-date adjusted operating marginwas 12.5 percent and 14.3 percent for fiscal 2015 and 2014, respectively.

Donaldson’s third quarter effective income tax rate increased to 29.4 percent from28.5 percent last year, primarily due to discrete tax benefits recorded in the thirdquarter of the prior year. Year-to-date, the effective tax rate was 28.0 percent,compared to 27.9 percent in the prior year.

Capital Returned to Shareholders


During third quarter 2015, Donaldson repurchased 717 thousand shares of itscommon stock at an average price of $37.61 for a total of $27.0 million.

Year-to-date, the Company has repurchased 5.1 million shares, or 3.6 percent ofthe total diluted outstanding shares, at an average price of $39.42 for a total of$201.2 million.

Donaldson paid dividends of $22.5 million in third quarter and $68.2 millionyear-to-date, an increase from last year of 11.3 percent and 14.4 percent,respectively.

Fiscal 2015 Outlook

Consistent with the guidance provided on May 1, Donaldson expects full-yearsales to be approximately $2.35 billion, and adjusted EPS to be in the range of$1.53 to $1.59.

The Company expects full-year sales to decline by approximately 5 percentcompared with last year, which includes a fourth quarter decrease of 10percent to 12 percent.- In local currencies, full-year sales are expected to increase approximately

1 percent from 2014.- The forecast is based on the euro at US$1.12 and 119 yen to the US$.

Adjusted operating margin for fiscal 2015 is expected to be in the range of12.7 percent to 12.9 percent, reflecting year-to-date results combined with anexpected operating margin in fourth quarter of 13.5 percent and 14.1 percent.

Full-year effective tax rate is expected to be between 27 percent and 29percent.

Adjusted full-year diluted EPS guidance of $1.53 to $1.59 reflects year-to-date performance combined with fourth quarter adjusted EPS of 38 cents to 44cents.

Excluding the impact from future restructuring actions, fourth quarter andfull-year GAAP diluted EPS are expected to be lower than adjusted EPS byapproximately 1 cent and 6 cents, respectively, driven by:- Pre-tax restructuring charges of approximately $8.0 million, or 4 cents per

share, including an expected charge of $2.2 million in fourth quarter, and- A pre-tax charge in second quarter of $3.9 million, or 2 cents per share,

resulting from a U.S. pension settlement. Donaldson expects to repurchase at least 4 percent of its outstanding shares in

fiscal 2015.

Engine Products: Fiscal 2015 sales in U.S. dollars are expected to decline 6percent to 7 percent. In local currency, sales are expected to decrease 1 percent to2 percent, reflecting:


Continued lower rates of sales growth in both the OEM and independentdistribution channels for Engine Aftermarket,

Mixed demand by end market and geography from continued weakening inequipment build rates by Off-Road OEM first-fit Customers.

Strong performance in the On-Road OEM business, reflecting the Customers’expectation for increased production of heavy- and medium-duty trucks.

Industrial Products: Full-year 2015 sales in U.S. dollars are expected to decline1 percent to 2 percent. In local currency, sales are expected to increase 4 percentto 5 percent.

Industrial Filtration Solutions’ sales are expected to decline in the mid-single-digit percent range, reflecting the impact of ongoing currency translationheadwinds and softer first-fit equipment demand, partially offset by continuedstrong sales of replacement filters.

Gas Turbine sales are expected to increase 15 percent to 20 percent, whichincludes the benefit from the acquisition of Northern Technical in September2014.

Special Applications’ sales are expected to be slightly down as lowermembrane sales and currency headwinds offset improved demand forsemiconductor and venting products.

Restructuring Charges and Other Adjusting Items

Donaldson has proactively taken restructuring actions aimed at aligning its globaloperating and manufacturing cost structure with current and projected Customerand end-market demand. In fiscal 2015, restructuring actions included rebalancingand reducing the current salaried and production workforce globally. Fiscal 2015pre-tax restructuring charges were $5.2 million in third quarter and $5.8 millionyear-to-date, which compares with fiscal 2014 charges of $0.2 million and $2.4million, respectively.

In second quarter 2015, the Company recorded a $3.9 million charge related to alump-sum settlement of its U.S. pension plan.

27. On June 8, 2015, Donaldson filed its Quarterly Report with the SEC on Form 10-

Q for the quarterly period ended April 30, 2015. The Company’s Form 10-Q was signed by

Defendants Carpenter, Shaw, and Osland, and reaffirmed the Company’s financial results

previously announced on May 21, 2015. The Form 10-Q contained certifications pursuant to

SOX, signed by Defendants Carpenter and Shaw, substantially similar to the certifications



28. On September 1, 2015, Donaldson issued a press release entitled,

“DONALDSON REPORTS FOURTH QUARTER AND FULL-YEAR 2015 EARNINGS.”

Therein, the Company, in relevant part, stated:

Fourth quarter adjusted EPS of 45 cents; full-year adjusted EPS of $1.58

MINNEAPOLIS (Sept. 1, 2015) — Donaldson Company, Inc. (NYSE: DCI)today reported fourth quarter net earnings of $56.3 million, or 41 cents per share1,and full-year net earnings of $208.1 million, or $1.49 per share. Foreign currencytranslation negatively impacted earnings by $5.4 million in fourth quarter and$14.3 million for the full year, or 7.5 percent and 5.5 percent, respectively.Adjusted earnings per share2 were 45 cents in fourth quarter and $1.58 in full-year2015. In 2014, GAAP EPS was 50 cents in fourth quarter and $1.76 for the fullyear. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures.

“Our fourth quarter performance exceeded our guidance, driven by better-than-expected sales combined with expense discipline across our Company,” said TodCarpenter, President and CEO. “Although some of our end markets becameincreasingly challenged and uncertain as the fiscal year progressed, we deliveredlocal-currency sales growth of over 1 percent for the year.

During the year, we responded to reduced Customer demand by initiatingrestructuring actions, which we expect will generate annual savings of $35million. At the same time, we continued investing for growth, includingaccelerating the expansion of our liquid filtration capabilities in Europe with ournew plant in Poland, increasing our aftermarket distribution facilities in LatinAmerica and Eastern Europe, and continuing the roll-out of our global ERPsystem.

Additionally, we are investing in acquisitions that support our strategy and growthplans. Early in fiscal 2015, we acquired Northern Technical, which expanded ourproduct line and geographic reach in the Gas Turbine market. The acquisition ofIFIL USA in June expands our Industrial filtration replacement filter productoffering, while our recent acquisition of Engineered Products Company adds newproducts and technology to our Engine Products business. Later this fiscal year,we expect to complete the acquisition of Industrias Partmo in Colombia, whichwill provide additional products and distribution channels for our EngineAftermarket business.

For full-year 2016, we expect to generate local-currency sales growth of 2 percentto 6 percent, as our investments in growth offset the expected continued weaknessin many of our major end markets. This sales growth, combined withour Continuous Improvement initiatives and expense controls, are expected to


contribute to an improvement in our operating margin and full-year EPS of $1.56to $1.76."

Sales Results

Compared with last year, fourth quarter sales declined 8.8 percent and full-yearsales declined 4.1 percent. Foreign currency translation reduced fourth quartersales by $51.8 million, or 7.8 percent, and full-year sales by $134.8 million, or 5.5percent. The table below outlines the year-over-year percentage change for eachbusiness segment, with and without the impact of foreign currency translation.

Excluding the impact of currency translation, total sales decreased 1.1 percent infourth quarter, reflecting a 5.7 percent decline in Engine Products, partially offsetby an increase of 6.9 percent in Industrial Products.

Full-year 2015 sales in local currencies increased 1.3 percent, reflecting anincrease in Industrial Products of 5.6 percent, partially offset by a decline of 1.1percent in Engine Products.

Operating Margin Results

Fourth quarter operating margin was 12.8 percent, which includes a negativeimpact from restructuring and impairment charges of 1.2 percentage points.Excluding this impact, adjusted operating margin was 14.0 percent in fourthquarter, compared with 14.9 percent last year.

Fourth quarter gross margin decreased 2.6 percentage points to 33.1 percent from35.7 percent last year. The decrease was driven primarily by lower fixed-costabsorption and the mix of sales, which impacted gross margin by 2.0 percentage


points. Additionally, restructuring and asset impairment charges reduced grossmargin by 0.9 percentage points in fourth quarter. Donaldson’sContinuousImprovement initiatives partially offset these gross margin pressures.

As a percent of sales, fourth quarter operating expenses decreased 0.5 percentagepoints to 20.3 percent from 20.8 percent last year, reflecting lower compensationexpenses and disciplined expense management, partially offset by a 0.3percentage point impact related to restructuring charges.

Full-year 2015 operating margin was 12.2 percent, which includes 0.7 percentagepoints related to restructuring charges, asset impairments, and the lump-sumpension settlement recorded in second quarter. Excluding this impact, full-yearadjusted operating margin was 12.9 percent in 2015, compared with adjustedoperating margin of 14.5 percent in 2014.

The Company’s effective income tax rate was 27.7 percent in fourth quarter and27.9 percent for the full year, in line with the fourth quarter and full-year rates infiscal 2014.

Capital Returned to Shareholders

In fourth quarter, Donaldson repurchased 1.57 million shares of its common stockat an average price of $35.05 for a total of $55.1 million.

During full-year 2015, the Company repurchased 6.68 million shares, or 4.7percent of the total diluted outstanding shares, at an average price of $38.39 for atotal of $256.3 million.

On May 29, 2015, Donaldson’s Board of Directors increased the quarterly cashdividend by 3 percent to 17 cents per share from 16.5 cents per share. In 2015, theCompany distributed to its Shareholders dividends of $23.0 million and $91.2million in fourth quarter and full-year 2015, respectively.

Fiscal 2016 Outlook3

Donaldson expects full-year 2016 sales of $2.32 billion to $2.42 billion, or adecline of 2 percent to an increase of 2 percent versus fiscal 2015. In localcurrency, full-year sales are expected to increase 2 percent to 6 percent.

Based on a forecast of the euro at US$1.09 and 124 yen to the US$, foreigncurrency translation is expected to negatively impact full-year 2016 sales byapproximately $85 million.

Fiscal 2016 GAAP EPS is expected to be $1.56 to $1.76, and Donaldson currentlyforecasts GAAP EPS will be approximately 1 cent lower than adjusted EPS4.


Full-year 2016 operating margin is expected to be between 12.9 percent and13.7 percent, reflecting the benefits from completed restructuring actions andongoing operational improvements, partially offset by an increase incompensation expenses and the foreign exchange rates.

Donaldson expects full-year interest expense to increase by approximately $4million, reflecting the additional debt issued in fiscal 2015 associated with theCompany’s stated goal of maintaining a leverage ratio of approximately 1.5times debt-to-EBITDA.

Full-year 2015 effective tax rate is expected to be between 26.5 percent and28.5 percent.

We expect to repurchase between 2 percent and 4 percent of its outstandingshares in fiscal 2016.

Engine Products: Full-year 2016 Engine Product sales are expected to be in arange between a 2 percent decline and a 2 percent increase compared with 2015.In local currency, sales are expected to increase 2 percent to 6 percent, reflecting:

Continued weakness in the global agriculture and mining equipment markets,partially offset by modest growth in on-road heavy truck and stable conditionsin the construction equipment market.

Growing utilization of on-road heavy-duty trucks and construction equipmentin the field, while utilization of agriculture and mining equipment is expectedto be down slightly. Donaldson expects growth in replacement filter salesresulting from the continued expansion of its proprietary first-fit platforms,combined with continued geographic and product portfolio expansioninitiatives.

Growing sales of commercial aerospace products are expected to be partiallyoffset by a continued slowdown in U.S. defense spending.

Industrial Products: Full-year 2016 Industrial Product sales are forecast to be ina range between a 3 percent decline and a 1 percent increase compared with 2015.In local currency, sales are expected to increase 1 percent to 5 percent.

Industrial Filtration Solutions’ sales are expected to increase in the low-single-digit range, benefitting from the introduction of new products and growth inthe Company’s aftermarket business.

Gas Turbine sales are expected to decline between 9 percent and 13 percent,reflecting an expected market decline led by Europe and Asia Pacific, partiallyoffset by continued aftermarket market share gains and leveraging theNorthern Technical acquisition.

Special Applications’ sales are expected to decline slightly due to themembrane and disk drive businesses, partially offset by growth in venting andsemiconductor products.

Restructuring Charges and Other Adjusting Items


Donaldson has taken numerous actions to align its operating and manufacturingcost structure with current and projected Customer and end-market demand. Infiscal 2015, these actions included:

Rebalancing and reducing the current salaried and production workforceglobally,

Closing a production facility in Grinnell, Iowa, and Write-off of a partially completed facility in Xuzhou, China.

For the above actions, the Company recorded pre-tax restructuring andimpairment charges of $7.1 million in fourth quarter and $13.0 million for the fullyear 2015, compared with $0.6 million and $3.0 million in fiscal 2014,respectively.

In second quarter 2015, the Company recorded a $3.9 million charge related to alump-sum settlement of its U.S. pension plan.

29. The above statements contained in ¶¶ 19-28 were false and/or misleading, as well

as failed to disclose material adverse facts about the Company’s business, operations, and

prospects. Specifically, these statements were false and/or misleading statements and/or failed to

disclose: (1) that the Company improperly recognized revenue in relation to a project in the

European Gas Turbine Products business; (2) that the Company engaged in improper early

revenue recognition in relation to certain transactions; (3) that the Company improperly and

purposefully deferred certain charges from suppliers; (4) that the Company improperly

recognized revenue in an accelerated manner during the fourth quarter of fiscal 2014 and the

second and third quarters of fiscal 2015; (5) that, as such, the Company’s financial statements

were not prepared in accordance with GAAP; (6) that the Company lacked adequate internal

controls; and (7) that, as a result of the foregoing, the Company’s financial statements, and

Defendants’ statements about Donaldson’s business, operations, and prospects, were false and

misleading and/or lacked a reasonable basis.

Disclosures at the End of the Class Period


30. On September 29, 2015, after the close of the trading session, the Company

disclosed on Form NT 10-K filed with the SEC, that it was delaying filing of its annual report

because of certain misconduct relating to the Company’s accounting. Therein, the Company, in

relevant part, stated:

Donaldson Company Inc. (the “Company”) is temporarily unable to file itsAnnual Report on Form 10-K for its fiscal year ended July 31, 2015 (the “Form10-K”) within the prescribed time period for reasons described below.

The Company’s Compliance Committee received reports from two formeremployees that revenue for a project in the European Gas Turbine Productsbusiness was improperly recognized in the second quarter of fiscal 2015. TheCompany initiated an internal investigation which verified the substance of thereport and identified additional revenue transactions within the European GasTurbine Products business involving the same improper practices.

The Audit Committee of the Board has subsequently engaged independentexternal counsel and independent forensic accountants to continue theinvestigation, which is still on-going. Based on the investigation findings to date,the Company concluded that documents were altered with the intent toinappropriately recognize revenue for certain transactions in periods earlier thanwould be allowable under generally accepted accounting principles. There is alsoan indication that there may have been purposeful deferring of certain chargesfrom suppliers to later time periods than appropriate.

The investigation findings to date suggest that the revenue transactions were allvalid, but revenue was inappropriately recognized in an accelerated mannerduring the fourth quarter of fiscal 2014 and the second and third quarters of fiscal2015. Based on the investigation findings to date, the Company believes that thefinancial statement misstatements were immaterial, however the investigation isstill on-going and it is uncertain as to whether additional misstatements will befound, either in revenue or other accounts. The Company has begun takingremedial actions in response to the discovery of these practices.

Once the investigation is completed, including the evaluation of its findings, theCompany expects to complete its assessments as to the impacts to the financialstatements and effectiveness of internal controls over financial reporting and fileits Form 10-K.

The Company wishes to caution investors that any forward-looking statements(such as those identified by words such as “believe,” “expect” or similarexpressions) are subject to uncertainties and other risk factors that could causeactual results to differ materially from such statements, including but not limited


to risks associated with the timing and outcome of the Audit Committee’sinvestigation, including the possible identification of additional facts that couldhave an impact on the Company’s historical or future financial results. TheCompany undertakes no obligation to publicly update or revise any forward-looking statements.

31. On this news, the Company’s stock fell approximately $2.85, or over 10%, to

close at $24.55 on September 30, 2015, on unusually high volume.

DONALDSON’S VIOLATION OF GAAP RULESIN ITS FINANCIAL STATEMENTS

FILED WITH THE SEC

32. These financial statements and the statements about the Company’s financial

results were false and misleading, as such financial information was not prepared in conformity

with GAAP, nor was the financial information a fair presentation of the Company’s operations

due to the Company’s improper recording of revenue, in violation of GAAP rules.

33. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a

particular time. Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) states that financial statements

filed with the SEC which are not prepared in compliance with GAAP are presumed to be

misleading and inaccurate. Regulation S-X requires that interim financial statements must also

comply with GAAP, with the exception that interim financial statements need not include

disclosure which would be duplicative of disclosures accompanying annual financial statements.

17 C.F.R. § 210.10-01(a).

34. Donaldson announced that revenue was improperly recognized.

35. Given these accounting irregularities, the Company announced financial results

that were in violation of GAAP and the following principles:


(a) The principle that “interim financial reporting should be based upon the

same accounting principles and practices used to prepare annual financial statements” was

violated (APB No. 28, 10);

(b) The principle that “financial reporting should provide information that is

useful to present to potential investors and creditors and other users in making rational

investment, credit, and similar decisions” was violated (FASB Statement of Concepts No. 1, 34);

(c) The principle that “financial reporting should provide information about

the economic resources of Donaldson, the claims to those resources, and effects of transactions,

events, and circumstances that change resources and claims to those resources” was violated

(FASB Statement of Concepts No. 1, 40);

(d) The principle that “financial reporting should provide information about

Donaldson’s financial performance during a period” was violated (FASB Statement of Concepts

No. 1, 42);

(e) The principle that “financial reporting should provide information about

how management of Donaldson has discharged its stewardship responsibility to owners

(stockholders) for the use of Donaldson resources entrusted to it” was violated (FASB Statement

of Concepts No. 1, 50);

(f) The principle that “financial reporting should be reliable in that it

represents what it purports to represent” was violated (FASB Statement of Concepts No. 2, 58-

59);

(g) The principle that “completeness, meaning that nothing is left out of the

information that may be necessary to insure that it validly represents underlying events and

conditions” was violated (FASB Statement of Concepts No. 2, 79); and


(h) The principle that “conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business situations are

adequately considered” was violated (FASB Statement of Concepts No. 2, 95).

36. The adverse information concealed by Defendants during the Class Period and

detailed above was in violation of Item 303 of Regulation S-K under the federal securities law

(17 C.F.R. §229.303).

CLASS ACTION ALLEGATIONS

37. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased

Donaldson’s securities between August 27, 2014 and September 29, 2015, inclusive (the “Class

Period”) and who were damaged thereby (the “Class”). Excluded from the Class are Defendants,

the officers and directors of the Company, at all relevant times, members of their immediate

families and their legal representatives, heirs, successors or assigns and any entity in which

Defendants have or had a controlling interest.

38. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Donaldson’s securities were actively traded on the

New York Stock Exchange (the “NYSE”). While the exact number of Class members is

unknown to Plaintiff at this time and can only be ascertained through appropriate discovery,

Plaintiff believes that there are hundreds or thousands of members in the proposed Class.

Millions of Donaldson shares were traded publicly during the Class Period on the NYSE. As of

November 30, 2014, Donaldson had 137,309,539 shares of common stock outstanding. Record

owners and other members of the Class may be identified from records maintained by Donaldson


or its transfer agent and may be notified of the pendency of this action by mail, using the form of

notice similar to that customarily used in securities class actions.

39. Plaintiff’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

40. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

41. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period omitted and/or misrepresented material facts about the business, operations, and

prospects of Donaldson; and

(c) to what extent the members of the Class have sustained damages and the

proper measure of damages.

42. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation makes it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.


UNDISCLOSED ADVERSE FACTS

43. The market for Donaldson’s securities was open, well-developed and efficient at

all relevant times. As a result of these materially false and/or misleading statements, and/or

failures to disclose, Donaldson’s securities traded at artificially inflated prices during the Class

Period. Plaintiff and other members of the Class purchased or otherwise acquired Donaldson’s

securities relying upon the integrity of the market price of the Company’s securities and market

information relating to Donaldson, and have been damaged thereby.

44. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of Donaldson’s securities, by publicly issuing false and/or misleading

statements and/or omitting to disclose material facts necessary to make Defendants’ statements,

as set forth herein, not false and/or misleading. Said statements and omissions were materially

false and/or misleading in that they failed to disclose material adverse information and/or

misrepresented the truth about Donaldson’s business, operations, and prospects as alleged herein.

45. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiff and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false and/or

misleading statements about Donaldson’s financial well-being and prospects. These material

misstatements and/or omissions had the cause and effect of creating in the market an

unrealistically positive assessment of the Company and its financial well-being and prospects,

thus causing the Company’s securities to be overvalued and artificially inflated at all relevant

times. Defendants’ materially false and/or misleading statements during the Class Period

resulted in Plaintiff and other members of the Class purchasing the Company’s securities at


artificially inflated prices, thus causing the damages complained of herein.

LOSS CAUSATION

46. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused

the economic loss suffered by Plaintiff and the Class.

47. During the Class Period, Plaintiff and the Class purchased Donaldson’s securities

at artificially inflated prices and were damaged thereby. The price of the Company’s securities

significantly declined when the misrepresentations made to the market, and/or the information

alleged herein to have been concealed from the market, and/or the effects thereof, were revealed,

causing investors’ losses.

SCIENTER ALLEGATIONS

48. As alleged herein, Defendants acted with scienter in that Defendants knew that

the public documents and statements issued or disseminated in the name of the Company were

materially false and/or misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the

federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their

receipt of information reflecting the true facts regarding Donaldson, his/her control over, and/or

receipt and/or modification of Donaldson’s allegedly materially misleading misstatements and/or

their associations with the Company which made them privy to confidential proprietary

information concerning Donaldson, participated in the fraudulent scheme alleged herein.

APPLICABILITY OF PRESUMPTION OF RELIANCE(FRAUD-ON-THE-MARKET DOCTRINE)

49. The market for Donaldson’s securities was open, well-developed and efficient at

all relevant times. As a result of the materially false and/or misleading statements and/or failures


to disclose, Donaldson’s securities traded at artificially inflated prices during the Class Period.

On November 18, 2014, the Company’s stock closed at a Class Period high of $42.91 per share.

Plaintiff and other members of the Class purchased or otherwise acquired the Company’s

securities relying upon the integrity of the market price of Donaldson’s securities and market

information relating to Donaldson, and have been damaged thereby.

50. During the Class Period, the artificial inflation of Donaldson’s stock was caused

by the material misrepresentations and/or omissions particularized in this Complaint causing the

damages sustained by Plaintiff and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false and/or

misleading statements about Donaldson’s business, prospects, and operations. These material

misstatements and/or omissions created an unrealistically positive assessment of Donaldson and

its business, operations, and prospects, thus causing the price of the Company’s securities to be

artificially inflated at all relevant times, and when disclosed, negatively affected the value of the

Company stock. Defendants’ materially false and/or misleading statements during the Class

Period resulted in Plaintiff and other members of the Class purchasing the Company’s securities

at such artificially inflated prices, and each of them has been damaged as a result.

51. At all relevant times, the market for Donaldson’s securities was an efficient

market for the following reasons, among others:

(a) Donaldson stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, Donaldson filed periodic public reports with the

SEC and/or the NYSE;


(c) Donaldson regularly communicated with public investors via established

market communication mechanisms, including through regular dissemination of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services;

and/or

(d) Donaldson was followed by securities analysts employed by brokerage

firms who wrote reports about the Company, and these reports were distributed to the sales force

and certain customers of their respective brokerage firms. Each of these reports was publicly

available and entered the public marketplace.

52. As a result of the foregoing, the market for Donaldson’s securities promptly

digested current information regarding Donaldson from all publicly available sources and

reflected such information in Donaldson’s stock price. Under these circumstances, all purchasers

of Donaldson’s securities during the Class Period suffered similar injury through their purchase

of Donaldson’s securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

53. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

The statements alleged to be false and misleading herein all relate to then-existing facts and

conditions. In addition, to the extent certain of the statements alleged to be false may be

characterized as forward looking, they were not identified as “forward-looking statements” when

made and there were no meaningful cautionary statements identifying important factors that

could cause actual results to differ materially from those in the purportedly forward-looking

statements. In the alternative, to the extent that the statutory safe harbor is determined to apply to


any forward-looking statements pleaded herein, Defendants are liable for those false forward-

looking statements because at the time each of those forward-looking statements was made, the

speaker had actual knowledge that the forward-looking statement was materially false or

misleading, and/or the forward-looking statement was authorized or approved by an executive

officer of Donaldson who knew that the statement was false when made.

FIRST CLAIMViolation of Section 10(b) of

The Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants

54. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

55. During the Class Period, Defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and

other members of the Class to purchase Donaldson’s securities at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them,

took the actions set forth herein.

56. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for Donaldson’s securities in violation of Section 10(b)

of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in

the wrongful and illegal conduct charged herein or as controlling persons as alleged below.


57. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about Donaldson’s

financial well-being and prospects, as specified herein.

58. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of Donaldson’s value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and/or omitting to state

material facts necessary in order to make the statements made about Donaldson and its business

operations and future prospects in light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of the Company’s

securities during the Class Period.

59. Each of the Individual Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) the Individual Defendants were high-level executives

and/or directors at the Company during the Class Period and members of the Company’s

management team or had control thereof; (ii) each of these defendants, by virtue of their

responsibilities and activities as a senior officer and/or director of the Company, was privy to and

participated in the creation, development and reporting of the Company’s internal budgets, plans,

projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and

familiarity with the other defendants and was advised of, and had access to, other members of the

Company’s management team, internal reports and other data and information about the


Company’s finances, operations, and sales at all relevant times; and (iv) each of these defendants

was aware of the Company’s dissemination of information to the investing public which they

knew and/or recklessly disregarded was materially false and misleading.

60. The defendants had actual knowledge of the misrepresentations and/or omissions

of material facts set forth herein, or acted with reckless disregard for the truth in that they failed

to ascertain and to disclose such facts, even though such facts were available to them. Such

defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing Donaldson’s financial well-being and prospects from the

investing public and supporting the artificially inflated price of its securities. As demonstrated

by Defendants’ overstatements and/or misstatements of the Company’s business, operations,

financial well-being, and prospects throughout the Class Period, Defendants, if they did not have

actual knowledge of the misrepresentations and/or omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

61. As a result of the dissemination of the materially false and/or misleading

information and/or failure to disclose material facts, as set forth above, the market price of

Donaldson’s securities was artificially inflated during the Class Period. In ignorance of the fact

that market prices of the Company’s securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by Defendants, or upon the integrity of

the market in which the securities trades, and/or in the absence of material adverse information

that was known to or recklessly disregarded by Defendants, but not disclosed in public

statements by Defendants during the Class Period, Plaintiff and the other members of the Class


acquired Donaldson’s securities during the Class Period at artificially high prices and were

damaged thereby.

62. At the time of said misrepresentations and/or omissions, Plaintiff and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff

and the other members of the Class and the marketplace known the truth regarding the problems

that Donaldson was experiencing, which were not disclosed by Defendants, Plaintiff and other

members of the Class would not have purchased or otherwise acquired their Donaldson

securities, or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

63. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

64. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period.

SECOND CLAIMViolation of Section 20(a) of

The Exchange Act Against the Individual Defendants

65. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

66. The Individual Defendants acted as controlling persons of Donaldson within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had


the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which Plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

67. In particular, each of these Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

68. As set forth above, Donaldson and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and/or omissions as alleged in this Complaint. By

virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants’ wrongful

conduct, Plaintiff and other members of the Class suffered damages in connection with their

purchases of the Company’s securities during the Class Period.


PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action under Rule 23 of the Federal

Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of Plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated:

By: __________________________

GLANCY PRONGAY & MURRAY LLPLionel Z. GlancyRobert V. Prongay1925 Century Park East, Suite 2100Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

LAW OFFICES OF HOWARD G. SMITHHoward G. Smith3070 Bristol Pike, Suite 112Bensalem, PA 19020Telephone: (215) 638-4847Facsimile: (215) 638-4867

Attorneys for Plaintiff

united states district court district of ...donaldson’s reports to the sec, press releases and...

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