Donaldson Q4 Earnings Call Highlights

Key Points

• Donaldson delivered record fiscal 2026 results: Annual sales rose 5% to $3.9 billion, adjusted EPS increased 8% to $3.98, and operating margin reached 16%. Fourth-quarter sales topped $1 billion, with EPS up 12% to $1.15 and margin expanding to a record 17.5%.
• The Facet Filtration acquisition added about three percentage points to fourth-quarter sales growth and strengthened Donaldson’s aerospace, defense and power-generation businesses, but reduced quarterly EPS by $0.06. Management expects roughly $0.12 of dilution in fiscal 2027 while continuing to reduce acquisition-related debt.
• Fiscal 2027 guidance calls for continued growth: Sales are expected to increase 5.5% to 9.5%, EPS is projected at $4.22 to $4.38, and operating margin is forecast at 16.6% to 17.2%. Growth is expected across aftermarket, aerospace and defense, Life Sciences and industrial operations as production issues are resolved.

Donaldson NYSE: DCI reported record fiscal 2026 results, including annual sales of $3.9 billion and adjusted earnings per share of $3.98, as the filtration company cited growth across its Mobile Solutions, Industrial Solutions and Life Sciences segments. Sales rose 5% from fiscal 2025, while EPS increased 8% and operating margin reached a record 16%.

For the fourth quarter, sales surpassed $1 billion for the first time, increasing 8% from the prior-year period. Adjusted EPS rose 12% to $1.15, while operating margin expanded 110 basis points to a record 17.5%.

“Fiscal 2026 was another record year for Donaldson Company,” President and CEO Rich Lewis said, pointing to the company’s growth strategy, operational efficiency efforts and the acquisition of Facet Filtration.

Facet acquisition adds sales, creates near-term earnings dilution

Donaldson acquired Facet on May 4, 2026, making the fourth quarter the first period in which the company reported combined results. The acquisition, the largest in Donaldson’s history, expanded its positions in aerospace and defense and power generation, according to management.

Chief Financial Officer Brad Pogalz said Facet added roughly three percentage points to fourth-quarter sales growth but reduced EPS by $0.06. Facet’s sales, gross margin and operating profit were in line with the company’s forecast, although amortization and interest expense were somewhat higher than expected.

For fiscal 2027, management expects Facet to dilute EPS by about $0.12, reflecting incremental amortization and interest expense. Pogalz said the acquisition is accretive on a cash basis after accounting for business performance and interest expense. Donaldson has already repaid more than $100 million of Facet-related debt and reported net debt-to-EBITDA leverage of approximately 1.4 times.

Mobile aftermarket growth offsets uneven first-fit demand

Mobile Solutions revenue rose 8% to $635 million in the fourth quarter, supported by volume growth and pricing. Aftermarket sales increased 9% to $512 million, with growth in all regions and both channels. Lewis said the company posted double-digit growth in its independent channel and has begun realizing revenue from a major North American fleet win discussed in the previous quarter.

First-fit off-road sales were flat at $95 million, as construction strength offset muted agricultural demand. On-road sales increased 9% to $29 million as truck production began to rise, particularly in the U.S. and Europe.

Donaldson’s China business grew 27%, driven by a nearly 40% increase in original-equipment replacement-part sales. The company said it has been winning new off-road platforms and seeing demand from export markets.

For fiscal 2027, Mobile Solutions sales are expected to rise 2% to 6%. Management forecast mid-single-digit off-road growth, supported by construction while agriculture remains subdued, and high-single-digit on-road growth as global truck production increases. Aftermarket sales are projected to rise mid-single digits through share gains and higher vehicle utilization.

Industrial operations improve, though power generation remains a focus

Industrial Solutions sales rose 8% to $334 million, including $30 million in Facet sales. Aerospace and defense revenue increased 61% to $76 million, though organic aerospace and defense sales declined 3% because of continuing supply-chain constraints.

Industrial Filtration Solutions, or IFS, sales declined 2% to $257 million. Lower dust-collection new-equipment volumes were partly offset by strong power-generation new-equipment demand. IFS replacement-part sales grew in the low single digits and represented 51% of total IFS sales.

Industrial Solutions pre-tax margin was 16.4%, down 450 basis points from the prior year. Pogalz attributed the decline to Facet-related expenses and amortization, organic expense deleveraging, and production-shift headwinds in power generation. Still, the segment’s margin improved 300 basis points sequentially from the third quarter.

The company continues to stabilize operations at a Mexico power-generation plant following a production shift. Pogalz said the issue created approximately 40 basis points of consolidated gross-margin pressure in the fourth quarter, though throughput and delivery performance have improved. Donaldson expects to fully recover by the middle of fiscal 2027.

Lewis also said the company expects to spend the first half of fiscal 2027 improving production at an Illinois facility following the closure of a California aerospace and defense site. Donaldson expects organic aerospace and defense sales to increase in the mid-teens during fiscal 2027 as it addresses supply constraints and works through elevated backlogs.

Life Sciences growth and fiscal 2027 outlook

Life Sciences sales increased 10% to $90 million, led by double-digit disk-drive growth and solid food-and-beverage demand. The segment’s pre-tax margin rose 660 basis points to 11.9%, aided by volume leverage in higher-margin food-and-beverage and disk-drive businesses, as well as expense discipline.

Beginning in the first quarter, Donaldson will combine its food-and-beverage and microelectronics operations under the name Process Filtration. Lewis said the businesses share filtration technologies, engineering, manufacturing and regulatory capabilities. Management cited demand related to disk-drive HAMR technology, microelectronics, data-center artificial intelligence buildouts and liquid cooling.

For fiscal 2027, Donaldson forecast:

• Total sales growth of 5.5% to 9.5%, with approximately two percentage points each from Facet and pricing, one point from currency, and the balance from organic volume.
• Operating margin of 16.6% to 17.2%, with the midpoint implying 90 basis points of expansion.
• EPS of $4.22 to $4.38, including approximately $0.12 of Facet-related dilution.
• Free cash flow conversion of 95% to 105% and capital expenditures of $70 million to $90 million.

Management expects the second half of fiscal 2027 to account for about 52% of annual sales and 57% of operating profit, reflecting typical seasonality and anticipated industrial margin recovery. Donaldson also said it expects to repurchase roughly 1% of shares outstanding during the year, following the resumption of buybacks after the Facet acquisition.

About Donaldson (NYSE:DCI)

Donaldson Company, Inc NYSE: DCI is a global provider of filtration systems and replacement parts for a wide range of industries. The company develops and manufactures air, liquid and gas filtration solutions for engine and industrial applications, helping customers improve performance, lower emissions and extend equipment life. Donaldson's product portfolio includes engine air intake filters, fuel filters, hydraulic filters, compressor filters, dust collection systems and gas turbine air intake systems.

Serving markets such as agriculture, construction, mining, power generation, aerospace and original equipment manufacturing, Donaldson operates through two primary business segments: Engine Products and Industrial Products.

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