Donaldson Company, Inc. (DCI) | The Buildout — AI Infrastructure
The Verdict
Donaldson is a filtration company. It makes filters and the housings, systems and sensors around them — for engines, heavy equipment, industrial air and gas, power generation, and high-purity liquids used in semiconductor, disk drive, food and beverage and medical work. In the AI build-out, it sells high-purity membrane filtration into semiconductor manufacturing and has a data center liquid cooling line management describes as a newly entered adjacency. Both sit inside Life Sciences, the smallest of its three segments. The company also sells gas turbine filtration into power generation, a demand pool shaped by data center electricity needs, though management does not link that business to AI.
| Market Cap | — |
| Revenue (TTM) | $3.9B |
| Revenue Growth | +5.3% |
| EBITDA Margin (TTM) | 18.2% |
| Net Debt | $1.1B |
| Earnings Beats | 5 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Record company-level results: Q4 FY26 sales of $1,058.8M, up 8% year over year, with gross margin of 36.3% and operating margin of 17.5%, which management described as all-time company highs.
- Recurring revenue mix: over 75% of mobile revenue is replacement parts, 51% of Industrial Filtration Solutions sales were replacement parts in Q4 FY26, and roughly 70% of Facet's revenue is recurring, regulated replacement parts.
- Power generation visibility: management says power gen is "booked out" for the better part of the fiscal year with line of sight to fully loading capacity through 2028, at roughly a 50/50 first-fit to aftermarket mix.
- Life Sciences is guided to +7% to +11% in FY27, above the total company guide of +5.5% to +9.5%, and its Q4 FY26 pretax margin was 11.9%, up 660 basis points year over year.
- Deleveraging ran ahead of plan and capital return resumed: over $100M of Facet-related debt paid down, leverage from about 1.8x to about 1.4x net debt/EBITDA, buybacks restarted at roughly 1% of shares outstanding, and the quarterly dividend raised 6.7% to $0.32/share.
What We’re Watching
- The FY27 profit plan is weighted to the second half — about 52% of sales and 57% of operating profit — and depends on an industrial margin recovery that has already moved once, from H2 FY26 to mid-FY27.
- Organic aerospace and defense fell 3% in Q4 FY26 while total A&D rose 61% on Facet; FY27 organic is guided up mid teens, and the California-to-Illinois production ramp needs the first half of FY27.
- Facet's FY27 arithmetic: about $0.12 of EPS dilution, about $22M of amortization, and interest expense stepping from $36M to $55-60M. Management says Facet is cash accretive in FY27 and GAAP accretive in FY28.
- Disclosure: once food and beverage and microelectronics are reported together as Process Filtration from Q1 FY27, the AI-adjacent microelectronics revenue becomes harder to isolate from the outside.
On the operating evidence the thesis looks intact and strengthening: Q4 FY26 set records on sales, gross margin, operating margin and adjusted EPS, and the FY26 guide finished above the high end on sales while landing inside the ranges on margin and EPS. On the AI-infrastructure question, the exposure is real but small — estimated at low single digits of revenue, sitting inside a segment that is under a tenth of the company, and absent from prepared remarks and from the FY27 guide. The forward plan leans on an industrial margin recovery that has already slipped once, and the FY27 profit is weighted to the second half. The open question is whether that recovery lands in H2 FY27 and whether organic aerospace and defense inflects to mid teens, given a neighbor reports aerospace organic growth of 13.4% while Donaldson's organic A&D declined 3%.
Earnings Beat
Donaldson's fiscal Q4 2026 (quarter ended July 31, 2026; call August 26, 2026) was a record close. Sales of $1,058.8M passed $1B for the first time, up 8% year over year. Gross margin was 36.3% and operating margin 17.5%, both described by management as all-time company highs, and adjusted EPS was $1.15, up 12%. Facet added roughly 3 percentage points of the sales growth and diluted EPS by $0.06, worse than the roughly $0.03 guided. For the full year, sales were $3.9B (+5%), adjusted EPS $3.98 (+8%) and operating margin 16% — all records.
| Metric | Q4 FY2026 | Q3 FY2026 | Q4 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $1.1B | $995M | $981M | +8.0% |
| Gross margin | 36.3% | 33.5% | 34.5% | +180bps |
| EBITDA | $216M | $179M | $176M | +22.4% |
| EPS | $1.10 | $1.00 | $0.97 | +13.3% |
| Facet sales contribution | $30M | n/a | n/a | — |
power gen, we are booked out. For the better part of the fiscal year, and we see line of sight to fully loading our capacity through 2028.— Richard Lewis, President and CEO, 2026-08-26
Management tone: Management's commentary was direct and numerically specific, and the Q&A was brief — a handful of analysts covering FY27 margin seasonality, Facet dilution, aerospace and defense supply chain, mobile first-fit, life sciences margins and dust collection. No refusals or deflections were recorded. The company volunteered the organic aerospace and defense decline rather than leaning on the +61% total, and walked through why Facet's dilution came in above guidance. The new CEO repeated a portfolio-rigor frame across both calls: each business must earn a place in the portfolio.
Management Guidance
For FY27, management guides total sales +5.5% to +9.5%, decomposing it as Facet and pricing each about 2 percentage points, currency about 1 point, and organic volume the balance. Operating margin is guided to 16.6% to 17.2%, a midpoint 90 basis points above FY26, and EPS to $4.22 to $4.38 including roughly $0.12 of Facet dilution. Interest expense steps to $55M to $60M from $36M, mostly Facet-related debt, with capex of $70M to $90M and free cash flow conversion of 95% to 105%. Management expects about 52% of sales and 57% of operating profit in the second half, with industrial margins normalizing and power generation fully recovered by mid-FY27.
Trajectory
Revenue stepped up through FY26, from $896.3M in Q2 to $995.1M in Q3 and $1,058.8M in Q4, and year-over-year growth accelerated from 3.0% in Q2 to 8.0% in Q4. Trailing-twelve-month revenue is $3,885.6M, up 5.3% year over year. Margins moved with it: gross margin went from 33.4% in Q2 FY26 to 36.3% in Q4, and EBITDA margin from 16.0% to 20.4% over the same span. Management attributes the Q4 step-up to volume, pricing and mix, with Facet adding about 3 percentage points of sales growth, and management describes the Q4 operating margin of 17.5% as an all-time high. The one soft patch inside the year was the Industrial segment, where pretax margin fell to 13.4% in Q3 FY26 on power generation production shifts to Mexico and footprint optimization costs, before recovering to 16.4% in Q4.
The Model
The model projects FY+1 revenue of $4,200M and EBITDA of $844M, a 20.1% margin, and FY+2 revenue of $4,450.1M and EBITDA of $917M, a 20.6% margin. The FY+1 revenue sits roughly at the midpoint of management's FY27 sales guide of +5.5% to +9.5%, with Facet and pricing each contributing about 2 percentage points. The FY+2 step-up rests on the power generation order book management says extends through 2028, continued mobile aftermarket share gains, life sciences growth guided above the total company rate, and Facet's move from cash accretion in FY27 to GAAP accretion in FY28.
| Metric | FY2026 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $3.9B | $4.2B | $4.5B |
| YoY Growth | — | +8.1% | +6.0% |
| EBITDA | $706M | $844M | $917M |
| EBITDA Margin | 18.2% | 20.1% | 20.6% |
Projections are the median of 5 independent model runs. The model’s revenue sits 0.4% above analyst consensus.
For FY27, management guides total sales +5.5% to +9.5%, decomposing it as Facet and pricing each about 2 percentage points, currency about 1 point, and organic volume the balance. Operating margin is guided to 16.6% to 17.2%, a midpoint 90 basis points above FY26, and EPS to $4.22 to $4.38 including roughly $0.12 of Facet dilution. Interest expense steps to $55M to $60M from $36M, mostly Facet-related debt, with capex of $70M to $90M and free cash flow conversion of 95% to 105%. Management expects about 52% of sales and 57% of operating profit in the second half, with industrial margins normalizing and power generation fully recovered by mid-FY27.
What Could Go Right — and Wrong
- Industrial pretax margin returns toward the prior high-water mark that the CFO called a fair assessment, pulling company operating margin to the guided 16.6% to 17.2%.
- Organic aerospace and defense inflects to the guided mid teens, converting a near-record backlog into revenue.
- Facet moves from cash accretion in FY27 to GAAP accretion in FY28 as about $22M of amortization rolls off.
- Power generation converts booked capacity through 2028 into revenue, and the roughly 50/50 first-fit to aftermarket mix builds a replacement-parts annuity.
- Life Sciences sustains 7% to 11% growth at margins above the company average, lifting the mix as Process Filtration becomes a named operating unit.
- The industrial margin recovery slips a second time; about 57% of FY27 operating profit is guided into the second half, so a soft first half has to be made up in a compressed window.
- The organic aerospace and defense problem proves company-specific — a neighbor reports aerospace organic growth of 13.4% while Donaldson's organic A&D fell 3%.
- Facet's GAAP dilution persists past year two, with interest expense at $55M to $60M and amortization of about $22M.
- Cyclical demand fails to inflect: agriculture was described as muted with only green shoots, trucking carries uncertainty into the second half of next calendar year, and IFS sales fell 2% in Q4 FY26 on lower dust collection new equipment.
- Input cost inflation and tariffs bite — the 10-K warns that sustained tariff increases on imports from Mexico, China and the EU could have a significant adverse effect on the supply chain, and power generation turbine production was moved to Mexico.
Looking Ahead
Over the next 12 months the tests look like execution rather than demand. Demand is confirmed externally: GE Vernova, Caterpillar and Cummins all describe supply-constrained power generation with orders years out, and Seagate and Western Digital confirm the HAMR disk drive content step-up Donaldson cites. Inside the company, the FY27 plan leans on an industrial margin recovery in the second half, an organic aerospace and defense inflection to mid teens, about $10M of annualized footprint savings reaching run rate, and Facet's integration. The new Process Filtration operating unit stands up in Q1 FY27.
- Q1 FY27Process Filtration stands up — Food and beverage and microelectronics combine under one unit.
- H1 FY27A&D facility ramp — California-to-Illinois ramp; first half to return to normalcy.
- Mid-FY27Power gen recovery — Mexico plant margin drag from ~40 bps to zero.
- H2 FY27Industrial margin normalization — Segment pretax margin back toward prior high-water marks.
- H2 FY27Footprint savings at run rate — About $10M annualized from plant closures at run rate.
- FY28Facet GAAP accretion — Facet moves from cash accretion to GAAP accretion.
Financials
Annual Summary
| Metric | FY2025 | FY2026 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $3.7B | $3.9B | $3.9B | +5.3% |
| Gross Margin | 34.9% | 34.6% | 34.6% | 25bps |
| EBITDA | $595M | $706M | $706M | +18.7% |
| EBITDA Margin | 16.1% | 18.2% | 18.2% | +205bps |
| Net Income | $367M | $454M | $454M | +23.7% |
| Free Cash Flow | $338M | $426M | $426M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)34.6%
- EBITDA Margin (TTM)18.2%
- Net Margin (TTM)11.7%
- ROIC16.7%
- FCF Conversion60.4%
- SBC / Revenue0.5%
The Company
Donaldson makes filtration products and solutions — replacement filters and filter elements, filtration housings and systems fitted to new equipment, and increasingly complete systems with monitoring and service attached. It filters air, liquids, fuels, gases and process fluids. The company reports in three segments: Mobile Solutions (62.1% of FY25 net sales), which serves off-road, on-road and aftermarket customers; Industrial Solutions (29.9%), covering industrial air, gases, hydraulics, power generation and aerospace and defense; and Life Sciences (8.0%), which spans food and beverage, disk drive, microelectronics, vehicle electrification, medical device and bioprocessing.
Donaldson operates from more than 150 locations globally, with headquarters and primary research facilities in Minneapolis, Minnesota. FY25 revenue split 44.2% U.S. and Canada, 27.8% EMEA, 17.2% APAC and 10.8% LATAM. Property, plant and equipment, net stood at $637.2M as of April 30, 2026, with the largest regional blocks in the U.S. and Canada ($231.4M) and EMEA ($190.8M). A global footprint and cost optimization program begun in fiscal 2024 closed its last two identified plants in Q3 FY26; about $10M of annualized savings is expected once receiving sites reach run-rate productivity in the second half of FY27.
Business Segments
Competitive Landscape
Donaldson competes in filtration against a set of named global suppliers. Atmus Filtration's filing names MANN+HUMMEL, Donaldson, Parker and MAHLE as key global participants in engine filtration, and Parker-Hannifin names Donaldson among competitors in its Diversified Industrial Segment while noting that none of those businesses compete with every product group. The source material describes an industry consolidation wave: Parker-Hannifin's pending acquisition of Filtration Group would more than triple its filtration business and raise filtration aftermarket by 500 basis points, and Atmus is integrating Koch Filter in industrial air filtration. Donaldson's own Facet acquisition sits in the same wave.
- Parker-HannifinA documented quote names Donaldson among Parker's primary global competitors in its Diversified Industrial Segment. Parker also appears in the supply-chain graph as a Donaldson customer and supplier, and is acquiring Filtration Group.
- Atmus FiltrationA documented quote names Donaldson as a key global participant in engine filtration, alongside MANN+HUMMEL, Parker and MAHLE. Atmus reports aftermarket flat while Donaldson reports aftermarket up 9%.
- MANN+HUMMELNamed by Atmus Filtration as a key global participant in engine filtration; not otherwise discussed.
- Camfil ABNamed in filings; not discussed.
- DanaherNamed in filings; not discussed.
Supply Chain
Donaldson sits between raw-material suppliers — steel, filter media, nonwovens and membranes — and equipment makers and end users in engines, industry, power generation, aerospace and semiconductor manufacturing. No neighbor in the supplied transcripts names Donaldson directly.
More on DCI: Earnings recap