Donaldson Company, Inc. (DCI) | The Buildout — AI Infrastructure
The Verdict
Donaldson designs and manufactures high-precision filtration products that remove particles and gases inside hard disk drives, and it supplies membrane-based filters for liquid cooling systems in data centers. The company’s Life Sciences segment is the gateway to AI — its absorption filters are critical consumables for high-capacity HAMR drives used in AI storage, and its cooling filters are being adapted for the thermal management of increasingly dense AI racks.
| Market Cap | — |
| Revenue (TTM) | $3.8B |
| Revenue Growth | +4.4% |
| EBITDA Margin (TTM) | 17.5% |
| Net Debt | $404M |
| Earnings Beats | 5 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Record Q3 adjusted operating margin of 16.6%, an all-time high, with operating expenses as a percentage of sales improving 40 basis points.
- Life Sciences segment revenue up 13% year over year; full-year growth guidance raised to 9–11% due to Disk Drive and Food & Beverage strength.
- Aftermarket annuity represents roughly two-thirds of revenue; independent aftermarket channel grew double digits in Q3.
- New CEO signals portfolio evaluation, potentially unlocking value through divestitures of underperforming businesses.
- Facet Filtration acquisition adds ~$110M of high-margin, regulated recurring revenue, with 70% coming from replacement parts.
What We’re Watching
- Industrial pretax margin recovery — management targets a return to the ~18% high-watermark by mid-fiscal 2027, but power gen ramp delays have already slipped once.
- Aerospace & Defense backlog conversion; supply-chain issues expected to resolve by Q1 FY2027, but further delays could risk permanent share loss.
- Mobile aftermarket sustainability — Q3 benefited from OE restocking; management assumes a sequential pullback in Q4; if aftermarket remains strong, it would signal structural gains are even larger.
- The CEO’s portfolio evaluation could lead to divestitures or restructuring, adding uncertainty and potential execution risk.
The thesis is intact. Donaldson is executing a clear margin recovery plan while its aftermarket and Life Sciences businesses show accelerating momentum. The temporary Industrial headwinds are well-understood and management has provided a concrete timeline for resolution. The open question is whether the power gen ramp and A&D supply-chain fixes stay on track to deliver the promised margin uplift by mid-fiscal 2027.
Earnings Beat
Donaldson reported record quarterly sales of $995 million, up 6% year over year, with gross margin of 33.5%, down 70 basis points as temporary Industrial headwinds masked underlying strength. Adjusted operating margin reached an all-time high of 16.6%, and adjusted earnings per share rose 7% to $1.06.
| Metric | Q3 FY2026 | Q2 FY2026 | Q3 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $995M | $896M | $940M | +5.9% |
| Gross margin | 33.5% | 33.4% | 34.2% | -70bps |
| EBITDA | $179M | $143M | $112M | +60.2% |
| EPS | $1.00 | $0.78 | $0.48 | +108.1% |
We are continuing to invest in attractive markets where we have a clear path to win while also critically evaluating our existing portfolio of businesses. Ensuring each business has earned a place in our portfolio.— Rich Lewis, President & CEO, Q3 FY2026 Earnings Call (June 2, 2026)
Management tone: Confident and forward-looking, with a new emphasis on critically evaluating the business portfolio; management was candid about operational setbacks and provided a specific margin recovery path.
Management Guidance
For fiscal 2026, management guided to 3–5% organic sales growth, with Mobile Solutions up 3.5–5.5%, Industrial Solutions flat to up 2%, and Life Sciences up 9–11%. Organic operating margin is expected at 15.8–16.2%, implying 10–50 basis points of expansion. The guidance includes $25–30 million in sales from the Facet acquisition in Q4, with an estimated $0.03 per share dilutive impact. Capital expenditures are expected at $60–75 million, and free cash flow conversion at 85–95%.
Trajectory
Revenue growth accelerated to 6% in Q3 FY2026 from 3% in Q2, driven by a strong Mobile aftermarket and Life Sciences. GAAP gross margin fell to 33.5% from 34.2% a year ago, but management stated that underlying gross margin would have been up 90 basis points excluding the power gen ramp and footprint costs. The mix improvement continues to support record operating margins, while the Industrial recovery is expected to lift consolidated profitability further as temporary headwinds ease.
The Model
The model forecasts revenue of $4,182 million and EBITDA of $849 million (20.3% margin) for the next fiscal year, and $4,373 million in revenue with $910 million EBITDA (20.8% margin) the year after. The near-term projection is supported by sustained aftermarket strength and Life Sciences growth; the second-year build incorporates the full resolution of Industrial inefficiencies and a full year of Facet’s contribution.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $3.7B | $4.2B | $4.4B |
| YoY Growth | — | +13.3% | +4.6% |
| EBITDA | $595M | $849M | $910M |
| EBITDA Margin | 16.1% | 20.3% | 20.8% |
Projections are the median of 5 independent model runs. The model’s revenue sits 0.4% above analyst consensus.
For fiscal 2026, management guided to 3–5% organic sales growth, with Mobile Solutions up 3.5–5.5%, Industrial Solutions flat to up 2%, and Life Sciences up 9–11%. Organic operating margin is expected at 15.8–16.2%, implying 10–50 basis points of expansion. The guidance includes $25–30 million in sales from the Facet acquisition in Q4, with an estimated $0.03 per share dilutive impact. Capital expenditures are expected at $60–75 million, and free cash flow conversion at 85–95%.
What Could Go Right — and Wrong
- Industrial pretax margin returns to the ~18% high-watermark earlier than mid-fiscal 2027, driving consolidated margins into the high teens.
- The fleet aftermarket win scales beyond the initial award and opens dealer channels, leading to sustained double-digit independent channel growth.
- A divestiture of an underperforming business sharpens the portfolio and improves the growth and margin profile.
- Data center liquid cooling filtration gains a design-win with a major cooling systems provider, creating a new high-growth revenue stream.
- A cyclical recovery in agriculture and truck first-fit boosts Mobile revenue beyond current guidance.
- Power gen production ramp delays persist beyond mid-fiscal 2027, preventing margin recovery and eroding management credibility.
- Aerospace & Defense supply-chain issues fail to resolve by Q1 FY2027, leading to permanent customer losses and a shrinking A&D backlog.
- Mobile aftermarket growth moderates as OE restocking effects fade and the fleet win fails to scale, reverting aftermarket share gains to cyclical.
- Intensifying competition from Atmus and Parker-Hannifin in industrial air filtration limits margin recovery and requires higher investment.
- Commodity inflation escalates due to Middle East conflict, compressing margins despite surcharge mechanisms.
Looking Ahead
Over the next twelve months, Donaldson will navigate the ramp of Facet integration and the critical path of Industrial margin recovery. The Q4 fiscal 2026 report should show whether the power gen headwind is narrowing as promised, and early fiscal 2027 will test A&D supply-chain fixes. The new CEO’s portfolio evaluation could yield a divestiture announcement, while the EPA 2027 pre-buy cycle may lift on-road truck orders. Data center liquid cooling remains an early-stage but high-upside watchpoint.
- Q4 FY2026 (Aug–Sep 2026)Facet contribution & power gen update — First quarter with Facet; tests narrowing of power gen headwind and initial FY2027 guide.
- Q1 FY2027 / end CY2026A&D supply‑chain resolution — A&D sales expected to return to growth as single‑source part issues clear.
- Mid‑fiscal 2027 (Jan–Feb 2027)Industrial margin recovery — Power gen inefficiency expected eliminated; Industrial pretax margin returning to ~18%.
- During FY2027Footprint savings materialize — $10 million in annual run‑rate savings from plant consolidation.
- Fiscal 2028Facet GAAP accretion — Acquisition expected to turn accretive to earnings.
- No timelinePortfolio evaluation outcome — Potential divestiture or strategic action from CEO’s review.
Financials
Annual Summary
| Metric | FY2025 | TTM |
|---|---|---|
| Revenue | $3.7B | $3.8B |
| Gross Margin | 34.9% | 34.2% |
| EBITDA | $595M | $1.3B |
| EBITDA Margin | 16.1% | 17.5% |
| Net Income | $367M | $439M |
| Free Cash Flow | $338M | $686M |
| Net Cash | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)34.2%
- EBITDA Margin (TTM)17.5%
- Net Margin (TTM)11.5%
- ROIC21.4%
- FCF Conversion58.3%
- SBC / Revenue0.6%
The Company
Donaldson Company is a global filtration technology leader serving mobile equipment, industrial, and life sciences end markets. Its filters clean air, fuel, oil, and other fluids, and its proprietary media — such as PowerCore and Ultra-Web — deliver performance that helps customers extend equipment life and meet emissions standards. The company’s replacement parts account for roughly two-thirds of revenue, creating a recurring, high-margin annuity.
Donaldson operates a global manufacturing and distribution network, with plants in the Americas, Europe, and Asia-Pacific. It emphasizes vertical integration in strategic areas, including in-house membrane manufacturing for Life Sciences and connected monitoring (iCue) for dust collectors. The company is optimizing its footprint, having recently closed four plants, and is expanding production capacity for gas turbine inlet systems in Monterrey, Mexico.
Business Segments
Competitive Landscape
Donaldson competes against diversified industrial companies and specialized filtration firms, including Atmus Filtration Technologies and Parker-Hannifin. It differentiates through proprietary filter media, connected monitoring, and a high aftermarket mix that creates sticky recurring revenue. In its core heavy-duty engine air filtration, PowerCore technology is widely specified by OEMs, and the recent fleet win suggests the company is gaining share from incumbents.
- Atmus Filtration TechnologiesDirect competitor in engine and industrial air filtration; recently acquired Cook Filter, intensifying competition in industrial air.
- Parker-HannifinDiversified competitor in industrial and aerospace filtration; building a dedicated Filtration Group.
Supply Chain
Donaldson sits between raw material and component suppliers upstream and a diverse set of customers downstream, providing filtration systems and consumables for mobile, industrial, and life sciences applications. No neighbor has named Donaldson as a direct supplier or customer in recent transcripts.