DONALDSON Co Q3 FY26 earnings call DCI

Q3 was Donaldson's strongest quarter to date on sales, adjusted operating margin and adjusted EPS. Sales reached a record $995 million, up 6% on currency translation, net pricing and volume growth. Adjusted operating margin of 16.6% was an all-time high, up 30 bps YoY and up 260 bps sequentially from Q2, driven by both gross-margin improvement and expense leverage. Adjusted EPS was $1.06, up 7%. Management had spent the quarter guiding investors toward a strong sequential step-up and delivered on it, though the operational work in the Industrial segment is not yet complete.

Gross margin of 34.4% was down 10 bps YoY as pricing, volume and mix benefits were more than offset by ~100 bps of headwinds from short-term Industrial inefficiencies. About 80 bps came from production shifts to Mexico for large turbine systems in Power Generation, and a little under 20 bps from footprint-optimization plant-closure/transfer costs. Management views Q3 as the low point on the Power Gen drag, expecting full recovery midway through FY2027. Industrial segment pretax margin fell to 13.4% from 18.1% a year ago, though it stepped up sequentially and is expected to keep improving in Q4.

The last two plants identified within the footprint-optimization initiative were closed during the quarter, completing the closure phase. Work has transitioned to ramping up productivity at the receiving sites. These industrial-based initiatives are expected to generate annualized benefits of about $10 million once run-rate productivity is reached during FY2027. Footprint costs added a little under 20 bps of gross-margin pressure in Q3.

Subsequent to quarter end, Donaldson closed its acquisition of Facet Filtration, adding high-performance fuel and fluid capabilities to the Industrial Solutions portfolio and increasing exposure to aerospace and power generation. Roughly 70% of Facet revenues are recurring regulated replacement-part sales with highly accretive margins (roughly double Donaldson's margin profile). Facet will be reported in the Aerospace and Defense business unit within Industrial Solutions starting in Q4. Cost synergies of ~$4M-$5M are on the procurement side; no revenue synergies were built into the deal model, though management sees cross-selling potential (e.g., marine fuel systems pulling through air filtration).

Mobile Solutions sales were $630 million, up 8% with strong volume growth, and segment margin hit an all-time-high 20.2% (+210 bps) on volume leverage and favorable aftermarket mix. Aftermarket sales were $498 million, up 8%, with growth in all regions and both channels; the independent channel grew double digits on product availability and reliability driving share gains. A large competitive win with a major North America fleet operator (air, lube and fuel products) will begin shipping in Q4. First-fit off-road sales were $104M (+9%, led by construction) and on-road $28M (+5%) as truck production began to ramp, particularly in EMEA. China mobile sales were up 6% on off-road strength and a growing export market.

Life Sciences sales rose 13% to $84 million on robust Food & Beverage new-equipment volume and Disk Drive strength. Food & Beverage sales grew over 30%, supported by new-equipment sales and a growing installed base driving consumables demand. Life Sciences pretax margin was 8.1% (+30 bps); excluding a prior-year Purilogics earn-out reversal benefit, margin would have increased more than 8 percentage points. In March the company expanded its LifeTec line with its most advanced high-loading performance filter for bottled-water applications, built with Donaldson-manufactured membrane.

Leverage stands at approximately 1.8x net debt to EBITDA including Facet. Capital-allocation priorities are unchanged: reinvestment (R&D, ~3,000 active patents with 120+ awarded in CY2025, plus working capital and capex), disciplined M&A, dividends, and share repurchase. Donaldson has paid dividends for 70 consecutive years and raised them for 30 consecutive years, recently announcing a further 7% increase, and remains an S&P High-Yield Dividend Aristocrat. Share repurchase — the variable lever — has been paused to pay down Facet-related debt; year-to-date the company repurchased 1.2% of shares outstanding, offsetting stock-comp dilution.