Donaldson Company, Inc.

Donaldson reported third-quarter record sales of $995 million, up 6% year over year, adjusted operating margin of 16.6%, up 30 basis points, and adjusted EPS of $1.06, up 7%. Gross margin was 34.4%, down 10 basis points year over year, mainly because industrial segment inefficiencies more than offset pricing, volume, and mix. By segment, Mobile Solutions sales were $630 million, up 8%; Industrial Solutions sales were $282 million, down 1%; Aerospace and Defense sales were $45 million, down 14%; and Life Sciences sales were $84 million, up 13%. For fiscal 26, management now expects consolidated organic sales growth of 3% to 5%, organic operating margin of 15.8% to 16.2%, full-year pretax margin in the mid to high single digits, and adjusted EPS of $3.94 to $4.01 excluding Facet; Facet is expected to add $25 million to $30 million of Q4 sales, about 70 to 80 basis points to full-year growth, and roughly $0.03 of EPS dilution this year.

Richard Lewis said Q3 was Donaldson’s strongest quarter to date for sales, adjusted operating margin, and adjusted EPS, and emphasized the company’s ability to execute through macro uncertainty, including Middle East disruption and uneven cyclical conditions. He framed the quarter as evidence that Donaldson’s technology-led filtration strategy, broad product portfolio, and high service levels are winning in markets such as aftermarket mobile, food and beverage, and disk drive. He also highlighted Facet as a strategic fit that expands exposure to aerospace and power generation and increases recurring aftermarket revenue.

Bradley Pogalz highlighted 6% sales growth, 16.6% operating margin, and 34.4% gross margin, noting that gross margin was held back by about 100 basis points of industrial headwinds, including about 80 basis points from production shifts for large turbine systems and a little under 20 basis points from footprint optimization costs. He said the last two plant closures were completed in the quarter and that those industrial initiatives should generate about $10 million of annualized benefits once productivity normalizes in fiscal 27. He also outlined fiscal 26 guidance: organic sales growth of 3% to 5%, organic operating margin of 15.8% to 16.2%, capex of $60 million to $75 million, cash conversion of 85% to 95%, and leverage of about 1.8x net debt to EBITDA including Facet.

Analysts focused on the timing of Industrial margin recovery, and management said the current quarter likely marked the low point for industrial inefficiencies, with recovery expected by midway through fiscal 27 and potential return to prior high-water-mark margins if the footprint and power-generation issues normalize. Questions on Facet centered on synergy potential and dilution; management said the modeled cost synergies are about $4 million to $5 million, mostly procurement, while revenue synergies were not built into the deal case but could emerge over time. Analysts also pressed on Aerospace and Defense backlog and supply chain issues, and management said backlog is near record levels, most shipment delays should clear by Q1 of next fiscal year or by calendar year-end, and the category should be a tailwind into fiscal 27.