Summary of DCI Q3 2026 Earnings Call

1Key Financial Results and Metrics

Sales: Record sales of $995 million, up 6% year-over-year, driven by currency translation, net pricing benefits, and volume growth.

Adjusted EPS: $1.06, a 7% increase compared to the prior year.

Operating Margin: 16.6%, up 30 basis points year-over-year and an increase of 260 basis points from Q2.

Gross Margin: 34.4%, down 10 basis points from the previous year due to production shifts and operational inefficiencies.

Free Cash Flow Conversion: Approximately 90%.

Debt: Following the acquisition of Facet Filtration, leverage ratio stands at about 1.8x net debt to EBITDA.

2Strategic Updates and Business Highlights

Acquisition of Facet Filtration: Completed in Q3, expected to enhance capabilities in high-margin markets such as aerospace and power generation. Integration efforts are underway.

Cost Structure Optimization: Closure of the last two plants in footprint optimization initiative, expected to yield annualized benefits of $10 million once productivity ramps up.

Segment Performance:

Mobile Solutions: Sales of $630 million, up 8%, with strong aftermarket growth.

Industrial Solutions: Sales of $282 million, down 1%, affected by volume declines but offset by pricing and currency benefits.

Aerospace and Defense: Sales of $45 million, down 14% due to weaker new equipment sales.

Life Sciences: Sales of $84 million, up 13%, driven by food and beverage and Disk Drive strength.

3Forward Guidance and Outlook

Fiscal 2026 Guidance:

Organic sales growth projected between 3% to 5%, with a midpoint increase due to strength in mobile solutions and life sciences.

Operating margin guidance revised to 15.8% to 16.2%.

Adjusted EPS expected between $3.94 and $4.01, reflecting an 8% increase from the prior year.

Facet expected to contribute $25-$30 million in Q4 sales, with minimal impact on operating margin due to amortization costs.

4Bad News, Challenges, or Points of Concern

Industrial Solutions Margin Pressure: Operating margin in the industrial segment was 13.4%, down from 18.1% the previous year, impacted by production shifts and operational inefficiencies.

Aerospace and Defense Decline: Sales down 14% due to supply chain constraints and project timing issues, with expectations for continued challenges into 2027.

Temporary Operational Inefficiencies: Gross margin pressure expected to persist in the short term, although improvements are anticipated moving forward.

5Notable Q&A Insights

Footprint Optimization: Analysts inquired about the timeline for margin recovery in the industrial segment, with management indicating a return to prior margins by mid-fiscal 27.

Facet Integration: Initial integration steps are underway, focusing on procurement synergies and potential revenue growth through cross-selling opportunities.

Mobile Aftermarket Strength: Management noted strong global utilization rates and a new business award expected to drive future growth, although some caution was expressed regarding the sustainability of this momentum.

Supply Chain Challenges: Ongoing supply chain issues were highlighted, particularly in aerospace and defense, with expectations for resolution in the upcoming quarters. Overall, Donaldson Company reported a strong quarter with record sales and improved margins, while also navigating challenges in certain segments and integrating a recent acquisition. The outlook remains positive, with expectations for continued growth and margin expansion despite some operational headwinds.