Donaldson Company, Inc. 2026 Q4 Earnings Call

Thank you for joining Donaldson's fourth quarter fiscal 2026 earnings conference call. With me today are Rich Lewis, President and CEO, and Brad Pogalz, Chief Financial Officer. This morning we will provide a summary of our fourth quarter performance and our outlook for fiscal 2027. During today's call, we will discuss non-GAAP or adjusted results. The fourth quarter 2026 non-GAAP results exclude pre-tax charges of $8.9 million, including $4.2 million of restructuring and other, and $4.7 million of business development charges. This compares to prior year pre-tax charges of $9.5 million of restructuring and other. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release. A quick note on the Facet acquisition. We acquired Facet on May 4, 2026. Therefore, beginning with fourth quarter results, we will report on our combined performance.

For clarity and to help understand organic performance, Rich and Brad will add detail on Facet's impact in their remarks where appropriate. Please keep in mind that any forward-looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I will now turn the call over to Rich.

Thanks, Sarika, and good morning, everyone. Fiscal 2026 was another record year for Donaldson Company, and I am proud of the way our global teams came together, demonstrating agility and resilience and finishing strong. Led by our collective mission of advancing filtration for a cleaner world, we reached sales of $3.9 billion, an all-time high and a 5% increase versus 2025, grew EPS 8% to a record $3.98, expanded operating margin to a record 16%, and returned $250 million to shareholders through dividends and share repurchases. Our execution on our clear and balanced growth strategy is yielding higher levels of performance. In Mobile, we are building on our strong first fit and aftermarket leadership positions, leveraging our large install base, gaining share with our OEM partners, and winning new customers.

In Industrial Solutions, we are scaling our platform, increasing our aftermarket penetration, and expanding in high growth end markets such as power generation. In Life Sciences, we are applying our industry-leading technologies to grow and gain share in attractive markets focused on high purity filtration. In support of our growth strategy, we completed the largest acquisition in company history, Facet Filtration, expanding our strategic position in durable end markets, including aerospace and defense and power generation, and also strengthening our financial profile with Facet's high growth, high margins and high percentage of aftermarket sales. We have made good progress on integration, including technical collaboration to expedite product development and testing to support growth into newer Facet target markets. Our teams have also been working towards achieving targeted synergies. Our progress in 2026 no doubt drove the company forward.

We executed strategically and financially while demonstrating structural expense discipline and driving operating leverage. Throughout the year, we displayed our commitment to delivering for all our stakeholders, including our customers, shareholders and employees. We continually do this through our leadership position in filtration, which was built on decades of solving our customers' most difficult filtration problems. Our best-in-class technology, uniquely powerful because we focus on filtration capabilities and leverage these technologies across markets. Our ability to help customers meet evolving environmental and operational goals by helping to protect equipment, processes and people. Our clear and balanced growth strategy as described earlier. This is how we have and continue to win. Now I will review some fourth quarter highlights. Brad will discuss the quarterly financials and fiscal 2027 guidance in more detail, and then I will return for some closing remarks.

In the fourth quarter, sales surpassed $1 billion for the first time in company history, growing 8% above prior year, driven by higher volume, including the Facet acquisition and pricing benefits. Operating margin was 17.5%, up 110 basis points over prior year and 90 basis points sequential step-up from third quarter due to gross margin expansion, including from improved operational efficiency. Adjusted earnings per share were $1.15, 12% above 2025. Now I will cover some highlights by segment. In Mobile Solutions, sales were $635 million, up 8%, driven by strong volume growth and pricing. Aftermarket sales were $512 million, up 9%, with increases in all regions and in both channels.

We grew double digits in our independent channel, where we continue to gain share through our product availability, reliability and consistency. We are realizing sales from the major North America fleet win we mentioned last quarter, and we are excited about further strengthening our dealer relationships and creating meaningful pull-through opportunities for incremental sales. On the first fit side, off-road sales were $95 million, flat to prior year, with strength in construction offsetting muted performance in agriculture. On-road sales of $29 million increased 9% as truck production began to ramp, particularly in the U.S. and Europe. I am encouraged by the momentum we are beginning to see in our first-fit businesses in this quarter. We had several meaningful program wins across regions, positioning us well for years to come. Another bright spot within Mobile Solutions has been our business in China.

Sales were up 27% due to a nearly 40% increase in OE replacement part sales. We are winning new platforms, particularly within the off-road, and our growing export market is driving demand, and we are seeing our razor-razorblade model at work in driving aftermarket sales strength. In Industrial Solutions, sales were $334 million, up 8%, driven by the inclusion of Facet sales, which added $30 million or 10 percentage points of growth. Aerospace & Defense sales, which now include Facet, were $76 million, a 61% increase versus 2025. Organic Aerospace & Defense sales declined 3% as overall supply chain constraints, while incrementally improving in some areas, persist. IFS sales of $257 million declined 2%. Lower dust collection new equipment volumes compared against a strong quarter in prior year were partially offset by robust power generation new equipment.

New equipment sales from our industrial project-based businesses can be lumpy, which is why growing aftermarket penetration remains a key to our strategy. To that end, this quarter, IFS replacement part sales grew in the low single digits and accounted for 51% of total IFS sales. In Life Sciences, sales of $90 million increased 10%, largely a result of double-digit growth in disk drive, which has been supported by strong market conditions and increasing demand for newer technologies. Solid food and beverage sales also contributed to the increase. Part of our success in food and beverage has been driven by our ability to serve an expanding range of high-purity applications, including in food and beverage, healthcare, pharmaceuticals, and data centers. Through our growth in these markets, we have seen increasing commonality in the capabilities required to serve them, including the underlying filtration technologies, including membrane platforms, engineering, manufacturing, and regulatory.

This same foundation extends to our microelectronics business. As such, beginning in the first quarter, we will operate our food and beverage and microelectronics businesses together under a new name, Process Filtration. With this focused structure, we aim to drive scalable above-market growth. In summary, I am pleased with our fiscal 2026 results. I am particularly impressed by how the Donaldson team closed out the year. We begin fiscal 2027 with robust order volumes, healthy backlogs, and focused execution. Our full year guidance, which Brad will cover in more detail in a minute, reflects our plans to build an even stronger Donaldson for the future and continue our long history of shareholder value creation.

To that end, for fiscal 2027, at the midpoint of our guidance ranges, we are forecasting record sales of over $4.1 billion, a 7.5% increase over prior year, driven by growth in several key high-margin businesses, operating margin expansion of 90 basis points to 16.9%, earnings per share of roughly $4.30, including approximately $0.12 of dilution from Facet, and free cash flow conversion of approximately 95%-105%, which is important as we maintain our commitment to return value to our shareholders. With that, I will now turn it over to Brad, who will provide more details on the fourth quarter financials and our outlook for fiscal 2027.

Brad? Thanks, Rich. Good morning, everyone.

I want to start by recognizing the contributions from the Donaldson team over the past year. We delivered fourth quarter results ahead of expectations, capping off a year filled with significant macro uncertainty, including from tariffs and conflict in the Middle East, while also navigating a complicated execution environment, particularly in the industrial segment. Throughout the year, our teams had a clear focus on serving our customers and delivering results. So thank you to all of our employees for your hard work and for positioning us to build on our success in fiscal 2027. I'll cover our financial outlook in a few minutes, but first, I'll discuss our record fourth quarter results in more detail. Note that my comments exclude the impact from the non-recurring charges Sarika referenced earlier.