On August 26, Donaldson Company (NYSE:DCI) reported the first $1 billion quarter in its history, an 8% jump that capped a record fiscal year with $3.9 billion in total sales. Adjusted earnings per share climbed 12% to $1.15, and operating margin hit an all-time high of 17.5%. The filtration maker also handed investors fiscal 2027 guidance pointing to another record year. But buried inside that outlook is a jump in interest costs and fresh dilution tied to the company’s biggest acquisition ever.
A Business Hitting New Highs
Donaldson’s fourth quarter gross margin reached 36.7%, an all-time company high, driven by higher volume, favorable pricing, and product mix. That strength flowed straight to the bottom line, pushing operating margin up 110 basis points from a year earlier. Aftermarket sales, the recurring replacement-parts business that keeps customers coming back long after the original equipment sale, grew 9% to $512 million, with double-digit growth in the independent channel. Mobile Solutions, the company’s largest segment, posted $635 million in sales, up 8% on volume growth and pricing benefits. China stood out even more, with sales up 27% as OE replacement part sales jumped nearly 40%.
In Life Sciences, sales grew 10% to $90 million, supported by the shift toward Heat-Assisted Magnetic Recording technology, which increases how much filtration content Donaldson can sell into each hard drive. Management also pointed to power generation as a source of durability rather than a cyclical blip, noting backlogs are full through fiscal 2027 with visibility into 2028. On the capital side, Donaldson has paid down more than $100 million of the debt tied to its Facet acquisition, brought net debt to EBITDA down to 1.4 times, and restarted its share buyback program after pausing it post-acquisition. The company also extended a streak of 30 consecutive years of dividend increases and 70 straight years of paying one.
The Bill Comes Due
Not every part of the business moved in the same direction. Organic sales in Aerospace and Defense fell 3% in the quarter, a result of supply chain constraints that management said are only incrementally improving. Industrial Filtration Solutions sales declined 2% as lower dust collection equipment volume outweighed gains from power generation projects. A production shift to Mexico created operational inefficiencies that cost the company 40 basis points of gross margin in the quarter, and management said full recovery isn’t expected until the middle of fiscal 2027. Separately, a plant closure in California and the move of that production to Illinois is expected to take the first half of fiscal 2027 to resolve a resulting backlog in the aerospace segment.
The acquisition of Facet, completed May 4, is also adding real costs alongside its benefits. The deal was $0.06 dilutive to earnings per share in the fourth quarter alone, and management expects roughly $0.12 of dilution across all of fiscal 2027 from amortization and interest expense. That interest bill is set to rise sharply, guided to $55 million to $60 million in fiscal 2027, up from $36 million in fiscal 2026, largely because of debt taken on for the deal. Input costs tied to the conflict in the Middle East also weighed on gross margin during the quarter.
What The Street Sees
Hedge fund ownership of Donaldson rose from 27 funds in the prior quarter to 35 in the most recent one, a sign of building institutional interest. Short interest sits at just 3.06% of float, which points to little organized skepticism toward the stock right now. Shares trade at a forward price-to-earnings ratio of 21.23 as of August 28, a multiple that assumes the record guidance for fiscal 2027 actually plays out.
The Question For Fiscal 2027
Donaldson closes fiscal 2026 with records across sales, margins, and earnings, and guidance pointing to another record year ahead. The bull case rests on aftermarket strength, China momentum, and a power generation backlog that management says stretches into 2028. The bear case centers on rising interest costs, aerospace supply chain strain, and a Mexico plant transition still working through its inefficiencies. For the growth story to hold, Facet needs to keep delivering the margin and aftermarket benefits management describes even as its financing costs weigh on per-share results. How cleanly the industrial segment’s margin pressure eases in the second half of fiscal 2027 will say a lot about how solid this record year truly was.
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