Donaldson Sets Q4 Sales and EPS Records

Donaldson(NYSE:DCI) reported fourth-quarter fiscal 2025 earnings on August 27, 2025, posting record topline performance, with sales up 5% year over year to $981 million and adjusted EPS up 10% year over year to $1.03. Full-year results for the fiscal year ended July 31, 2025, included all-time highs in both revenue ($3.7 billion) and operating margin (15.7%), with $465 million returned to shareholders, while guidance for fiscal 2026 targets further operating margin expansion and record earnings of $4.00 per share. Below, we examine management’s execution on operational efficiency, aftermarket penetration, and growth investments, and clarify near- and long-term catalysts and risks.

Donaldson delivers record margin through cost discipline

Gross margin (GAAP) was pressured by higher LIFO (last-in, first-out) inventory costs linked to U.S.-China tariff inflation, but operating margin still set a new high at 16.4%, with operating expense as a percent of sales improving 160 basis points compared to the previous year. The company continued major restructuring and plant consolidation efforts, targeting completion in fiscal 2026, to drive fixed cost leverage and maintain high on-time delivery rates despite macro headwinds.

"Operating margin was a record 16.4%, up 10 basis points over the prior year. Adjusted EPS was $1.03, 10% above the prior year. And as expected, cash conversion was strong at 123% as we successfully worked down inventory and delivered to our customers. Going further into the P&L, gross margin was 34.8%, down 140 basis points from 2024. The impact from tariff-related inflation on our LIFO inventory valuation was significant this quarter."
-- Brad Pogalz, Chief Financial Officer

The company's structural cost reductions and demonstrated pricing power offset supply chain and input cost volatility, sustaining incremental margins that outpace muted sales growth.

Aftermarket and connected solutions fuel strong growth in DCI’s core

Donaldson’s mobile solutions aftermarket business achieved $1 billion in annual sales, aided by new distribution wins such as the Mighty partnership, and OEM (original equipment manufacturer) channel demand rebounded sequentially in North America. The industrial solutions segment benefited from a razor-to-sell razor blade model, with nearly 50% of quarterly sales now derived from higher-margin replacement parts, while connected equipment installations are forecast to grow over 30% in fiscal 2026.

"In our independent channel, which eclipsed $1 billion in sales this year, partnerships like NAPA allow us to expand our reach and we continue to build these types of relationships. For example, in the fourth quarter, we signed a new partnership with Mighty Distributing System of America. Donaldson is Mighty's sole heavy-duty filtration supplier of Donaldson branded products and we are pleased with the early results. With respect to our largest first-fit business within mobile, off-road sales grew after eight consecutive quarters of declines"
-- Todd Carpenter, Chairman, President and CEO

The shift to aftermarket and connected models creates recurring revenue and profit streams, positioning the company for superior resilience and margin expansion through industry cycles, regardless of near-term first-fit equipment volatility.

Growth investments target long-term platforms despite short-term headwinds

Bioprocessing remains muted due to industry project delays; new downstream Purexa products have launched, but meaningful revenue ramp is expected in fiscal 2027. Capital expenditures for fiscal 2026 are projected between $65 million and $85 million, with disciplined allocation toward innovation in life sciences, solvent recovery, alternative fuels filtration, and disk drive technologies.

"That is taking a little bit longer to get those projects to market. We've made really good progress in 2025. We do not see the revenue expectation really with a high kind of a bounce in '26. That's likely more in the '27 time frame, as we get through testing of those products and bring them to market, perhaps as in the later part of fiscal 2026. Some of those products have been released."
-- Todd Carpenter, Chairman, President and CEO

Management’s measured approach to scaling higher-margin and differentiated business lines underscores a focus on durable value creation, while candidly acknowledging the delayed realization of certain life sciences growth vectors.

Looking Ahead

For fiscal 2026, management guides to $3.8 billion in sales (+3% year over year at the midpoint), operating margin (non-GAAP) between 16.1% and 16.7%, and record EPS of $3.92 to $4.08. Incremental margin is targeted at approximately 40%, with cash conversion expected to normalize to 85%-95%. Capital expenditures are forecast at $65 million to $85 million, the M&A pipeline remains active, and share repurchases of 2%-3% of outstanding shares are planned; no material changes to strategic priorities or dividend policy are indicated.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Donaldson. The Motley Fool has a disclosure policy.