Donaldson (NYSE:DCI) President and CEO Rich Lewis outlined the filtration company’s growth strategy, capital-allocation priorities and market outlook during a conference presentation, emphasizing recurring aftermarket revenue, technology investments and expansion in industrial and life sciences applications.
Lewis, who became CEO in March, described Donaldson as a technology-led filtration company serving a broad range of end markets. He said the company uses its filtration technologies to protect customers’ equipment, manufacturing processes and work environments while helping improve reliability, uptime and operating costs.
Donaldson operates across three business verticals: Mobile Solutions, Industrial Solutions and Life Sciences. The company has operated for 111 years and holds about 3,000 active patents, according to Lewis. He said approximately two-thirds of company revenue comes from high-margin, recurring sources and that 75% of revenue is produced within the region where it is sold.
Lewis said Donaldson’s stated fiscal 2027 targets, at the midpoint, include 7.5% sales growth, 90 basis points of operating-margin expansion and 8% earnings-per-share growth. He characterized both the targeted results and the company’s fiscal 2026 performance as records for Donaldson.
Three-business strategy
Mobile Solutions, Donaldson’s legacy segment, supplies filtration products across on- and off-highway applications. Lewis said the segment generated 80% recurring revenue last year and continues to have growth potential. Replacement-parts demand has remained strong, he said, while original-equipment demand has been mixed across end markets.
Mining and construction markets are in a mid-cycle environment, Lewis said, with construction benefiting from data-center and infrastructure-related activity. Agriculture and trucking remain near trough levels, although U.S. truck build rates improved during the second half of the calendar year following regulatory changes.
Industrial Solutions includes aerospace and defense, power generation and manufacturing-related filtration operations. Lewis said the segment is positioned to benefit from demand tied to the data-center and artificial-intelligence buildout, particularly within power generation. He added that Donaldson aims to raise the segment’s aftermarket revenue mix from roughly 50% today to closer to 70% over the next decade.
Life Sciences is anchored by process filtration and disk-drive filtration. The process-filtration business supplies sterile air, steam and liquid filters to microelectronics, food and beverage, and pharmaceutical customers. Donaldson is also investing in membrane capabilities intended to expand its presence in higher-margin bioprocessing applications, Lewis said.
Facet acquisition expands aerospace exposure
Lewis discussed Donaldson’s acquisition of Facet Filtration for $830 million, calling it the largest deal in the company’s history. Facet provides mission-critical fuel filtration for commercial and military aviation.
He said Facet was separated from Filtration Group in connection with Parker’s acquisition of another business, creating an antitrust-related divestiture process. Donaldson had been familiar with Facet for years and viewed the business as a strategic fit, Lewis said.
Facet’s margins are about twice Donaldson’s margins, according to Lewis, and its products have high retention rates because aviation filtration products are subject to regulatory requirements after they are specified into customer applications. He said the deal increases Donaldson’s aerospace and defense scale and is expected to support above-average growth and higher margins.
Donaldson also sees potential revenue synergies through Facet’s customer channels and the company’s existing power-generation operations, though Lewis said expanding Facet’s core business represents the more significant opportunity.
Margins, investment and capital allocation
Donaldson has guided to a 16.9% operating-profit margin, Lewis said, adding that management believes operating margins beginning with “twos” are achievable. Near-term improvement is expected to come partly from productivity and efficiency efforts in Industrial Solutions, where he said execution has not met the company’s standards.
Longer term, margin expansion is expected to be supported by scalable growth, a richer mix of aftermarket revenue and internal productivity initiatives. Lewis said the company intends to pass inflationary costs to customers while offsetting as much as possible through procurement, redesign and material-substitution efforts.
On capital allocation, Lewis said Donaldson will prioritize organic investment, strategic acquisitions, dividends and share repurchases. The company has increased its dividend for 30 years and intends to continue doing so, he said. Share repurchases have traditionally represented 2% to 3% of shares, though buyback activity may vary depending on acquisition opportunities.
Lewis said Donaldson would consider additional leverage for the right strategic transaction but would seek to remain below two times leverage over the long term. He added that the company sees a large addressable filtration market, which he estimated at $90 billion to $100 billion, providing room for continued expansion across its existing portfolio.
About Donaldson (NYSE:DCI)
Donaldson Company, Inc (NYSE: DCI) is a global manufacturer of filtration systems and replacement parts. The company serves original-equipment manufacturers, industrial businesses and aftermarket customers with products designed to protect engines, equipment, processes and the surrounding environment.
Its product portfolio includes air, oil, fuel, hydraulic and coolant filters for on- and off-road vehicles and heavy equipment, as well as filtration systems for industrial dust, fume and mist collection.
