Sign in

    Donaldson Company Inc (DCI)

    Business Description

    Donaldson Company, Inc. is a global leader in technology-led filtration products and solutions, serving a broad range of industries and advanced markets. The company designs and manufactures filtration systems and components for various applications, including air and liquid filtration, industrial processes, and life sciences. Donaldson's products are used in diverse sectors such as construction, mining, agriculture, transportation, power generation, aerospace, and medical devices.

    1. Mobile Solutions - Provides replacement filters for air and liquid filtration, filtration housings, and systems related to exhaust and emissions for OEMs in construction, mining, agriculture, and transportation, as well as independent distributors and OEM dealer networks.

    2. Industrial Solutions - Offers products for industrial air filtration, industrial gases, industrial hydraulics, power generation, and aerospace and defense, including dust collectors, compressed air purification systems, and filtration for industrial processes.

    3. Life Sciences - Supplies products for bioprocessing, food and beverage, medical devices, vehicle electrification, microelectronics, and disk drives, including bioprocessing equipment, chromatography devices, and specialized air and gas filtration systems.

    Q1 2025 Summary

    Initial Price$74.66July 30, 2024
    Final Price$73.69October 30, 2024
    Price Change$-0.97
    % Change-1.30%

    What went well

    • Donaldson Company is achieving significant market share gains in the Mobile Solutions aftermarket business, driving strong sales growth despite steady vehicle utilization rates.
    • Potential upside in the Aerospace and Defense segment if supply chain constraints are resolved, as supply chain issues have held back significant projects.
    • Executing well on organizational redesign, the company is gaining share in several businesses, expanding its addressable market, and is well-positioned to deliver on its financial targets.

    What went wrong

    • The Life Sciences segment is experiencing significant headwinds, with both upstream CapEx projects slowing and downstream projects elongating, leading to delays of 1 to 2 years and requiring adjustments and restructuring, which may impact profitability and growth.
    • The company's free cash flow conversion in Q1 was only 47%, significantly below the full-year target of 85% to 95%, due to increased working capital investments, potentially indicating cash flow challenges.
    • The Aerospace and Defense segment is facing "incredibly stubborn" supply chain issues, particularly with "a couple of piece parts" holding back seven-figure projects from being delivered, potentially impacting revenue and limiting growth in this segment.

    Q&A Summary

    1. Life Sciences Restructuring
      Q: When will Life Sciences restructuring be complete?
      A: The Life Sciences segment faced headwinds due to slowed large CapEx projects and elongated downstream projects. The company has made the planned adjustments to right-size the business and is focusing on current opportunities to return to basic profitability within the fiscal year. They believe they can grow from a smaller footprint even if macro conditions remain unchanged for the next 3 to 5 years.

    2. Aftermarket Share Gains
      Q: Is aftermarket growth driven by share gains?
      A: Yes, aftermarket growth is largely due to share gains, including with major customer NAPA, and across the independent channel. Vehicle utilization is steady with no significant expansion, but they continue to win share, evidenced by nearly double-digit growth across all regions. Q2 is typically the toughest quarter seasonally.

    3. Free Cash Flow Conversion
      Q: Why was free cash flow conversion 47% and how will it improve?
      A: The 47% conversion was due to working capital investments, especially in inventory, to ensure on-time deliveries for customers. They expect to return to the 85% to 95% conversion range for the year as sales increase and working capital normalizes throughout the year.

    4. Aerospace & Defense Upside
      Q: Is there potential upside in Aerospace & Defense guidance?
      A: Despite a strong start, the flat guidance accounts for supply chain challenges, with a few critical parts delaying seven-figure projects. If resolved, there is potential upside. The fourth quarter last year saw a 40% increase, and timing of parts delivery can significantly impact results.

    5. Price-Cost Impact
      Q: How is price-cost impacting margins and outlook?
      A: Price realization was about 1% in the quarter, aligning with normal low single-digit levels, and is expected to remain similar for the rest of the year. Costs are mixed, with labor and some inputs up and others down. The company believes price and cost are currently balanced.

    6. IFS Growth Confidence
      Q: What supports confidence in IFS high single-digit growth?
      A: Industrial Filtration Solutions experienced timing delays in project deliveries, but backlogs are strong and support the forecasted high single-digit growth for the year. They are already filling in backlog for the next fiscal year, indicating a solid business cycle in power generation.

    7. Post-Election Impact
      Q: How might the election affect business and tariffs?
      A: The post-election environment could normalize macro conditions, with potential positives in power generation depending on the administration's policies. There are tariff risks, particularly on steel, which is their number one commodity. However, 75% of products are manufactured within the region, mitigating some tariff impacts.

    8. Off-Road Business Outlook
      Q: Have we reached an inflection point in Off-Road?
      A: It's tough to say. Despite some acceleration after five quarters of decline, the outlook remains uncertain. Agricultural markets are getting tougher, construction is muted, and improvement in China doesn't yet signal a sustained inflection point.

    9. Medica's Impact on Life Sciences
      Q: How did Medica affect Life Sciences profitability?
      A: Medica was essentially immaterial in the quarter, neither a contributor nor a detractor to Life Sciences operating profit. The significant event was a cash outflow of $71 million for acquiring the remaining 49% stake.

    10. Fiscal Year Outlook
      Q: Is the fiscal year still expected to be 49% H1 and 51% H2?
      A: Yes, the outlook remains close to 49%-51%, with possible slight variations. Q2 is typically the toughest quarter due to seasonal factors like holidays and lower activity in planting and harvesting.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Tod E. CarpenterChairman, President, and CEONovember 2017Tod E. Carpenter has been with Donaldson Company, Inc. since 1996. He was appointed as the Chairman, President, and Chief Executive Officer in November 2017. Previously, he served as COO and in various other roles.
    Scott J. RobinsonChief Financial Officer2015Scott J. Robinson served as the Chief Financial Officer of Donaldson Company, Inc. from 2015 until October 31, 2024. Before joining DCI, he was CFO at Imation Corp..
    Amy C. BeckerChief Legal Officer and Corporate SecretaryNovember 2022Amy C. Becker joined Donaldson Company, Inc. in 1998 and was appointed as Chief Legal Officer and Corporate Secretary in November 2022. She has held various legal roles within the company.
    Sheila G. KramerChief Human Resources OfficerNovember 2022Sheila G. Kramer has been with Donaldson Company, Inc. since 2015 and was appointed as Chief Human Resources Officer in November 2022. She previously worked at Taylor Corporation and Lifetouch, Inc..
    Guillermo BriseñoPresident, Industrial SolutionsNovember 2022Guillermo Briseño joined Donaldson Company, Inc. in 2003 and became President, Industrial Solutions in November 2022. He has held various positions in Latin America.
    Andrew DahlgrenPresident, Mobile SolutionsAugust 1, 2024Andrew Dahlgren joined Donaldson Company, Inc. in 1994 and was appointed as President, Mobile Solutions effective August 1, 2024. He has held various leadership roles within the company.
    Richard B. LewisPresident, Life SciencesAugust 1, 2024Richard B. Lewis joined Donaldson Company, Inc. in 2002 and was appointed as President, Life Sciences effective August 1, 2024. He previously served as President of Mobile Solutions.
    Thomas R. ScalfPresident, Enterprise Operations and Supply ChainNovember 2022Thomas R. Scalf has been with Donaldson Company, Inc. since 1989 and was appointed as President, Enterprise Operations and Supply Chain in November 2022. He has held various roles in operations and management.
    Brad PogalzChief Financial OfficerNovember 1, 2024Brad Pogalz was appointed as the Chief Financial Officer effective November 1, 2024. He has been with Donaldson Company for nearly a decade and has held various finance roles.

    Questions to Ask Management

    1. Given the pretax loss of approximately $5 million in the Life Sciences segment due to continued investments and market challenges, can you elaborate on the specific actions you're taking to focus your expense structure, and how confident are you in achieving breakeven for the segment this fiscal year?

    2. With Off-Road sales down 6% due to sustained weak conditions in agriculture, and considering that the agriculture market continues to get tougher, what strategic initiatives are you implementing to mitigate this weakness, and when do you anticipate a potential inflection point?

    3. You mentioned that supply chain constraints in Aerospace and Defense are holding back seven-figure projects; can you provide more detail on these bottlenecks, the expected timeline for resolution, and how they might impact your full-year guidance for this segment?

    4. While Mobile Solutions aftermarket sales grew due to market share gains, you've indicated that Q2 is typically the toughest quarter and that vehicle utilization is steady; how do you plan to sustain growth in the aftermarket business during this seasonal slowdown, and are there risks to your full-year outlook if utilization rates decline?

    5. Free cash flow conversion was 47% in the quarter, below your full-year guidance of 85% to 95%; given ongoing investments in working capital and inventory, what measures are you taking to improve cash conversion in the coming quarters, and do you still expect to meet your full-year cash flow targets?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 2023
    End Date/DurationUntil terminated
    Total Additional Amount12.0 million shares
    Remaining Authorization9.7 million shares (as of 2024-10-31)
    DetailsPart of the company's capital deployment strategy to return value to shareholders, supported by strong cash flow generation.

    Past Guidance

    Here is the exhaustive guidance provided by Donaldson Company (DCI) in the last four earnings calls, including the issued period, guided period, and the full list of metrics:

    1. Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: FY 2025

    Guidance:

    1. Sales Growth: Total sales expected to increase 2% to 6%, including a pricing benefit of approximately 1%.

      • Mobile Solutions Sales: Flat to up 4%.
        • Off-Road: Up low single digits.
        • On-Road: Down low double digits.
        • Aftermarket: Up low single digits.
      • Industrial Solutions Sales: Up 4% to 8%.
        • IFS: High single-digit growth.
      • Aerospace and Defense Sales: Flat.
      • Life Sciences Sales: Low double-digit growth.

    2. Operating Margin: 15.3% to 15.9%.

    3. Adjusted EPS: $3.56 to $3.72, up from $3.42 in FY 2024.

    4. Capital Expenditures: $85 million to $105 million.

    5. Cash Conversion: 85% to 95%.

    6. Share Repurchase: 2% to 3% of outstanding shares.

    2. Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025 and FY 2026

    Guidance for FY 2025:

    1. Sales Growth: Total sales expected to increase 2% to 6%, with a pricing benefit of approximately 1%.

      • Mobile Solutions Sales: Flat to up 4%.
        • Aftermarket: Low single-digit increase.
        • Off-Road: Low single-digit increase.
        • On-Road: Low double-digit decrease.
      • Industrial Solutions Sales: Up 4% to 8%.
        • IFS: High single-digit growth.
        • Aerospace and Defense: Flat.
      • Life Sciences Sales: Low double-digit growth.

    2. Operating Margin: 15.3% to 15.9%.

    3. Adjusted EPS: $3.56 to $3.72.

    4. Interest Expense: Approximately $21 million.

    5. Other Income (Net): $16 million to $20 million.

    6. Tax Rate: 23% to 25%.

    7. Cash Conversion: 85% to 95%.

    8. Capital Expenditures: $85 million to $105 million.

    9. Share Repurchases: 2% to 3% of shares outstanding.

    10. R&D Investments: Expected to continue increasing.

    11. Dividend Policy: Intention to continue paying and increasing dividends.

    Guidance for FY 2026:

    1. Sales Growth: Consolidated sales expected to grow at a 3-year CAGR of 3% to 7%.
    2. Operating Margin: 15.8% to 16.6%.
    3. Mobile Solutions Operating Margin: 18.1% to 18.9%.

    3. Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024

    Guidance:

    1. Sales Growth: Total sales expected to increase 4% to 6%, with pricing contributing approximately 2%.

      • Mobile Solutions Sales: Up 2% to 4%.
        • Off-Road: Down low double digits.
        • On-Road: Down low single digits.
        • Aftermarket: Up mid-single digits.
      • Industrial Solutions Sales: Up 6% to 8%.
        • IFS: Mid-single-digit growth.
        • Aerospace and Defense: Low double-digit growth.
      • Life Sciences Sales: Mid-teens increase (revised down from 20%).

    2. Operating Margin: 15.0% to 15.4%.

    3. Adjusted EPS: $3.33 to $3.39.

    4. Interest Expense: Approximately $22 million.

    5. Other Income (Net): $15 million to $17 million.

    6. Tax Rate: 23% to 24%.

    7. Cash Conversion: 95% to 105%.

    8. Capital Expenditures: $90 million to $105 million.

    9. Dividends: Announced an 8% increase in the quarterly cash dividend.

    10. Share Repurchases: Approximately 2% of shares outstanding.

    4. Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024

    Guidance:

    1. Sales Growth: Total sales expected to increase 3% to 7%, with pricing contributing approximately 2% and a currency translation benefit of about 1%.

      • Mobile Solutions Sales: Up 1% to 5%.
        • Off-Road: Down low double digits.
        • On-Road: Flat.
        • Aftermarket: Up mid-single digits.
      • Industrial Solutions Sales: Up 3% to 7%.
        • IFS: Mid-single-digit growth.
        • Aerospace and Defense: Mid-single-digit growth.
      • Life Sciences Sales: Up approximately 20%.

    2. Operating Margin: 15.0% to 15.4%.

    3. Adjusted EPS: $3.24 to $3.32.

    4. Capital Expenditures: $95 million to $110 million.

    5. Cash Conversion: 95% to 105%.

    6. Life Sciences Profitability: Expected to be approximately breakeven.

    7. Gross Margin: Second-half gross margin rate expected to approximate the first half.

    8. R&D Investments: Double-digit increase planned.

    This summary includes all metrics guided for in the last four earnings calls, along with the issued and guided periods.