Donaldson Company Inc (DCI) Q3 2024 Earnings Report

- Revenue: $928M, up 6% YoY; Gross margin: 35.6% (+260 bps vs. prior year); Operating margin: 15.5% (+130 bps); Net income: $113.5M; Diluted EPS: $0.92; EBITDA: $166M; Free cash flow: $120.2M; Net debt to EBITDA: 0.5x; Cash at end of period: $223.7M; Backlog: across all three segments remains strong; 2024 guidance: Revenue +4% to +6%, EPS $3.33–$3.39; Capex: $90–$105M for the year; Dividend: +8% announced; Share repurchases: ~$27M in Q3; Cash conversion: ~106% in Q3.

Key themes from management commentary on the earnings call include: (1) Strategy and M&A: Tod Carpenter highlighted EZ-Flow acquisition to expand industrial services capabilities and geographic presence in the Southeast US, and the Medica SpA stake (49% with call option for remaining 51%) to broaden hollow fiber membrane technology for bioprocessing. (2) Operational health: Backlogs remain strong across all three segments, with on-time delivery improvements and supply chain conditions described as mostly supportive. (3) Segment performance: Mobile Solutions delivered a record pre-tax margin of 18.4%, driven by favorable mix, volume growth and pricing; Industrial Solutions delivered a pre-tax margin of ~18.7%; Life Sciences carried a ~1% pre-tax margin due to acquisition-related headwinds (~16 percentage points) but remains strategic for long-term growth. (4) Outlook and guidance: Full-year 2024 guidance reaffirmed, with a narrowed net sales growth range of 4–6% and a long-term view that profitability will benefit from gross margin expansion, albeit with near-term headwinds from life sciences investments and timing. (5) Capital allocation: 3.5% capex-to-revenue constraint discussed; the company intends to reinvest in organic/inorganic growth and return cash via dividends and buybacks. (6) Pricing and cost environment: Pricing cadence reverted to more normal levels; input costs and freight/labor headwinds persist, supporting a cautious pricing discipline and selective investments in the Life Sciences portfolio. Notable quotes include: “Sales increased 6% to a record $928 million, EPS increased 22% to a record $0.92, and operating margin was at more than a decade-long high.” and “Fiscal 2024 is forecasted to be a year of record sales, record operating margin, and record earnings.”

Overall, Donaldson’s QQ3 2024 results reinforce a constructive investment thesis grounded in a diversified filtration portfolio, improving pricing power, and meaningful growth optionality from Life Sciences and strategic acquisitions. The company guided to a mid-single-digit to mid-teens growth cadence across segments in 2024, complemented by continued gross margin expansion and a strong cash generation profile. The near-term risk is concentrated in Life Sciences profitability due to integration costs and project timing, and in China/Asia-Pacific markets where demand normalization remains uneven. Nevertheless, the combination of a prudent capex policy (max 3.5% of sales), an 8% dividend hike, ongoing share repurchases, and the EZ-Flow and Medica initiatives provides multiple levers for upside if Life Sciences monetizes sooner than expected and if aftermarket dynamics in Mobile Solutions continue to favor share gains. Investors should monitor: (1) Life Sciences profitability inflection and revenue ramp from Univercells, Isolere, Purilogics and Medica; (2) the cadence of backlog conversion in IFS and disk-drive related segments; (3) progress in pricing against input costs; and (4) the trajectory of China demand and its spillover into regional APAC markets. On a relative basis, Donaldson trades with a P/E around 19x and a P/B of about 5.9x, with an enterprise value to EBITDA multiple in the mid-50s, suggesting a premium reflecting its diversified growth platforms and cash-generative profile, albeit with near-term Life Sciences headwinds to calibrate expectations against peers in the broader Industrials group.