Donaldson (NYSE:DCI) reported record second-quarter fiscal 2026 sales of $896 million, up 3% year over year, as the filtration company cited strong customer demand, elevated backlogs, and continued order intake across its three operating segments. Management said the quarter included short-term execution challenges—most notably in Industrial Solutions—that pressured profitability, while several businesses, including parts of Mobile Solutions’ aftermarket and Life Sciences, delivered notable growth.
Quarterly performance: record revenue, margin pressure
Operating margin in the quarter was 14%, down from 15.2% a year earlier. Adjusted earnings per share were $0.83, flat versus the prior-year period’s record, according to management’s prepared remarks. The company discussed results on a non-GAAP basis that excluded $6.7 million of pre-tax charges, including $2.9 million of restructuring and other costs and $3.8 million of business development charges.
- About 60 basis points of de-leveraging from lower volume in Mobile and Industrial segments.
- Operational inefficiencies tied to changes in Donaldson’s manufacturing footprint, including a ramp in power generation production.
- Footprint optimization costs, including a U.S. plant closure and transfer of production.
Pogalz said the company expects volume pressures to abate in the second half given strong backlogs and Donaldson’s typical second-half sales step-up, with sequential improvement in gross margin and full-year expansion still contemplated in the forecast.
Segment results: mixed volumes, strong pockets in aftermarket and Life Sciences
Mobile Solutions sales were $557 million, up 2%, driven primarily by currency benefits. Aftermarket sales were $447 million, up 1%, with high single-digit growth in the independent channel offset by declines in the OE channel. Management said the business is benefiting from share gains and higher global vehicle utilization. First-fit results were mixed: off-road sales rose 8% to $86 million as comparisons eased, while on-road sales fell 9% to $23 million amid continued declines in global truck production. In China, Mobile Solutions sales increased 18% on strength in off-road and aftermarket, marking a sixth consecutive quarter of growth in that market.
Industrial Solutions sales were $260 million, up 2% on currency benefits. Within the segment, IFS sales increased 7% to $223 million on strength in power generation, particularly in North America and Europe, while Aerospace and Defense sales declined 19% to $37 million due to project timing, primarily in defense.
Life Sciences sales rose 16% to $80 million. Management attributed the increase largely to robust growth in food and beverage and disk drive. Rich Lewis, incoming CEO, said food and beverage new equipment sales grew substantially in all regions, which management described as supportive of future replacement parts growth.
Operational updates: power generation ramp and footprint optimization
Management described power generation demand as strong, but said the company experienced concentrated operational inefficiencies during the quarter. Pogalz said a headwind of about 40 basis points to gross margin stemmed from a “protracted startup process” in Mexico for production of large turbine systems alongside surging demand. Donaldson began producing the large systems at a Mexico facility last year to meet customer requirements for North American production. The company said it has plans in place to accelerate improvement and expects progress in the second half of fiscal 2026.
On footprint optimization, Lewis told analysts Donaldson has been working on four plant closures over the last couple of years. Two are in final phases, and two are expected to close in the third quarter, with productivity improvements continuing into Q4. Lewis said margin benefits from the most significant projects are expected to become more apparent in fiscal 2027, while Pogalz said cost benefits should begin later in fiscal 2026 and extend into the future.
Facet acquisition: largest in company history, expected to close in coming quarters
Donaldson also highlighted its announced acquisition of Facet, which CEO Tod Carpenter called the largest acquisition in the company’s history. Carpenter said the deal expands Donaldson’s portfolio with high-performance fuel and fluid filtration for “mission-critical applications” and increases exposure to durable end markets such as aerospace and defense and power generation. He added that roughly 70% of Facet’s revenue is driven by recurring, regulated replacement part sales.
Management said Facet adds nearly $110 million in sales and carries gross and EBITDA margins “significantly above” Donaldson’s current company average, with low capital intensity and strong cash flows. Pogalz said Donaldson expects to close the transaction in the next couple of quarters and noted it is not included in fiscal 2026 guidance. He also said Donaldson’s net leverage ratio is currently 0.7x, and would be approximately 1.7x after the Facet acquisition.
In Q&A, Lewis said Facet has historically grown at “high single digits,” driven by a mix of volume and pricing, and management expects that to continue. He said the company sees potential growth opportunities outside Facet’s core markets and characterized potential commercial synergies as upside not baked into expectations. Pogalz said the company expects earnings accretion “pretty rapidly” and referenced year two, while describing the deal as more strategic than a synergy play.
Guidance: reaffirmed sales outlook; margin and EPS ranges updated
For fiscal 2026, Donaldson reaffirmed consolidated sales growth guidance of 1% to 5% and reiterated expectations for record sales of about $3.8 billion, with growth in each segment. The forecast assumes pricing and currency translation each contribute about 1% to growth.
However, the company revised profitability guidance following the second-quarter gross margin performance. Pogalz said Donaldson now expects full-year operating margin between 16% and 16.4% and fiscal 2026 EPS between $3.93 and $4.01. At the midpoint of $3.97, management said it implies about 8% EPS growth on 3% sales growth, supported by a second-half step-up in sales and gross margin expansion as operational improvements take hold.
By segment, the company raised its Mobile Solutions growth outlook to 2% to 6% (from flat to up 4%), citing favorable currency and stronger aftermarket expectations, particularly in the independent channel. Life Sciences sales growth guidance was increased to 5% to 9% (from 1% to 5%). Industrial Solutions guidance was lowered to a range of down 1% to up 3% (from up 2% to 6%), driven by weaker expectations in dust collection and industrial hydraulics systems and lower Aerospace and Defense sales due to program timing.
On capital allocation, Pogalz said the company’s priorities remain reinvestment, disciplined M&A, dividends, and share repurchases as the variable component. Given the pending Facet close, he said Donaldson does not expect to repurchase additional shares in the remainder of fiscal 2026, and plans to focus on paying down debt. The company guided capital expenditures of $60 million to $75 million and maintained expectations for cash conversion of 85% to 95%.
Donaldson also confirmed a leadership transition: Rich Lewis is slated to become president and CEO effective March 2, with Carpenter moving to executive chairman.
About Donaldson (NYSE:DCI)
Donaldson Company, Inc (NYSE: DCI) is a global provider of filtration systems and replacement parts for a wide range of industries. The company develops and manufactures air, liquid and gas filtration solutions for engine and industrial applications, helping customers improve performance, lower emissions and extend equipment life. Donaldson’s product portfolio includes engine air intake filters, fuel filters, hydraulic filters, compressor filters, dust collection systems and gas turbine air intake systems.
Serving markets such as agriculture, construction, mining, power generation, aerospace and original equipment manufacturing, Donaldson operates through two primary business segments: Engine Products and Industrial Products.
