Snapshot
DONALDSON Co INC reported $896M of revenue in Q2 2026, up 3.0% year over year, with diluted EPS of $0.78 and an operating margin of 13.2%.
- Revenue
- $896M
- YoY growth
- +3.0%
- Diluted EPS
- $0.78
- Operating margin
- 13.2%
What management said
- •This morning, we will provide a summary of our Q2 performance and our outlook for fiscal 2026.
- •Donaldson Company achieved record sales in the Q2 as we worked hard to meet strong customer demand across all three of our segments.
- •While we face short-term execution challenges in our industrial segment, we saw strength in areas such as independent aftermarket within mobile solutions and food and beverage and Disk Drive within life sciences.
- •We also announced the acquisition of Facet, the largest acquisition in company history, which I will discuss in a few minutes.
- •Before I turn it over to Rich to discuss our Q2 results in more detail, I wanna touch on our recent acquisition of Facet, which we are very excited about.
- •This acquisition complements and expands Donaldson's product portfolio, bringing high-performance fuel and fluid filtration capabilities for mission-critical applications and broadening our exposure to durable end markets, such as Aerospace and Defense and power generation.
- •Importantly, approximately 70% of Facet's revenue are driven by recurring, regulated replacement part sales, a nice fit with our already large composition of replacement parts.
- •Facet makes us stronger, adding nearly $110 million in sales, with gross margins and EBITDA margins significantly above our current company average.
- •At a high level, sales were a record $896 million, 3% above prior year, with growth across all three segments.
- •Operating margin was 14%, down from 15.2% a year ago as a result of gross margin pressure.
- •Volume de-leveraging, concentrated operational inefficiencies related to our production shifts to support higher demand and power generation, and footprint optimization costs negatively impacted gross margin in the quarter.
- •Adjusted earnings per share were $0.83, flat versus the record achieved in 2025.
What went well
- •Q2 sales reached a record $896 million, up 3% year-over-year with growth across all three segments.
- •The company announced the acquisition of Facet, the largest in company history, adding nearly $110 million in sales with gross and EBITDA margins significantly above the company average and approximately 70% recurring regulated replacement-part revenue.
- •Mobile Solutions independent channel grew high single digits and China sales were up 18% for a sixth consecutive quarter of growth, driven by off-road and aftermarket.
- •Life Sciences sales grew 16% to $80 million on robust food and beverage and disk drive growth, with pre-tax margin improving to 9.3% from a loss of about 1% a year ago.
- •IFS sales grew 7% to $223 million from continued power generation strength in North America and Europe, with order books full through the fiscal year and solid bookings already loaded into the next two fiscal years.
- •Operating expenses improved to 19.7% of sales from 20% a year ago, reflecting structural cost optimization benefits and continued expense discipline.
What went wrong
- •Operating margin declined 120 basis points to 14% and gross margin fell 150 basis points to 33.7%, below expectations, driven by volume deleveraging and operational inefficiencies.
- •Power generation production startup in Mexico for large turbine systems caused a roughly 40 basis point gross margin headwind due to a protracted ramp amid surging demand.
- •Footprint optimization created about 30 basis points of gross margin pressure during the final stages of a U.S. plant closure and production transfer.
- •Aerospace and Defense sales fell 19% to $37 million on project timing primarily in defense, and Industrial Solutions pre-tax margin dropped to 11.9% from 16.1%.
- •Adjusted EPS of $0.83 was flat versus the prior-year record, and on-road sales declined 9% on continued global truck production declines.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Total sales growth | FY2026 | 1% to 5% | 1% to 5% (reaffirmed, ~1% pricing, ~1% currency) | reaffirmed |
| Operating margin | FY2026 | 16.2% to 16.8% | 16% to 16.4% (down 30 bps at midpoint), all-time high 16.2% | lowered |
| EPS | FY2026 | $3.95 to $4.11 ($4.03 midpoint) | $3.97 (~8% above prior year) | lowered |
| Free cash flow conversion | FY2026 | 85% to 95% | approximately 90% | reaffirmed |
| Mobile Solutions sales | FY2026 | flat to up 4% | 2% to 6% (raised, primarily favorable currency) | raised |
| Mobile aftermarket sales | FY2026 | low single digits | mid single digits | raised |
| Industrial Solutions sales | FY2026 | 2% to 6% | -1% to +3% (lowered) | lowered |
| IFS sales | FY2026 | mid single digits | low single digits (dust collection and hydraulics declines) | lowered |
| Aerospace and Defense sales | FY2026 | flat | decline mid single digits (program timing) | lowered |
| Life Sciences sales | FY2026 | 1% to 5% | 5% to 9% (raised on currency and momentum) | raised |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Total sales | +3% to record $896M | Currency and pricing benefits partially offset by mobile and industrial volume declines |
| Adjusted EPS | flat at $0.83 | Gross margin pressure from discrete operational issues |
| Operating margin | -120 bps to 14% | Discrete operational issues and volume deleveraging hitting gross margin |
| Gross margin | -150 bps to 33.7% | ~60 bps volume deleveraging, ~40 bps power gen Mexico startup, ~30 bps footprint optimization |
| Mobile Solutions sales | +2% to $557M | Currency benefits; independent channel up high single digits offset by OE declines |
| Mobile Solutions pre-tax margin | -60 bps to 16.8% | Volume deleveraging in aftermarket OE channel and footprint optimization |
| Industrial Solutions sales | +2% to $260M | Currency benefits; IFS up 7% offset by A&D down 19% |
| Industrial Solutions pre-tax margin | -4.2 pts to 11.9% | Operational inefficiencies and footprint optimization costs |
| Aerospace and Defense sales | -19% to $37M | Project timing primarily in defense and supply chain challenges |
| Life Sciences sales | +16% to $80M | Robust food and beverage and disk drive growth |
| Life Sciences pre-tax margin | +~10 pts to 9.3% (from ~-1%) | Higher margin food and beverage and disk drive plus focused expense structure |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Power generation super cycle | Order books full through fiscal year | Booked through fiscal year-end plus solid bookings into next two fiscal years; Mexico ramp causing near-term inefficiency | improving |
| Footprint optimization | Building benefit toward back half FY26 | Four plant closures, two in final phase and two closing in Q3; margin benefit feathers into FY27 | progressing |
| M&A / Facet acquisition | Strong pipeline, appetite for M&A | Announced largest acquisition in company history (~$110M sales, high margin), close expected within a couple quarters | improving |
| Aerospace and Defense | Softer defense after large project completions | Down 19% on timing and supply chain, but post-October backlog up over 20%; significant 2H step-up expected | stable |
| First-fit cyclical markets (ag and truck) | At or near trough | Near bottom of cycle with pockets of ag optimism; truck builds expected to rise in 2H calendar 2026 (FY27) | stable |
| Disk drive / HAMR and liquid cooling | Growing on AI and cloud demand | Continued strength; HAMR ramped with an OE customer; liquid cooling for data centers a new fragmented opportunity | improving |
Q&A summary
Why is A&D guided down for fiscal 2026 and how does it compare to Facet?
A&D is down on lumpy military project timing and ongoing supply chain challenges, though post-October backlog is up over 20% with a significant 2H step-up expected; Facet plays in different parts (military fixed wing, marine) versus Donaldson's ground vehicle exposure.
Will footprint changes continue or abate into Q3 and Q4, and what does it buy you in power gen?
Four plant closures (none touching power gen) are underway; two are in final phase and two will close in Q3 with productivity ramping in Q4, with margin benefit appearing in the FY27 guide.
How did IFS orders trend and is there accelerated weakness in dust collection?
Power gen is very strong and broad-based; dust collection is about where it was in Q2, with weakness concentrated on first-fit new systems while replacement parts continue to perform well.
What are Facet's historical growth rates and the P&L impact for fiscal 2027?
Facet grows high single digits on a mix of volume and pricing, is margin and EBITDA accretive, with only a few million in procurement cost synergies expected and unmodeled revenue synergy upside.
What drove the power generation operating inefficiencies and how will they ramp?
Production was moved into the Monterrey, Mexico facility with capacity ramped through process improvements and a dramatic staffing increase; with hiring largely behind, output and productivity are expected to improve through the fiscal year.
What is the time frame for the Facet acquisition to reach acceptable return on capital?
It is more strategic than a synergy play, with cash-basis returns near the cost of capital in a five-year horizon, immediate cash generation, and GAAP earnings accretion by year two.