Donaldson Highlights Margin Reset, FY26 Targets and Facet Deal at Oppenheimer Conference

Key Points

• FY26 targets: Donaldson reiterated guidance calling for sales growth of 1%–5%, an adjusted operating margin of 16%–16.4% (a company record if achieved), roughly 8% adjusted EPS growth, and noted $465 million returned to shareholders in fiscal 2025.
• Q2 margin reset: Adjusted operating margin fell to 14% (from 15.5% in Q1) as gross margin contracted about 150 bps due to volume de‑leverage, a delayed Mexico start‑up for turbine filtration, and footprint optimization/plant closures; management says this is temporary and expects a H2 recovery from gross‑margin improvement and expense leverage.
• Facet acquisition: The pending purchase of Facet adds roughly $108 million in annual filtration sales with an EBITDA margin near 40% and ~70% recurring consumables, centered on commercial aviation and military markets, offering procurement synergies and complementary liquid filtration exposure for power generation.

Donaldson NYSE: DCI executives detailed the company’s growth priorities, recent margin dynamics, and a pending acquisition during a presentation at the 21st Annual Oppenheimer industrial growth conference.

Chief Financial Officer Brad Pogalz, joined by Head of Investor Relations Sarika Dhadwal, framed Donaldson as an “advanced filtration” company with deep OEM and aftermarket relationships across a diversified set of end markets. Pogalz noted the company’s fiscal year ends July 31 and said comments reflected the company’s second-quarter earnings update from late February, with Donaldson having recently closed its fiscal third quarter.

Business mix and filtration strategy

Pogalz said Donaldson’s approach starts with core filtration capabilities and extends them across applications, describing how technology developed in one area can be leveraged in others. He emphasized the company has “very limited exposure to markets that are lower tech,” citing that Donaldson does not sell engine air filters for passenger cars.

He also highlighted company scale and innovation, including approximately 14,000 employees and “3,000 active patents,” and said R&D efforts focus on “white space and gray space” opportunities in filtration materials and next-generation solutions.

Donaldson reports three segments, Pogalz said:

• Mobile Solutions (62%): filtration for heavy-duty applications, including air, fuel, lube, and hydraulics.
• Industrial Solutions: a wide range of markets including factories, power generation, and aerospace and defense.
• Life Sciences (8%): a mix of longer-established businesses and newer bio-related efforts, including acquisitions, two of which were pre-revenue.

Guidance targets and operating margin drivers

Pogalz pointed to the company’s fiscal 2026 guidance (as previously provided), calling out targets that include sales growth of 1% to 5% and adjusted operating margin of 16% to 16.4%, which he said would be a record for the company if achieved. He also cited adjusted EPS growth expectations of about 8% and referenced $465 million in return to shareholders in fiscal 2025.

A major portion of the discussion focused on fiscal second-quarter operating margin performance. Pogalz said operating margin dipped to 14% in the second quarter (from 15.5% in the first quarter and 15.7% in fiscal 2025), below expectations, prompting a “modest guide pull down” for the full-year operating margin. He attributed the decline to gross margin, saying year-over-year gross margin was down about 150 basis points.

Pogalz described multiple factors behind the second-quarter gross margin pressure, including “volume de-leveraging” tied to order timing in a quarter that includes holidays and many customers’ calendar year-end. He also cited two industrial-related issues:

• Power generation: Donaldson moved production for certain large turbine filtration systems to a facility in Mexico to meet customer supply requirements, but the startup “had just taken longer than expected,” creating margin pressure.
• Footprint optimization: the company is nearing the end of a plant-closure initiative, with four facilities expected to be closed by the end of the fiscal year (three already closed). Pogalz said overlapping productivity impacts from ramping down closing sites and ramping up new locations were “stacking in the middle of this fiscal year.”

Dhadwal later quantified the gross margin compression components, saying about 60 basis points were due to volume deleverage. She added that power generation accounted for about 40% of the deleverage and footprint actions about 30%, noting there were also mix headwinds.

Looking ahead, Pogalz reiterated management’s view that the second-quarter results represented “more of a temporary step back,” and said the company expects a step-up in the second half of fiscal 2026. He attributed the implied improvement to a combination of gross margin improvement and expense leverage, noting ongoing headcount discipline and a typical seasonal pattern in which roughly 52% of annual revenue lands in the second half.

Tariffs and manufacturing footprint

Pogalz said Donaldson’s tariff exposure is relatively limited, describing tariffs as “less than 1% of sales,” or roughly a $25 million headwind that the company would expect to offset through pricing. He attributed the insulation to a diversified manufacturing footprint, stating that about 75% of what Donaldson makes in a region stays in that region.

In response to a question about recent tariff developments, Pogalz said the “new 232” actions in early April had a specific impact on a small portion of the portfolio tied to metal content. He added that subsequent changes “wash away” potential benefits from other tariff mechanisms and said the company was watching for further developments and potential refunds.

CEO transition and operational priorities

Asked about the CEO transition, Pogalz said Rich Lewis became CEO at the beginning of March and has been with Donaldson for more than 20 years, with experience spanning manufacturing, global operations, and leadership roles in Mobile Solutions and Life Sciences. Pogalz characterized the transition as a continuation of strategy rather than a major shift, noting Lewis was part of senior leadership as the company’s strategy was developed.

Pogalz said prior CEO Tod’s tenure included a push beyond “traditional filter media” into “more membrane and polymer-based filtration,” which he positioned as an enabler for higher-purity and more advanced industrial applications. He also said Lewis is focused on expanding customer intimacy in Industrial Solutions to drive aftermarket growth, noting industrial aftermarket rose from roughly one-third of segment revenue several years ago to about 50% today.

Dhadwal added that the company is emphasizing “heightened operational rigor,” which she said is intended to support additional leverage and margin expansion.

Facet acquisition and Life Sciences update

Pogalz highlighted Donaldson’s pending acquisition of Facet, announced in early February and not yet closed at the time of the conference. He described Facet as having about $108 million in annual filtration sales, an EBITDA margin “approaching 40%,” and a consumables-heavy mix, with roughly 70% recurring. He said end-market exposure includes commercial aviation (48%) and military/defense (26%), with additional industrial applications including power generation.

According to Pogalz, Facet’s differentiation stems from highly regulated, mission-critical fuel filtration applications, and its role supporting “refinery to the wing” fuel quality workflows. He said Facet has one of two labs in the world for testing performance against certain regulatory standards, which he described as contributing to stickier customer relationships. Pogalz said expected synergies include procurement, and he also pointed to potential commercial adjacency, using power generation as an example where Donaldson supplies air filtration systems while Facet is focused on liquids-related filtration around turbine environments.

On Life Sciences and bioprocessing, Pogalz said Donaldson entered bio-related areas through acquisitions in the early 2020s, buying four companies—two upstream (bioreactors for cell culture development) and two downstream, pre-revenue businesses focused on purification and separation technologies. He acknowledged the timeline has not met original expectations, citing reduced funding for the relevant spaces after the post-COVID period. Pogalz said the approach is now milestone-based and added that the company is “much less inclined” to pursue additional pre-revenue technology acquisitions, favoring “more robust businesses” with clearer routes to commercialization.

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.

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