DCI Q2 Deep Dive: Diversified Filtration Demand and Margin Expansion Fuel Outlook

Filtration equipment manufacturer Donaldson (NYSE:DCI) announced better-than-expected revenue in Q2 CY2025, with sales up 4.8% year on year to $980.7 million. Its non-GAAP profit of $1.03 per share was 1.3% above analysts’ consensus estimates.

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StockStory’s Take

Donaldson’s results for Q2 reflected positive momentum, driven by broad-based demand across its filtration solutions portfolio. Management pointed to volume growth, effective pricing, and new customer wins in both mobile and industrial segments as major factors behind the quarter’s performance. CEO Todd Carpenter cited ongoing strength in aftermarket sales, particularly within the independent channel, and highlighted partnerships such as the new agreement with Mighty Distributing System of America as contributors to share gains. The company also noted significant progress in industrial dust collection and power generation applications, benefiting from what Carpenter described as a “power gen super cycle.” In life sciences, double-digit growth in food and beverage offset continued bioprocessing delays, and operational discipline helped mitigate macroeconomic and inflationary pressures.

Looking ahead, Donaldson’s forward guidance is anchored in expectations for continued segment growth and a focus on margin improvement. Management emphasized the scaling of connected solutions in industrial filtration, with plans to increase the number of connected machines by over 30% in the coming year, deepening customer relationships and expanding high-margin aftermarket opportunities. CFO Brad Pogalz stated, “Our expected performance represents an incremental margin of approximately 40%,” reflecting ongoing structural cost optimization and disciplined investment in R&D. Management cautioned that while new product introductions in bioprocessing are progressing, substantial revenue contributions from this segment may not materialize until later in the next year or beyond.

Key Insights from Management’s Remarks

Management attributed Q2’s performance to robust aftermarket growth, share gains in mobile and industrial solutions, and disciplined cost management, while highlighting pockets of end-market weakness and delayed bioprocessing ramp-up.

• Aftermarket demand in mobile solutions: Donaldson’s aftermarket business, particularly in the independent channel, continued to gain share, supported by expanded distribution partnerships such as the new agreement with Mighty Distributing System of America. Management cited strong vehicle utilization rates, especially in North America, as a driver for replacement part sales.
• Industrial solutions strength: The industrial filtration segment posted double-digit sales growth, led by dust collection and power generation projects in Europe and North America. The company’s “create, connect, replace, service” model was credited for driving both new equipment sales and higher-margin aftermarket revenue, with nearly half of industrial sales now aftermarket-derived.
• Connected solutions scaling: Donaldson expanded the deployment of connected filtration equipment, aiming for a 30% increase in connected machines next year. Management explained that while these solutions do not follow a subscription model, they deepen customer relationships and drive higher replacement parts and services revenue.
• Life sciences segment mixed: Food and beverage filtration continued to grow at a double-digit pace, but bioprocessing sales remained muted due to delayed large-scale project activity. New products in downstream applications, such as the Purexa membrane chromatography line, are not expected to provide significant revenue lift until later next year.
• Margin discipline amid cost pressures: Despite tariff-related inflation affecting LIFO inventory accounting, Donaldson maintained operating margin performance through pricing discipline, supply chain optimization, and footprint rationalization. Management reiterated plans to remain profit-neutral on ongoing tariff exposure by leveraging regional production and pricing power.

Drivers of Future Performance

Management expects incremental margin gains and steady revenue growth, supported by diversified end-market exposure, aftermarket expansion, and structural cost actions.

• Aftermarket and distribution expansion: Donaldson’s strategy to grow its aftermarket business—particularly in mobile solutions and industrial filtration—relies on ongoing share gains through expanded distribution and new partnerships. Management expects the independent channel and service revenue to outpace core first-fit equipment sales as vehicle utilization remains healthy.
• Growth in connected and value-added solutions: The company is investing in connected filtration technologies and new high-margin products across all segments, aiming to deepen customer relationships and boost replacement part sales. In industrial filtration, management anticipates the rollout of connected solutions to accelerate aftermarket revenue and improve profitability.
• Cost optimization and margin resilience: Structural initiatives such as footprint optimization, expense discipline, and price management are expected to drive incremental operating margin improvement, even in the face of LIFO-related headwinds and tariffs. Management also sees flexibility for further capital deployment through disciplined M&A and ongoing share repurchases.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will watch closely for (1) the pace of adoption and monetization of connected filtration solutions across industrial and mobile segments, (2) sustained aftermarket share gains through expanded distribution, and (3) the progression of new product launches in bioprocessing and other life sciences applications. Execution on cost optimization and discipline in capital deployment will remain key indicators of Donaldson’s ability to deliver its margin targets.

Donaldson currently trades at $81.88, up from $75.69 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free).

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