DCI Q3 Deep Dive: Aftermarket Gains and Industrial Strength Set Stage for Margin Expansion

Filtration equipment manufacturer Donaldson (NYSE:DCI) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 3.9% year on year to $935.4 million. Its non-GAAP profit of $0.94 per share was 1.8% above analysts’ consensus estimates.

Is now the time to buy DCI? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Donaldson’s third quarter results for 2025 were well received by the market, with the company outperforming Wall Street’s expectations for both revenue and non-GAAP earnings. Management highlighted robust growth in key segments, including mobile aftermarket, power generation, and food and beverage, which contributed to the sales and margin expansion. CEO Todd Carpenter credited the company’s “razor-to-sell razor blades model” and ongoing cost optimization initiatives for driving operational leverage. The team also pointed to share gains in the independent channel and strong execution in China as underpinning this quarter’s growth.

Looking ahead, Donaldson’s updated outlook is shaped by expectations for continued margin improvement, supported by structural cost optimization and investments in high-growth segments like life sciences and industrial filtration. Management is focused on completing footprint optimization projects and leveraging demand from data center and AI infrastructure trends. CFO Brad Pogalz stated the company expects “gross margin expansion for the full year, with most of the favorability in the second half as our footprint optimization projects come to completion.” Leadership remains cautious about certain end markets, but believes recent investments will position the company for durable profit growth.

Key Insights from Management’s Remarks

Management attributed third quarter momentum to aftermarket share gains, supportive end markets in construction and power generation, and disciplined cost control, while also noting the impact of ongoing global supply chain adjustments.

• Aftermarket share gains: Donaldson’s mobile aftermarket segment delivered nearly double-digit growth in the independent channel, with new partnerships and enhanced distribution contributing to strong performance. Management noted continued share wins in China and partnerships such as the expanded relationship with Napa.
• Industrial filtration demand: Power generation orders remained strong, benefiting from high electricity demand and investment in data center and AI infrastructure. The company’s order book in this area is full through the rest of the year, with large projects driving growth despite the lumpy nature of this business.
• Life sciences momentum: The life sciences segment, particularly food and beverage filtration, saw over 20% sales growth, supported by market share wins and expanded relationships with original equipment manufacturers (OEMs). Disc drive filtration also posted similar growth, aided by technological upgrades tied to AI and cloud storage needs.
• Cost optimization and footprint changes: The company continued executing on structural cost reduction, including facility consolidations and process improvements. Management expects most cost savings from these initiatives to materialize in the second half of the year, building a foundation for higher future profitability.
• Tariff mitigation and pricing discipline: Leadership discussed ongoing efforts to offset tariff impacts through targeted pricing actions and production shifts. The estimated annualized tariff burden has decreased from $35 million to $25 million, as the company leverages its global footprint and collaborative customer strategies.

Drivers of Future Performance

Donaldson’s outlook for the next quarter and full year centers on margin expansion, disciplined cost management, and growth from targeted end markets like data centers and industrial filtration.

• Footprint optimization benefits: Management expects the majority of structural cost savings from facility consolidation and process improvements to be realized later in the year, which should support higher operating margins and incremental profit leverage.
• End-market exposure: Growth in data center and AI-related infrastructure is projected to drive continued strength in power generation, while the food and beverage and disk drive filtration businesses are expected to benefit from secular demand trends. However, management remains cautious on agricultural and on-road truck markets, anticipating only gradual improvement.
• Pricing normalization and tariff risk: Leadership described the pricing environment as having returned to pre-pandemic norms, with targeted price increases offsetting input and tariff costs. While the company has reduced its tariff exposure, management acknowledges that global supply chain shifts and cost pressures remain ongoing risks.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be monitoring (1) progress on facility consolidation and the realization of structural cost savings, (2) sustained order strength and execution in power generation and data center filtration projects, and (3) continued market share gains in aftermarket and life sciences segments. We will also watch for further reductions in tariff exposure and any signs of recovery in muted end markets like agriculture and on-road trucks.

Donaldson currently trades at $93.73, up from $87.60 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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