DCI Q1 Earnings Call: Margins Improve Despite Slower Sales Growth and Segment Shifts

June 03, 2025 at 14:50 PM EDT

DCI Cover Image

Filtration equipment manufacturer Donaldson (NYSE: DCI) fell short of the market’s revenue expectations in Q1 CY2025 as sales only rose 1.3% year on year to $940.1 million. Its non-GAAP EPS of $0.99 per share was 4.5% above analysts’ consensus estimates.

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

Donaldson (DCI) Q1 CY2025 Highlights:

Revenue: $940.1 million (1.3% year-on-year growth)
Adjusted EPS: $0.99 vs analyst estimates of $0.95 (4.5% beat)
Adjusted Operating Income: $153.1 million vs analyst estimates of $150.1 million (16.3% margin, 2% beat)
Management slightly raised its full-year Adjusted EPS guidance to $3.67 at the midpoint
Adjusted EBITDA Margin: 19.5%
Constant Currency Revenue rose 1.6% year on year (6.8% in the same quarter last year)
Market Capitalization: $8.27 billion

StockStory’s Take

Donaldson’s first quarter results reflected the company’s ongoing focus on recurring aftermarket revenue, disciplined cost management, and strategic investments despite a challenging macro environment. CEO Todd Carpenter highlighted growth in all three business segments, with aftermarket parts supporting resilience amid softness in new equipment demand. The company reported that its mobile solutions aftermarket performed well across both original equipment and independent channels, while first-fit businesses continued to face cyclical headwinds, particularly in developed regions. Carpenter noted that the company’s industrial solutions segment benefited from higher replacement part sales and a strong performance in aerospace and defense, which reached an all-time high. Life sciences also contributed, with legacy businesses in disk drive and food and beverage offsetting slower bioprocessing activity. Management acknowledged that supply chain and manufacturing cost pressures affected gross margins, but reiterated confidence in their ability to manage expenses and invest in targeted growth areas.

Looking ahead, Donaldson’s leadership expects to maintain its emphasis on recurring aftermarket revenue and targeted capital deployment, while navigating ongoing end-market and macroeconomic uncertainties. The company reiterated its strategy of investing in capacity expansion, technology projects, and selective M&A opportunities, particularly within life sciences and industrial markets. CEO Todd Carpenter stated, “Donaldson is playing from a position of strength and I’m confident that we are well positioned to deliver long-term value through strategic investments, strong execution, and disciplined capital deployment.” CFO Brad Pogalz emphasized that cost controls and operational efficiency will remain priorities, especially as the company continues to mitigate the impact of tariffs and supply chain challenges. Management indicated that full-year performance is expected to be supported by continued strength in aftermarket, incremental progress in new product commercialization, and stability in core industrial and aerospace end-markets.

Key Insights from Management’s Remarks

Donaldson’s quarterly performance was shaped by aftermarket demand, expense discipline, and shifts across key business segments, while segment-specific pressures and supply chain dynamics influenced margins and sales trends.

Aftermarket resilience: The mobile solutions segment’s recurring aftermarket business, representing about 75-80% of segment sales, offset headwinds in new equipment and helped stabilize company-wide results. Management cited ongoing market share gains in both OE and independent channels.
Industrial solutions shift: Growth in industrial solutions was driven by higher replacement part sales and expansion in industrial hydraulics and services, compensating for slower new equipment orders due to cautious customer capital spending.
Aerospace and defense strength: Aerospace and defense sales reached record levels, benefiting from robust market demand and long-term project visibility, despite ongoing supply chain disruptions that created some project timing variability.
Life sciences margin improvement: The life sciences segment achieved margin gains primarily from cost optimization initiatives and a reversal of an earn-out reserve related to PureLogix. However, bioprocessing businesses continued to face weak capital spending and delayed drug development timelines, resulting in an intangible asset impairment.
Footprint optimization impact: Manufacturing cost increases, mainly from ongoing plant consolidation and footprint optimization in the U.S. and U.K., weighed on gross margins this quarter. Management expects these projects to support improved long-term profitability once completed.

Drivers of Future Performance

Donaldson’s outlook for the year centers on stable aftermarket demand, continued cost controls, and incremental progress in product development amid uneven end-market dynamics.

Aftermarket and replacement demand: Management expects aftermarket and replacement parts to remain a primary growth driver, with strong vehicle utilization and share gains in both OE and independent channels supporting stability. This foundation is expected to offset cyclical declines in first-fit and new equipment segments, particularly in agriculture and on-road transportation.
Margin management and expenses: Cost optimization and disciplined expense management are projected to support record operating margins, even as footprint optimization and higher manufacturing costs persist in the near-term. Management believes pricing power and supply chain adjustments will help mitigate most effects from tariffs and currency volatility.
Selective growth investments: The company plans to prioritize capital spending on technology upgrades, capacity expansion, and targeted M&A, especially in life sciences and industrial markets. However, leadership cautioned that execution timing may be impacted by ongoing supply chain and macroeconomic uncertainties.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace of aftermarket and replacement part growth as a buffer against end-market volatility, (2) the completion and benefits of footprint optimization projects on margins, and (3) the rollout and adoption of new products in life sciences and industrial solutions. Execution on targeted M&A and supply chain resilience will also be closely monitored.

Donaldson currently trades at a forward EV-to-EBITDA ratio of 46.5×. In the wake of earnings, is it a buy or sell? The answer lies in our full research report (it’s free).

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