Transcript: Donaldson Q3 2026 Earnings Conference Call

Donaldson (NYSE:DCI) reported third-quarter financial results on Tuesday. The transcript from the company's third-quarter earnings call has been provided below. This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/. View the webcast at https://events.q4inc.com/attendee/539545782 Summary Donaldson Company, Inc. reported its strongest quarterly performance to date with record sales of $995 million, a 6% increase from the previous year, driven by currency translation, net pricing benefits, and volume growth. The company successfully closed its acquisition of Facet Filtration, which is expected to enhance its Industrial Solutions portfolio and contribute to future revenue growth, particularly in aerospace and power generation markets. Despite macroeconomic uncertainties and operational challenges, Donaldson delivered robust financial results, with an adjusted EPS of $1.06 and an operating margin of 16.6%, marking a significant improvement from the previous quarter. Mobile solutions saw an 8% sales increase, driven by strong volume growth and aftermarket sales, while industrial solutions faced a slight decline due to volume drops, offset by pricing and currency benefits. The company revised its fiscal 2026 guidance, now expecting consolidated organic sales growth between 3% and 5%, with a notable focus on operational improvements and margin expansion in upcoming quarters. Full Transcript OPERATOR After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, press Star one again. I will now hand the conference over to Sarika Dodwal, Head of Investor Relations. Please go ahead. Sarika Dodwal (Head of Investor Relations) Good morning. Thank you for joining Donaldson's third quarter fiscal 2026 earnings conference call. With me today are Rich Lewis, President and CEO and Brad Pogalz, Chief Financial Officer. This morning we will provide a summary of our third quarter performance and our outlook for fiscal 2026. During today's call we will discuss non-GAAP or adjusted results for third quarter 2026. Non GAAP results exclude pre tax charges of 9.8 million including 9 million of restructuring and other and 800,000 of business development charges. This compares to prior year pre tax charges of 65.8 million including 4.2 million of restructuring and other 800,000 of business development charges, 62 million for the impairment of intangible assets and a $1.2 million gain on the sale of fixed assets. A reconciliation of GAAP to non-GAAP metrics is provided within the schedules attached to this morning's press release. Before I turn it over to Rich, a quick note on our recently completed acquisition of Facet Filtration. Facet performance will be included in our consolidated fourth quarter earnings results reported in the Aerospace and Defense Business unit within Industrial Solutions. With that, please keep in mind that any forward looking statements made during this call are subject to risks and uncertainties which are described in our press release and SEC filings. I will now turn the call over to Rich. Rich Lewis (President and CEO) Thanks Sarika and Good morning everyone. Third quarter was a strong quarter for Donaldson Company And as expected marked a significant step up in performance from our second quarter results. I am proud of our team whose hard work resulted in the company's strongest quarter to date with respect to sales, adjusted operating margin and adjusted eps. We successfully navigated macro uncertainty including uneven cyclical dynamics and the ongoing conflict in the Middle East. To that end, I specifically want to thank our team in Abu Dhabi whose dedication and resolve have been on display over the last several months. Our leaders have ensured employees feel as safe as possible and that our local operations continue globally this quarter we continue to serve our customers through our expanded product portfolio and high on time delivery rates including in the higher margin Mobile solutions, aftermarket business, food and beverage and our disk drive business.. We made further progress on optimizing our cost structure as we closed the last two plants identified within our Footprint optimization initiative. We are now focused on ramping up production in the receiving sites which puts us on the path to delivering incremental efficiencies in the future. Lastly, subsequent to quarter end we closed our acquisition of Facet Filtration, adding high performance, fuel and fluid capabilities to our expanding Industrial solutions product portfolio. Facet increases our exposure to durable growing end markets including aerospace and power generation and strengthens our aftermarket position with approximately 70% of revenues driven by recurring regulated replacement part sales with highly accretive margins. We welcome the Facet team to the Donaldson and integration integration efforts are underway as demonstrated this quarter. Donaldson is committed to delivering for all our stakeholders including our customers, shareholders and employees. We continually do this through our leadership position infiltration which was built on decades of solving our customers most difficult filtration problems our best in class technology uniquely powerful because we focus on filtration capabilities and then leverage these technologies across multiple end markets our ability to help customers meet evolving environmental and operational goals by helping to protect equipment, processes and people and our clear strategic and balanced growth strategy. This is how we have and continue to win. Now I will cover some third quarter highlights, Brad will discuss the quarterly financials and full year guidance in more detail and then I will return for some closing remarks. At a high level, sales were a record 995 million 6% above prior year driven by currency translation, net pricing benefits and volume growth. Operating margin was 16.6% up 30 basis points over prior year and an increase of 260 basis points from second quarter expense. Leverage on higher sales was partially offset by gross margin pressure from production shifts to support customer specific requirements and power generation. Within Industrial Solutions, adjusted earnings per share were 1 $1.06 7% above 2025. Now I'll cover some highlights by segment. In mobile solutions sales were 630 million up 8% inclusive of strong volume growth. Aftermarket sales were 498 million up 8% with growth in all regions and in both channels. We grew double digits in our independent channel where our product availability, revenue, reliability, and consistency continue to drive share gains. This quarter we had a large competitive win with a major North America fleet operator supplying a mix of air, lube and fuel products. These types of programs allow us to strengthen our future dealer relationships and create meaningful future pull through opportunities for incremental sales. On the first fit side off road sales were were 104 million, an increase of 9% versus prior year led by strength in construction on Road. Sales of 28 million increased 5% as truck production began to ramp particularly in EMEA Touching on China within mobile sales were up 6% due to strength and off road performance in China has been encouraging and the growing export market is supporting demand for our technology led solutions. In industrial solutions sales were 282 million down 1% driven by volume declines partially offset by net pricing and currency benefits. IFS sales of 237 million grew 2% from net pricing and power generation volume growth primarily in EMEA where sales of new equipment more than doubled as we continue to benefit from the super cycle. Partially offsetting this favorability were volume declines and new equipment sales for industrial gases and dust collection. Importantly, we are encouraged by the positive macro indicators we are seeing for our capex based businesses including strengthening industrial production and capital expenditures in certain regions including North America and apac. This more supportive backdrop combined with our new product introductions gives us confidence in our ability to win in these markets. Last month we launched our Stratos Mist collector as part of our dust collection product portfolio. With modern machining operations, elevated levels of smaller mist particles and contaminants need to be captured. We are solving this customer problem through Stratos reliable continuous duty filtration which comes in a space efficient footprint and supports multiple industries. Early indications are positive including strong customer interest and quoting activity. Switching over to aerospace and defense sales were 45 million, down 14% versus 2025 due to weaker new equipment. Sales volumes were pressured by ongoing supply chain constraints and project timing. In life sciences, sales of 84 million increased 13% largely as a result of robust new equipment volume in food and beverage and ongoing strength in disk drive. Momentum continues in our food and beverage business where sales grew over 30% supported by new equipment sales and with a growing installed base driving consumables demand. We are excited about the customer and channel partner reception to our new technology led offerings and continue to build out our portfolio. In March we expanded our LifeTech product line by introducing our most advanced high loading performance filter largely for use in bottled water filtration applications. This product is built with Donaldson Membrane manufactured in our own Material Research center and is designed to improve efficiency and filter life driving lower total cost of ownership and value to our customers. In summary, I am pleased with our third quarter results. We exited the quarter with robust order volumes, elevated backlogs and focused execution giving us confidence in delivering on our record organic guidance ranges inclusive of record sales of over 3.8 billion or a 4% increase over prior year driven by growth in several key high margin businesses. Operating margin expansion versus 2025 earnings per share roughly 8% above prior year and free cash flow conversion of approximately 90%. Important as we remain committed to returning value to our shareholders. With that, I will now turn it over to Brad, who will provide more details on the financials and our outlook for fiscal 2026. Brad Pogalz Brad thanks Rich Good morning everyone. The topic we had been discussing with many of you since our last report was our plan to drive a strong sequential improvement in operating margin and we're pleased to say on that point we delivered. While the operational work is not yet done in our industrial segment, our mobile and life sciences segments performed very well, all complemented by sharp prioritization of initiatives across the company. I want to thank my global colleagues for their diligence and commitment as we propelled the company to new records for sales, operating margin and eps. As I detail third quarter results, note that my profit comments exclude the impact from the non recurring charges Sarika Dodwal referenced earlier. Total sales increased 6% and adjusted EPS of $1.06 grew 7% over the prior year. Third quarter operating margin of 16.6% was up 30 basis points from the prior year and at an all time high versus second quarter operating margin increased 260 basis points due to both gross margin improvement and and expense leverage. Breaking down the components of the year over year operating margin expansion. Expense leverage remains a consistent strength at Donaldson Co. Third quarter operating expense as a rate of sales was 17.8%, an improvement of 40 basis points from the prior year, showcasing the structural expense discipline that affords us the latitude to make investment choices while driving margin expansion. Third quarter gross margin was 34.4%, down 10 basis points from 2025 as benefits from pricing volume and mix were more than offset by about 100 basis points of headwinds from short term operating inefficiencies in our industrial segment. More specifically, we realized about 80 basis points of pressure from from the production shifts to Mexico for large turbine systems. In our power generation business; we're seeing improved delivery performance and operational alignment, so we view third quarter as the low point and expect to be fully recovered midway through fiscal 2027. footprint optimization initiatives added a little under 20 basis points of pressure due to costs associated with plant closures and transfers of production. These initiatives were designed to improve our cost structure and the last two plant closures were completed during the quarter. The work is now transitioned to ramping up productivity in the new locations. We expect these industrial based initiatives to generate annualized benefits of about $10 million once we hit run rate productivity during fiscal 2027. I want to take a moment to recognize the teams that have been working on these projects. It has been an incredible effort and we're in the final stages due entirely to their commitment, collaboration and resilience. The work being done strengthens Donaldson's foundation for long term success, so I want to especially thank everyone involved in this massive undertaking. In terms of Profitability by segment, the gross margin impacts from power generation and footprint optimization drove pressure on the pre tax margin in our industrial segment which was 13.4% in the quarter versus 18.1% in the prior year. The margin was lower than we anticipated but did step up from the second quarter. We expect that trend to continue in the fourth quarter driven by higher sales and improved operational performance in our other two segments. We were pleased with the profit performance. Mobile solutions margin was an all time high of 20.2% 210 basis points above prior year primarily due to volume, leverage and favorable mix related to aftermarket sales strength. Life sciences pre tax margin was 8.1% up 30 basis points from the prior year. Importantly, last year's profitability benefited from an earn out reversal from the purologics business. Excluding this prior year, one time benefit pre tax margin would have increased more than 8 percentage points. Volume, leverage and favorable mix from our higher margin food and beverage and distrib businesses combined with a focused expense structure drove the improvement. As of the end of the quarter, the company remains in a strong position with robust orders record backlog and notable progress made on the footprint projects. All of that factored into our revised outlook for fiscal 26 which contemplates another sequential step up in sales and margin and we will also have Facet included in our results for the first time. Given the newness of facet, I want to break out our guidance in terms of organic performance and then lay out the impact Facet will have on some key measures. With that our consolidated organic sales are expected to grow between 3% and 5% with the midpoint being about 1% higher than prior guidance due to sales strength in our mobile solutions and life sciences segments. Additionally, pricing and currency translation are each expected to contribute a little more than 1% to growth in mobile solutions. Sales are expected to grow between 3.5% and and 5.5% slightly above our prior guidance driven by an improved but still mid single digit increase outlook in aftermarket sales as a result of share gains and higher vehicle utilization rates in our first fit businesses. Off road sales are projected to grow mid single digits from improvements in select end markets and on road sales are expected to decrease low single digits versus flat previously as global truck production remains tempered in industrial solutions, organic sales are forecast to be between flat and up 2% with the midpoint of this range consistent with the prior guide ifs. Sales are expected to grow in the low single digits driven by robust volume growth in power generation and favorable currency and pricing in dust collection, aerospace and defense sales are projected to decline mid single digits due to the timing of certain programs as we continue to navigate supply chain issues. In life sciences, we project sales to increase between 9% and 11%, up from 5% to 9% previously, reflecting continued volume strength in food and beverage and disk drive. With our focused expense structure, we expect full year pretax margin in the mid to high single digits driven by our year to date performance and reflective of another margin step up in the fourth quarter. Our organic operating margin guidance is now forecast between 15.8% and 16.2% versus 16 to 16.4% previously. The current range implies full year organic operating margin expansion between 10 and 50 basis points, with expense leverage being partially offset by gross margin pressure. It's worth reiterating that our fiscal 2026 margin performance will be at a record level despite dealing with temporary operational inefficiencies which we advanced meaningfully in the quarter and have a clear path to eliminating with the strength of our underlying business. I I am confident we will get past these headwinds and generate more meaningful margin expansion in future periods. Now I'll give a few points on facets impact to what I just laid out. We expect fourth quarter sales between 25 and $30 million, adding around 70 to 80 basis points to the full year growth rate. The impact on operating margin is likely immaterial this year, but as robust business performance is offset by amortization costs, debt incurred from the transaction will add about $9 million of interest expense in the quarter with the net dilution to eps of about $0.03 excluding facet adjusted EPS is projected between $3.94 and $4.01 per share with the midpoint reflecting an 8% increase from the prior year, about double the rate of our sales growth. Now onto our balance sheet and cash flow outlook, our capital expenditures are expected to be between $60 million and $75 million with focused investments including new products and technologies across all segments. Rich highlighted several new product introductions earlier and we intend to continue leading in the area. We project cash conversion in the range of 85 to 95%, an improvement versus 2025 and consistent with historical averages. Our balance sheet remains a strength including facet. Our Leverage ratio is approximately 1.8 times net debt to EBITDA, still leaving us ample financial flexibility to thoughtfully invest for future growth. Integral to the Donaldson story is our capital allocation strategy, how we build for our future and simultaneously return value today. Our priorities in that regard are unchanged. First, reinvest back into the company. We're committed to maintaining our position as the leader in technology led filtration. We do this through our R and D investments in strategically important high growth high margin areas where we have a clear path to win. We're proud to have a portfolio of patent protected products and have nearly 3,000 active US and international patents with over 120 patents awarded in calendar year 2025. In addition to R and D, we think critically about our investments in working capital and capital expenditure investing for efficiency today and and growth for tomorrow by ensuring we meet our customers needs. Our second capital deployment priority is disciplined M and A. We will continue to pursue opportunities that strengthen our portfolio and meet our strategic and financial criteria with Facet being an excellent example. The financial strength of Donaldson is evidenced by our ability to invest for profitable growth and still return cash to shareholders. With that, our third capital allocation priority is dividends. As of the end of calendar 2025 we have paid dividends for 70 years in a row. We've also increased our dividend for 30 years in a row and recently announced an additional 7% dividend increase. We're committed to remaining as a proud member of the S and P High High yield dividend. Aristocrat Index Share repurchase is our fourth capital deployment priority. Share repurchase is our variable lever and as we indicated last quarter, we have paused our repurchasing activity to focus on paying down our Facet related debt. Year to date we have repurchased 1.2% of shares outstanding, offsetting stock compensation dilution. As Sarika Dodwal mentioned, beginning in the fourth quarter our reporting will include Facet and I'm excited to fold their financial strength into our results. We're working towards a strong finish to fiscal 2026 and I'm confident our strategy, deployed by the talented Donaldson teams around the world, will deliver. Now I'll turn the call back to Rich. Rich Lewis (President and CEO) Thanks Brad. While I've been a Donaldson employee for over two decades, my first 90 days as CEO have been remarkable. I've had the chance to meet with countless employees, customers and investors around the globe and I am increasingly proud of the work we have collectively done to fulfill our mission of advancing filtration for a cleaner world. Our deep technical expertise, strong culture, track record and financial position have allowed us to operate from a position of strength and I take great pride and responsibility in building upon that success. For more than a decade, our strategic investments have driven the growth and diversification of our high performing company and there is ample opportunity for us to further enhance our performance. We are continuing to invest in attractive markets where we have a clear path to win, while also critically evaluating our existing portfolio of businesses, ensuring each business has earned a place in our portfolio. With this rigor, our foundation becomes stronger, positioning us to deliver value for all of our stakeholders. I am excited about the journey that lies ahead and humbled by the opportunity to lead such a talented organization through this next phase of our evolution. I look forward to reporting on our progress. With that, I now turn the call back to the operator to open the line for questions. OPERATOR We will now begin the question and answer session. If you would like to ask a question, please press Star one To raise your hand. To withdraw your question, press Star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from Brian Blair with Oppenheimer. Please go ahead. Brian Blair (Equity Analyst) Morning everyone. Morning Brian. I was hoping to level set a bit on footprint optimization, power gen ramp up and the impact on industrial margins. I realized that most of the pieces are now in place and sounds like your team is confident in driving better operating leverage going forward, but there's still quite a number of moving parts at hand. Is the right way to think about this that by the midpoint of fiscal 27 you're back, all else equal to 18% -ish margin at a prior run rate and then we're layering on the 10 million in cost savings? Or is that unfair or overly aggressive based on mix outlook or any other consideration? Brad Pogalz Yeah Brian, I would say if you just take footprint and the power gen situation and factor those in, I think that's a fair assessment. That would put us clearly back to prior high water marks for the industrial business and then I think as you look forward from there we'll have the rolled in savings that we had mentioned. Of course if there's other major mix changes that could have an impact, we'll have to explain those and talk about those as those arise at this point. I would not foresee anything meaningful at this point, but you know, we'll continue to monitor the situation and keep you informed. Brian Blair (Equity Analyst) Okay, understood. And he's obviously owned Sassa for about a month now. So obviously early stage. Maybe offer a little color on the initial steps of integration. Remind us of the cost synergies contemplated in your deal model. I believe that's all procurement. And then most importantly, elaborate on commercial synergy potential. If I recall the phrase correctly, the journey of refinery to the wing. That has a nice ring to it. Rich Lewis (President and CEO) Yeah. So as you mentioned, we just closed Facet and I would just tell you if you just go back to the sort of the rationale for the acquisition, you know, it's a great end market with a lot of natural tailwind, higher margins, So think double our margin profile, higher growth rates. We continue to be encouraged by what we've seen. We did our first deep business review with the team post close and the outlook for the business over the next 12 months, even in spite of the situation in the Middle East is still strong. We're very encouraged by what we're seeing with Facet from a cost synergy. You're right, it's all on the procurement side. It was in the neighborhood of around 4 to 5 million dollars. Brad can clarify the exact amount. And then on the revenue synergy side, we didn't build any revenue synergies into our justification, but we do believe that there are some. So for example, they'll sell a fuel system into a particular marine application. It also requires air filtration. So they have relationship with customers that we do not. And we have relationship with customers that they do not. So over time we believe we'll be able to leverage additional growth synergies. It's not determined at this point how large those will be, but we're encouraged by what we've seen so far. Brad Pogalz Nothing to add for me. Brian Rich has the cost right and I think it's just it's been a good month of getting to know the team and starting to work the plans together. Brian Blair (Equity Analyst) Understood. Appreciate the color. Thanks again. OPERATOR Your next question comes from Angel Castillo with Morgan Stanley. Please go ahead. Oliver Hey, good morning guys. This is Oliver on for angel this morning. Just a quick question on on your operating margin guide. I mean that seems to imply a pretty substantial step up in fourth quarter in industrial solutions. Can you just help us bridge some of the key drivers there? Is it mostly mix or operating leverage or something else there? Thanks. Brad Pogalz Hi, Oliver. Yeah, I mean you've got it right. We're definitely implying the step up in Q4 and as I commented in my remarks, we expected more of a step up in Q3, but we feel good about the endpoint where we've worked through some things. And as I noted on Footprint specifically, two plants were closed and now it's about that final phase of transitioning and getting productivity in the new homes. So the step up there is really about improved operational performance. Volumes are contemplated up from here, and then on top of it, some of the more meaningful headwinds are behind us in terms of overall profit. Oliver Okay, great, that's helpful. And then just a question on AMD, I mean, you know, year to date, it seems like we're down kind of in the mid teens organically. Can you just give us a sense of the orders in the backlog? If you can still ship those, you know, this year with the supply chain constraints or, you know, potentially does this become a tailwind in 202027? If we all ship those orders, then Brad Pogalz yeah. Oliver, if you think about. OPERATOR Please hold for technical delay. Brad Pogalz All right, Oliver, I think we're back. We lost connection. Oliver Yeah, I can hear you. Brad Pogalz Yeah, so A and D, we exited Q3 with near record backlogs and it's been increasing steadily throughout the year. So there is an element of, Hey, we only have three months left. How much will we be able to get out? And as you mentioned, there are some recurring supply chain issues that we're working through. We do expect that you'll see continued improvement in the next few quarters. But yeah, as a tailwind into F27, that's probably a good way to think about it. Oliver Perfect. Thanks guys. OPERATOR Your next question comes from Adam Farley with Stifel. Please go ahead. Adam Farley (Equity Analyst) Good morning, everyone. Good morning. And then we first saw in the mobile aftermarket strength, just a little more color on, you know,, how the original equipment (OE) channel progressed following last quarter's expected balance sheet management. And then, you know,, what's, what's driving the double digit strength on the independent side. Rich Lewis (President and CEO) So Adam, you know, if you think about. Let's just talk about the OE side. You know, we came out of Q2 and the OEs were aggressively managing their balance sheet, as you mentioned, the expectation was we would see a reversal of that. I think clearly that came through. I would call it a. Probably a destocking in Q2 and a little bit of restocking in Q3, and we'll have straight pull through demand in Q4, albeit at a very high level. Just in general, utilization rates are really strong right now globally. And we see that very broad based. It's not just one region, it's across the entire world through both Channels. On our independent aftermarket side, we mentioned that we had picked up a nice new business award that'll start shipping here in Q4 and will be a nice tailwind into next year. So overall a mix of volume, pricing and we feel really encouraged by what we're seeing out in the market right now. Adam Farley (Equity Analyst) That's really helpful. Maybe staying on the mobile business. On the first-fit side, how do you characterize the end markets? Maybe on a relative basis. I know you pulled out construction, but maybe what are you seeing or expecting on some of the other end markets in first Fit? Rich Lewis (President and CEO) So let's start on the sort of the positive side. So construction, as you mentioned, mining, they continue to run sort of, I'd call them mid cycle levels, good order patterns. On the AG and trucking side, we continue to be at trough levels or near those levels. We have seen pockets of improvement in certain areas of ag. So think small AG and turf, but those are more niche applications. I'd say broad based AG remains constrained. On the trucking side, we're seeing elevated order patterns especially in North America in the second half as we enter the new EPA regulations in 2027. But overall demand on both of those markets for the first fit remains muted. And as we spoke a minute ago, most of our revenue over 75% recurring revenue on the replacement side. And we can see those demand and backlog still remaining pretty strong. Adam Farley (Equity Analyst) Okay, thank you for taking my questions. OPERATOR Your next question comes from Brian Drab with William Blair. Please go ahead. Brian Drab (Equity Analyst) Hi. Thanks for taking my questions. I just wonder if you could talk a little bit more about the aerospace and defense business in the last quarter. I think the main issue you highlighted was project timing. Now I think it sounds like project timing and supply chain. Could you just elaborate on what's happening in the supply chain and is that your supply chain? Are you seeing disruptions in customer supply chain, this dampening demand and, and kind of give us some visibility there to when that gets resolved. Rich Lewis (President and CEO) Sure. Yeah. Thanks Brian. Good morning. And yeah, maybe just start big picture where we're hearing from our customers, it does sound like from our customers that they have a number of supply chain challenges. Very rarely are our supply chain challenges the ones that are keeping them from building product. If you look at our specific situation, it's probably twofold. So let us talk about the lumpy project timing, we talked about. We've seen a lot of strengthening coming out of the first half in our aerospace and defense backlogs. So that's those project timing,, those new orders coming in that we expected. So that has strengthened significantly. Really comes down to our ability to ship those. It's primarily on the system side. So if you think about it, these are large engineered, highly complex systems that we're selling to our customers and in many cases we're waiting on one part or one material to ship those. So there is a handful of challenges that we're working through. Based on our timelines, we would expect the vast majority of these to be recovered through Q1 of next fiscal into calendar year at the latest. Probably the only one internally would be. We did close that plant in California in last quarter and we're working on the ramp up at the new site. Like our supplier challenges that will also continue into the early part of next fiscal. But overall we'll carry a strong tailwind into next year and we would expect most of these issues to get resolved through a series of actions. Brian Drab (Equity Analyst) Okay, thank you. And then this is one more on the outlook. The three 3 to 5% revenue growth. What is the breakdown there between in your mind, between price and volume and you know, how much is price contributing and is this, you know, are you having to adjust based on tariffs and steel prices, etc. Brad Pogalz Hey, Brian, the price is relatively consistent with where we've been so far this year. Probably a little more than 1%. I will point out though, if you remember one year ago, we were starting to lap the real hit from tariffs. We were paying those costs. So year over year it looks a little bit different to your question about what we're getting right now. You know, of course, I think the biggest thing that we're all watching is the inflation and the impact from the Middle East conflict. And it really didn't come through in Q3. So I would say we're poised for that. We'll use surcharges where appropriate. We'll use price increases where appropriate, but that's something we didn't factor in meaningful incremental price in our forecast as a result of that. I would consider it more of an organic forecast in that regard. Brian Drab (Equity Analyst) Okay, and Brett, can you just quickly remind me, did Section 232 change impact anything? I know you moved a lot of volume to Mexico and you're shipping a lot of that into the U.S. yeah, Brad Pogalz sorry, I didn't mean to cut you off. Yes, the change there is at this point, I would say negligible for us. There's a few parts that we're looking at and obviously the metal content is the biggest one. So think about our hydraulic filters are a good example. But in terms of the net impact to tariffs. And despite these changes with 232, it's not something that I would say is material for Donaldson. Brian Drab (Equity Analyst) Okay, got it. Talk to you more later. Thank you. Thanks. OPERATOR Your next question comes from Robert Mason with Baird. Please go ahead. Robert Mason (Equity Analyst) Good morning. Thanks for the question. Just first question around FAFSA, you know the expectation that that comes in about $0.03 dilutive. Yeah, I guess more or less on a GAAP basis. That includes the amortization. And the thought that the GAAP the margin impact is immaterial in the fourth quarter. Is that are those good benchmarks to annualize and carry into fiscal 27 or is there anything unique about the fourth quarter quarter? Presumably you would deleverage some along the way, but how to think about that on an annualized basis? Sure, you really touched on an important Brad Pogalz point is the deleveraging. So thinking about fourth quarter and we talked about roughly $9 million of interest expense, all sequel, that ends up being a high watermark as we work to pay it down over the course of the coming quarters in terms of the net impact. The other side of it would be the expected and expected growth in revenue and then profit expansion that comes with facet, whereas amortization of course ends up being a fixed amount. We'll give some more details on the very specific components of that when we do our fiscal 27 outlook in a few months. But to your question, I would caution against just saying $0.03 times four is the annualized number. It definitely goes less than that. And as we said on the call last quarter, we would expect facet accretion on a gap basis in year two and it's cash basis much more quickly. Robert Mason (Equity Analyst) Understood, understood. Rich Lewis (President and CEO) Just as a follow up, Rich, your Robert Mason (Equity Analyst) commentary around the mobile aftermarket certainly tended to the positive with some things kicking in here even in the fourth quarter on the share gain, you know. But if I step back and look at what that in your full year guide kind of implies sequentially, it's maybe not as strong seasonal as I would normally expect. I don't know, maybe my math is off. But is that conservatism on your part or is there you know, anything else kind of discreet that is keeping kind of this seasonal lift less than what we've seen historically? Rich Lewis (President and CEO) Yeah, it's a little bit of what we spoke about a minute ago where we had the OES doing the destocking in Q2 and then they restocked probably we think to a little bit more aggressive level than pull through demand. It's honestly a little Bit hard to pin that down. Exactly. But we're assuming there'll be a slight pullback and we'll just have pull through demand. No more stocking destocking in Q4. I would say, you know, to be determined. Order rates still look really strong in the Q4, but we'll continue to monitor it throughout the quarter. But that's the main impact there. Robert Mason (Equity Analyst) Very good, thank you. OPERATOR Your next question comes from Lawrence Alexander with Jefferies. Please go ahead. Dan Rizwan (Equity Analyst) Hey guys, it's Dan Rizwan from Lawrence. Thanks for taking my question. So you mentioned, I mean obviously market share gains are a big part of kind of the growth, the growth algorithm. I was wondering if it's, if how it's split between increased penetration with existing customers versus new customers, if new customers is harder to get or that's not how we should think about it or just any color on how that's working. Rich Lewis (President and CEO) Yeah, I would say it's really a business by business conversation because if you go to some of our businesses, like in our mobile OE world, we have business with the vast majority of the large OEs. So it's about taking share with those existing customers. Disk drive would be a similar story. But then if you get into like our food and beverage business, a big part of their Q3 story was taking share at new customers. You know, we talked about last time the cooling systems for data centers. That's a brand, that's an adjacency that we've just pushed into. So I would, it's a mix and it probably varies by business and the maturity of the business. Dan Rizwan (Equity Analyst) Okay. And then I'm sorry if I missed this. So obviously interest rates going up, but you still have a, a very healthy balance sheet. But I was wondering if you're shifting your strategic priorities to focus more on debt reduction and lessening share repurchases. I'm thinking more of 2027 and beyond or just for 2027, really. I don't know if it's just going to be a short term shift in how you kind of allocate your available cash. Brad Pogalz Hey, Dan. So the share repurchases as we talked about, we paused to do some pay down on Facet, but I would say this isn't a suspension at all. Share repurchase has always been the variable lever. We've got fresh debt minted right now. Obviously we'll give more updates on our plans in a few months, but it's something that would ebb and flow based on our opportunities. And the point to make too is that we would still look for M and A opportunities in the market. It's got to be the right strategic fit. It's got to be something like a facet, good qualifications that come with FaceTime, but share repurchase will move according to those opportunities. Dan Rizwan (Equity Analyst) Thank you very much. OPERATOR Your next question comes from Tim Feen with Raymond James. Please go ahead. Tim Feen (Equity Analyst) Thank you. Good morning. First question, Brad, maybe one for you. Just on the gross margins and circling back to the comments earlier around some of the potential inflation bubbling up that, that, that hasn't yet flown through the P and L. Did that, did the gross margin change? Did that, did that come into play or was it more on the industrial side and that impacted that. And I'm just thinking as we, as we put the calendar to 27, you know, based on where we sit today, which you know, could change tomorrow, obviously, but just how you think your position is from a broader kind of price cost perspective. Brad Pogalz Sure. Overall we're positioned pretty well from price cost. So the impacts in the quarter, as you point out, it was really about these very specific industrial things. So we talked about essentially reconciling 100 basis points of pressure that are attributable to the industrial segment for temporary activities and all else equal, then that would imply gross margin up 90 basis points versus the minus 10 year over year price, volume and mix were all contributing there. So I feel like our pricing muscle is in a really good spot. To the extent that we see pressure from the Middle East, we'll react and we'll react quickly. And in the past quarter it was only upside for us. Tim Feen (Equity Analyst) Okay, interesting. And then on the, the aftermarket piece within mobile, how do you, I know you want, you don't want to go out on thoughts on 27, but the new contract that you want, we're not talking a scope of the Napa win from years past, I assume, right. In terms of how to size that. Yeah. Rich Lewis (President and CEO) Think about it in two pieces. So first it's not the size of an APPA win, but it is a sizable win. And what it does strategically is it gets our products on the shelf at a number of dealers that we had not been present before, which then creates future growth opportunities. We actually think the future growth opportunity is bigger than the current business award. So it is a nice catalyst for our growth over the next couple years. Brad Pogalz Tim, maybe I'll add on that. I talk in my section about capital deployment and working capital every quarter. We hear from our aftermarket partners about wins that they've got in the field and some are bigger than others. Of course, but it's consistency and reliability that are helping us get share here. This is a durable part of our growth plans in aftermarket as well. Rich Lewis (President and CEO) Excellent. Thank you very much. OPERATOR There are no further questions at this time. I will now turn the call back to Rich Lewis for closing remarks. Rich Lewis (President and CEO) Thank you. That concludes our call for today. Thanks to everyone who participated. We look forward to reporting our fourth quarter fiscal 2026 results in August. OPERATOR Thank you and goodbye. This concludes today's call. Thank you for attending. You may now disconnect. Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.