Prepared remarks
Hello everyone. Thank you for joining us. And welcome to the Donaldson Company Third Quarter Fiscal Year 26 Earnings Webcast and Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Sarika Dhadwal, Head of Investor Relations. Please go ahead.
Good morning. Thank you for joining Donaldson's third quarter fiscal 26 earnings conference call. With me today are Richard Lewis, President and CEO, and Bradley J. Pogalz, Chief Financial Officer. This morning, we will provide a summary of our third quarter performance and our outlook for fiscal 26. During today's call, we will discuss non-GAAP or adjusted results. For third quarter 26, GAAP results exclude pretax charges of $9.8 million, including $9 million of restructuring and other charges and $0.8 million of business development charges. This compares to prior year pretax charges of $65.8 million, including $4.2 million of restructuring and other, $0.8 million 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 Richard, a quick note on our recently completed acquisition of Facet Filtration. Facet's performance will be included in our consolidated fourth quarter earnings results and 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 Richard.
Thanks, Sarika. 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 continued 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 Donaldson and 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 in filtration, which was built on decades of solving our customers' most difficult filtration problems; our best-in-class technology, uniquely powerful because we focus on 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 is how we have, and continue to, win. Now I will cover some third quarter highlights. Bradley 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, 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 in power generation within Industrial Solutions. Adjusted earnings per share were $1.06, 7% above 2025. Now I will 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, 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 $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 in 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 in 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. Modern machining operations have elevated levels of smaller mist particles and contaminants that need to be captured. We are solving this customer problem through Stratos's reliable, continuous-duty filtration in a space-efficient footprint that 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 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. We are confident 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%. This is important as we remain committed to returning value to our shareholders. With that, I will now turn it over to Bradley who will provide more details on the financials and our outlook for fiscal 26. Bradley?
Thanks, Richard. 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 performance and we are 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 nonrecurring charges Sarika 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 expense leverage. Breaking down the components of the year-over-year operating margin expansion, expense leverage remains a consistent strength at Donaldson Company. 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 the production shifts to Mexico for large turbine systems in our power generation business. We are 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 27. 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 27. 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 are 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 pretax 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 pretax margin was 8.1%, up 30 basis points from the prior year. Importantly, last year's profitability benefited from an earnout reversal from the Purologix business; excluding that prior year one-time benefit, pretax margin would have increased more than 8 percentage points. Volume leverage and favorable mix from our higher-margin food and beverage and Disk Drive 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% to 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 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% to 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% to 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 is worth reiterating that our fiscal 26 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 am confident we will get past these headwinds and generate more meaningful margin expansion in future periods. Now I will give a few points on Facet's 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, 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 on to 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. Richard highlighted several new product introductions earlier, and we intend to continue leading in that 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 1.8x 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 are committed to maintaining our position as the leader in technology-led filtration through our R&D investments in strategically important high-growth, high-margin areas where we have a clear path to win. We are proud to have a portfolio of patent-protected products and have nearly 3,000 active U.S. and international patents, with over 120 patents awarded in calendar year 2025. In addition to R&D, we think critically about our investments in working capital and capital expenditure, investing for efficiency today and growth for tomorrow by ensuring we meet our customers' needs. Our second capital deployment priority is disciplined M&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 have also increased our dividend for 30 years in a row and recently announced an additional 7% dividend increase. We are committed to remaining as a proud member of the S&P 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 mentioned, beginning in the fourth quarter, our reporting will include Facet and I am excited to fold their financial strength into our results. We are working towards a strong finish to fiscal 26 and I am confident our strategy deployed by the talented Donaldson teams around the world will deliver. Now I will turn the call back to Richard.
Thanks, Bradley. While I have been a Donaldson employee for over two decades, my first 90 days as CEO have been remarkable. I have 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.
Questions and answers
We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 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&A roster. Your first question comes from Bryan Blair with Oppenheimer. Please go ahead.
Good morning.
Morning, Bryan.
Hey, Brian.
I was hoping to level set a bit on footprint optimization, the power generation ramp-up, and the impact on Industrial margins there. I realized that most of the pieces are now in place and it sounds like your team is confident in driving better operating leverage going forward, but there is still quite a number of moving parts in hand. Is the right way to think about this that by the midpoint of fiscal 27 you are back, all else equal, to the prior ~18% margin run rate and then layering on the $10 million in cost savings? Or is that unfair or overly aggressive based on mix outlook or any other consideration?
Yeah, Brian, I would say if you just take footprint and the power generation situation and factor those in, I think that is a fair assessment. That would put us clearly back to prior high watermarks for the Industrial business, and then I think as you look forward from there we will have the rolled-in savings that we had mentioned. Of course, if there is other major mix changes that could have an impact, we will have to explain those and talk about those as those arise. At this point, I would not foresee anything meaningful, but we will continue to monitor the situation and keep you informed.
Okay. Understood. And you obviously owned Facet for about a month now, so 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 is all procurement—and then most importantly elaborate on commercial synergy potential. If I recall the phrasing correctly, the 'refinery to the wing' idea has a nice ring to it.
Yeah. So as you mentioned, we just closed Facet. If you go back to the rationale for the acquisition, it is a great end market with a lot of natural tailwind, higher margins—so I think double our margin profile—and higher growth rates. We continue to be encouraged by what we have seen. We did our first deep business review with the team post-close and reviewed the outlook for the business over the next 12 months. Even in spite of the situation in the Middle East, the outlook for the business is still strong, and we are very encouraged by what we are seeing with Facet. From a cost synergy perspective, you are right: it is primarily procurement. It was in the neighborhood of around $4 to $5 million—Bradley can clarify the exact amount. On the revenue synergy side, we did not build any revenue synergies into our justification, but we do believe there are some. For example, they will sell a fuel system into a particular marine application that also requires airflow, so they have relationships with customers that we do not, and we have relationships with customers that they do not. Over time, we believe we will be able to leverage additional growth synergies. It is not determined at this point how large those will be, but we are encouraged by what we have seen so far.
Nothing to add for me, Brian. Richard has the cost right, and it has been a good month of getting to know the team and starting to work the plans together.
Understood. Appreciate the color. Thanks again.
Your next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Hey. Good morning, guys. This is Oliver on for Angel Castillo this morning. Just a quick question on your operating margin guide. That seems to imply a pretty substantial step up in 4Q in Industrial Solutions. Could you help us bridge some of the key drivers there? Is it mostly mix or operating leverage or something else?
Thanks. Hi, Oliver. You have it right; we are definitely implying the step up in Q4. As I commented in my remarks, we expected more of a step up in Q3, but we feel good about the endpoint as we work through some things. Specifically on footprint, two plants were closed and now it is 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 on top of it some of the more meaningful headwinds are behind us in terms of overall profit.
Okay, great. That is helpful. And then just a question on Aerospace and Defense. To date it seems like we're down kind of in the mid-teens organically. Can you give a sense of the orders and backlog—can you still ship those this year given supply chain constraints? Or does this become a tailwind in 2027 if we all ship those orders then?
Yeah, Oliver. We exited Q3 with near-record backlogs and it has been increasing steadily throughout the year. So there is an element of '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 are working through. We expect to see continued improvement in the next few quarters, and thinking of it as a tailwind into fiscal 27 is a reasonable way to look at it. Please hold for a brief technical delay—are we back? I think we are back—we lost connection briefly. Overall, these are large engineered, highly complex systems that we sell to our customers, and in many cases we are waiting on one part or one material to ship them. There are a handful of challenges we are working through, and based on our timelines we would expect the vast majority of these to be recovered through Q1 of next fiscal year into the calendar year at the latest. The only internal timing issue is the plant closure in California we referenced and the ramp-up at the new site. Supplier challenges will also continue into the early part of next fiscal, but overall we expect a strong tailwind next year and most of these issues to be resolved through a series of actions.
Alright. Perfect. Thanks, guys.
Your next question comes from Adam Farley with Stifel. Please go ahead.
Good morning, everyone.
Good morning.
Hi. On the mobile aftermarket strength—just a little more color on how the OE channel progressed following last quarter's expected balance sheet management. And what is driving the double-digit strength on the independent side?
So Adam, on the OE side we came out of Q2 and the OEs were aggressively managing their balance sheets, as you mentioned. The expectation was we would see a reversal of that and clearly that came through. I would call it a bit of a restocking in Q3, and we expect a straight pull-through demand in Q4, albeit at a high level. Utilization rates are really strong globally and that is broad-based across regions and channels. On the independent aftermarket side, we mentioned a nice new business award that will start shipping in Q4 and will be a tailwind into next year. Overall it is a mix of volume, pricing, and share gains, and we feel encouraged by what we are seeing in the market.
That is really helpful. And on the First-Fit side, how do you characterize the end markets on a relative basis? You called out construction, but what are you seeing or expecting in other end markets?
On the positive side, construction and mining continue to run mid-cycle levels with good order patterns. On the ag and trucking side, demand remains muted and near trough levels, though we have seen pockets of improvement in small ag and turf applications. On trucking, we are seeing elevated order patterns in North America into the second half as we enter new EPA regulations in 2027, but overall first-fit demand in those markets remains constrained. Recall that over 75% of our revenue is recurring on the replacement side, and that replacement demand and backlog remain pretty strong.
Okay. Thank you for taking my questions.
Your next question comes from Brian Drab with William Blair. Please go ahead.
Hi. Thanks for taking my questions. I was wondering 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 it sounds like project timing and supply chain. Can you elaborate on what is happening in the supply chain? Is it your supply chain or customers' supply chains dampening demand, and when do you expect that to get resolved?
Sure. Good morning, Brian. We are hearing from our customers that they have a number of supply chain challenges. Very rarely are our supply chain challenges the ones preventing them from building product. In our specific situation it is probably twofold: lumpy project timing and some supplier constraints. We have seen a lot of strengthening in Aerospace and Defense backlogs coming out of the first half—new orders have strengthened significantly—but our ability to ship those is often held up by one part or material for the large engineered systems. We expect the vast majority of these to be recovered through Q1 of the next fiscal year into the calendar year at the latest. Internally, the plant closure in California and the ramp-up at the new site will also continue to require attention into the early part of next fiscal year. Overall, we expect most of these issues to be resolved and for the business to be a tailwind over the coming year.
Thank you. One more on the outlook: the 3% to 5% revenue growth—what is the breakdown between price and volume in your view? How much is price contributing? And are you having to adjust based on tariffs and steel prices?
Hey, Brian. Pricing is relatively consistent with where we have been so far this year—probably a little more than 1% contribution. If you remember a year ago we were starting to lap the real hit from tariffs; we were paying those costs then, so year-over-year it looks different. Regarding inflation and the impact from the Middle East conflict, it did not come through materially in Q3, but we are poised to react—using surcharges or price increases where appropriate. We did not factor in meaningful incremental price in our forecast as a result of that, so consider the guide more organic in that regard.
And Bradley, can you just quickly remind me: did the Section 32 change impact anything given the move of a lot of volume to Mexico and shipping into the U.S.?
At this point, I would say the change is negligible for us. There are a few parts we are looking at, and metal content is the biggest consideration—think about our hydraulic filters as an example—but in terms of net impact to tariffs, it is not something material for Donaldson.
Okay. Got it. Talk to you more later. Thank you.
Your next question comes from Robert Mason with Baird. Please go ahead.
Hi. Good morning. A few questions around Facet. The expectation that it is about $0.03 dilutive this quarter—more or less on a GAAP basis it includes the amortization—and you said the margin impact is immaterial in the fourth quarter. Are those good benchmarks to annualize and carry into fiscal 27 or is there anything unique about the fourth quarter? Presumably you would deleverage some along the way; how should we think about that on an annualized basis?
Sure. You touched on an important point: the deleveraging. For the fourth quarter, we talked about roughly $9 million of interest expense—that ends up being a high watermark as we work to pay it down over the coming quarters. In terms of net impact, the growth and profit expansion from Facet will flow in on the other side while amortization is a fixed amount. We will provide more details when we give our fiscal 2027 outlook in a few months, but I would caution against simply annualizing $0.03 times four. It will go down from that as we pay down debt and integrate the business. On a GAAP basis, we would expect Facet accretion in year two, and cash accretion more quickly.
Understood. Just a follow-up: your commentary around the mobile aftermarket is certainly positive with some things kicking in in the fourth quarter and share gains. But if I step back and look at what your full year guide implies sequentially, it seems maybe not as strong seasonally as we might expect. Is that conservatism on your part or is there anything discreet keeping the seasonal lift less than historically?
It is a bit of what we discussed earlier. The OEs did some aggressive balance sheet management earlier and then restocked in Q3, perhaps a bit more than pull-through demand. We are assuming a slight pullback and then pull-through demand in Q4 without additional stocking. Order rates still look strong into Q4 and we will continue to monitor throughout the quarter. That is the main factor moderating seasonal expectations.
Very good. Thank you.
Your next question comes from Laurence Alexander with Jefferies. Please go ahead.
Hey, guys. It is Dan Rizzo from Laurence. Thanks for taking my question. You mentioned market share gains are a big part of the growth algorithm. How does that split between increased penetration with existing customers versus winning new customers? Is new customer acquisition harder or is that not how we should think about it?
It really varies by business. In Mobile OE, we already do business with the vast majority of large OEs, so growth is about taking share with existing customers. Disk Drive is similar. In our food and beverage business, a big part of Q3 was taking share at new customers. We also are expanding into adjacencies like cooling systems for data centers where we have been able to push into new channels. So it is a mix and it varies by the maturity of each business.
Okay. And on capital allocation—interest rates are higher but you have a healthy balance sheet—are you shifting priorities to focus more on debt reduction and less on share repurchases for 2027 and beyond, or is repurchase just the variable lever that will ebb and flow?
Share repurchases are paused as we pay down Facet-related debt, but this is not a suspension. Repurchase is our variable lever and will ebb and flow based on opportunities. We will continue to pursue disciplined M&A when the right strategic fits come available. We will provide more updates on our plans in a few months, but repurchases will move according to those opportunities and overall capital priorities.
Thank you very much.
Your next question comes from Timothy Thein with Raymond James. Please go ahead.
Thank you. Good morning. Bradley, first on gross margins: you mentioned some potential inflation that has not yet flowed through to the P&L. Did gross margin change or did the industrial issues primarily drive the impact this quarter? And thinking into 2027, based on where we sit today, how do you view your positioning from a price-cost perspective?
Overall, we are positioned pretty well from a price-cost perspective. The impacts in the quarter were really about specific industrial items: roughly 100 basis points of pressure attributable to the industrial segment from temporary activities. Elsewhere, price, volume, and mix were contributing positively. Our pricing muscle is in a good spot, and to the extent we see pressure from geopolitical events we will react quickly with surcharges or price increases as appropriate. For now, Q3's gross margin pressure was largely driven by those industrial operational items.
Okay. And on the aftermarket piece within Mobile: the new contract you mentioned—this is not on the magnitude of a very large national account win historically, correct? How should we think about the size and how it might ramp?
It is not the size of a very large national account like some historical examples, but it is a sizable win in that it places our products on the shelf at a number of dealers where we had not been present before. That creates future pull-through opportunities. We believe the future growth opportunity from the placement is larger than the current business award, so it is a durable catalyst for growth over the next couple of years.
I'll add that every quarter we hear from our aftermarket partners about wins in the field. Some are bigger than others, but it is the consistency and reliability of our supply that are helping us gain share in aftermarket. This is a durable part of our growth plan.
Alright. Excellent. Thank you very much.
There are no further questions at this time. I will now turn the call back to Richard Lewis for closing remarks.
Thank you. That concludes our call for today. Thanks to everyone who participated. We look forward to reporting our fourth quarter fiscal 26 results in August. Thank you, and goodbye.
This concludes today's call. Thank you for attending. You may now disconnect.