Donaldson (DCI) Q3 2026 Earnings Transcript

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DATE

Tuesday, June 2, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Richard Lewis
• Chief Financial Officer — Bradley J. Pogalz
• Vice President, Investor Relations — Sarika Dhadwal

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TAKEAWAYS

• Total Sales -- $995 million, a 6% increase driven by currency translation, net pricing benefits, and volume growth.
• Operating margin -- 16.6%, up 30 basis points year over year and a sequential increase of 260 basis points primarily from expense leverage and gross margin improvement.
• Adjusted Earnings Per Share -- $1.06, a 7% rise supported by record segment performance and operating improvements.
• Mobile Solutions Revenue -- $630 million, up 8% with double-digit growth in the independent channel and a new contract with a major North America fleet operator.
• Aftermarket Sales -- $498 million, increasing 8% across all regions and both channels, driven by product availability and reliability.
• Off Road Sales (First Fit) -- $104 million, a 9% increase, led by construction sector demand.
• On Road Sales (First Fit) -- $28 million, up 5%, with growth attributable to EMEA truck production ramp-up.
• China Mobile Solutions Sales -- 6% growth, attributed to off-road strength and export market demand.
• Industrial Solutions Revenue -- $282 million, down 1% due to volume declines partially offset by favorable pricing and currency impacts.
• Industrial Filtration Solutions (IFS) Sales -- $237 million, up 2% with EMEA power generation driving more than double the equipment sales; volume declines in industrial gases and dust collection partially offset gains.
• Stratos Mist Collector Launch -- Introduced for dust collection, receiving positive customer interest and increased quoting activity.
• Aerospace and Defense Sales -- $45 million, a 14% decrease attributed to weaker new equipment sales and supply chain constraints.
• Life Sciences Revenue -- $84 million, a 13% increase, propelled by equipment volume in food and beverage and disk drive sectors.
• Food and Beverage Sales -- Over 30% growth driven by new equipment and an expanding installed base for consumables.
• Lifetech Product Line Expansion -- Launch of a high-loading performance filter for bottled water, manufactured internally for enhanced efficiency and lifespan.
• Order and Backlog Position -- Exited the period with robust order volumes and record backlog, supporting management’s confidence in delivering on organic sales and margin guidance.
• Full-Year Revenue Guidance -- Organic consolidated sales growth expected between 3%-5%, with midpoint guidance 1% higher than previous, aided by strength in mobile solutions and life sciences.
• Pricing and Currency Impact -- Each expected to add slightly more than 1% to annual sales growth.
• Mobile Solutions Outlook -- Anticipates 3.5%-5.5% sales growth, above prior guidance, with aftermarket mid-single digit growth due to share gains and high vehicle utilization; off-road projected mid-single-digit growth, on-road expected to contract low single digits.
• Industrial Solutions Outlook -- Organic sales are projected flat to 2% growth; IFS expected to benefit from power generation and favorable dust collection pricing.
• Aerospace and Defense Outlook -- Mid-single-digit decline forecast due to program timing and ongoing supply chain challenges.
• Life Sciences Outlook -- Sales growth now forecast at 9%-11%, up from previous 5%-9%, based on volume strength in food and beverage and disk drive businesses.
• Organic Operating Margin Guidance -- 15.8%-16.2%, revised downward from 16%-16.4%, with implied full-year expansion of 10-50 basis points despite temporary inefficiencies.
• Facet Filtration Acquisition -- Closed post-quarter, with expected fourth quarter sales contribution of $25 million-$30 million, adding 70-80 basis points to full-year growth; no material operating margin impact in the current year due to amortization offset.
• Debt and EPS Impact from Facet -- Transaction adds $9 million interest expense in the fourth quarter and net EPS dilution of $0.03; management states accretion is expected on a GAAP basis in year two.
• Full-Year Adjusted EPS Guidance (Excluding Facet) -- $3.94-$4.01, with the midpoint representing an 8% year-over-year increase, approximately double the pace of sales growth.
• Gross Margin -- 34.4%, down 10 basis points due to about 100 basis points of pressure from industrial segment operating inefficiencies, including 80 basis points from production shifts to Mexico and 20 basis points from plant closures.
• Industrial Segment Pretax Margin -- 13.4%, down from 18.1%, with some sequential improvement expected and further gains anticipated in the fourth quarter.
• Mobile Solutions Margin -- Record 20.2%, up 210 basis points, driven by volume and favorable mix from aftermarket.
• Life Sciences Pretax Margin -- 8.1%, up 30 basis points; excluding a prior year one-time earnout reversal, margins would have increased by more than 8 percentage points.
• Footprint Optimization -- Final two plant closures completed during the period; ramp-up underway at new sites, with anticipated annualized cost benefits of about $10 million once fully operational in fiscal 2027.
• Capital Expenditures -- Expected between $60 million and $75 million, focused on new product and technology investments across all segments.
• Free Cash Flow Conversion -- Projected at 85%-95%, above prior year and consistent with historical performance.
• Leverage Ratio -- Pro forma net debt to EBITDA approximately 1.8x post-Facet acquisition, leaving management flexibility for further investment.
• Dividend History -- 70 years of consecutive payments and 30 years of consecutive increases, with a recent 7% dividend increase and ongoing commitment to the S&P High-Yield Dividend Aristocrat Index.
• Share Repurchases -- Activity paused to prioritize Facet-related debt reduction; year-to-date repurchases have offset 1.2% stock compensation dilution.
• Patent Portfolio -- Nearly 3,000 active U.S. and international patents, with over 120 new patents awarded in calendar 2025.

SUMMARY

Following the addition of Donaldson (NYSE:DCI)'s Facet Filtration, the company will integrate high-performance fuel and fluid assets, with management noting that roughly 70% of Facet revenue stems from regulated, recurring aftermarket sales that carry "highly accretive margins." Management stressed that cost synergy expectations from Facet focus on procurement, forecasting $4 million-$5 million without any revenue synergies embedded in the deal model. The company's record backlog and orders position it for another sequential step up in both sales and margin in the coming quarter, underpinned by sustained momentum in mobile solutions—including a new large fleet customer win—plus accelerating contributions from life sciences and new product launches. Inventory restocking and elevated utilization rates in OEM and independent channels drove top-line volume gains, while completed footprint optimization projects are projected to generate $10 million in annualized cost savings as sites reach productivity targets.

• Fourth quarter guidance incorporates Facet results for the first time, with $25 million-$30 million projected revenue and an immaterial margin impact due to offsetting amortization.
• Supply chain and project timing issues are ongoing in Aerospace and Defense, yet management flagged a "near record backlogs" with most issues expected to resolve by early fiscal 2027.
• Food and beverage delivered over 30% sales growth, supported by both new equipment demand and a growing installed base, which expands consumable pull-through.
• Management "paused" share repurchases to focus on debt paydown but confirmed willingness to resume buybacks opportunistically and continue evaluating M&A aligned with stated criteria.
• Gross margin was constrained primarily by temporary operational inefficiencies in industrial solutions and costs from recent plant closures, with expectations for margin normalization as these headwinds abate.

INDUSTRY GLOSSARY

• Aftermarket: Sales of replacement parts and filters to existing equipment owners, distinct from sales to original equipment manufacturers (OEM).
• First Fit: Filtration products sold for installation in new equipment, often as a component provided directly to OEMs at the point of initial manufacture.
• Footprint Optimization: Initiatives to consolidate, close, or shift manufacturing plants and operations for cost and efficiency improvements.
• IFS (Industrial Filtration Solutions): A Donaldson segment specializing in providing filtration systems for industrial dust, fume, mist, and purification applications.
• Stratos Mist Collector: Recently launched Donaldson dust collection product designed for machining operations, focused on capturing small particle contaminants.
• Lifetech Product Line: Donaldson’s family of life sciences filtration products, including high-loading filters for bottled water applications.

Full Conference Call Transcript

Sarika Dhadwal: 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, and 800 thousand of business development charges.

This compares to prior year pretax charges of 65.8 million, including 4.2 million of restructuring and other 800 thousand 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 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. Will now turn the call over to Richard.

Richard Lewis: 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 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 close the last 2 plants identified within our footprint optimization initiative. We are now focused on ramping up production in the receiving sites, 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 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 and 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, 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 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, elevated levels of smaller missed particles and contaminants need to be captured. We are solving this customer problem through Stratos' reliable, continuous duty filtration comes in a space efficient footprint and supports multiple industries. Darcy 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 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. gives 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 Bradley who will provide more details on the financials and our outlook for fiscal 26. Bradley?

Bradley J. Pogalz: 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 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 2 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 2 segments, we were pleased with the profit performance. Mobile solutions margin was an all time high of 20 point 2 percent 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 this prior year onetime 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 million 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 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 1.8x 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. We do this 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 thousand active US 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 Donald's 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 25, 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.

Richard Lewis: Thanks, Bradley. While I have been a Donaldson employee for over 2 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 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. Amy 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 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.

Analyst (Brian Blair): Good morning, Gabriel.

Richard Lewis: Morning, Bryan.

Bradley J. Pogalz: Hey, Bryan.

Analyst (Brian Blair): I was hoping to level set a bit on footprint optimization and power gen ramp up and the impact on non 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 18% ish margin. In the prior run rate. And then we are layering on the $10 million in cost savings Or is that unfair or overly aggressive based on mix outlook or any other consideration?

Bradley J. Pogalz: Yeah. Bryan, I would say if you just take footprint and the power gen 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 at this point, but we will continue to monitor the situation and keep you informed.

Analyst (Brian Blair): Okay. Understood. And he is obviously owned Facet 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 is 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.

Richard Lewis: 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, it is a great end market with a lot of natural tailwind. Higher margins, so I think double our margin profile 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 the outlook for the business over the next 12 months. Even in spite of the situation in The Middle East is still strong, We are very encouraged by what we are seeing with facet.

From a cost synergy, you are right. it is all on the procurement side. It was in the neighborhood of around $4 million to $5 million, Bradley, clarify the exact amount. And then on the revenue synergy side, we did not build any revenue synergies into our justification, but we do believe that there are some. So for example, they will sell a fuel system into a particular marine application. It also requires airflow So they have a relationship with customers that we do not, and we have a relationship with customers that they do not.

So 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.

Bradley J. Pogalz: Nothing to add for me, Bryan. Richard has the cost right, and I think it is just it is been a good month of getting to know the team and starting to work the plans together.

Analyst (Brian Blair): Understood. Appreciate the color. Thanks again.

Operator: Your next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Analyst (Oliver): Hey. Good morning, guys. This is Oliver on for Angel this morning. Just a quick question on your operating margin guide. I mean, that seems to imply a pretty substantial step up in Q4 in Industrial. Solutions. You just help us bridge some of the key drivers there? Is it mostly mix or operating leverage or something else there?

Bradley J. Pogalz: Thanks. Hi, Oliver. Yeah. I mean, you have got it right. We are 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 work through some things. And as I noted on footprint specifically, 2 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 then on top of it, some of the more meaningful headwinds are behind us in terms of overall profit.

Analyst (Oliver): Okay. Great. that is helpful. And then just a question on A&D. I mean, to date, it seems like we are 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 this year? With the supply chain constraints or, potentially, does this become a tailwind in 2027 if we all ship those orders then?

Richard Lewis: Yeah. Oliver, if you think about Please hold for technical delay. Alright. Are we back? We are back. Alright, Oliver. I think we are back. We lost connect. Yeah.

Analyst (Oliver): I can hear you.

Richard Lewis: Yeah. So A&D, we exited Q3 with a near record backlogs, and it is been increasing steadily throughout the year. So there is a element of, hey. We only have 3 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 do expect that you will see continued improvement in the next few quarters. But yeah, as a tailwind into f 27, that is probably a good way to think about it.

Analyst (Oliver): Alright. Perfect. Thanks, guys.

Operator: Your next question comes from Adam Farley with Stifel. Please go ahead.

Analyst (Adam Farley): Good morning, everyone.

Richard Lewis: Good morning.

Bradley J. Pogalz: Hi, Adam. And then we first saw in the mobile aftermarket strength.

Analyst (Adam Farley): Just a little more color on how the OE channel progressed, following last quarter's expected balance sheet management. And then what is driving the double digit strength on the independent side?

Richard Lewis: Yeah. 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-- and a little bit of a restocking in Q3, and we will have It a probably a destocking in Q2. 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 is not just 1 region. it is 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 will start shipping here in Q4 and will be a nice tailwind into next year. So overall, it is a mix of volume, pricing, and we feel really encouraged by what we are seeing out in the market right now.

Analyst (Adam Farley): it is really helpful. And maybe staying on the mobile business on the FirstFit side, how do you characterize the end markets maybe on a relative basis? I know you called out construction, but maybe what are you seeing or expecting on some of the other end markets in first fit?

Richard Lewis: Yeah. So let's start on the sort of the positive side. So construction, as you mentioned, mining, they continue to run sort of, I would 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 would say broad based ag remains constrained. On the trucking side, we are seeing elevated order patterns especially 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 see those demand and backlog still remaining pretty strong.

Analyst (Adam Farley): Okay. Thank you for taking my questions.

Operator: Your next question comes from Brian Drab with William Blair. Please go ahead.

Analyst (Brian Drab): 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. And can you just elaborate on what is happening in the supply chain? And is that your supply chain? Are you seeing disruptions in customer supply chain that is dampening demand and kind of give us some visibility there to when that gets resolved?

Richard Lewis: Sure. Yeah. Thanks, Bryan. Good morning. And yeah, maybe to start big picture, we are 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 is probably twofold. So let's talk about the lumpy project timing we talked about. We have seen a lot of strengthening coming out of the first half in our aerospace and defense backlogs. So that is 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 is primarily on the system side. So if you think about it, these are large engineered highly complex systems that we are selling to our customers. And in many cases, we are waiting on 1 part or 1 material to ship those. So there is a handful of challenges that we are 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 1 internally would be we did close that plant in California in the quarter, and we are 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 will carry a strong tailwind in the next year and we would expect most of these issues to get resolved. Through a series of actions. Okay.

Analyst (Brian Drab): Thank you. And then just 1 more on the outlook. The 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 are you having to adjust based on tariffs and steel prices, etcetera?

Bradley J. Pogalz: Hey, Bryan. The price is relatively consistent with where we have been so far this year. Probably a little more than 11%. I will point out, though, if you remember 1 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 are getting right now, of course, I think the biggest thing that we are all watching is the inflation and the impact from the Middle East conflict and it really did not come through in Q3. So I would say we are poised for that. We will use surcharges where appropriate.

We will use price increases where appropriate. But that is something we did not 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. Okay.

Analyst (Brian Drab): And, Brett, can you just quickly remind me, did the section 32 change impact anything? I know you moved a lot of volume to Mexico. And you shipped a lot of that into The US. Sorry. I did not mean to cut you off.

Bradley J. Pogalz: Yes. The Nope. Okay. The change there is, at this point, I would say negligible for us. there is a few parts we are looking at, and, obviously, the metal content is the biggest 1. So think about our hydraulic filters are a good example. But in terms of the net impact to tariffs and despite these changes with 32, it is not something that I would say is material for Donaldson.

Analyst (Brian Drab): Okay. Got it. Talk to you more later. Thank you. Thanks.

Operator: Your next question comes from Robert Mason with Baird. Please go ahead.

Analyst (Robert Mason): Hi. Good morning. Thanks for the questions. I just first question around Facet. The expectation that, that comes in about $0.03 dilutive Yeah. I guess more or less on a GAAP basis, it includes the amortization. And the thought that 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, but how to think about that on an annual annualized basis?

Bradley J. Pogalz: Sure. You really touched on an important point is the deleveraging. So thinking about fourth quarter, and we talked about roughly $9 million of interest expense. All else equal, 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 will give some more details on the very specific components of that when we do our fiscal 2027 outlook in a few months.

But to your question, I would caution against just saying $0.03 times 4 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 GAAP basis in year 2, and it is cash basis much more quickly.

Analyst (Robert Mason): Understood. Understood. Just as a follow-up, Richard, your commentary around the mobile aftermarket is certainly tinted to the positive. With some things kicking in here even in the fourth quarter on the share gain. Know? But if I step back and look at what that in your full year guide kind of implies sequentially, it is maybe not as strong seasonal as I would normally expect. Da not know. May maybe my math is off. But is that conservatism on your part, or is there, anything else kind of discreet that is keeping kinda the seasonal lift less than what we have seen historically.

Richard Lewis: Yeah. it is 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 is honestly a little bit hard to pin that down exactly. But we are assuming there will be a slight pullback, and we will just have pull through demand. No more stocking, destocking in Q4. I would say Know, to be determined, order rates still look really strong into Q4. But we will continue to monitor it throughout the quarter. But that is that is the main impact there.

Analyst (Robert Mason): Very good. Thank you.

Operator: Your next question comes from Laurence Alexander with Jefferies. Please go ahead.

Analyst (Dan Rizzo): Hey, guys. it is Dan Rizzo from Laurence. Thanks for taking my question. So you mentioned I mean, obviously, market share gains are a big part of kind of the growth algorithm. I was wondering if how it is split between increased penetration with existing customers versus new customers if new customers are harder to get or that is not how we should think about it or just any color on how and how that is working?

Richard Lewis: Yeah. I would say, it is 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 is 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.

We talked about last time the cooling systems for data centers. that is a brand-- that is an adjacency that we have just pushed into So I would say it is a mix, and it probably varies by business the maturity of the business.

Analyst (Dan Rizzo): Okay. And then I am sorry if I missed this. So obviously, interest rates going up, but you still have a very healthy balance sheet. I was wondering if you are shifting your strategic priorities to focus more on debt reduction and lessening share repurchases? I am thinking more of 2027 and beyond or just for 2027, really. I do not know if it is going to be a short term shift in how you kind of allocate your available cash.

Bradley J. 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 is not a suspension at all. Share repurchase has always been the variable lever. We have got fresh debt minted right now. Obviously, we will give more updates on our plans in a in a few months, but it is something that would ebb and flow based on our opportunities. And the point to make too is that we would still look for M&A opportunities in the market. it is got to be the right strategic fit. it is gotta be something like a facet good qualifications that come with facet.

But share repurchase will move according to those opportunities.

Analyst (Dan Rizzo): Thank you very much.

Operator: Your next question comes from Timothy Thein with Raymond James. Please go ahead.

Analyst (Tim Feen): Thank you. Good morning. First question, Bradley, maybe 1 for you. Just on the gross margins, and circling back to the comments earlier around some of the potential inflation bubbling up to that has not yet flown to the P&L? Did gross margin change? Did that come into play? Or was it more on the industrial side? That impacted that? And I am just thinking as we as we put the calendar to 2027, based on where we sit today, which could change tomorrow, obviously. But just how you think you are positioned just from a broader kind of price cost perspective?

Bradley J. Pogalz: Sure. Overall, we are we are 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 a 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 will react and we will react quickly.

And in the past quarter, it was only upside for us.

Analyst (Tim Feen): Okay. Interesting. And then on the aftermarket piece within mobile, how do you I know you do not want to go out on thoughts on 2027, but I the new contract that you want, we are not talking a scope of the NAPA win from years past, I assume. Right? In terms of how to size that?

Richard Lewis: Yeah. I about it in 2 pieces. So first, it is not the size of a Napa wind. 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 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.

Bradley J. Pogalz: Timothy, maybe I will 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 have got in the field, and some are bigger than others, of course. But it is consistent consistency and reliability that are helping us get share here. So I this is a durable part of our growth plans in aftermarket as well.

Analyst (Tim Feen): Alright. Excellent. Thank you very much.

Operator: There are no further questions at this time. I will now turn the call back to Richard Lewis for closing remarks.

Richard Lewis: 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.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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