Greetings, and welcome to Helios Technologies' third quarter fiscal year 2026 financial results call. All lines are now listen-only. Later, we will conduct a question-and-answer session. If you should require operator assistance at any time, press star zero. Today's call is being recorded. I would now like to turn the call over to Tania Almond, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.
Thank you, operator, and good day, everyone. Welcome to the Helios Technologies third quarter 2026 financial results conference call. We issued a press release announcing our results yesterday afternoon. If you do not have that release, it is available on our website at hlio.com. You will also find slides there that accompany today's discussion, as well as our prepared remarks.
Joining me today are Sean Bagan, President and Chief Executive Officer, and Jeremy Evans, Executive Vice President, Chief Financial Officer. Sean will begin with highlights from the third quarter. Jeremy will then review our financial results in more detail and provide our outlook for the rest of the year. Sean will return with some closing comments, and then we will open the call for questions. Before we get started, please turn to slide two, where you will find our safe harbor statement.
As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from those presented today. These risks and uncertainties and other factors can be found in our annual report on Form 10-K for 2025, along with our upcoming 10-Q to be filed with the Securities and Exchange Commission.
You can find these documents on our website or at sec.gov. I will also point out that during today's call, we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results presented in accordance with GAAP. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides. Please reference slides three through five as I now turn the call over to Sean.
Thanks, Tania, and welcome, everyone. We are pleased you could join us today. During last quarter's conference call, we described Helios' transition from business stabilization to profitable broad-based growth. This quarter adds another important element to that story: consistency. Our third quarter results exceeded our outlook as we delivered higher sales, earnings, and cash flow compared to the prior year. In sports, only a handful of professional teams have ever achieved the true five-peat.
The New York Yankees won five consecutive World Series titles, the Montreal Canadiens captured five straight Stanley Cups, and Real Madrid claimed five consecutive European Cup championships. Those accomplishments were never about the streak itself. They were the result of strong foundations, disciplined execution, and organizations built to sustain success over time. That same aspiration is at the heart of the CORE Strategy.
While we are still in the relatively early stages of our journey, our five consecutive quarters of double-digit pro forma sales and adjusted earnings per share growth provide encouraging evidence that our Helios Business System is building the right foundation. We remain focused not on extending the streak, but on creating a stronger company through disciplined execution, strategic investment, and operational excellence that can deliver sustainable profitable growth and long-term shareholder value creation for years to come.
We achieved record third quarter sales of $230 million, with both of our segments contributing to our outperformance. That breadth matters. It reflects contributions from established customer relationships, recent business wins, and the investments we have made in our commercial capabilities. It also reflects our sustained commitment to delivering product innovations to meet customer demands.
In the most recent quarter, Sun Korea developed new Common Cavity valves, Enovation expanded No Roads with Apple CarPlay and Android Auto, and partnered with C-MAP to enhance marine capabilities to the platform, while Balboa contributed to a luxury spa from Hanscraft, designed by Studio F. A. Porsche. These are examples of innovations today that will fuel our growth in the future. Within hydraulics, we saw growth from business wins and share gains.
We also continued to benefit from demand across construction, industrial, and smaller agricultural equipment, although large ag remains challenged. In electronics, strength in recreation led to record third quarter sales for Enovation Controls, and we saw year-over-year growth in the marine end market for the first time in seven quarters. The health and wellness end market was also up double digits in the third quarter.
We did see some customers place orders ahead of price increases announced in the quarter that resulted in some sales being accelerated into the third quarter in both segments. Considering the solid quarter, our September acquisition, and continued order strength, we are raising our full year 2026 sales outlook and expect fiscal year 2026 sales to be the highest in Helios' history. However, the operating environment remains challenging, with ongoing cost pressures, tightening supply chains, uncertainty around interest rates, and a volatile geopolitical and trade backdrop.
We cannot control those factors, but we can control how we execute, and that is where our focus remains. We continue to take actions to offset these dynamic macro factors. The timing of these actions, combined with when we will fully capture synergies on the Radio Sound acquisition, have been factored into our updated outlook ranges.
When we introduced the CORE Strategy, we laid out a clear roadmap for Helios' next phase of profitable growth. One built on stronger customer relationships, differentiated innovation, operational excellence, and disciplined capital allocation. The plan draws on the deep legacies of the Helios portfolio companies, exemplified by Schultes Precision's recent 80th corporate anniversary.
We set long-term financial targets anchored on organic compounded annual growth of 5% plus, with an average of 100 plus basis points of margin expansion each year. We also identified new adjacent markets we are investing in and our planned approach to acquisitions. Our third quarter and year-to-date results show we are delivering on our commitments. Beyond the numbers, we have made tangible progress in three areas tied to the CORE Strategy: operational excellence through footprint optimization, disciplined capital allocation through targeted acquisitions, and investments in new markets.
First, we continued advancing our global manufacturing initiatives and completed Faster's North American consolidation in Toledo, Ohio. With the physical consolidation completed, the focus is on improving productivity, delivery performance, and execution as the operation supports growing customer demand. Across Electronics, we are progressing production transfers within our global footprint, including moving manufacturing lines from Tulsa to our Tijuana facility to better align capabilities, costs, and regional customer requirements.
These actions, along with others, are intended to strengthen the business beyond any individual quarter. They support a more productive operating model, greater regional flexibility, and new opportunities to be closer to the customers we serve in each region. Second, we completed our first acquisition since 2023 with a small targeted transaction. We acquired select Radio Sound assets and established a new multi-year relationship with Indian Motorcycle.
The transaction adds audio and communications capabilities that complement our existing electronic solutions and can support additional customers in adjacent markets. While financially modest, it is strategically aligned with our approach to acquire technology and capabilities that can be built as a platform and leverage across the portfolio. We see a strong return on invested capital opportunity as we integrate the business and capture cost synergies.
This acquisition reflects the disciplined return-focused approach we will take as we evaluate additional targets. Third, following quarter end, Faster secured its first data center thermal management order, achieving an important milestone we expected to reach this fiscal year. Over the last 18 months, the team has moved through market research, R&D, product development, prototyping, testing, and qualification to get to an initial customer order.
It is a great example of how we applied our operational excellence developed throughout Faster's 75-year corporate history to diversify into a large, unpenetrated market. The significance today is not the order's near-term financial contribution, but rather the commercial achievement and potential implications for future growth. Together, these three areas are building a stronger foundation for long-term value creation. With that, I'll turn the call over to Jeremy to review the third quarter financial results and our updated 2026 outlook.
Thank you, Sean, and good day, everyone. Please refer to slides six through eight as I review our third quarter results. Sales were $230 million, a third quarter record, and an increase of 4% from the prior year period. Adjusting for the CFP divestiture, Radio Sound acquisition, and foreign exchange impacts, sales increased 13%.
As a reminder, last year's third quarter sales was an inflection point for us with year-over-year growth of 13% as well, so this is the second consecutive year with double-digit growth in the third quarter. Our results exceeded the high end of the outlook we provided in August by $8 million, with both reporting segments contributing to the out-performance. Radio Sound contributed approximately $400,000, while foreign currency translation added close to $1 million of sales in the quarter, neither of which were included in our prior outlook.
Additionally, we estimate customers pulled forward approximately $4 to 5 million of orders from the fourth quarter into the third quarter as a result of announced price increases. Gross profit increased 4% to $76 million, and gross margin expanded 10 basis points to 33.2%. Higher volume and the benefits of our operating and portfolio actions helped offset continued inflation in material and component costs, freight, and utilities.
Operating income was $28 million compared with $1 million in the prior year quarter, which included a goodwill impairment charge of $26 million. Adjusted operating income grew 4% to $38 million, and adjusted operating margin was 16.6%, consistent with the prior year. Adjusted EBITDA increased 3% to $47 million, with adjusted EBITDA margin of 20.3% compared with 20.5% last year.
Although adjusted EBITDA was up $1.4 million, adjusted EBITDA margin was pressured due to our increased investments in R&D, fast-moving inflationary costs, higher incentive compensation expense driven by our year-to-date performance, and a continued high run rate for employee benefit costs. We continue to manage spending carefully while protecting the engineering, commercial, and operational functions that support future growth.
Diluted earnings per share increased 71% to $0.53. The prior year third quarter was impacted by a goodwill impairment, which was partially offset by the gain realized on the CFP divestiture. Adjusted diluted earnings per share increased 11% to $0.80, $0.03 above the high end of our outlook. Turning to the segments, please refer to slide nine. Hydraulics sales were $143 million, up 1% as reported and 15% on a pro forma basis.
Sales increased in the Americas and EMEA, while the reported APAC comparison was affected by the divestiture. Growth reflected continued commercial execution and share gains, as well as distributor partners restocking ahead of our announced price increases. Order activity softened following those increases, but appears to have normalized.
It is important to distinguish replenishment of channel inventory from the underlying rate of end market consumption. We are monitoring distributor inventory and regional order patterns closely. Hydraulics gross profit was $46 million, essentially unchanged from last year, while gross margin declined 20 basis points to 32.3%. Gross margins were impacted by higher freight and utility costs, as well as additional expenses associated with the Faster North America consolidation.
Segment operating income increased 2% to $25 million, and operating margin improved 10 basis points to 17.3%, as leverage on operating expenses as a result of higher sales more than offset the gross margin decline. Electronics sales increased 10% to $87 million and reflected a record third quarter in Enovation Controls. Growth in the Americas and APAC more than offset lower sales in EMEA. Our performance reflects ongoing customer program activity and new business wins, even as conditions across certain core markets remain challenged.
We continue to target opportunities where our controls, displays, and integrated technologies can deliver greater value to customers. Electronics gross profit increased 11% to $30 million, and gross margin expanded 40 basis points to 34.7%. Gross margins benefited from leverage on overhead expenses as a result of higher sales, which more than offset higher input costs.
Segment operating income was $12 million, with an operating margin of 14.3%. The prior year third quarter operating margin was impacted by a goodwill impairment. Excluding the goodwill impairment, operating income was flat with the prior year, reflecting incremental investments in research and development. Electronic component availability and pricing remain areas of attention, particularly for memory chips and circuit boards.
We are working with suppliers and selectively positioning inventory to support customer requirements. We also continue executing production transfers and other initiatives intended to improve our cost structure and manufacturing flexibility, while routinely evaluating pricing-related actions to help offset inflationary pressures. The Radio Sound acquisition integration is underway. Our near-term priorities are supporting the Indian Motorcycle relationship, integrating the operations, and identifying additional applications for the acquired capabilities across our customer base.
We expect it will take about one quarter to capture the cost synergies. The acquisition represents a high-reward opportunity that expands our audio solutions offering and establishes a relationship with a new OEM. Turning to slide 10, we generated cash from operations of $40 million, up 59% from the prior year period, and a record for a third quarter.
Free cash flow in the quarter was $32 million, and capital expenditures were $8 million as we continued investing in the business. Those investments support manufacturing capabilities, productivity, and future growth. Our cash conversion cycle improved to 116 days compared with 128 days in the prior year period. This reflects our continued focus on driving timely customer collections, extending terms with our partners, and managing inventory held within Helios.
We maintained our days inventory on hand, although our inventory balance has increased year-over-year and sequentially, as we've increased stock to support higher sales while selectively taking an inventory position on electronic and thermal management components to support customer requirements and manage supply availability.
On slide 11, you can see our balance sheet continues to provide flexibility. We ended the quarter with total debt of $328 million and cash of $73 million, resulting in net debt of $255 million. Net debt declined by $109 million from the prior year period, and net debt to trailing 12-month adjusted EBITDA was 1.4 times compared with 2.4 times a year ago. Our capital allocation priorities remain in this order. First, organic investment, followed by returns to shareholders, strategic acquisitions, and then debt repayment.
Our capital deployment in the quarter reflected this, as we increased CapEx and R&D investments over the year-ago period, repurchased our highest amount of common stock within a quarter, extended our cash dividends to 119 consecutive quarters, and deployed $1.7 million on the acquisition of certain assets of Radio Sound. Slide 12 summarizes the financial priorities we established at the beginning of the year.
We made consistent progress across all four priorities this year: executing our growth plan, improving gross margins, maintaining earnings momentum, and optimizing capital allocation. We are focused on ending the year strong, delivering a new sales record, and converting the sales growth into earnings and cash. Turning to slides 13 and 14, we now expect 2026 sales of $895 to 902 million, or 13% pro forma growth at the midpoint over the prior year period.
The low end of the range eclipses our previous record of $885 million, so we are on pace for the highest annual sales in Helios' history. The top end of the range has increased as a result of anticipated sales from the completed acquisition. For the full year, we expect hydraulic sales of $564 to 568 million, 15% pro forma growth at the midpoint, and electronic sales of $331 to 334 million, 12% growth at the midpoint.
We expect consolidated adjusted EBITDA margin of 20.2% to 20.4% and adjusted diluted earnings per share of $3.08 to $3.15. We are tightening both the margin and earnings ranges from our prior outlook to reflect the current cost environment along with the impact of the Radio Sound acquisition. The new adjusted diluted earnings per share midpoint reflects a 22% annual growth rate, approaching twice that of our expected midpoint top-line growth of 13%. For the fourth quarter, we expect consolidated sales of $205 to 212 million.
This includes hydraulic sales of $135 to 139 million and electronic sales of $70 to 73 million, reflecting current order visibility, component availability, and the benefit from the acquisition. We expect fourth quarter adjusted EBITDA margin of 18.5% to 19.5% and adjusted diluted earnings per share of $0.60 to $0.67.
As a reminder, the fourth quarter of 2025 included an interest expense benefit of $5.4 million related to an interest rate swap that was originally due for maturity that quarter and was terminated as a result of our debt refinancing in 2024, which favorably impacted earnings per share by approximately $0.12.
This impacts the year-over-year comparison in the fourth quarter. There are several considerations behind this outlook. First, we expect the fourth quarter growth rate to moderate from the third quarter pace, as we are lapping tougher compares, combined with the fact there was a full extra week in the shipping calendar in the fourth quarter last year. Last year in the fourth quarter, we reported 17% sales growth and 29% pro forma growth without CFP.
This is part of those tougher compares mentioned. Second, we remain in an inflationary cost environment, and although we have taken targeted pricing actions, we believe the benefit will start to show more in 2027. Third, we will incur integration costs in the fourth quarter related to the acquisition, which were not originally anticipated in our prior outlook, while expected synergies will start to be reflected in early 2027.
Our outlook, therefore, balances the strength of our year-to-date performance and commercial pipeline with a measured view of the orders for the balance of the year, while layering in timing of initiatives to offset cost inflation, as well as the recent acquisition. With that, I will turn the call back to Sean for his closing comments.
Thanks, Jeremy. Our 2026 key focus areas shown on slide 15 remain intact and have guided our direction as we prioritize serving our valued customers while launching and executing against the CORE Strategy. As we close out our prepared remarks, I'd like to return to the sports analogy I referenced earlier. The New York Yankees, Montreal Canadiens, and Real Madrid each achieved the rare feat of winning five consecutive championships, yet their legacies were never defined by whether they won a sixth.
They were defined by the strength of the organizations they built and their ability to compete successfully year after year. While our recent growth reflects a strong start, we remain focused on building capabilities, culture, and operating discipline that can create value through market cycles. We recognize that the pace of growth may vary from quarter to quarter, so our focus remains on disciplined execution, strategic investment, and operational excellence.
With record year-to-date sales, strong order trends, and a healthy pipeline of new product releases, we are confident in our ability to close out 2026 and enter 2027 well-positioned for continued profitable growth. With the initial stages of 2027 planning completed, we are cognizant that comparisons are becoming tougher with component availability, inflationary costs, and the geopolitical landscape remaining dynamic.
What gives us confidence and excitement that we can continue the momentum ignited this year is the work taking place inside Helios, the customer relationships we are strengthening, the business we are winning, the products we are developing, and the operating capabilities we are building. We are not providing specific 2027 guidance today, but the priorities remain the same.
As we committed with the CORE Strategy, we are targeting a 5% plus organic growth CAGR through 2030. Our Helios Momentum Model has driven our performance this year to exceed that targeted pace, demonstrating the strength of our portfolio. However, we are focused on delivering sustainable compounding growth over the long term and would not assume that this year's double-digit pro forma growth rate is indicative of our expected annual growth profile going forward.
We look forward to providing additional perspective on 2027 when we report our fourth quarter results. I want to thank our colleagues across Helios for their commitment to our customers and to one another. Their work is what turns our strategy into results. To our customers, distributors, suppliers, and shareholders, thank you for your continued partnership. We remain focused on finishing the year with momentum and building a stronger Helios for the long term. With that, operator, let's open the lines for Q&A, please.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we pull for questions. Thank you. Our first question will be from Chris Moore with CJS Securities. Please go ahead with your question.
Hey. Good morning, guys. Thanks for taking a couple.
Good morning, Chris.
Good morning. Obviously, still lots of uncertainty, many end markets. Marine, as you said, showed some improvement for the first time in seven quarters. Just trying to find out, are there areas that you had been seeing improvement in 2026, either geographically or specific vertical end markets that started to soften in Q3, or you expect might be by the end of 2026?
Yeah. Chris, I would characterize that generally, no. Our markets that we're serving, we didn't see necessarily a slowdown anywhere. In fact, I would say the second half for us has gotten a little better than what we would have expected entering the third quarter, and I think that's indicative of us bringing up our sales guidance.
Some of the ones we're watching closely certainly are over in Asia and China, particularly on the Sun Hydraulics side, monitoring distributor inventory levels and market demand. Here in North America, the ag market, as we know, has been compressed for many years in a row. However, for us, where we're benefiting is on some of the smaller compact equipment where we're kind of agnostic to what part of the market is going up or down. We just want volume.
Certainly the large combines and larger ag equipment has been challenged, but when there's a tractor sold, just a unit sold, we're still getting this captured in the same revenue. Those would be a couple that I would point to, but generally, the marine one was a bit of a surprise just to see that go positive for the first time in seven quarters,
because certainly some of the discretionary item markets and with interest rates starting a little bit of an escalation puts a little question mark on some of them. But for us, our large customers had continued to grow there and just not at the pace that we did the year-over-year from the first half.
Got it. Very helpful. So congrats on the data center order. Trying to maybe just better understand a little bit on the go-to-market strategy. As you learn the market, I mean, do you expect potentially significant orders from a few players? It's going to be, or will be lots of smaller customers? How do you see that kind of playing out in 2027?
Yeah. First, we're really pleased, and as we have been indicating all year, we expected to get our first order, and obviously that's materialized. It's insignificant to the volume this year, but is back to our identification of a market that we weren't participating in that had emerged, and it really came out of our strategic planning work that we had implemented, and we had been methodically developing the product and building out our operations to be ready.
I would say we're going to look to stack a lot of small wins together. Today, we have over 30 customers, potential customers with products that are out there that are evaluating us, testing it. We are also under NDA with a couple of the hyperscalers, and that's more so just to get specced in on the standard product.
We're really focused on the differentiation that we can bring to that market, bringing our expertise from the ag and construction markets where we know leakage rates are always important, but even more paramount in a data center environment, given where we play with the quick-release couplings, that if water's leaking on chips and electronic components, that's not a good thing.
We believe our products are better given all the R&D and testing we've done on both competitor products and ours, and then also further enhancements to the existing products that are out there. So for us, it's very exciting from the perspective of a very large un-penetrated market that is purely green shoot for us. Certainly with the midterm election results and some of the data centers focus on build-out here in the U.S. and North America at least, there's less opportunity for us to penetrate as quickly likely, but it's all incremental, and we're just excited to have another market to pursue.
Very helpful. I'll pass it along. Thank you very much.
Thanks, Chris.
Our next question we will hear from Tomo Sano with JPMorgan.
Hi. Good morning, everyone.
Morning, Tomo.
Thank you for taking my questions. Maybe just on hydraulics, which is actually growing 15% pro forma, which is obviously well ahead of the underlying market. Can you help us separate how much of that growth is coming from share gains and the new business wins versus market recovery and restocking? Any also on color and how that is actually sustainable into 2027? Thank you.
Yeah. Thanks, Tomo, for the question. I would characterize it as majority of share gains. When you look at the overall markets, where we rely on looking at our two large businesses, Sun Hydraulics and Faster. Sun Hydraulics, we are part of the NFPA, National Fluid Power Association, and we are clearly seeing low single-digit market improvements.
That is the first time in multiple years that we have experienced that. So there is a little bit of market help, but we are by far outpacing that. In fact, all four of our businesses, including over to the electronic side of the large businesses, we expect to grow double digits over the prior year this year, which is implied in our guidance.
Clearly the Sun Hydraulics aggressive growth that we have achieved beyond the market is tied to our go-to-market and our re-engagement with our distributors and working through some of those operational challenges that had hurt in our delivery times and such. We have gained a lot of win-backs, a lot of confidence back, and really just how we are engaging with our customers and taking a much more data analytics approach and targeted market focus.
On the Faster side, the other large business within our hydraulic segment, as we know, the ag market has historically always been the largest for Faster. Despite that continued decline for multiple years, particularly here in North America, we have seen Faster grow. Faster, again, will grow double digits this year.
Again, remind you, before we recognized the data center opportunity, and really what we point to there is our recent products that we have launched have gained great market traction. The MultiFaster is a product that our competitors try to copy but can't make it as good as ours. We have been targeting other markets beyond just ag with that.
So we have seen our construction business continue to grow, and we have also seen our distribution business, which historically, Faster is OEM direct. If you think about the go-to-market approach and leveraging our overall portfolio with our distribution expertise on the Sun business, for instance, bringing that to Faster. Clearly the Faster growth is market share gains because the end markets are not helping. Jeremy, any other color?
Yeah, I would point to the ag market where it still is not back to what it has been. It has still been down several years. But for us, that has been an area of growth. The mobile end market, which is where we have construction, material handling equipment, specialty vehicles, that has been strong, and industrial as well. As Sean mentioned, we provide data into the National Fluid Power Association. We get information back so we can compare our sales growth to what we see there on the hydraulic side, and we definitely believe we are outgrowing the market.
Thank you. Follow-up on M&A. With the leverage now down to 1.4x, should we think of Radio Sound as the template for M&A going forward, meaning like smaller technology tuck-ins, or would you consider something larger as the balance sheet capacity continues to improve?
Tom, this is Jeremy. I would characterize the Radio Sound as a strategic acquisition that added capabilities to our electronics portfolio, specifically around audio solutions. That was a gap when we think about owning the cab experience, whether that is a cab of a recreational vehicle or a boat or even into some other mobile applications. It was obviously very small, very much a tuck-in.
We expect that to add in the near term $1 to 2 million on the top line with margins comparable to those within the electronics segment once we get through the integration activities that were taking place now. I think it represents the M&A approach going forward from a It is a strategic fit. It adds capability. There is high potential for good returns. That is what we are looking for. As you mentioned, we have been able to pay down debt.
Our debt leverage ratio is below our operating range that we communicated between 1.5 and 2.5. We are looking and we will look for bigger opportunities. I would not put a revenue threshold on what we are evaluating, but it is more of where do we see complementary capabilities and the ability to generate a good return.
Great. Thank you very much.
Next we will hear from Mig Dobre with Baird. Please go ahead.
Yes. Good morning. Thank you for the question. Congratulations on getting the first data center order. I want to talk a little more if we can about this topic. I guess a handful of questions. I am curious, how are you selling this product? I mean, is this a product that goes into a new build, or is this something that you can sell into existing data centers as well?
Related to this, what does the life cycle of this product look like once it is installed? Is this something that has a specific mandated useful life? Do you sort of have to change these couplings every so often in order to make sure that you are living within certain safety parameters? Or is this the type of product that once it is installed, it is kind of there for the very long haul, the life of the building or the equipment?
Hey, good morning, Mig. I will try and address some of that and pass it to Jeremy to fill in any gaps that I miss here. To start, our end customers are typically an integrator that is building the cooling racks for the data center. Our particular product is the couplings and many different variations of it. From the perspective of winning new business, getting spec'd in, obviously that is very helpful.
But unlike the rest of, generally, our entire Helios portfolio, where typically our products are outlasting whatever they are put into, this is a different market where, yes, there is aftermarket, if you will, or refreshing of the equipment. It really differs by each customer in terms of what their specs are and such.
Our focus has been on, first, well, really basically understanding the market, understanding the importance of the hyperscalers in terms of the standardized product and getting your product qualified, but also then targeting, like I said, the integrators, stacking these small wins. Jeremy, maybe you could speak a little more on the product side as well.
Yeah, this is Jeremy. When we think about the liquid cooling, you have a connection going into the rack unit, which is typically a larger coupling, and then you have a smaller coupling going against the actual cold plate. We are now supplying both. As Sean mentioned, this is really not meaningful to our Q4 expectation, but it is more of a very important milestone of something that we started 12 to 18 months ago, just investing in the capability, doing the studies, the designs, the prototyping.
As Sean mentioned, we now have a sample product out with several customers. It just is a representation of our operations execution and the methodical approach of the team that has been built with over 7 to 5 years in the hydraulic space. It is a very big milestone.
In terms of the refresh rate, because it is within the technology space, the underlying servers, we would estimate approximately a three-year, two to three-year refresh cycle on those. Typically, if you are going to be replacing the equipment in the rack, most likely you are going to be replacing the coupling and hose as well.
Okay. But I guess my initial question, maybe we can come back to hopefully address it, when you guys are selling, should we be thinking about just the pace of the build-out here in terms of incremental data center starts? Is that kind of like what the functional driver would be? Or are you able to go into existing data centers and try to get business that way?
Because obviously, we are talking about two very, very different things here. Is there a way to help us understand your addressable market here? If you were to maybe size it as to what the content would be per megawatt in the data center, I think that would also be really helpful. Just, it's a new end market, so we're trying to figure out if this has the potential to really kind of be a meaningful incremental driver into 2027 and 2028 for you.
Yeah, Mig. First, I would say we're starting at zero as it relates to the coupling. This is not in our run rate. Any sales we achieve will be incremental and add to our organic growth in 2027 and beyond. We had some information, we outlined at our Investor Day on the addressable market within the data center, and it was roughly $1 billion from a market opportunity, and that does represent new build-outs as well as replacement within existing data centers.
Our go-to-market approach, as Sean mentioned, is to work through integrators, work through distributors, the companies that are actually assembling and putting the racks together. To get at the big volume, you need to be qualified and approved by the big hyperscalers, so we're working with them as well to do that. We believe there's an opportunity both in existing data centers as that equipment gets refreshed, as well as new data center build-outs.
The other thing I would just add is, we know from the market intelligence, the market research, that there is currently a supply shortage to the extent the data center build-out isn't at the pace that was previously expected.
There still is clearly the replacement or the aftermarket, but we still believe there will be data centers built, and we feel well-positioned, not from a supply-demand perspective, but from a product perspective and our differentiated product and the things we're bringing to that market, just as we have in ag with the MultiFaster. Part of our product plan is tied to the connectivity of things and others. We're pretty excited, as Jeremy said, given that it's an entirely green shoot incremental revenue stream for us.
All right. If I may, one final question on a different topic. You talked about raising prices and inflation, some of the pull-forward that you noted. I am curious if you can give us a little more color in terms of additional action that you might have to take into 2027. With the price increase that you put through, are you where you need to be from a price-cost standpoint, or is there another round that is going to be required in 2027 in order to get to your kind of normalized targeted incremental margins? That is it for me. Thank you.
Yeah, let me touch on the cost pressures that we are seeing first. It is primarily around three areas. One is input costs. That is related to metals on the hydraulic side, both for raw material, but also in some of the tooling that we use. We have seen the cost of those go up. On the electronic side, it is really on the electronic components. Biggest drivers are the memory chips, but also some of the circuit boards. We are seeing inflation as well in freight, so freight costs remain elevated.
Fuel surcharges are as high as they have been since COVID. So we are seeing that increase. We are seeing an increase in utility costs as well, primarily in Europe. When we look at the year-over-year impact on the quarter, it is over 100 basis points from a sequential standpoint, up more than 50. So it is a meaningful impact on the gross margin line.
We have been putting in targeted pricing actions. We have had some surcharges in place, looking at freight policies. We did announce within our hydraulic segment a broader price increase, and that did lead to some orders pulling forward. So what we saw was an increase in the order take in July that was a bit lower in August, started to pick back up in September, and appears to have normalized here in October. So we do not see it as a long-term demand impact.
It was more of a pulling orders forward ahead of those announced price increases. We believe that we have covered the cost inflation with those increases. However, we have different types of pricing. We have pricing with OEMs, this contractual base that we have to work through. We have got list prices that we are able to be a little bit more flexible with certain communications.
Then there are levers, like I mentioned, with the freight that is more targeted in nature. So we are definitely reacting, taking action, but it is going to take some time for some of those actions to flow through the results.
Understood. Thank you so much.
Thanks, Mig.
We'll move on to Jeff Hammond with KeyBanc Capital Markets. Please go ahead.
Hey, good morning, everyone.
Hey, Jeff. Good morning.
Maybe just to start, so fourth quarter, I am just trying to understand kind of the underlying trend. I mean, it seems like you have one less week. I do not know if that is a 5%-7% headwind, and then you had the pull forward. Like, if we kind of strip all that out, what is kind of the underlying organic growth rate into fourth quarter? Then, it seems like in your comments, Sean, you are not ready to give 2027 guidance, but you want to point people more to a normal growth year as opposed to what was certainly been a great year.
Yeah. Thanks for the question, Jeff. I am going to allow Jeremy to give some of the specifics, but just directionally to provide a little more color on the prepared remarks and try and address the questions you asked there. I think it is important to ground on our Investor Day and what we have communicated.
We are committed to a 5% plus organic growth, and obviously, we feel really good in year one getting ahead of that. In fact, year to date, our growth is more than double that. Certainly, in our full year guide, would suggest we will grow double digits as well, acknowledging the growth rates are different by quarter. I think what is important to look at, though, is the comparables.
If you actually look at our growth rates either on a two-year or a three-year basis, and you look at it on halves of years rather than quarters, because there is a lot of noise in the quarters that Jeremy will mention, our second half is actually double the rate of growth on a two-year or three-year basis than our first half. So from our perspective and our lens, we are actually feeling a lot better.
We feel a lot better than we did entering this year, and hence why we have taken up our revenue guidance every quarter, because we viewed a lot of uncertainty in the back half, which has not materialized. In fact, we are very pleased with it. Then for me, I am always looking at trends, right? Not just a quarter, looking at R6s, R12s, and then looking at those demand indicators.
When I look at our order intake still being up double digits in the third quarter, when I look at our order book year-over-year up double digits, we are not seeing a slowdown. In fact, we see a lot of green shoot opportunities. However, knowing that we are going to lap these comps and exactly what happened here in the second half of the year, it gets tougher to continue to put up double-digit growth rates.
Trying to ground that as we enter next year, and now we will have more uncertainty because it is a full year instead of just one quarter left that we have great visibility into because we have the orders in-house and just need to execute. We would probably expect to commit to continue that 5% growth rate.
Now, a lot of things can play out, recessions, macroeconomic, outcomes of the election, but that is our job to manage through that. We are too small to make an excuse on what a market is doing. We are back to our targeted focus from a go-to-market perspective and going and creating our own growth, and I am really pleased with how we have done it this year, but acknowledging the fourth quarter on a year-over-year basis does look lighter, but there are many reasons for that. I will pass it to Jeremy to talk through that.
Sure. We have guided the fourth quarter to be in the range of $205 to 212 million, and that is. You compare it to the fourth quarter last year, it is down 3% to slightly up. But there are definitely some things impacting. First, I would highlight that last year's growth, as reported, was 17%, but stripping out the impact of the divestiture was 29%.
Now, that did benefit from the extra week, which it is tough to say what was that week and how would that impact this year's compare if we had an extra week. But I would say it is approaching $10 million benefit on the top line in the prior year. As I mentioned, we did have some orders pull forward that we estimate between $4 million and $5 million ahead of the price increase. That has about a 2% impact if those sales had been placed into the fourth quarter.
Again, I think the down 3% to slightly up when you remove the impact of the extra week and you considered orders that advanced were definitely in growing in that low mid-single digits. I would highlight that the second half is really playing out as we expected and we guided back in August. It is really more of a timing and with the addition of some incremental sales due to the acquisition of Radio Sound.
Last thing I would just point to is, obviously we have October results, and it was our best October ever in our company's history from a top-line perspective. Even at the guidance level, our second half will be the best ever. That is covering for CFP that we divested, which would have contributed close to $30 million or around $30 million.
Our fourth quarter, if we get to the high end of our guidance, potentially is the best fourth quarter ever as well. Again, we are not feeling any sort of slowdown or seeing anything. Obviously, it is going to be tough to grow on record years and record quarters and record half years, and that is a bit of the, hey, as we are heading into 2027, we still got a lot of planning left to do. We have got initial read of the year, but we anticipate our growth to continue, and we are committed to delivering on what we said in our March Investor Day of 5% plus through cycle growth.
Great. That is very helpful, Sean. Can you just talk about what you are seeing in distribution? One of your peers was kind of saying, one, it is accelerating, and two, there is really no restock. Just give me your thoughts on, are your distributors starting to restock, and are you seeing momentum building in distribution? Thanks.
Yes. As we have stated before, we do query our distributors on a regular basis to understand what inventory levels they carry. We did see some inventory increase in the third quarter. Part of that, as we mentioned, believe is due to orders being pulled forward. When you compare that to the sales increase that we have been seeing, and this is primarily related to our Sun Hydraulics business that primarily sells through distribution, they have been growing double digits.
From more of a DIO-type perspective, we do not see that the distributor inventory has stepped up. One area that we are watching is China. We did see some of that build up in China, and so we are staying in touch with those customers, understanding what the underlying demand is in those markets that we serve. But as I mentioned, we did see a slight drop in the orders after July, but we have seen that pick back up here as we exited September and into October.
Okay. Thanks for the time.
Thank you.
As a reminder, if you would like to ask a question, please press star followed by the digit one. Next, we will hear from Nathan Jones with Stifel. Please go ahead.
Good morning. This is Adam Farley on for Nathan.
Hey, Adam. How are you?
Hey, good morning. Maybe one more on demand trends. I appreciate the commentary around larger ag still remaining weak. Are you seeing any signs of maybe some improvement in that market? Then just a clarification too, did you say that you have similar content between small ag and large ag?
Sorry, repeat the end of that question. Do we have similar comp set, did you say? Content. Sorry.
Content between small ag equipment and large ag equipment.
Yeah, when you just think of a coupling or a MultiFaster, there's one MultiFaster on any tractor, right? A smaller tractor doesn't require as many lines, and so maybe the price per unit's a little bit lower, but it's one unit versus one unit of a large harvester with a MultiFaster on it, for instance. Jeremy, go ahead.
Yeah. Definitely from ag, if you look at the North American market, it's been down. If you look at the large tractors, the combines, it's been down. We follow what obviously our big OEMs are reporting. It is in that small tractor space where we are seeing some growth. But again, that's a big market for our Hydraulics segment, and we've been saying it for a few years now, it feels like, that ag has to rebound, has to come back. But that definitely is not a tailwind for us as of yet. Again, the mobile market remains strong for us, and even in industrial, has grew for us in the third quarter as well.
Yeah, so overall, the general growth that we're experiencing from Faster, again, index more to ag, is clearly more market share, more wins. We communicated at our Investor Day that in 2025, we had $60 million in new wins. We're above that pace for this year.
A lot of our growth is going back to our go-to-market and going and creating our growth and ignoring the noise of what's going on in markets and really having that targeted approach of those customers and leveraging our product plan with voice of customer. You've seen our consistent product launches over the last 18 months that are really targeted at incremental revenue and really how we're able to win more business.
Now, certainly we feel really good about the existing product portfolio, and selling a lot more of that, but you're seeing the step-up in our R&D, and you're seeing the product launches we're coming with that are becoming very meaningful and allowing us to win more business. Really, it's us creating a lot of that growth, and if we can get a little bit of this market help, tailwinds, it'll be very exciting for us.
Okay, that's helpful. My next question is going to be around supply chain. Could you just put a finer point on what's going on in the electronic component availability? I guess ultimately, do you think supply chain overall is still manageable for you guys? Thank you.
Yeah, the supply chain as it relates to electronics is very fluid. Memory chips have been in the news, just the rising cost and demand with the broad data center build-out. Now, one of things that could help if the data center build-out does slow as a result of some of the midterm elections or just capital constraints, right?
Maybe that helps the supply and the cost dynamic there. But that's still very fluid. We're starting to see some pressure as well on the circuit boards, and we have been working with suppliers for some time. We have taken a little bit of an inventory position on those. We ended the third quarter over $200 million in inventory.
Part of that is related to just building up for the higher sales, but some of that is due to taking some strategic positions on these electronic components, because we are seeing some lead times get pushed out, and it's something that we have to monitor. I think every company, electronics company, is dealing with it. It's not a very, very big cost component of our bill of materials, but obviously they are critical in our displays and in our controllers. You've got to have these components.
Thank you. Thanks for taking my questions.
Thanks, Adam.
There are no further questions at this time. I would now turn the floor back to Tania Almond for closing remarks.
Great. Thank you, operator, and thanks everyone for joining us today. We will be on the road over the coming weeks participating in both some in-person as well as virtual investor conferences. So, we look forward to connecting with many of you at these venues. Feel free to please reach out directly to me if you have any follow-up questions. Have a great weekend.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.