RBC Bearings Inc (RBC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 RBC Bearings earnings conference call.

My name is Carol, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr.

Steve Calk.

Please proceed, sir.

Good morning, and thank you for joining us today for the RBC Bearings fiscal second quarter 2008 earnings conference call.

On the call today will be Dr.

Michael J.

Hartnett, Chairman, President and CEO, and Daniel A.

Bergeron, Vice President and Chief Financial Officer.

Before beginning today's call, let me remind you that some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected or implied due to a variety of factors.

We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition.

These factors are also described in greater detail in today's press release and on the Company's website at www.rbcbearings.com.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website, as well.

Now, I would like to turn the call over to Dr.

Hartnett.

Thank you, Steve.

I'd like to add my welcome to each of you and thank you for taking the time this morning to join us.

We appreciate your continued interest in RBC Bearings.

We will follow the same format today as we've done in the past.

Dan Bergeron and I will be sharing the duties.

I'll go through some highlights for the quarter, and Dan will go into some of the details of the accounting treatments on specific points.

This morning we released our second quarter results, which are available on our website.

Let me take a minute to provide a few highlights.

Traditionally, our second quarter is the slowest as a result of summer vacation holidays for our customers and our plants as well.

As a result, it is one of the more challenging ones to predict.

In addition, this was a quarter when we relocated one of our larger plants into a new site, with all the attendant risks and difficulties that that entails.

I am pleased to announce that the move is behind us now, and we are fully up and operational in the new site.

With these considerations in mind, sales for the quarter were $78.2 million, up 6.8% from the same period last year and within our anticipated range.

We benefited from good order flow for the quarter, despite some minor constraints on product availability, principally as a result of the plant relocation on Torrington.

Product availability will be back on track in our third quarter.

For the quarter, aerospace and defense products represented 50% of the total sales, or $39.5 million, up 14.8% from last year.

Sales of industrial products, excluding Class 8 truck bearings, were up 6.6% from last year to $38.7 million.

Gross profit continued to improve for the quarter, up nearly 12% from the second quarter of fiscal '07, to $26.2 million this period.

Gross margin as a percentage of net sales improved in the quarter to 33.5% versus 32.1% last year, driven primarily by continued efficiencies across all of our businesses.

Our gross margin was slightly depressed as a result of a $300,000 charge in the quarter related to moving the API facility in Torrington.

On a GAAP basis, operating income increased 11% for the period to $14 million, the high end of our guidance range, and net income increased 18.6% over the same period last year to $8.7 million.

This produced $0.41 of adjusted net income per diluted share in the second quarter compared to $0.35 in the same period in fiscal 2007.

Dan will provide more color on this comparison later in the call.

Our second quarter earnings were also positively impacted by further debt reductions during the last year.

Over the past 12 months, we reduced debt by approximately $32 million, or 37%.

Our debt net of cash ending September of '07 was $48.5 million.

Operating cash flow for the quarter was $10.2 million, and this brings our operating cash flow for the trailing 12-month period to over $52 million.

Now let me shift gears and make some comments on our growth strategy.

As evidenced by our recent acquisitions of Coastal Bearing Services in Houston and Phoenix Bearings in the UK, we continuously look to position ourselves in markets where we see strong and continuing prospects for profitable expansion of our business and defensible franchises can be created.

In this case, we are addressing the need for large bore bearing products in the oil, construction, aggregate and wind markets.

As these acquisitions highlight, we are expanding our production capacity for these larger bearings.

Our plans now include the investment of approximately $25 million to $30 million in internal capacity expansion over the next 30 months, which will support our growth in the large bearing products.

Much of this initial investment will be the addition of machinery and equipment in our existing plants in Texas, Mexico and South Carolina.

We are currently working with a number of customers in several industry sectors to allocate these plant capacity expansions to support their most immediate product needs.

Turning now to margin performance, year-over-year quarterly gross margin expansion was 130 basis points.

This demonstrates our continued efforts on efficiency improvements and our manufacturing and planning activities, further plant consolidations, moderate capitalization, market channel positioning and new product introductions, as well as pricing.

I am confident we'll continue to make solid progress in each of these areas for the foreseeable future.

And as we've stated in previous sessions, we expect to see fiscal 2008 consolidated margins lead 2007 by at least 150 basis points.

Looking ahead, as a result of our visibility the business provides us, we are very confident about our performance for the balance of the fiscal year.

As of September, backlog stands at $191.2 million compared to $185 million last quarter and $175 million 12 months ago.

We have consistently maintained a strong backlog and have sufficient order book visibility today to support a high degree of confidence for the full year.

Our key markets of construction and mining, oil, defense and aerospace airframe have been unusually demanding.

Requests for proposals, designs and quotations for new projects have stretched our infrastructure continually over this period.

As a result, we are adding staff to accommodate these demands and accelerate our response to these opportunities.

We expect to see sales from these projects and capital expansions begin to work their way through our revenues as early as the fourth quarter of this year and demonstrate even more favorable quarter-to-quarter industrial comps next year.

We are pleased with the results so far this year and feel confident that RBC is squarely on the path to achieve its fiscal '08 objectives.

Looking ahead, we expect to see fiscal third quarter sales in the range of $80 million to $82 million and operating profit in the range of $15 million to $15.5 million.

Excluding Class 8 truck volumes, this revenue growth is in the 8% to 10% range, which is where we like to see it.

RBC Bearings has made considerable strides in what is traditionally a difficult quarter.

This would not be possible if it were not for the ongoing dedication and unparalleled skill of our workforce.

I know that this makes the difference to our customers, and it's why we have enjoyed so much success.

And I'd like to take a moment and publicly thank our team and encourage them to keep up the great work.

Now, I would like to turn the call over to Dan Bergeron to provide some additional color on the financials.

Thank you, Mike.

Net sales for the second quarter fiscal 2008 were $78.2 million, an increase of 6.8% from $73.2 million for the comparable period last year.

Net sales for the second quarter fiscal 2008 of $78.2 million was within the Company's quarterly guidance range of $78 million to $80 million.

Excluding the decline in Class 8 truck, net sales for the second quarter fiscal 2008 increased 10.8% over the same period last year.

Gross margins for the second quarter fiscal 2008 was $26.2 million, an increase of 11.6% from $23.5 million for the comparable period in fiscal 2007.

As a percentage of net sales, gross margin was 33.5% for the second quarter fiscal 2008, compared to 32.1% for the same period last year.

We did experience approximately 0.3 million of margin erosion associated with the move of our aerospace business in Connecticut from a leased facility to the newly built facility.

For the six-month period ended September 29, 2007, gross margin percentage was 34% compared to 31.7% for the same period last year.

This margin improvement is in line with our internal goal to increase fiscal year 2008 gross margin percentage by 1.5% to 34.2% from 32.7% in fiscal year 2007.

SG&A for the second quarter fiscal year 2008 was $11.9 million compared to $10.6 million for the same period last year.

As a percentage of sales, SG&A was 15.2% for the second quarter fiscal 2008 compared to 14.5% for the same period last year.

The increase of $1.3 million was mainly due to additional personnel necessary to support our growth plans and the inclusion of two acquisitions, Phoenix Bearings and Coastal Bearings.

Other net for the second quarter fiscal year 2008 was $0.4 million.

This includes $0.1 million of expense associated with the relocation of our aerospace division in Connecticut from a leased space to a new manufacturing facility.

The remaining $0.3 million is mainly amortization of intangibles.

Operating income was $14 million for the second quarter fiscal 2008 compared to an operating income of $12.6 million for the same period in fiscal 2007.

Operating income, excluding the costs associated with the move of our aerospace facility and disposal of fixed assets, was $14.4 million, an increase of 12.7% compared to adjusted operating income for the same period last year.

Operating income, excluding these charges, for the second quarter fiscal 2008 of $14.4 million exceeded the Company's quarterly guidance range of $13 million to $14 million.

As a percentage of net sales, operating income excluding these charges was 18.4% for the second quarter fiscal 2008 compared to 17.4% for the same period last year.

Interest expense net for the second quarter fiscal 2008 was $0.7 million, a decrease of $0.5 million from $1.2 million for the same period last year.

This decrease is mainly due to debt reduction from free cash flow.

For the second quarter fiscal 2008, the Company reported net income of $8.7 million compared to net income of $7.4 million for the same period last year.

This is a 18.6% increase year-over-year.

Diluted earnings per share was $0.40 for the second quarter fiscal 2008 compared to $0.35 per share for the same period last year, an increase of 14.3%.

Excluding the after-tax impact of the plant moving costs and disposal of fixed assets, net income increased 20.7% to $9 million in the second quarter of fiscal 2008 from an adjusted net income of $7.5 million for the same period last year.

Diluted earnings per share, excluding the after-tax impact of these charges, was $0.41 for the second quarter fiscal 2008 compared to an adjusted $0.35 per share for the same period last year, an increase of 17.1%.

Cash provided by operating activities for the second quarter fiscal 2008 was $10.2 million compared to $14.5 million for the same period last year.

The Company invested approximately $1.4 million in working capital, mainly inventory, in the second quarter fiscal 2008.

Capital expenditures for the second quarter fiscal 2008 were $4.5 million compared to $2 million for the same period last year.

The increase in CapEx was mainly driven by the construction of our new aerospace manufacturing facility in Torrington, Connecticut, and investment in new and refurbished machinery.

Given our current expansion plans, we expect capital expenditures to be in the range of $15 million to $20 million in fiscal year 2008.

In the second quarter fiscal 2008, the Company used approximately $1.2 million of cash to pay down debt and $3.6 million to acquire Coastal Bearings.

Total debt minus cash on hand for the period ended September 29, 2007, was $48.5 million compared to $78.7 million for the same period last year.

So, Operator, we can open the call now to Q&A.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Walt Liptak with Barrington.

Please proceed.

Good morning, guys.

Thanks.

My first question is about the capacity expansion in large diameter.

I wonder if you can tell us, you mentioned that you're in talks with customers.

What sector are those customers in, and do you have contracts lined up yet for any of the new capacity that you're proposing?

Sure, Walt.

The sectors are oil, construction, aggregate and wind.

We don't have contracts lined up yet for all of this capacity.

But we're quite far along with talks with many customers in those sectors, and we feel more than confident that, having long-term contracts, it won't be much of an issue.

Okay.

Is it a matter that as you sign contracts, then you put the capacity in place, or are you planning on putting the capacity in in anticipation of contracts?

No.

It will be done in parallel.

We have customers that have worked with us for many, many years.

And so they've made verbal commitments and not written commitments, but their verbal commitments were always something that we could go to the bank on.

And that's where we are today.

All right.

And as a second question, the capacity ramp that you're doing, the facility change in Torrington, is the $300,000 charge, is that it, or are there other charges that we'll see in the coming quarter?

It's Dan.

In Q3, Walt, it will be a smaller number, maybe another $100,000 of physical moving costs that have come through in this quarter, but it won't be anything like what we just reported in Q2.

Okay.

Are there any inefficiencies that may take place as a result of the plant move or any of the capacity expansion?

That was what we enjoyed over the previous 90 days.

As you will see on investor day here, the plant is completely up and operational and in full production.

And so, we had to move from one site to another site that was about six to eight miles away.

And so, all of those inefficiencies are reflected in that charge number over the quarter.

That's great.

Okay.

Thanks very much, guys.

And your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Please proceed, sir.

Good morning.

Good morning, Steve.

One of your specialty bearing competitors recently made a sizeable large-diameter acquisition a week or two ago for about $55 million.

I guess my question is, were you aware of that company, and would you do a deal of that size?

Steve, we were aware of that company.

We're under a confidentiality agreement, obviously.

And we would do a deal of that size, but we didn't do that deal.

Right, right.

So how would you characterize the market for other properties of a similar size that are out there?

Of a similar size?

Yes, I mean, or larger than your typical acquisition that we've seen over the last few years.

Is there anything big that you can buy that will kind of accelerate this 30-month build-out into large diameter bearings?

No, there isn't, not to our knowledge, and nothing that we've seen.

Okay.

But to reiterate, though, if it is out there, you would consider a deal in that range.

Absolutely.

Okay.

Of the three markets that you mentioned, the oil, wind and heavy equipment, how do you rank them by opportunity size, speed to market potential and the margin profile of those markets?

Well, oil is -- speed to market is very high, and construction speed to market is very high.

As a matter of fact, some of this expansion is in our capital numbers this year.

And so, I suspect of that $25 million to $30 million that we spoke about, $2 million to $4 million will be spent this year.

And there, we have contracts in the form of purchase orders, and we're flowing product in our fourth quarter.

So I think the speed to market for those two is very good.

I think the speed to market for the wind sector is longer for us because of capacity constraints.

We have capacity, but we have a small amount of capacity for those bearings.

Right.

And how about the margin profile?

Is any one of those markets significantly better or worse than the others?

Well, it depends a lot.

The answer is yes and no, and it depends upon where in the channel you're selling it.

If you're selling it to an OEM, typically, your margins are tighter than if you're selling it through some aftermarket channel to a user.

I would say of those three sectors, I would rank wind, as far as I've seen, the third of the three in terms of margin potential.

Okay.

So I guess given the immediate demand in oil and construction, and you did say you were going to spend some money this year, but why a 30-month build-out?

Is it just that you don't have the resources to go faster than that to capitalize on these markets?

Well, we're trying to do it in a measured way, and I think the first sweep will probably be 15 of the 30.

Okay.

And we want to put the 15 of the 30 in place, and we want to measure what our manufacturing costs are for some of these products that we haven't made in high volume before and make sure that we manage the surprises before we take the second phase.

I understand.

And so, in terms of the SG&A potential build-out relative to this, will monetization of these opportunities lag any SG&A or do you think like the contracts and capacity, it will be kind of concurrent?

It'll be mostly concurrent.

I think right now we've frontloaded a little bit of the SG&A in order to support some of these markets, but as the revenues flow in, that should normalize.

Okay.

And the last one, and I'll jump back in line.

Anecdotally, I've been hearing some stories about supply chain issues and delays in the aerospace segment.

Can you tell us what you're hearing from your customers or what is the market like right now in the supply chain?

Well, I think Boeing pushing out the 787 for six months is certainly a supply chain issue.

I think Boeing having done that probably did the industry a favor because I think putting that 787 volume on top of the rest of the industry demand today would exaggerate the supply chain problems.

So the market got a little bit of a breather in that regard.

We do hear in our sector for bearings that lead times are, in some cases, out to 110 weeks.

Wow.

Our lead times are not out that far, but they are for some products.

Right.

Okay.

That's great.

I'll jump back in line.

Thanks.

And your next question comes from the line of Peter Lisnic with Robert W.

Baird.

Please proceed.

Good morning, everyone.

Morning, Peter.

I was wondering if I could just ask on the product availability issue that you alluded to in the prepared remarks.

Do you have any idea of what that may have cost you in terms of top line or margin or any of those sorts of numbers?

Yes, probably $2 million.

In sales?

Yes.

All right.

And then in terms of this capacity that you're adding, the $25 million to $30 million, how do we equate that to what an underlying sales potential for that added capacity is?

I use -- when it's mature, I use $2 in sales per dollar of capitalization, if you're not doing bricks and mortar.

Which, in this case, you're not, right?

We are not.

Okay.

All right.

And then since there seems to be a lot of interest on wind and the capacity that you're adding here with the $25 million to $30 million, what addressable wind markets will you be able to serve with this added capacity?

I guess, in other words, what I'm asking is if you kind of look at the megawatt spectrum of turbines, will you be kind of in that middle range, the 1.5 megawatt to 2 megawatt, or will you be able to provide components for larger size megawatt turbines?

Certainly, we can go to the 2.5 megawatt turbine.

Okay.

So you'll be able to get up that far.

Okay.

All right.

That is all I had.

Thank you very much.

And your next question comes from the line of Vincent Damasco with the Colony Group.

Please proceed.

Yes, gentlemen, a few cleanup questions, I guess, on the top line.

How much did the Torrington move impact top line sales?

Was it the $2 million you just stated?

And I guess why are seeing that $2 million kind of fall into Q3?

Well, yes, it's more than half of that $2 million.

It's probably three-quarters of that $2 million.

I hope it does fall into the top line in Q3.

I suspect we're going to have it all cleaned up by the end of the third quarter, but we didn't bake it into the top line.

Then I guess maybe this was inferred in some of the other questions on the call, but some of the large OEMs, big construction guys, Terex, Cat, Manitowoc, [De Cyrus], all of them are facing manufacturing constraints.

How much of that is actually flowing through to you guys, and do you hear of any of them kind of holding back on orders to kind of catch up with their own supply issues and manufacturing constraints?

Well, I mean, we're seeing it.

I would say that it's flowing through to us in some cases in the form of constraining our top line in certain plants.

On the other hand, it's going to flow to us in other cases with new opportunities for revenue to grow the top line once we have some of these capital programs behind us.

But if you look at the market today for a lot of that equipment, lead times for that equipment are out six, nine, 12 months.

The manufacturers just -- there's just not enough support in the channel, in the OEM channel to produce the equipment faster today.

Okay.

And then, lastly, on the aerospace, if I did the math correctly, it looked like it declined 7% or so sequentially.

Can you give us some color on why that is?

I know Sikorsky and Boeing had sequential declines in deliveries.

Is there anything else to that?

Let's see.

I think our -- sequential, you mean first quarter to second quarter.

Exactly.

Do you have that number?

Well, at six months, we were at 17%.

I think it was mainly associated to the $2 million that Mike was talking about and half that being associated to the API facility that we moved.

That's all aerospace and defense.

But it would still be down about 3% sequentially, even if I add back in that $2 million?

I was just trying to get a sense of it's the second...

I think when I look at it, the aerospace and defense is up for the quarter, quarter-to-quarter, 17% and year-to-date 17%.

And I suspect the difference is the amount of production days in the first quarter.

There's more days to produce product in the first quarter than there is the second quarter because of vacations and holidays.

So that's an internal issue.

If you look at our order book, we substantially increased our order book in those sectors.

So that will start flowing out here in the second half of our year.

And Mike, when you rolled up your guidance or your outlook for the current or the past quarter last call, you were kind of skeptical about the European forecast that was provided to you.

Did that come in as expected or were there any surprises there, or was it just normal summer holiday weakness over there?

Well, when we layered it back, it was pretty much as expected.

We're in startup on a big contract in the first and second quarter over there.

So that really was the root of it.

So we should be coming out of that in the third and fourth quarter, which should help push our margins a little bit.

Okay.

Thank you very much.

And your next question comes from the line of Marty Pollack with NWQ Investment Management.

Please proceed.

Yes, hi.

Pretty good numbers.

I'm wondering if you could just describe the impact of the truck side, the Class 8 truck, on this quarter and how big is that?

And what is the general profitability there?

Because I would assume that even though if we're seeing some sluggish results here, by the time we get to second half '08 or certainly '09, this could be tailwind to your performance.

That's one question.

If I may, let me just start with that.

Hi, Marty.

I think the answer to that is for this year, in total, I think that sector should be off about $10 million versus what we saw in '07.

The profitability in '07, at the gross margin level, was probably as close to zero as you could get.

I think this year, the profitability is sort of low 20s at the gross margin level.

And I totally agree with you.

I think next year at this time or slightly later, there's going to be a tremendous demand for these products again.

Your profitability, then, you're saying this segment is -- is it at the level of the rest of the company?

No, it's not.

It's in the low 20s.

You're saying low 20s gross margin.

Right.

Oh, okay.

If I may, just looking at some of the trends we're getting I think out of SKF and Timken, they reported -- you know, Timken has also large industrial bearings exposure.

I'm just wondering whether in terms of what your look versus their outlook, they have significantly lower margins than you do in the industrial side.

But I'm just trying to remember.

Your exposure is very heavily weighted to the larger type of bearings on the industrial side as well as, of course, the aerospace.

I'm just wondering, are you competing with Timken in large niches of your business and SKF, which are some of the bigger players there?

Well, we have small bearings as well as large bearings in our current offering, and so we're expanding our large bearing offering to different sizes.

For our current offerings, without the expansion, our competitive posture relative to Timken and SKF on the industrial side is very small.

As we expand into larger bearings, we'll probably be more competitive with Timken, but not so much with SKF.

But Timken itself is not -- I don't believe they're heavily exposed to aerospace, nor are they heavily exposed to, I think, the bigger type bearings markets, if I recall.

So I'm just wondering, if you had to describe how much of your business overlaps with Timken today, how much of that business is, in fact, competing with them head on?

With Timken today?

Yes.

Oh, golly, it's really a small amount.

It's probably in the $20 million to $30 million range.

All right.

Thank you very much.

And your next question comes from the line of [Tom Lycap] with Value Holdings Management.

Please proceed.

I apologize, I got in late on the call.

Did you give your percentage of sales to the aerospace and defense industry?

We did.

For the quarter, it was 50% of our sales.

50%.

And how did that compare to last quarter, again?

It was probably a little higher last quarter.

And in terms of the CapEx plans, you've got $25 million to $30 million over the next 30 months.

What has been your typical run rate for maintenance CapEx?

Our CapEx normally runs around $10 million to $12 million, in that range, without any of these special projects, and usually of that $10 million to $12 million, around 30% is maintenance related and 70% is capacity related, unless we have some special project we're working on like a new roof or something.

So then is this $25 million or $30 million plan, is that incremental to the 70%?

Yes.

Yes.

Okay, that is.

All right.

And then in terms of the sales figures you gave for the new capacity, you said about $2 in sales per dollar of CapEx.

When it's mature.

When it's mature.

And just kind of looking at your current margins, if you use that as sort of a proxy, that seems to imply about a high 20% to mid 20% return on this invested capital.

Does that sound about right compared to what you all are forecasting?

That's how the math works.

All right.

Well, good.

So these margins, then, you gave kind of the breakout earlier between the oil, construction and wind, but kind of on average, those are going to be comparable to current margins.

Yes.

And from an outside perspective, it seems a little curious to expand capacity into heavy construction now, given where we're at in the U.S.

Can you shed some more light on why that's an industry you want to get more levered to at the moment?

Well, if you believe in Caterpillar's business plan, as one manufacturer, their objective is to be a $50 billion company by 2010 and $100 billion by 2020, and they seem to really believe their program.

So I think it's a matter of is the world really going to need all these additional basic commodities over the next ten years and if they do, then they're going to need machinery to dig and haul the dirt.

So is it fair to say that, at least in terms of the construction portion of this new capacity, that the bulk of it, if not all of it, is kind of promised for Caterpillar or are you bringing on any new heavy construction customers with this expansion?

It's not dedicated to Caterpillar.

There's several manufacturers in that realm that are all trying to do everything they can to expand capacity.

And so we're looking right now at trying to determine the appropriate machinery so that it can support the mix required for those three market sectors.

All right.

And then one last question.

According to the press release, it looks like the total number of employees has gone up 130 since last quarter.

Is that accurate?

I'm not sure what the last -- I don't have the last quarter number in front of me.

That last quarter, you said you're at approximately 1,900 and now you're at approximately 2,030.

Right.

We had the acquisitions in there, two acquisitions, and head count increase.

Are the head count increases, the organic, let's call them, head count increases, are those more geared toward your sales force, kind of as you alluded to earlier in the call, or is that spread across the company?

Well, on the SG&A side of the business, there's certainly been an expansion, some expansion of the sales force.

Unfortunately, the way we do business, there also has to be an expansion of the design engineering and customer service people to support the sales force or there's no point in putting the sales guy out there.

So it's been sort of across-the-boards for those functions.

Great.

Well, thank you and good luck with the expansion plans.

Thank you.

(OPERATOR INSTRUCTIONS)

And your next question is a follow-up question from the Walt Liptak.

Please proceed.

Mr.

Liptak, your line is open.

Thanks.

Just a couple of follow-ups.

Of the 10.8% organic growth ex-trucks, could you break that out industrial versus aerospace-military?

Yes.

Of the 10.8%, less heavy truck, 14.8% was aerospace and defense and 6.6% was industrial.

And what are you assuming for the third quarter?

And I guess the question is industrial seems to be a little bit mixed here.

What are you assuming for your industrial growth?

I don't have that in front of me, but it's something we can get together.

And the tax rate for the third quarter?

It's 34.7, 34.5 to 34.7.

Great.

Thanks.

And your next question is also a follow-up question from the line of Steve Barger.

Please proceed, sir.

Could you just tell me how the distribution business is holding up for the short lead time market and if there are any notable areas of strength or weakness there?

The distribution business was very favorable for us in the quarter and so that is holding up for us extremely well.

We have a few new programs going on where our key distributors can buy products from us directly over the Internet and that's one of the things that's helping our volumes there.

Any specific end market in the short lead time business that really is exhibiting a lot of strengths or weakness?

Oil.

Okay.

Thanks.

And there are no additional questions in the queue at this time.

I would now like to turn the call back over to management for closing remarks.

Well, I'd like to thank everybody for participating in the call today.

We are going to go back to work now and try to deliver an outstanding third quarter, and we'll talk to you again in January.

Thank you for joining in today's conference.

You may now disconnect, and have a wonderful day.