RBC Bearings Inc (RBC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 RBC Bearings Earnings Conference Call.

My name is Carmen and I'll be your coordinator for today.

I would like to turn the call over to your host for today, Mr.

Michael Cummings.

Please proceed, sir.

Thank you.

Good morning, and thank you, all, for joining us today for the RBC Bearings Fiscal Third Quarter 2008 Earnings Conference Call.

On the call today will be Dr.

Michael Hartnett, Chairman, President and Chief Executive Officer and Daniel Bergeron, Vice President and Chief Financial Officer.

Before beginning today's call, let me remind you that some of the statements 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 conditions.

These factors are also described in greater detail in the press release and on the Company's website.

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.

Now, I'd like to turn the call over to Dr.

Hartnett.

Well, thank you, Mike.

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

As always, we appreciate your continued interest in RBC Bearings.

Today, we are going to follow the usual format.

Dan Bergeron and I will be sharing the duties.

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

Last night, we released our third quarter results.

If you haven't seen our release, you may view it in more detail on our website.

Let me provide you with a few highlights.

Sales for the quarter were $80.4 million, up 5% from the comparable period last year and within our anticipated range.

Excluding Class A truck bearings, our sales growth for the quarter was 8.9%.

For the quarter, Aerospace and Defense products represented 52% of total sales, or $41.6 million, up 4.4% from the same quarter last year.

Year-to-date sales of aircraft products are running 12.5% above last year.

Industrial product sales, excluding Class A truck bearings were up 14.7% to $35.2 million for the period.

Industrial distribution was 27% better than the same period last year and industrial OEM, less the effective Class A truck market, was up 7.6%.

Our Aerospace sales this quarter reflected some production delays and sign-offs associated with plant moves and certification of products.

This impact was a few million dollars in revenue during the term and it moved their revenues from the third quarter to the fourth quarter.

And this should be completely behind us at this point.

Gross profit improved 12.3% to $27.6 million from $24.5 million in the third quarter of fiscal 2008.

Gross margin as a percent of sales for the quarter was 34.3%, a 220-point basis improvement over the same period last year.

Operating income increased 5.4% on a GAAP basis and 12.4% on an adjusted basis year-over-year.

Net income was $9.6 million or $0.44 a diluted share, as compared to $9.4 million last year.

Net income increased 17.9% to $9.5 million when we exclude the after-tax impact of plant moving and consolidation costs, disposal of fixed assets and the CDSOA payment compared to $8.1 million for the same adjusted period last year.

Dan will provide more color on a year-over-year comparison later in the call.

Our debt for the quarter ended December 2007 was $51 million, which decreased 29.5% over last 12 months.

This equates to a leveraged ratio of EBITDA to debt on a trailing 12-month basis of less than 1 time.

Debt net of cash as of December was $42.1 million.

And operating cash flow for the last nine months totaled $24.6 million.

We are pleased with the results this period and feel that we have good momentum going into the last fiscal quarter of our 2008 and into 2009.

The outlook for 2010, at this stage is very, very favorable.

During the quarter, we saw continued strength from our primary markets, including aerospace, defense, construction, industrial distribution, oil and wind.

Either this strength was demonstrated in new orders -- in fact, our order book expanded to $192.7 million from $178.1 million at the end of the third quarter last year -- or in programs that were announced by the government to our key OEMs, where we have specific and identifiable content, or in inquiries that we currently have moving to our proposal and contract process that we have a high confidence in closing.

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

We've always spoken about targeting a revenue growth rate in percentage terms that would be in the low double-digits per year.

As we discussed last quarter, we continue to position ourselves in markets where strong and continuing prospects for profitable expansion of our business exists and defensible franchises can be created.

We certainly are planning around this level of growth in 2009 and see growth acceleration in 2010 and 2011, as new programs, such as the 787, the Joint Strike Force Fighter, the A380 ramp-up and wind among others come online in a meaningful way.

We like where we are today in terms of product offerings, markets and our ability to just plain execute.

In this regard, our recent acquisitions of Coastal Bearings Services in Houston and Phoenix Bearings in the UK are progressing well and they are contributing as expected and we are working through expansion programs at both sites.

Strong demand for large bore bearing products in the oil, construction/mining, aggregate and wind markets continues.

In fact, demand for bearing and gear products for the wind market materially dilutes the available capacity to support other markets, leading, in part to today's shortages that many of you have spoken to me about.

In fact, when you convert the number of wind turbines that must be installed to meet the national objectives of producing 100 gigawatts of electrical power generated in North America from this source by the year 2020 to bearing dollars, approximately $700 million to over $1 billion of bearings per year must be consumed in the United States each year for the next 12 to support this objective.

The 100-gigawatt total in 2020 will be less than 10% of the electrical power consumption in North America at that time.

The world capacity for bearings is not close to meeting this demand and supporting similar objectives of this scope occurring in India, China and Europe.

Back to the United States, the wind industry did not exist in its current scale in this country before 2005.

We estimate that pre-wind annual market for bearings consumed in the United States for these wind market sizes were less than $700 million pre 2005.

To more fully service this small component of this growing demand, we previously announced an initial investment of approximately $25 million to $30 million for internal capacity expansion, much of which is underway today.

We expect to see the first evidence of these investments show up modestly in our revenues in the third or fourth quarter next year.

Now let me turn to margin performance.

Gross margin expanded by 80 basis points and 230 basis points on a quarter-over-quarter and year-over-year basis respectively.

The strength of these results underscores the margin expansion opportunities we've discussed for several quarters now.

We continue to benefit from our investments in enhancing the efficiencies across our businesses, plant consolidations, strengthening market channel positions, improved pricing and mix improvement.

Importantly, we are well on our way to exceeding our guidance of over 150 basis points improvement and gross margin for the full fiscal year of 2008.

Our management, manufacturing and sales teams understand the importance of maintaining a high level of service and assurance to our customers at these extremely busy times.

I want to personally thank each of these members of the RBC team who are listening to the call today for their continued hard work and dedication to our customers.

In closing, I want to take a moment and share my thoughts on our position, given the current economic environment.

We are very pleased and secure that there are some very important macro forces at work in our core markets of aircraft, defense, construction, oil and wind that will support a strong business plan over the intermediate term and beyond.

We continue to differentiate RBC Bearings by improving our internal capacities and capabilities and service to our customers and are confident that this ongoing commitment to improvement coupled with new product initiatives in dynamic markets will continue to service well for the periods ahead.

Now, I'd like to ask Dan to review the financials.

Thank you, Mike.

Net sales for the third quarter fiscal year 2008 were $80.4 million.

It was an increase of 5% from $76.5 million for the comparable period last year.

Net sales for the third quarter fiscal 2008 of $80.4 million were at the lower range of the company's quarterly guidance range of $80 million to $82 million that we gave on the Q2 call.

And as Mike has already explained, this was mainly due to the time of the shipments from Q3 to Q4.

Excluding the decline in the Class A truck, net sales for the third quarter fiscal year 2008 increased 8.9% over the same period last year.

Gross margin for the third quarter fiscal 2008 was $27.6 million, an increase of 12.3% from $24.5 million for the comparable period in fiscal 2007.

As a percentage of net sales, gross margin was 34.3% for the third quarter fiscal 2008 compared to 32.1% for the same period last year.

For the nine-month period ended December 29, 2007, gross margin percentage was 34.1% compared to 31.8% for the same period last year.

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

SG&A for third quarter fiscal 2008 was $12 million compared to $10.8 million for the same period last year.

As a percentage of sales, SG&A was 15% for the third quarter fiscal 2008 compared to 14.1% for the same period last year.

The increase of $1.2 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 third quarter fiscal 2008 was $0.4 million.

This including $0.1 million expense associated with the relocation of our aerospace division in Connecticut.

And the remaining $0.3 million is mainly amortization of intangibles.

Operating income was $15.1 million for the third quarter fiscal 2008 compared to an operating income of $14.3 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 $15.3 million, an increase of 12.4% compared to adjusted operating income for the same period last year of $36 million - I'm sorry, $13.6 million.

Operating income excluding these items for the third quarter fiscal 2008 of $15.3 million was within the company's quarterly guidance range of $15 million to $15.5 million.

As a percentage of net sales, operating income excluding these items was 19% for the third quarter fiscal 2008 compared to 17.7% for the same period last year.

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

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

For the third quarter fiscal year 2008, the company reported net income of $9.6 million compared to net income of $9.4 million for the same period last year.

Diluted earnings per share was $0.44 for third quarter fiscal 2008 compared to $0.44 per share for the same period last year.

Excluding the after-tax impact of the plant moving costs, disposal of fixed assets and payments received under the CDSOA payment program, net income increased 17.9% to $9.5 million in the third quarter fiscal 2008 from an adjusted net income of $8.1 million for the same period last year.

Diluted earnings per share excluding the after-tax impact of these items was $0.44 for the third quarter fiscal 2008 compared to an adjusted $0.38 per share for the same period last year.

And that was an increase of 15.8%.

Cash provided by operating activities for the nine-month period ended December 29, 2007, was $24.6 million compared to $42.2 million for the same period last year.

Over this nine-month period, the company invested approximately $2.2 million in working capital.

Capital expenditures for the nine-month period ended December 29, 2007, were $14.3 million compared to $8 million for the same period last year.

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

During the nine-month period ended December 29, 2007, the company used approximately $8.2 million of cash to pay down debt and $7.9 million to finance acquisitions.

Total debt minus cash on hand for the period ended December 29, 2007, was $42 million compared to $59.2 million for the same period last year.

And at the end of December, the company's net debt to total capital was 16.8% compared to 27% for the same period last year.

So I'll turn it back to Mike now to discuss the fourth quarter guidance.

Okay, thanks, Dan.

Now, I'd like to give you guidance for our fourth quarter and the full year.

We expect sales in the fourth quarter to be between $88 million and $92 million and operating income to be between $18 million and $19 million.

Combined, year-to-date results will bring the full year to somewhere between $325 million and $330 million in sales and produce total operating income of between $63 and $64 million.

I'd like now to turn the call back to the operator and answer any questions that you might have.

[OPERATOR INSTRUCTIONS]

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

Please proceed.

Hi, thanks.

Walt Liptak with Barrington.

Good morning, guys.

Good morning, Walt.

First question is just, in the outlook, the tax rate that you're expecting for the fourth quarter?

About 35%.

Okay, great.

And then, everyone is kind of gloom and doom about the economy.

And in your industrial businesses, you called out the things that were still strong.

Are you seeing weakness show up in any -- or where are you showing weakness showing up?

Well, we're by and large, in total, we're not seeing much weakness, if any.

And if we are seeing weakness, it's probably in the smaller-sized bearings.

But we're not really seeing too much there and it's more than offset by demand for our larger sizes.

So for the most part, that capacity is spongable.

Okay.

Let me see if I can drill in a little bit more.

60% of your business, roughly, is recurring revenue that goes through distribution for replacement.

What are you seeing from the channel?

Is there any inventory correction going on?

Anything that could hurt your revenue in this soft economic period?

Let me just correct that for you, Walt.

A little over 30% of our business goes through distribution.

And we have a big chunk that goes to the after-market and defense.

And then we have a product that goes into the OEMs that's used in their after markets.

So on a total basis, 60% of our total revenues go into the aftermarket.

So -- ?

Okay.

Then I guess can you focus on the distribution and then what you're seeing in the aftermarket?

Yes, I think the industrial distribution -- the information that we have so far, Walt, is the information from the third quarter and, obviously, just January.

And the information for the third quarter, our industrial distribution was extremely good.

I mean, if I circle back to the summary there, our total industrial distribution was up 27% in that quarter alone.

And some of that came in because companies that we acquired were industrial distribution-oriented.

And if we just look at the organic growth, it came out of -- or net back the effects of those companies, it was almost 12%.

So we're seeing a good, strong performance from the industrial distribution sector.

I would say that the aircraft distribution sector, year-to-year, seems to be about flat.

So, I think there's a little bit of inventory correction going on in the aircraft distribution sector.

But it's being more than offset by the aircraft OEMs.

Okay.

And if I may just ask one more and then I'll get back in queue.

You talked a little bit -- I'm going to switch gears -- about the wind power demand and that the investment that you're making.

Do you have customer commitments yet?

What can you tell us about your discussions with customers or any contracts?

Well, we have several customers, right now, where we're working towards memorandums of understanding.

And we're close on memorandums of understanding on a few of them.

So, I'm highly confident that we'll be able to close those MOUs.

Okay.

Thanks very much.

And our next question comes from the line of Steve Barger from KeyBanc Capital.

Please proceed.

Good morning.

Good morning, Steve.

Good morning.

Thanks for the commentary on the large diameter wind bearing market.

Sounds like a great opportunity.

The balance sheet being in the shape it is, is there any way that you can accelerate entry there via additional acquisitions?

Yes.

Well, can you talk a little bit about the size of the companies that might be available and when we might be able to see some activity there?

Well, I think those companies are in the size range of $30 million to $60 million in revenue.

And the timing on something like that is always uncertain because of the process.

But if anything like that happens, it's more likely to happen in the next six months than the six months after that.

Okay.

So, is it fair to say that you're in -- are you talking to anybody with a company of that size right now?

As you probably know, Steve, there's all sorts of memorandums floating around with companies that have those capabilities.

And obviously, we read the books.

And the ones that we're interested on, we return the calls.

But it really hasn't gone much farther than that, at this point.

Okay.

Thanks.

Over the last couple of years, SG&A in absolute terms has grown at a mid-team percentage rate.

And we know you made some investments this year, in terms of being able to build out your design and engineering capabilities.

How should we think about growth of SG&A in FY '09?

Can you put a range around it?

Yes, when it gets over 14%, we have to get the weed control out and try to chop it back.

So we try to keep it between 14% and 15%.

The closer to 14% it is, the happier I am.

And do you think that's achievable in '09 to commit the low end of that -- around 14%?

I'll let Dan answer that.

Well, I think right now, for the nine-month period, we're at about 14.8%.

I think for the year, we'll probably end up a little lower than that.

But remember, we invested this year and some of that cost is getting carried into next year on the wind market.

So we're not going to see that revenue until the third and fourth quarter, maybe, of next year -- some of that revenue.

So I think we're, still over the next year, going to be in that 14.5% range for fiscal year '09.

Okay.

And last question, when you look at the backlog growth, can you talk about where you really saw it, industrial versus aerospace -- pockets of strength?

And just give us some color there?

Well, typically, the aerospace products have a longer lead-time and therefore fill in the backlog disproportionately.

So, we are definitely seeing much more strength in the aerospace market.

In fact, when we looked at January just before this week, we looked at our order book for January and our backlog exceeded $200 million.

And most of that difference was aircraft.

So the aircraft backlog is really building out.

Very good.

I'll hop back in line.

Thanks a lot, gentlemen.

And the next question comes from the line of Peter Lisnic from Robert Baird.

Please proceed.

Good morning, gentlemen.

Good morning.

Good morning, Peter.

I guess if I could just go back to one of Walt's questions on the aircraft distribution side being flat, can you give us some insight as to why that might be?

Yes, I think probably 12, 18 months ago, the aircraft distribution loaded up on product.

And so, over the last year, they've been leading it off.

And typically, absolutely, that's the way that sector has always run since I've been in the industry.

I mean they go through peaks and valleys.

And last year, probably '07 -- '08, our fiscal '08 was the valley.

And I suspect, when you see the 787 released for production, you're going to go back into a peak as those guys start building out all of their positions again.

Okay.

All right, fair enough.

And then on the industrial distribution business, you said the organic growth number was 12% or so.

Can you give us a sense as to what that order book looks like, or what the order counts there are?

Because I think one of the concerns out there is that the industrial business will, to some extent, suffer tougher environment in fiscal '09.

So seeing what the order book might be like, I think, would be helpful or useful.

Typically, that doesn't go into order book.

That sector -- the order comes in and it's often, more likely than not, shippable the same day.

Okay, so it's short cycle.

It's very short cycle.

And some of the things that we've been doing in order to encourage growth in our sales there are increasing our inventory positions of what we call [high creator] products.

In order words, those products that are in high demand, nationwide.

And we don't want to achieve a stock out.

So we've invested in those inventory positions for high-turn items.

And it's paying off.

We've also established some inventory expansion on the West Coast that's also been very beneficial to servicing the West Coast, which wasn't serviced as well as it should have been with RBC products.

Okay, all right.

And then, I guess along those same lines, if I heard you right, it sounds like '09 will be -- you were talking about your double-digit top line growth comparisons.

I guess the first question there is that organic or does that include some acquisition numbers in there?

It doesn't include an acquisition.

It'll be organic.

Yes, okay.

That's fine.

But then, what I was intrigued by was the comment that you expect that growth to accelerate in fiscal years 2010 and 2011.

And I assume part of that is just the 787 and the 380 and things like that coming through and wind.

But can you maybe give us a bit more granularity on how you expect to see growth accelerate from '09 into 2010 and 2011?

Or is it just that simple?

It's the 787.

It's wind and 380 and those sorts of things?

Yes, I mean the list of programs we have blossoming -- there's probably a dozen programs.

I just touched the top four.

But there's a number of programs that we've been working on for several years that are coming to maturity.

We talked about the 787 and you know what the numbers look like there.

There's an expansion in 737 production.

There's an expansion in the airbus production under the A380.

The A400 is coming online.

We have industrial gas turbine business that's expanding nicely.

And we have some important horizontal works going on with key construction OEMs to build out our position that is with those OEMs in important ways.

And that's bearing proof.

And you add the wind market to that and the Joint Strike Fighter on top of the pile.

And you can see considerable demand.

And it's to the point where we're spending a lot of time to understand what might be our capacity constraints.

Okay.

All right.

Thank you very much.

Okay.

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

Please proceed.

Yes, gentlemen, thanks for your time.

Just two questions.

One on the aerospace side.

I guess with the difficulty with the plant move or some lost sales opportunities, how much of that in the sequential uptake in Q4 as being realized in the current quarter.

And then, secondly, on the other side, it seemed like it had -- the other segment had a nice take-up in both sales and margins.

Could you just provide a little bit of a color on what's being seen in there?

Okay, the first part of your question had to deal with the move-out of the aircraft product from one quarter to the next.

Basically, when we moved the plant -- our plants are highly coordinated.

Some plants do the initial processing and other plants do the finishing and assembly.

And when we moved the plant in Torrington to the new plant in Torrington, we got behind the curve on the production rate because of -- basically, management was overwhelmed with all the details of moving the plant.

And so, we backed up a couple million dollars worth of sales in the quarter that moved to the fourth quarter.

And obviously, when you move plants like that, because of the certification process for aircraft products, the OEMs have to come in and the government comes in and the Navy comes in and they certify and sign off on new processes in your new plants.

And so sometimes the timing of that doesn't work perfectly.

So, by and large, that's the nature of it.

There are other smaller events around the horn in other groups.

But the major part of it was that aerospace move.

The second part of your question was industrial distribution?

No, on the other segments.

The other segments.

Oh, the other segments.

Dan's the other specialist.

I'll turn it to him.

That was mainly our collet business in Europe.

And we sold machine tool collets to the industrial market out of our Switzerland facility.

And that business is doing very well.

But going forward, are we looking back for more normalized, low single-digit margins from that segment?

Or is it going to be sustained in double-digits?

It'll be sustained.

Yes, there were some improvements we made to Switzerland, also.

But just getting back to the first question, with the facility move.

And I know you had to get the FAA certification of the new facility to ship out of it.

I think it was with the last call or in Q2, you had a few million-dollar slip, which I presume fell into Q3.

And then whatever slippage occurred in Q3 is now falling into Q4.

So are we talking collectively $4 million to $5 million in revenue that is moving around, or is it net $2 million to $3 million?

Yes, it's net $2 million to $3 million.

It's like a pool ball.

We exchanged the product from one quarter to the next to the next.

But we will have it all cleaned up by the end of the fourth quarter.

Okay.

Great.

Thanks for the color.

Your next question comes from the line of Marty Pollack from NWQ Investment Management.

Please proceed.

Yes, hi.

Nice quarter.

Thank you.

If I may, just on acquisitions, you have been able to really make some tiny -- well, very small acquisitions at incredible prices with great economic value generated.

Looking into wind side, as you talk about the wind business and the opportunity there.

But you're describing a much bigger type opportunity.

On the metrics, to get involved in that business, is the acquisition is going to be anything similar to what we've seen so far on the other acquisitions you've made?

Marty, the problem with -- I think the straight answer is no.

And the problem is usually the size of those acquisitions, when they get to $40 million or $50 million in revenue, they get these investment banks all involved and they're all writing memorandums or creating a sale process.

And so you're moving to multiples in the five to six to seven times trailing, sometimes, projected EBITDA.

So the smaller businesses that are under performing, just aren't interesting, are more interesting to us than the investment bankers.

The larger businesses that are performing are more interesting to the investment bankers than they are to us.

Unfortunately, the wind group falls into the latter that we're looking at.

But nevertheless, I mean the opportunity of this has some kind of mega-potential that therefore, you're saying, assuming you make an acquisition there, it will be justified by its stellar growth opportunities venturing into new market?

Right.

If we believe the opportunities were real and achievable by the management team in the intermediate term, then you could get to a justification of some price.

You have currently, I think, a $10 million authorization of buyback stock.

You've not done that -- not done too much buying.

The stock is now, I think, trading near its lower end of its range, obviously about 30% from the previous high.

Fundamentally, this story hasn't really changed.

We have almost the same earnings dynamic in place.

Do you see a share buyback as really a viable alternative to any of the other options?

Obviously, continue to grow the business.

But any reason why you would not be buying stock here?

Or would that, presumably now that earnings have arrived, you'd be free to exercise that opportunity to the stock?

And should we assume in that guidance that shared purchase is built into those applications?

Marty, when we put the buyback program in place, it was mainly to try to offset any dilution from our incentive stock option programs that we have in place.

I mean have a $10 million buyback -- I mean on 21 million shares outstanding doesn't move the needle that much anyways.

So I think if you looked year-to-date, the buybacks match to what the dilution was from the shares that might have been exercised through these incentive programs.

And that was the main reason for the program that we put in place.

Is there any reason at this point not to consider a share repurchase as a more sizeable one?

Your financial liquidities -- you're in pretty good shape.

The stock seems to appear, relative to its very strong growth dynamics overall on a secular basis, you would think the stock is quite an attractive opportunity here.

Well, and we do discuss that and we have that discussion with our board and what's the best way to proceed with the cash flow and the shape of the balance sheet.

And so it's obviously a point that we do discuss.

And as you know, we like to focus a lot of our free cash flow on acquisition work.

So, I'm not saying, no, it's not something we would do or yes.

But it's definitely something that we do have discussions about.

Just one last question.

As far as bearing on the other large competitors seems to mean the larger diameter type products, where we're seeing a lot of boost releases out of Timken.

I'm just wondering if you see as a competitor of Timken becoming more formidable in some of the niche areas you are involved with.

Or is it the other way around?

I'd say they are becoming less formidable, Marty.

And is that specifically because of the product areas you are involved with?

Yes, I think they have a certain -- market-by-market, sector-by-sector they have a certain business objective, which is really quite different than ours.

And so they seem to be moving at a direction different than the direction we're moving from a market standpoint.

So that's great.

Okay.

Thank you.

The next question comes from the line of Andrew Obin from Merrill Lynch.

Please proceed.

Yes, good morning.

Good morning, Andrew.

Just a more philosophical question observation, I believe somebody had pointed this out to me last night that this is the first time you guys actually did not beat your own internal expectations that you publicly stated for the street.

And I was just wondering if something else is happening inside the company with all these moves, with revenues slipping forward because, before, revenues seemed to slip from third quarter to second quarter and we were beneficial of this [strength].

Can you just explain from a 30,000 foot view what took place over the past couple of quarters and what gives us more confidence that you guys start beating your own internal expectation?

Or is it just pure macro?

Well, I think it's nice to be able to put guidance out there that you can beat.

And I think one of the problems is you guys have really improved your calibration of our guidance to the point that there's not $0.02 difference between what we're projecting and what you're publishing.

So I'd say that you're really zeroing in on our hedges.

I think there's nothing macro going on in the company.

I mean when you do move a plant or you tool up a new product line or you introduce a new product, sometimes things don't go exactly the way you would like them to go.

And I think every business has some of that.

We had a little of that over the last six months.

And had we not had it, we would have beat our guidance.

But that means a lot of good companies go through that process.

But once it's over, things get back to normal.

And from where you stand, looking at the macro, looking at the operational performance, do you feel that this was just normal operational hiccup?

And I understand it's tough when Wall Street is staring at you, and things should go better going forward?

Yes, I mean we've had a full week this last week our industrial conference here in Connecticut with all of the key members of our sales, marketing and manufacturing teams here discussing budgeting for '09, new programs, new projects, projections and so on.

And I have never been more confident in our ability to execute.

Thank you very much, Mike.

And the next question comes from the line of Edward Marshall from Sidoti and Company.

Please proceed.

Good morning, gentlemen.

Good morning, Ed.

I think on the second quarter call, I think that you were asked about the growth that you'll be seeing year-over-year in the fiscal 2009 gross margins.

I just wanted to see -- I think the comment was of about 100-basis points that you would expect year-over-year.

and I know that was preliminary guidance.

I just wanted to see if you'd care to shed some color on that or update it for us.

Would you expect it higher, lower or -- ?

Ed, right now, I'd say we'll leave it there into our fouth quarter conference call, when we get closer to finishing our budget reviews here and our own internal planning.

And then we'll put our target out on where we expect to see that gross margin improvement in fiscal year '09.

Okay, so as of right now, the 100-basis points is where we'll be sitting?

Yes, year-over-year.

Year-over-year, right.

Okay, fair enough.

And comments on backlog.

It looks like fiscal 2007 was averaged out about 16% growth, year-over-year, fiscal 2007 over fiscal 2006.

As I look through fiscal 2008, it looks like you're showing a high single-digits, maybe [9.3%] on an average basis.

Can you comment on that as to what could possibly be slowing the backlog here?

Yes, Ed, I would say that the backlog snapshot at the end of our third quarter does not reflect what we have moving through our system today.

I think we're going to have some very meaningful bookings in the next 90 days that are going to change that more towards the mid-teens, percentage-wise.

Now is that due to 787, or that type of order entry?

You know what, it's not really due to the 787.

That hasn't really begun yet.

But it's due to some new product releases that we've made that we're in the process of completing contracts on.

Okay, I understand.

And then, I guess, lastly, you mentioned about a $30 million to $60 million acquisition as possible.

Is it fair to assume that would be in a large bore bearing type company, or -- ?

No, that's not fair to assume.

It would be -- I think the bearing market is pretty much spoken for in terms of producers of those type products today that are available.

So it'd probably be something non-bearing.

I see.

Okay, thank you very much.

And the next question comes from the line of Keith LaRose from Bradley, Foster & Sargent.

Please proceed.

Good morning, gentlemen.

Good morning, Keith.

Can you give some color on nature of some of the cost pressures you're wrestling with for the company if there's anything new on that scale or on the horizon?

Well, I think things have been modest on the cost side and average and normal.

We're expecting a little bit of a squall on -- driven by iron-ore prices and scrap steel prices, which we are beginning to see.

And we'll address that through our contractual relationships with our customers.

We'll pass it along is what I'm saying.

And your ability to pass it along is one-to-one, or something else?

Yes, it's easy to say it's one-to-one.

It's easy to talk about and hard to do because we have 6,500 accounts.

So, in order to do that, you have to have a strategy and a mechanism and administrative process to get that done.

And every contract is negotiated differently.

So there's a lot of work to do it.

And we've done it before.

We know how to keep up with it.

We have a structure and as soon as it becomes an issue, we will pass it along.

And given the size of your ability now in wind or with in addition to your planned expansion in wind, how big can that business get, given your planned capacity and current capacity?

based upon the size of RBC today and the current capacity that we're planning for wind, I would say that it's going to be a very light breeze.

It's probably worth somewhere in the $20 million to $30 million per year range maximum today.

Whether we want to take it beyond that position in the future is under a great deal of study and discussion here everyday.

There's plenty of opportunity and exactly where to take that position is what we're thinking about.

And potentially, could some of those contractual relationships represent payments for fixed capacity from you guys from people that want you to be a supplier?

Yes, absolutely.

Could you give some more color on that?

It's a matter of -- that's how we would organize most of it, that if we put in so much capacity that there would be a contractual relationship to use that capacity and buy so many systems over so many years.

And that would be part of our relationship.

And is that potential for those types of contracts -- can you give us the possibility within three months, nine months, 12 months, et cetera, et cetera?

I'd say it's 90% within six months.

90% probability within six months?

Yes.

And then can you give also just a color historically in going forward?

What's your view of the curve pipeline for you guys of acquisitions on the health of the pipeline currently?

It's alive and well.

It's doing fine.

We have a little acquisition team that always has its desk full of process.

And they certainly have their desks full of process now.

And so we're working through a few at the moment.

And the marketplace right now and all the places that you touch, see, listen and interact with, what's your assessment of the notion of credit being tight or difficult for companies that you're interfacing with?

Well, I think the credit for small deals -- RBC doesn't have a credit issue for the other deals that we typically deal with is well within our capacity to -- the credit issue for small deals is available.

It seems like the people that I know in the industry that are doing the smaller companies that are maybe in the $50 million to $100 million sales range are just over funding the amount of equity point-of-view and leveraging in the one-to-one to two-to-one to maybe three-to-one maximum, which is obviously different than it's been.

So I think for the smaller companies, that money seems to be available.

Thank you, gentlemen, very much.

And we have a follow-up question that comes from the line of Walt Liptak from Barrington.

Please proceed.

They've largely been asked and answered.

I'd just reiterate the buyback.

You've got the balance sheet.

The cash flow is good.

I'd ask you to consider doing that and talking to the board.

Secondly, to follow up on the gross margin question and maybe not to get too far into it, but where do you see the 100-basis points coming from this time around.

Is it pricing?

Is it leverage on the sales?

Is it operational excellence?

Can you comment on that?

Well, it's probably a little bit of all, Walt.

I could probably comment more specifically after we complete the budgeting process for '09, plant-by-plant.

And we're right in the middle of all that work, now.

But I think by and large, it seems to be plant execution and pricing.

Plant-by-plant, the numbers that are coming and we're moving through are better numbers than they were last year.

Okay.

All right, fair enough.

Thanks, guys.

Okay.

Well, I'd just like to say that that concludes our conference call for the third quarter.

And I'd like to thank everybody for their interest today and for their participation in the call.

And now I'll go back to work again and let you go back to your models.

Thanks again.

This concludes your presentation for today, ladies and gentlemen.

You may now disconnect.

Have a wonderful weekend.