RBC Bearings Inc (RBC) 2010 Q2 法說會逐字稿

Good morning and thank you for joining us today for RBC Bearings' fiscal year 2010 second-quarter earnings conference call.

On the call today will be Dr.

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

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 condition.

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

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

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

Hartnett.

Thank you, and good morning.

During our second quarter, our performance was well within our expected limits without many surprises.

Sales were $63.7 million, a drop of 32.5% from last year, and adjusted operating income was $8.5 million versus $16.6 million a year ago.

For the first six months, these comparisons were $127.4 million in sales against $186.7 million last year.

Operating income was $17 million this year versus $34.1 million a year ago.

Clearly, these were some major demand changes demonstrated by our end markets versus last year.

all attributable to the international financial crisis that has affected everyone.

Sales of our industrial products at the OEM level was off 44% from last year.

Sales of our industrial aftermarket products was off 42% from the previous year.

Relative to the industrial sector, we experienced weakness across the board, with small construction, oil, and aftermarket being the weakest of the weak.

On the aircraft side of our business, which represented 62% of Q2 sales, sales were off 23.5%.

The aircraft aftermarket suffered from de-stocking initiatives driven principally by liquidity concerns by some of our customers, coupled with extreme weakness and de-stocking actions in the private aircraft sector.

The more positive attributes of the quarter were our gross margins.

Our management team did an outstanding job right-sizing the business for these volumes versus a year ago.

Our gross margins were down 130 basis points from last year and came in at 31.4% on an adjusted basis.

I'd like to recognize our management team for this performance and thank them here today for this accomplishment.

Dan will talk a little bit more about this later in the call.

As a result of their efforts, we were able to achieve a good level of profitability during the period and came close to achieving last year's performance metrics on the -- on a gross margin basis.

The good news today is that we are seeing a well demonstrated pickup in our business now.

Sequentially, we've seen an increase in demand during the quarter in our industrial businesses.

Distribution demand is up 10% on a sequential basis in the US, while our OEM demand is up sequentially more than 70%, with the mining sector now leading the way.

Additionally, there are some improvements in requirements from Class 7 and Class 8 truck sector.

The most encouraging sign so far is that our second quarter US industrial OEM booked at a rate that was very close to the rate demonstrated pre-September 2008.

In Europe, the situation is mixed.

OEM sales continues to demonstrate a steady performance for the past 12 months for smaller bearing products, primarily as a result of some unique programs in which we participate.

No changes in this profile are expected.

Industrial distribution orders for machine tool products are now up considerably in September and October after a normal seasonal low during the summer period.

Demand for large industrial bearings in Europe remains weak.

With regard to our aircraft businesses, this is the year when many of our supply contracts with the majors roll over.

We are currently refreshing these supply agreements with some of our major customers and are pleased to report that we are successful in expanding some of these agreements to incorporate new products that have been brought on line or acquired over the past few years.

We are seeing greater mix and volume commitments, which should product a meaningful expansion of our revenues over the term of these new contracts.

As we are in the midst of this process, we are not in a position to quantify this today, but we do expect our order book to fill out again in this sector this quarter as a result of the timing of these contracts and order releases.

During the period, we acquired a small product line of bearings that is directed towards the market of infrastructure.

This includes dams, floodgates, bridges, and earthquake-proofing of structures.

This acquisition provides design approvals and pedigree to service those markets where we expect there will be considerable expansion in public funding in the months ahead.

Looking ahead, we expect the third quarter to reflect a modest expansion of sales from our second-quarter low, primarily as a result of improvement seen in the industrial sector, mitigated by the reality of logistics and lead times.

The fourth quarter will be the strongest of the year, and, given the lead times for materials, that period now is filling in nicely for most of our businesses.

At this point, I'd like to turn the call over to Dan Bergeron, who can discuss the finances for the quarter.

Thank you, Mike.

Since Mike has already discussed sales, I'll jump down to gross margin.

Our gross margin for the second quarter of fiscal 2010 was $19.1 million, compared to $30.2 million for the same period last year.

Gross margin, as a percent of net sales, was 30% in the second quarter of fiscal 2010, compared to 32% for the same period last year.

The decline in gross margin percentage was mainly driven by the drop in volume due to the current economic downturn, combined with startup costs associated with the Company's expansion into large bearing products.

Gross margin, as a percentage of net sales, excluding $0.9 million of startup cost, was 31.4%, compared to 32.7% for the same adjusted period last year.

SG&A for the second quarter of fiscal 2010 decreased $2.8 million to $11.1 million, compared to $14 million for the same period last year.

As a percentage of sales, SG&A was 17.5% for the second quarter of fiscal 2010, compared to 14.8% for the same period last year.

The decrease in SG&A year over year was mainly due to personnel-related cost reductions and reductions in professional fees and general expenses.

Other net for the second quarter fiscal 2010 was $0.7 million, compared to $1.1 million for the same period last year.

This was comprised of $0.3 million of amortization of intangibles and $0.4 million of restructuring and moving costs associate to personnel reductions and the consolidation of our Houston manufacturing facilities.

Operating income was $7.2 million for the second quarter fiscal 2010, a decrease of 52.3%, compared to operating income of $15.2 million for the same period in fiscal 2009.

Operating income, excluding the startup costs associated with the expansion into new bearing products and the restructuring and moving costs, was $8.5 million, a decrease of 48.8% compared to adjusted operating income for the same period last year of $16.6 million.

Interest expense net for the second quarter fiscal 2010 was $0.5 million, a decrease of $0.2 million, from $0.7 million for the same period last year.

For the second quarter fiscal 2010, the Company reported net income of $4.4 million, compared to net income $9.6 million for the same period last year.

Diluted earnings per share was $0.20 for the second quarter of fiscal 2010, compared to $0.44 per share for the same period last year.

Excluding the after-tax impact of the startup costs associated with expansion into new bearing products, restructuring and moving costs and the foreign exchange loss, the net income -- adjusted net income, was $5.3 million in the second quarter fiscal 2010, compared to an adjusted net income of $10.7 million for the same period last year.

Diluted earnings per share, excluding the after-tax impact of these items, was $0.24 for the second quarter fiscal 2010, compared to $0.49 per share for the same period last year.

Turning to cash flow, the Company generated $4.6 million in cash from operating activities in the second quarter of fiscal 2010.

For the six-month period ended September 26, 2009, the Company generated $21.4 million in cash from operating activities, compared to $23.9 million for the same period last year.

Capital expenditures for the six-month period were $6 million, compared to $11 million for the same period last year.

In fiscal year 2010, we expect capital expenditures to be in the range of $8 million to $10 million.

Total debt, minus cash and short-term investments for the period ended September 26, 2009 was $21.4 million, compared to $41.9 million for the same period last year, and compared to $24.7 million for the first quarter fiscal 2010.

The Company ended the quarter with $41.6 million of cash and short-term investments on the balance sheet and borrowing capacity of $81.7 million under our credit facility.

At September 26, 2009, the Company's net debt to total capital was 7.3%, compared to 14.7% for the same period last year.

And our net debt to equity was 7.9%, compared to 17.3% for the same period last year.

I'd like now to turn the call back to the operator for a question-and-answer session.

(Operator instructions) Your first question comes from the line of Edward Marshall of Sidoti & Company.

Please proceed.

Good morning, guys.

Good morning.

: Good morning, Edward.

The discussion about the aerospace contracts that are being renewed this year -- that was some good color there on that, but could you comment on what you're seeing as far as pricing on those contracts?

Is it holding up or what can you add there?

It's normal.

It's so far, so good, Ed.

I mean we haven't seen any tremendous pressure.

I mean there's always adjustments to mix.

I think the contracts, as far as we can see, there's a slight improvement in overall margin expected.

But I think it's more a shift in mix than anything else.

I see.

And then the prospects for additional acquisitions -- is there anything that we can see kind of on the time horizon here that you could see something larger than the smaller acquisitions that you've been making here?

Can you comment in that arena, please?

Yes.

I mean we're active in talking to other candidates that are substantially larger than the small product line acquisition we did a few weeks ago.

I think it's -- all of these are sort of in the talking stage right now.

And I couldn't venture a guess on whether or not they're going to convert to the true acquisitions at this point.

Okay.

And did you say that the OEM industrial pickup in order flow was up 7-0 percent, 70%?

Yes, that's -- yes, over the first quarter.

That's right.

Okay.

And then my final questions center around the debt.

It looks like debt was removed -- about $4 million reduced in the quarter from the previous quarter.

Does that include any letters of credit from the acquisition that was most recently made?

And if not, what are those?

No.

We paid down $5 million of the revolver.

And our current outstanding LCs are around -- about $6 million.

That's hasn't changed.

But that hasn't changed.

Right, okay.

And the cash that you're generating is -- what's the plans for cash?

Our plans still are to continue to use these funds to grow the business via acquisition.

We'll continue to look at where we stand from a debt standpoint.

But, as you know, our revolving credit facility is secured until June 2011.

And at this point that's still the strategy.

Perfect.

Thanks, guys.

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

Please proceed.

Good morning, gentlemen.

Good morning, Peter.

Good morning, Peter.

I guess first question on aerospace.

If you look at the comp from first quarter to second quarter, it went from minus18 to minus 23.5.

Is that acceleration significantly attributable to inventory de-stocking or can you maybe help us understand what drove that deceleration?

Yes.

I think it's certainly inventory de-stocking.

I think the -- probably the -- both in our -- in the aircraft distributor sector.

And the aircraft distributor sector services a lot of these private aircraft builders.

And so I think what you see there is just a falloff in run rate in terms of completed orders that we shipped in the first quarter that weren't renewed and weren't shipped in the second quarter.

So, in other words, we had order book -- it was a depletion of order book for those particular customers.

Okay, got it.

Is there any sort of proxy that you could give us to maybe help us understand where inventories are relative to what might be a normalized kind of demand level?

Yes.

We're -- I think that these aircraft distributors probably won't get back to a normalized level because of their -- because their customer base is so -- has contracted so much.

And that's in the -- particularly in the private aircraft sector.

A lot of these distributors bought product from us and then, through some logistics procedure, supplied it to small OEMs that were building small planes.

So I think there is going to be some contraction there.

We're looking at right now trying to determine when the market will become normalized.

And we're expecting to see that sort of around -- at the end of March.

So we think that the -- the rest of our fiscal year for these people are going to be about what it is now.

We're seeing a slight pickup in order from that sector at this point.

Okay.

But I think, overall, it's about a [$50 million] sector for us.

And I think the -- I think that's probably going to steady-state off about $10 million.

Right.

And is the commentary relatively similar outside of that end marketer channel on the aerospace side?

In other words, OEM, how does that look from an inventory perspective?

Well, on the OEM side, the people building the big planes are building the big planes.

And if Boeing does stay with their 787 schedule, there is plenty of inventory right now in the channel for 787 planes.

And, as that starts to turn out, then the whole industry is going to [see] an improvement.

We're seeing sort of normal activity both in the United States and Europe for that sector in particular.

Okay, all right.

And then if you wouldn't mind giving a little bit more color on those comps that you gave on the industrial side.

With distribution up 10% -- I think that was US and also sequential.

And then OEM up 70%, that's a pretty significant number.

And you said mining led that.

So, I guess my first question is can you give us a little bit more color on the distribution side, whether there's a particular end market there that's driving that?

And then the second point would be, there must be other things that are soft, and I would assume that's aerospace, if I look at what your implied order number is for the quarter given the change in backlog and the revenue that you booked.

Right.

Well, let's deal with the second one first.

I think the aerospace backlog is normally lumpy depending upon the programs that we're involved in.

And given the fact that the -- some of these big OEM contracts and subcontractor contracts sort of terminate this year and are rolling over now, we would expect to see some pretty significant fill here for the balance of the quarter in some of those -- from that sector.

Okay.

And the first part of your question concerned what, the industrial distribution, sequentially 10%?

Yes.

That was up 10%.

So I'm wondering if there is any specific end market that drove that or whether that's more market share related.

Just any sort of color, commentary that you have.

That's just right across the market.

It's -- you know we keep very good stock levels of our product.

That's one of the things that we're really focused on.

And so that market seems to be dry enough that the way we sell the product and have it available for consumption is several different -- there's several different techniques.

And the technique that's quickest to market is seeing the greatest demand, which would indicate to us that the inventories are a little dry and people are willing to spend a little bit more money to have a bearing over the next day -- shipped that day.

Okay.

Okay, that is very useful.

Thanks for the time, and I'll jump back in queue.

And your next question comes from the line of Walt Liptak from Barrington Research.

Please proceed.

Hi; thanks, guys.

I wanted to ask you about the aerospace distributor channel and just get a clarification.

Why is it that that business is down?

Is it related -- you said it's related to end customers or is it related to the financial crisis?

I think it's both reasons, Walt.

I think, first of all, on the aerospace distribution side of the bearing business, many of these customers are small in scale, privately owned, and financed with local banks.

And in many cases, we see that the local banks are having a little bit of difficulty understanding the inventory levels at some of these accounts.

So I think there's liquidity issues there as a result of maybe the local banks tightening up covenants a little bit.

I think the second issue is a lot of those distributors sell to the private aircraft market.

And that private aircraft market, as we all know, is off 50%, expected to be off 50% for the -- until the Democrats stop complaining that everybody is flying around in a jet.

Okay, understand.

So the expectation for this market to get better is if the financial crisis improves, we get more liquidity, you might get some inventory build, combined with end market demand.

Yes, that's right.

And when you -- when we speak to these distributors, it seems that their year-to-year top line sales are up.

Okay.

So they're not -- what they're shipping to the market does not seem to be the issue.

The issue is their assets.

And apparently they're finding some markets to consume these products that are good for everybody.

Okay.

You haven't mentioned your defense business.

What's the status and the outlook for them?

Defense has been fairly normal.

We continue to supply the historical products that we've always supplied to that business.

And we expect to have some new products that are meaningful to our revenues starting to flow into the defense sector in the next fiscal year.

So I think -- we expect next year the defense side to be up a little bit from this year.

It's hard to say exactly given the timing of some of these programs and some of these sign-offs that we need in order to ship these products, but, overall, we're optimistic about that sector right now in the short term.

Okay.

And then I guess another -- the improvement in industrial OEM, is that related to some of the things happening at Deere with some of their products seeing increased production or the Cat power-up program?

Or can you point to which sectors that's -- you're seeing the significant increase?

Yes.

I think the major sector that's driving that increase is, right now, is the commodities.

Anybody that's making equipment for mining and selling that equipment overseas is probably seeing some pretty big demand right now.

And, yes, the Cat power-up program is certainly part of that overall equation.

Okay.

And, Dan, if I can ask you one on the gross margin.

You talked about the obvious volume under-absorption.

Is there any way of quantifying the impact in the quarter?

I guess specifically with the cost-out programs that you've done, what the gross margin would look like in a more normalized period.

That's hard to qualify for you, Walt.

But I think if you just take out the large bearing startup costs, I mean that's costing us about 1.5% in Q2.

So our normalized margins would have been north of 31%, Q2, and improving throughout the rest of the year.

I think what we're going to start seeing is some revenue coming out of our large bearing factory over the next six months.

We'll start taking some pressure off of that large bearing startup cost number, which should give us some improvement and get the overall margins higher for the year.

Okay.

Okay, yes, thanks for trying.

And your next question comes from the line of Fred Buonocore of BGS Securities.

Please proceed.

Good morning, gentlemen.

It's actually Fred Buonocore of CJS Securities.

Hi, Fred.

Just wanted to touch base on, I know you've had some cost cutting initiatives going on and I wanted to understand if those were complete and if, for the full year, the savings is expected to come in at your original projections?

Yes.

I think we're always looking at it and we look at the cost structure on a rolling three-month forecast every month.

But right now it looks like on the SG&A line that we'll hit our target year over year of taking $10 million of costs out.

And, obviously, on the cost-of-goods-sold line, it's a very large number given the drop in the volume year over year.

Right.

And would you say you've kind of hit that on the SG&A line?

Hit that run rate of savings that you expect to get for the full year?

Yes.

Great.

And then I wanted to understand -- you talked about you'll start getting some revenues out of your new facility over the next six months.

So are you actually starting to get and preparing to ship orders for wind turbine bearings?

I know you're making some other large bearing products out of there.

I'm trying to understand what markets and what kind of orders you're starting to see for that facility.

Yes, we expect to ship wind turbine bearings out of that facility over the next six months.

And so with any one of these customers you go through a period of design, design qualification, design certification, process and procedure certification at the plant, first article manufacture, low initial production rate manufacture, and then full production.

So we're in the low initial production rate manufacture for a few customers over the next six months.

Great.

And, ultimately, I think you'd said you would expect to be close to full production by the end of FY11 out of that facility?

Does that still sound on target or is it possible that that could even be accelerated?

I would say that's best case.

I think there's a lot of -- there is still uncertainty in the wind turbine market with regard to tax incentives.

And so I think once the US policy and legislation is clear and passed to benefit the wind industry, I think the market should do well.

I think there is sort of a lead/lag thing in terms of getting the legislation passed and getting all of the wind turbine plants in the United States that are planned to be built, built and then consuming bearings.

And it's hard to predict what that sequence is going to look like.

But I think the first important shoe to drop here is the passage of the legislation.

Right.

And then assuming that happens and assuming your outlook for that market is close to what occurs in reality, would you expect that sales out of that facility to ramp steadily through the year or would it kind of be, under a best case scenario, very back half of '11 loaded?

Just trying to --

Yes.

Very best case scenario, back half of '11 loaded.

Got it.

And then just getting back to gross margins, just to make sure that I'm clear, if we kind of X out any additional startup costs out of the large bearing facility and under the assumption that you're starting to ship over the next six months, excluding those things, do you anticipate seeing gross margin expansion kind of towards where you would have been in periods -- in 2007 and 2008?

I mean can you get back to those close-to-mid-30s levels this year on an adjusted basis?

Well, you've really backed me into a corner there.

All right.

Because I have -- I always expect my gross margins to expand to the mid-30s as a worldwide corporate standard of performance.

And looking at the list here of all the people that are on this call, I see there's about a dozen RBC operating people that are listening to this call.

But, yes, we expect to see our margins improve and we expect to see a standard of mid-30s of performance and we expect to get there sooner rather than later.

But I still don't know how to exactly answer your question.

Fair enough.

All right?

But I guess the message is clear to your employees, so --

Absolutely.

Okay, great.

And then just finally, just to make sure that I caught this clearly, Q3, you expect some slight incremental pickup on the revenue side on a sequential basis and then maybe more improvement in Q4, maybe to a greater degree on a sequential basis; is that right?

That's absolutely right.

Very good.

Well, thank you very much.

Okay.

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

Please proceed.

Hi, good morning.

Good morning.

Good morning, Steve.

Can you remind us what full production means from a revenue standpoint out of a large bearing plant and generally what margin profile you expect for that business once it does get to full production, whenever that occurs?

Yes.

I think -- Steve, I think that the way that plan is tooled today, the first increment of revenue that we expect to see is sort of in the $20 million range.

The plant, in terms of bricks and mortar, is constructed to do triple that volume.

But the tooling is only suitable for the first $20 million increment.

Right.

And that makes -- you're just trying to match production to whatever the customer interest you're seeing right now?

Right, right.

And we certainly expect that plant to be close to normal in terms of margin performance.

So in line with corporate you're saying?

Yes.

It might be a little bit off that number, but it shouldn't be off too much.

Okay.

As I think about the fact that some of your end markets are still pretty weak here, is there any bearing market that you're not big in right now or that is capacity-constrained or has a weak competitor where you can take some share?

I guess what I'm trying to get to.

is there any growth catalysts in your end markets right now that you can point to while you wait for your legacy markets to kind of pick up?

Yes.

The answer is yes.

The markets are aerospace, and we're very active on products to do exactly that.

And I hesitate to say more.

All right.

And given the restructuring or whatever else you've done through this downturn, you have the bench strength right now from an engineering standpoint to be about to pursue any opportunities that do come up?

Yes.

I mean we -- our engineering strength is the best it's ever been in the 20 years that I've been with the Company.

It's just gotten -- we've spent a lot of time year in and year out trying to improve our engineering capacity and our professional skills, and it is a very -- it's of a very high standard right now.

Okay.

And last question.

If US growth underperforms the rest of the world or we get a more tepid recovery, where do you have leverage to non-US sales and what could you do to grow your non-US exposure if it came down to it?

Well, I think we're well positioned in the -- in Europe in terms of our product offering on the -- particularly on the aerospace side, and in terms of the dollar/euro relationship.

And currently we have a tremendous amount of interest and demand from the European community, aerospace community, for us to supply Europe with product out of our US plants.

And so we haven't sort of biased the agenda to an extreme extent in the US because we have a lot of opportunity in the US right now and we have a lot of program content in the US right now that's passing through product development and into manufacturing.

So we haven't made that European aerospace sector as high a priority as it could be.

But certainly Europe is a very prominent place for us to expand our line.

And that sort of goes without saying since a lot of these European aircraft companies like Airbus and like Eurocopter are establishing plants in Asia that have the approvals, the product approvals, that are gained in Europe.

Those products would also flow to Asia.

So are you suggesting that that is going to be an inevitable outcome and it's just a function of making sure you have the capacity to serve the US opportunity?

So it's really a timing issue?

Or is it an either/or?

It's a priority issue in terms of where do you want to apply your resources.

And I'm on a plane tonight headed to Europe to understand exactly -- with the shift in the dollar/euro relationship a few years ago, we saw an awful lot of European aerospace companies coming to RBC looking for supply.

Then when the -- when that relationship sort of normalized and mitigated a little bit, there wasn't as -- the extreme need.

Well, right now you can -- there's a -- the extreme need to move their product into a dollar-denominated supplier is back.

And so we have a lot of interest here and we may have to change priorities or emphasize something that was de-emphasized in the past.

Got it.

Thanks.

And your next question comes from the line of Marty Pollack of NWQ Investments.

Please proceed.

Yes.

If I may, I was off the call for a little bit, so -- but I just want to ask this question sort of.

Focusing on aftermarket by the three segments -- industrial, defense, and commercial aerospace -- I'm wondering if you could just describe sort of just very briefly on all three segments as far as aftermarket.

What's the status, as you see it, as far as de-stocking, restocking, and what appears to be real demand?

If there's a way to just kind of describe that, certainly in the context to the industrial aftermarket down so significantly.

Again, maybe I missed this, your question, if you could just amplify that one more time.

Sure, Marty.

Starting with the industrial aftermarket, as we said earlier in the call, we're seeing sort of a 10% per quarter improvement in demand coming from the US side of that market today.

We saw that in the second quarter relative to the first quarter.

We saw that in October relative to the second quarter.

So we think that the de-stocking program in the industrial sector is coming to an end and we think that our industrial volumes for that aftermarket should be sort of back to normal at the end of our fourth quarter, maybe into our first quarter of next year, assuming that the economy doesn't do something that's -- that nobody really wants to see it do.

On the aircraft side of the business, that aftermarket is off.

That's off.

Even though the customers in that sector report to us that their sales, [to a man,] are up on a year-to-year basis, their purchases are down.

In many cases they're down because of liquidity and covenant issues with their lenders.

And so I think their lenders are asking them to liquidate some of their inventories and that's what's going on.

The -- that sector does a lot of business with private aircraft, corporate aircraft builders, and that volume, as everyone knows, is off substantially.

And so I think those aerospace distributors who are servicing that market with our product are probably going to see their business off in that sector for some time in the future.

They are -- they do seem to find other ways of finding business through mix extensions that -- and they all work on those kinds of issues and so they find other ways to offset their revenue shortfalls for private aircraft.

On defense, the defense side is reasonably -- has been reasonably normal and stable.

I mean we see ups and downs with demand, depending upon mix.

We expand our content monthly to that sector based upon some new approvals or some market researches that we've done.

So we expect net/net over the longer term, intermediate term, that our defense aftermarket business will expand.

Okay.

Any -- what is the potential exposure or current exposure to the JSF?

Do you see that as an opportunity of meaningful size --

Yes, we do.

-- as, clearly, that program develops?

Yes, we do.

We have many applications, a considerable amount of product on the JSF.

And we're very active on developing new products for that aircraft right now.

As the JSF moves from sort of prototype manufacture into a sort of a pre-manufacturing stage, the systems on the JSF sort of get better defined and sort of redesigned for manufacturability and we're very much a part of that.

Relative, I guess -- well, I guess if you look at the potential for dollar content there, are your products -- product opportunities there similar to what you might be doing with the 787?

Yes.

Are there more --

I think our dollar content there currently is somewhere around $100,000 a plane.

But that has a chance of moving up by 50%.

I mean there's still a lot of program out there that -- and we seem to find it every month.

We find new applications for our bearings.

Just lastly, back on the JSF, the potential other suppliers, presumably there will not be one sole source, but the other players who you see as viable alternatives, where everybody perhaps wins here, who would the other guys -- who would be supplying similar products or competing with you on that, on the JSF again?

Well, for the most part they would be New Hampshire Ball Bearing, which is a division of Minebea.

And the other -- all the other guys I think that we compete with are private.

I'm just running through the list now.

Yes, I mean we might be supplying to a Honeywell or a Goodrich or a General Electric or a Pratt & Whitney, but those would be -- we would be supplying product into subsystems that would end up into the ship itself.

Okay.

Thanks so much.

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

Please proceed.

Thanks again for taking my question.

The sequential pickup in sales that you talk about, to circle back to an earlier question about the gross margin, there's going to be a natural improvement in gross margins just for the additional size in the business as well.

But I guess my question is centered on kind of further down the P&L to the operating margin.

Previously, you said there were -- and I think the commentary was two goal posts, and it was 15% and 17%.

Can you comment kind of where you see them going this year or are you prepared to do that for the remainder of this year?

Or is this comment that you made still consistent?

We're just looking at our numbers here.

Just give us a --.

Sure.

-- give us a moment.

Yes, I think we start creeping up toward that lower end in the fourth quarter.

But for the whole year, we'll be a little under that 15%, just given what we did on an adjusted basis for Q1 and Q2.

Okay.

They're both at around 13% through each quarter.

Okay.

You should see an increase in our fourth quarter over the first three quarters of the year.

Okay, fair enough.

Inventory balance in the quarter?

Do you have that handy, Dan?

Yes.

It was 138.8.

Pretty much in line with the --

(Inaudible -- multiple speakers) flat to Q1.

The main increase was foreign exchange.

Okay, perfect.

Thank you very much, guys.

And there are no further questions at this time.

I would now like to hand the call over to Dr.

Michael Hartnett for closing remarks.

Well, I'd just like to say -- thank everyone for participating in the call today.

We appreciated the questions and hope we provided the right insight and level of answers.

I think the -- we're very confident given where the economy is and what our business is doing right now that the second quarter was our low spot for the period and the business is on the upswing.

So we will look forward to talking to you in February.

Is that the next call?

About that time, yes.

And until then, we'll go out and get the job done for you.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.