RBC Bearings Inc (RBC) 2017 Q3 法說會逐字稿

Good day ladies and gentlemen, welcome to the Q3 2017 RBC Bearings earnings conference call. (Operator Instructions). It is now my pleasure to hand the conference over to Mike Cummings with Alpha IR. The floor is yours, sir.

Good morning. Thank you for joining us for RBC Bearings fiscal 2017 third quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer, and Daniel Bergeron, Chief Financial Officer and Vice President. Before we begin 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 condition. 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'll turn the call over to Dr. Hartnett.

Thank you Mike, and good morning. The format this morning will be the same as usual. I will provide an overview, and turn it over to Dan Bergeron, our CFO, to give you some of the details on the financials. Net sales for the third quarter fiscal 2017 were $146.7 million, versus $144.2 million for the same period last year, a 1.7% improvement. Our aerospace and defense markets increased 1.2% on a year-over-year basis and our industrial markets were up 2.7%. Industrial distribution showed a slight contraction of 1.5%, while OEM sales showed an expansion of 4.7%.

For the third fiscal quarter of 2017, sales of the industrial products represented 34.7% of our net sales, with aerospace products at 65.3%. Adjusted gross margin for the third quarter 2017 was $55.6 million, or 39.7% of net sales, compared to $54.1 million, or 37.5% for the same period last year. Again mix timing plays a dominant role here. As discussed in earlier calls, we see margins more relative of our historical levels, as we continue to integrate the Sargent businesses, in both rationalized as well as tune our existing product offering, and sales channels to better meet the demands of the market and advance our business.

We still expect some modest headwinds due to new program startups. Let me back up a minute. However incoming orders for the products, yes, we still expect some modest headwinds due to new program startups, both in North America and Europe, as we expand capacity to support long-term programs. And should see volume increases as a result of, for new aircraft products on both continents early next year. This expansion will begin to contribute to revenues in the second quarter of fiscal 2018. I am pleased to report that we've seem to be moving through the startup phases with much less friction than in the past.

Adjusted EBITDA for the period was $37.4 million versus $36.9 million last year. Adjusted EPS for the quarter was $0.73. This quarter we saw an increased contribution to our sales and gross margin from the Sargent businesses. Further, we are seeing continued year to year improvement in execution from Sargent, now that they are settling into a good operating cadence, and management is maturing in their positions. Products for the oil and gas market as well as what we classify as general industrial products for North American markets had the weakest year to year revenue comps in our line up, this negatively impacted our year to year sales by almost 3%.

However, incoming orders for these products over the past 12 weeks has been nothing short of spectacular, and this is the case for many of our industrial businesses. This accelerated industrial demand has been reported by other companies this quarter, so it's not a role original phenomenon, but we are happy to see this big incoming tide, and this will certainly help to have solid organic consolidated sales growth next year. Higher plant operating rates are now being implemented to satisfy these higher demands in plants where overheads were trimmed considerably over the past 24 months. We like the way this is lining up.

Regarding our mining related products, sales were steady over the period, with the majority of new orders coming from the MRO markets. Products for infrastructure, which has amounted to about 1% of our sales over the past year, should double next year as a result of new contracts acquired early in the last quarter. Sales of semiconductor products were strong in the quarter, and we have a very favorable outlook for the next 12 months. We expect a move here from 1% to 2%-plus of our revenues next year.

Looking at components of our aerospace and defense business for the period, we saw commercial aerospace OEM up 3.7%, off by defense OEM, which was off 9%, yielding a positive 1.2% for the OEM component of the sector. Overall the consolidated growth was 1.7% net. The defense sector can be lumpy quarter to quarter as demonstrated here. The policy of sequester depressed the demand needs of the military since its introduction in 2011, but it's clear that the defense budget has now troughed, we expect the demand will strengthen considerably, as a result of policies from the new administration.

We are now seeing inquiries from agencies and OEMs to accelerate the repair of both depleted military hardware, and to support foreign military spares. This will become impactful in the second half of fiscal 2018. Senator McCain's January White Paper calling for three Virginia class submarines in 2020 from the current two rate, and four per year beginning in 2021 has our attention.

As a result of our five-year demand capacity review on aircraft products, we believe a strong outlook for the next three to five years, for solid growth in our core business resulting from build rate increases, or expanded content on platforms, including 737 MaX, 787 A350, and the Joint Strike Fighter, as well as the 777X, and engine introductions, including the leaf engine, the A320 Neo and the A330 Neo. Our content is further augmented by the addition of new products recently introduced. As a result, our projections continue to show a low double-digit rate of expansion from RBC over the next three year window for aircraft products.

Regarding our fourth quarter, we are expecting sales over the period to between $158 million and $160 million, compared to $162 million last year. You have to remember that last year's quarter had one more week, and on a weighted basis plant to plant, that's about a $5 million difference in sales rate. I'll now turn the call over to Dan for more detail on our financial performance.

Thanks Mike. SG&A for the third quarter of fiscal 2017 was $25.7 million, compared to $23.9 million for the same period last year. The increase of $1.8 million was mainly due to $0.9 million in personnel related costs, $0.4 million of incentive stock compensation, $0.2 million in professional fees, and $0.3 million in other items, as a percentage of net sales, SG&A was 17.5% for the third quarter of fiscal 2017, compared to 16.5% for the same period last year.

Other operating expense for the third-quarter of fiscal 2017 was an expense of $6.1 million, compared to expense of $2.6 million for the same period last year. For the third quarter fiscal 2017, other operating expenses were comprised mainly of $3.8 million of integration and restructuring costs, and $2.3 million in amortization of intangible assets, other operating expense for the same period last year, consist of mainly $2.5 million in amortization of intangible assets, and $0.1 million of other costs.

Operating income was $28.5 million for the third quarter fiscal 2017, compared to operating income of $27.1 million for the same period in fiscal 2016. On an adjusted basis, operating income would have been $27.6 million for the third quarter fiscal 2017, compared to $27.6 million for the same period last year. Adjusted operating income as a percentage of net sales would have been 18.8% for the third quarter of fiscal 2017, compared to 19.2% for the same period last year. For the third quarter of fiscal 2017, the Company reported net income of $12.8 million, compared to net income of $17 million for the same period last year. On an adjusted basis, net income would have been $17.4 million for the third quarter fiscal 2017, compared to net income $17.3 million for the same period last year.

Diluted earnings per share was $0.54 per share for the third quarter fiscal 2017, compared to $0.73 per share for the same period last year. On an adjusted basis, diluted earnings per share for the third quarter of fiscal 2017 would have been $0.73 per share, compared an adjusted diluted EPS of $0.73 per share for the same period last year.

Turning to cash flow, the Company generated $36.1 million from cash from operating activities in the third quarter of fiscal 2017, compared to $21.5 million for the same period last year. Capital expenditures were $4.8 million in the third quarter of fiscal 2017, compared to $4.8 million for the same period last year. In the third quarter fiscal 2017 the Company paid down $35.1 million of debt, and repurchased $1.2 million of company stock. On a ninth-month basis the Company paid down $69.4 million of debt, and repurchased $4.8 million of company stock. I would now like to turn the back to the operator for Q&A session.

Thank you sir. (Operator Instructions). Our first question will come from the line of Kristine Liwag with Bank of America. Please proceed.

Hi. Good morning, guys.

Good morning.

I wanted to follow up a little more on the restructuring. Can you provide a little more details on why you decided to restructure this facility now, and should we expect to see more restructuring activity in the future if we do see industrial demand pickup?

Well, with the downturn in industrial demand last year, we were in a situation where we had to sort of rationalize our production capacity, and sort of reduce our overall manufacturing footprint for those products, and so the net results of that was this restructuring charge. Now going forward, I think time will tell, I mean we're always looking for a more efficient way of execution, and a more efficient way of getting our products produced and supplied to the customer.

And we're really always weighing the alternative scenarios on what we might consider as underperforming businesses, or maybe interesting combinations of businesses that would be more efficiently, a more efficient way for us to execute the manufacture of the product. So time will tell on that. It's kind of our job to kind of screen through those options, and determine what's the best way for the Company, and we continue to work on that.

Great. And switching gears to aerospace, Boeing is planning to increase a 737 ramp to 47 per month from 42 in 3Q calendar 2017. Are you seeing pick up in demand now to prepare for this increase? I know your aerospace business is largely narrow bodies, so this should be a pretty big pickup for you.

We normally see that Kristine about six months ahead of their rate, so we should begin to see this, this quarter. Our incoming rate, order rate for the aircraft products has sort of been normal. We haven't seen that bump in demand yet, but we're contracted on all of the products that we've always been contracted for on that 737, so we should begin to see that soon.

Great. And maybe a housekeeping question for Dan. With SG&A with a 17.5% as a percent of sales, is that the going run rate that you think the business would operate 17.5%, or do you think for the full year it's going to normalize more toward 16%, 16.5% range?

Yes, I think by the end of the year back in that 16.5% range. It's just that the third quarter is always our lowest top line volume, so and we are investing a little more in human capital, given some of the turnaround in our industrial markets, which has put a little bit of pressure on that line.

Great. Thank you.

Thank you. Our next question will come from the line of Steve Barger with KeyBanc Capital Markets. Please proceed.

Hi, good morning guys.

Morning, Steve.

You said incoming industrial orders over the past four weeks have been spectacular. What is that on a year-over-year basis, and what end markets are you seeing the most strength from?

Well, it was over the past 12 weeks, Steve.

Oh sorry. Twelve weeks, great.

So it's four weeks I wouldn't really have mentioned it, but 12 weeks seems like it's worthy of mention. And the second part of your question, how strong? In some cases it's up more than 50%. So that's strong. And what was the third part of your question?

What end markets specifically are you seeing that in conjunction --

No, no.

Yes.

It's really from oil and gas, what you're reading about is actually turning into orders for us. It's from general industrial products, it's from the bottling, the canning, the plant MROs all over the country, are starting to order at accelerated rates. So it's just a big sea change in that whole business that we weren't expecting, but we're happy to participate in it.

Yes. I mean, that sounds really positive. When you think about what happened to industrial markets over the past few years, and how things are shaking up, what would you expect your revenue growth rates on the industrial side could be year-over-year for the next five or six quarters?

I think our challenge Steve is going to be to put the capacity back, because we didn't liquidate a substantial, have a substantial manufacturing footprint there, and all of the costs associated with the normal operating environment is human cost. So we are going to be capacity-constrained if these rates continue, and we're talking about the effects of that right now, and the constraint will be human constraint.

So I guess in that context, I didn't understand your answer to the first question on the call. The heart of the industrial downturn was last year. Orders for the past 12 weeks per your comments are really strong. In the press release you said you wanted to position for a period of increasing industrial demand. So why consolidate the facility now, and write down inventory and fixed assets?

Well, two reasons. Number one, you don't turn that planning on and off like a switch. I mean it takes you months to figure out what your manufacturing footprint should look like, and what your strategies should be, and what product lines you feel are marginal in terms of margin performance, and where the outlook is dim. And one of those products lines was taper roller bearings for truck axles, so we decided to exit that particular part of our business. And that was only worth a few million dollars a year to us at the most.

Was that the only product line that you exited?

I'm running through the list, but yes, that's the majority of it.

Okay. And that was legacy roll, right, not Sargent?

Right, right.

So I think I know how you'll answer to this, but just looking at the year-to-date numbers, revenue is up almost 5%, incremental operating contribution margin is less than 1%, so really flat EBITDA on up revenue. Has anything fundamentally changed in the price cost structure here that is limiting incremental margin? Are you at the limit in terms of managing costs in the footprint versus current volume levels?

Yes, I think what's affecting that is that we were at a severely reduced level of industrial demand for a couple of our plants, and so the overhead absorption equation, and all of the rest of that, doesn't balance very well, and it dilutes your margin. So then you have the choice to make, do you just tough it out, and wait for the cycle to turn, or do you reduce the footprint? And we sort of cut the baby in half there.

Because you're doing some restructuring, but it does feel like the cycle is turning is that --?

Yes the cycle has turned for our most profitable products, and we left behind the ones that were not promising.

Understood. All right. I'll get back in line. Thank you.

Yes.

Thank you. Our next question will come from the line of Walter Liptak with Seaport Global. Please proceed.

All right thanks. Good morning, guys.

Good morning, Walter.

Just to follow on with that conversation, I wonder how much costs are coming out permanently as a result of this, part of that charge was inventory, the fine, but how much is there a plant overhead, and kind of other permanent costs that are out now?

Yes. Got to dig for that number, Walter.

Oh sorry about that.

So Walter, the total charge was $7.1 million. Of that it is $3.2 million mainly of components and inventory that we decided not to finish into finished goods. Then there is $2.4 million of fixed assets that were written down to disposal value. And then we had an operating lease where we took a $1.2 million exit obligation reserve against that lease, and then we had a small amount of tangible assets associated to, it which is about $0.3 million.

Great. Okay. And I'm not sure if you answered this one yet, but is there more restructuring that you have to look at, or do you have the right size for your manufacturing footprint now?

Yes, I think Kristine asked that question already, and I think the answer we gave her Walter was time will tell.

Oh, okay. Great. Yes. Okay. Great. As you're thinking about the increased contents in some of the narrow bodies, and the growth rates you called out double-digit growth, I wonder if you could provide a little bit more description? Are you talking about double-digit annual growth, and what's the market opportunity you see over the next three years?

Well, we said low double-digit growth, and we beat annual on that. Is there any other way to describe that?

No. I just wanted to make sure that you weren't saying double-digit over the next three years?

No.

Annual rate.

It's low double-digit. And the question is, well I mean, we have new content on some of the older ships, and we have, that are because of contract rollovers that favored us versus others, and so that's pleasing. And then we have new content on new ships that are being built, and so some factor, portion of the growth is coming from those aspects, and other parts of the growth are coming from increased rates on the narrow bodies. I think Boeing is still talking about 60 ships a month, and as it was discussed earlier, they are moving to 47 this year, so we have increased rates there, and we do have new products that are being, have either been qualified or being qualified, and that will accrue to the revenues also.

Okay. Great. Okay. And the discussion so far today we haven't talked too much about gross margin leverage, and I wonder what you're thinking about for gross margins. Your March fiscal year is just about done. What are you thinking about for 2018, and where you might be able to get gross margins, especially in the light of some of the industrial recovery and industrial restructuring?

Yes, well, I think there's no question that our gross margins will be expanding for numerous reasons. Number one, with the industrial volume coming back, just the whole overhead absorption equation, accrues substantially to our benefit on those plants. And secondly, with the acquisition of Sargent, there are certain contracts that they had which were not beneficial to their interests, and as we renegotiate those contracts, or in some cases exit the business, because the products really don't fit the plant, there will be a normal margin expansion just as a result of that.

And finally, there's some products that we're looking at that we manufacture at RBC, classic RBC, where it would be more beneficial to use the plant capacity to support internal demand, and improve margins internally, than it would be to produce those products which we think are, really more commodities and sold externally. They're not strategically important to us in any way. So we've got people working on all aspects of that plumbing.

Okay. Great. Care to take a guess at the number of basis points you might get, as the gross margin leverage comes through?

Well, every time I answer a question like that Dan gives me this look, so I'll let him answer it.

Well, yes, I think this year Walter we'll probably end up pretty close or exceed the number last year. I think last year we end the year at 37.8%, so I think we're right on target to at least hit that this year, or exceed it. We had a good third quarter at 37.9% on an adjusted basis, if you take out that inventory write-off that we had. But I think we'll get more clarity to it on the fourth quarter call, with we finally have all of our 2018 plans in mind, but I think we're going to try to get back to our internal target goal to adding 1% a year for the next few years. But I think we'll be able to give you a little bit more color on that in our fourth quarter call when we chat in May.

That sounds great. Thanks guys.

Thank you. (Operator Instructions). Our next question will come from the line of Larry Pfeffer with Avondale. Please proceed.

Good morning, guys.

Good morning, Larry.

Just on the cash flow and capital allocation standpoint, obviously you've talked about some costs associated with ramp-up on new products. Where do you think we should look at for CapEx and debt pay down in fiscal 2018?

Right now for the last two years, our CapEx has been very tame. We've done a good job of controlling the costs there, and the demand from the plants has been pretty good. So I think next year we'll probably be in the same range we are this year, of around $5 million a quarter. From a debt standpoint, when we did the Sargent acquisition a little under two years ago, we borrowed $425 million, and now we're down to gross debt of $299.7 million. If you back out the $39.5 million of cash we have, our net debt is $260 million. So that puts our adjusted leverage at about 1.6 times, from basically close to 3 times when we did the deal. So I think we're feeling good where we are from that standpoint, our availability under the revolving credit facility is $238 million of capacity, and we're out working hard trying to find a few other companies to add to our portfolio. We'll continue that as we always have, to push hard to find some new acquisitions to add in over the next 12 months.

And are you thinking more on the industrial side of the business, or aerospace, or just wherever you could find something that would fit?

Wherever we find an attractive asset, we like both markets equally, and so if it's a good industrial asset, we would definitely take a hard run at it if it was a good aerospace asset.

Multiples any different than they've been over the last few quarters?

I think like for us, we do look at a lot of private deals, and there the multiples are a little more attractive, than transactions that are coming through investment banking auction type transactions. But I think they are a little better than what we were seeing maybe 24 months ago. But not by a lot.

Okay. Fair enough. Thanks guys.

Thank you. We have follow-up questions from the line of Steve Barger with KeyBanc Capital Markets. Please proceed.

Hey thanks. Dan, you made the comment that full year gross margin could come in at 37.8%, I know that's a target, but that implies around 39% in 4Q. Pretty sizable step up year-over-year. What kind of revenue would you assume that would take to hit that?4Q top line.

Mike gave the opening statement what our Q4 range was.

I think I said $158 million to $162 million.

Okay. So is that really, you're assuming that big step-up in gross margin is coming from the absorption stemming from the industrial products that we talked about earlier?

Yes. And plus, we're just having quarter over quarter improvement in our gross margin, so if you looked at Q1 we're at 37.3, Q2 we're at 36.9, Q3 we're at 37.9 on an adjusted basis, so I think we're pretty much right in target to be in that neighborhood.

Yes. And I think we have got a couple of other things, we got some, the mix can change your gross margins a lot quarter to quarter, and the fourth quarter mix looks pretty good. And the other thing is that we'll have a full absorption in our industrial plants, and that's meaningful.

Yes. Just holistically for the business, when you think about capacity utilization in the plants, absorption, product margin, would you have rather to have a 5% increase in industrial or aerospace in FY 2018?What would deliver more absolute operating income?

Depends upon the market sector it came from. Industrial, if it came from certain market sectors would be the winner. And aerospace, if this came from certain market sectors would be the loser. So it really depends upon the customer, and what aspect of the market they're servicing.

On the industrial side, would that be oil and gas which would be the winner?

No. Oil and gas is not much of a winner. Industrial distribution is a winner.

Got it. And which would be the adverse mix on aerospace?

The adverse mix on aerospace would be a contractual obligation that we would have acquired in the Sargent for one of the big engine producers.

Is that a fairly sizable business, and when can you reprice that?

We're working on that now, and more to come.

So I guess with respect to Sargent in general, we're almost two years in the acquisition. Can you talk about more broadly how those assets have performed relative to expectations, whether it's revenue growth, or your ability to leverage product into the aftermarket, free cash flow relative to ROLL classic?

Yes, I think on balance, they performed very well. They are good, solid management based, good solid management teams, strength in lots of positions and good execution and very, very attentive in our strategy sessions on how to improve the business. I mean, I just couldn't be more pleased. I mean, to some extent I wish the RBC classic guys would take a lesson, not all of them, but some of them, some of them need medial work. So I'm very pleased with their execution, and the outlook for most of their business.

So from a free cash flow standpoint when you think about those products, is that better right now than legacy roll, or is the aerospace side of legacy still giving more on a free cash flow basis relative to revenue or fixed assets?

We just don't have it broken down that way Steve, because their businesses flow over both of our major market segments, both over aerospace, commercial, over defense, and over industrial, where the submarine business is in. But the cash generation is where our expectations were, and I think if you'll go back all of the way to the press release we did in the conference call Mike and I had when we closed the deal, that we thought we could pay down a $100 million a year on debt, and I think we're pretty close onto that target of doing that. So I think from that standpoint, it's met our expectation.

And did you give a free cash flow number for the quarter? I'm sorry If I missed it.

Yes, you did. I think it was $35 million.

I gave you the if you go to the press release on the last page, I don't want to give you any non-GAAP information right now. So our cash from operations was $36.1 million, and our CapEx was $4.8 million.

Oh I got it. Yes. Okay. Great. And yes, just one last one from me. If there was a border adjustment tax, would you have an issue around that, or what percentage of product is made in the country other than where it's sold?

I think all of the details around that Steve are very vague, and what exactly will happen, I don't think anybody knows, not even the administration right now. But I'll just give you some statistics around our business, and you make our own determination. We have 33 manufacturing facilities, 27 in the United States, two in Europe, three in Mexico, and one in Canada. Approximately 13% of our sales are generated by our international facilities. That means they're selling within their own territories. Approximately 15% to 20% of our domestic sales are direct export sales. And we have a large percentage of indirect domestic export sales through our large domestic OEMs, both in the industrial and the aerospace space, where our product ends up in their final assembly, and then exported to a foreign customer. So from our initial look and analysis, we are definitely a net exporter, I'm not sure what that means either way, and I'm sure we'll all learn a lot more, once there's more definitive information coming out of the current administration.

All right. Thanks. That is really good detail. Appreciate it.

Thank you. We have a follow-up question from the line of Walter Liptak with Seaport Global. Please proceed.

Hi thanks for taking my follow-up. In the opening remarks you called out infrastructure expecting to pick up, and I wondered if you'd care to comment on just your expectations for sort of the government plans to improve infrastructure, or that is based on private infrastructure, water, utilities, other source of spending, and maybe your view on this industrial recovery that we may be in. Is there enough there for this to be something that we can be talking about a couple of years from now?

Well, typically we've run, we have a small infrastructure business in California that runs about 1% of our sales, and it's a pretty steady Eddie, and it produces parts for bridges and highways and buildings and dams and weir gates, and that sort of thing. And the business is very profitable and very predictable.

So we also bid projects here, there and everywhere, through our agents in various parts of the world that are under construction, and so we recently received a contract for a project, which is a large one in Asia, which we'll begin shipping those products mid next year. So we haven't seen any impact on infrastructure from the new administration, so we hear a lot of talk about strengthening the budget for infrastructure and repair, we haven't seen anything from that. I suspect if that budget is strengthened we will a beneficiary of it, but we expect to see our expansion independent of the new administration.

Okay. Great. Okay. So all of the comments were exclusive of any Trump bump, I guess?

Right.

And just, the cycle has been kind of a prolonged slow down for the last couple of years. I wonder if you think we can get a recovery for a couple of years, and maybe how much your industrial businesses are down from the peak, to where they are troughing now?

Yes. That's probably a number I am really going to be guessing at. But I suspect our industrial businesses, both mining, oil, and oil and gas, and sort of the general industrial nature of the business probably is down 40% from the peak, maybe even more, because the mining peak was very peaky. I don't have those comparisons peak to trough, but I think 40% is probably a modest guess. We are seeing demand right now in excess of that 40%, not so much from the mining sector, a little bit from the oil and gas, but really from the general industrial sector. So where this thing equivolates, Walter, I would just be guessing. I'm happy to, I do think if we end up with a 4% GDP expansion, that we're going to be probably living at heights that we hadn't seen in ten years, if we see a 3% GDP expansion we're probably going to be back to 80% of our peak.

Okay. Well thank you for your comments.

Yes.

Thank you. (Operator Instructions). Our next question will come from the line of Joe [Mubar, Luma] Sales. Please proceed.

Thank you for taking my question. Two numbers kind of jumped off the press release to me. The first one was cash flow from operations of $36 million. I need a lot of help understanding why this number was so large? I think the last couple of years Q3 has seen a modest increase in working capital. And then secondarily any commentary from management regarding the future cash generation profile of the Company year-to-date, it's been running about $75 million, which is pretty impressive?

Yes, Joe, I think for us in Q3, it was a combination of three different things. There was less investment in working capital than we normally would see. There's timing on payments, especially with our bigger government contracts where we might have incurred the expense, and we're finally getting the payments in on those contracts. And a little bit on the tax side on payments there, mainly due to the amount of the restructuring we did, and the impact it had on that some. But the cash flows have just been strong. We've been trying to keep a good control on our capital allocation, and I think it will be fourth quarter will be a good quarter, it won't be the same on Q3, but it will be on our nine-month run rate.

Great. And you addressed this a little bit, Dan, but like net debt dropped $37 million sequentially, so for modeling future changes in net debt, can we use that sort of shortcut of cash flow from operations, subtract out CapEx, like you talked about before, get a free cash flow number, and just assume it will go toward debt pay down?

Yes. If we don't have a deal happening that we can finance, all of our excess cash will continue to go to pay down debt, and then once in a while we step in to buy back some of our stock, when the opportunity presents itself.

All right. Thank you.

Thank you. There are no further questions, so now I would like to hand the conference back over to Dr. Michael Hartnett, Chief Executive Officer, for closing comments and remarks. Sir.

Well, I thank everyone for participating in the call today, and their interest in RBC Bearings, and we will talk again after our fourth quarter. Thank you. Good day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you all may disconnect. Everybody have a wonderful day.