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spk05: This time, we'd like to open up the call to any questions you might have.
spk01: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we post our first question. Our first question comes from Theodore O'Neill with Litchfield Hills Research. Please proceed.
spk03: Thank you, and congratulations on the good quarter. Lynn, I know you said at the Jeffries Conference that your debt is as low as it's going to get, but I was wondering if you could talk about either M&A or how you're going to deploy the capital, because at the time of the conference, you didn't have $100 million in cash, and you do now. And you're talking about bringing inventory turns down as well, so that would add to your cash balance as well.
spk04: Yeah, so I'll just jump in here, Theo. We did have a nice cash build this quarter. I'd also point out that we're roughly on track to double last year's capex spend internally here as we look at various growth avenues and investments. You know, as Dan had pointed out, too, we are obviously always on the hunt for M&A. We think that there is a little bit of a slowdown right now in the M&A market, given some of the global circumstances and kind of, you know, situations that we keep reading about. We do believe that will change, and as we build our cash here, obviously we're always looking for ways to invest in the future of the business for the long term. So we think that there will be a use for it. History has shown that if you look back to a bunch of years, quite frankly. So we do know that it will be useful there for it. But as also Dan called out, we're always looking for ways to improve our capital allocation strategies. So I'll kind of leave it at that.
spk03: Okay. In the e-mobility segment, are you seeing any particular pockets of strength or growth in there? And could you comment just broadly about if you're seeing any inflation effects in the supply chain?
spk04: Yeah, I mean, inflation is all around, you know, whether it be at the wage level, and obviously that doesn't just impact us, it impacts all of our suppliers as well and our customers. So I think inflation is something that everybody's wrestling with and how to contain it. So as we think about automation, as we think about streamlining, right, there's a big emphasis on ensuring efficient operations. So it is definitely something that we are thinking about and managing as, quite frankly, as everything with our numbers. Our facility consolidations will help us manage some of this inflation, but it is a point of consideration, quite frankly, through everything we do, whether the customers we pursue, the products we pursue, our pricing, our operations. So it's definitely front and center. So we do think it is something that everybody is wrestling with.
spk03: And on the e-mobility side, any particular pockets of strength there?
spk04: Yeah, so on the e-mobility side, generally, maybe just a general comment on industrial e-mobility. These are big-ticket items. They cost more than traditional, let's say, ICE buses, as an example. So as a result of that, we're still seeing overall industry excitement around the future of e-mobility. I think some of the nature of our customers, we are seeing that are called a little more startup in nature as they go through funding rounds. Those are points of consideration. But the good thing about our e-mobility business, it's diverse, and it covers customers from startup mode all the way to mature household names. But overall, I've characterized it as a very good end market. But like any other market, a little bit of challenge there at the customer level, but I think for the most part, we're bullish on that for sure.
spk03: Okay, thanks very much.
spk01: Our next question comes from James with Judy with Needham & Company. Please proceed.
spk06: Hi, good morning. Maybe just to close the loop on the e-mobility side, I think you said at one point that you expected this revenue to double this year. Is that still the case, or are you seeing some macro influencing some of the demand in that market?
spk07: Yeah, so Jim, last year, e-mobility sales were in the neighborhood of $20 million. For the first nine months of this year, we're at $22 million. So probably we'll not be doubling this year at this rate, but we You know, we've already been seeing, we're already exceeding last year's full year e-mobility sales. So we'll not double this year.
spk04: Also, I think on the e-mobility side, given some of the components, there was a little bit of challenges getting products out the door earlier this year. So we do expect a nice finish here in Q4, but I don't think it will be at the double level.
spk06: at it. There's a lot of moving parts on the sales line. You've exited some low margin business. You have these raw material surcharges, that impact. Is there any way to think about what the revenue growth was organically nine months or Q3? I'm just trying to get a better fix on the top line.
spk04: So revenue excluding PBV?
spk06: Yeah, I mean, you know, Farouk, I guess, and we could discuss this offline. It's just, you know, I know that you're de-emphasizing some low-margin business. That's coming out. There's an impact from the raw material surcharges. But, yeah, is there on an organic basis, are you seeing growth? Clearly, there's some overhang in the channel, the distribution channel. I think we all get that.
spk05: Hey, Jim. I think because of the long lead times that were faced over the past 24 months, our pricing that we put in place really didn't affect it. We didn't lose sales because of price increases. I think going forward, that might change as lead times come down. So, you know, as I said, over the past 24 months, our new strategy on looking at margin and not just taking business to take business hasn't really, you know, we haven't seen the effects of it at all because of the lead times. So most of it is coming from PVD.
spk06: Okay. And maybe just moving to the facility consolidation, you gave a little bit of color on some of the early benefits. How do we think about The balance of that rolling out over the course of 24, is that expected early in the year, or is it going to be spread more evenly over the course of the year?
spk04: I'd say the way I think about it, Jim, is it's kind of a phased rolling approach. So we start seeing a little bit of benefits in Q2, more in Q3. We expect to see more in Q4. My guess is, you know, if I were just going to hedge it a little bit, my guess is that there will still be a little bit maybe cost that dribbles into Q1 next year. But I think largely we expect that this will be behind us in 2023, maybe with a little bit of overhang into next year. But I think for the most part, you know, we've made some pretty good progress here. So, yeah, so I think we'll largely see the benefits of that, you know, throughout all of next year.
spk07: Just to circle back quickly on your question about the expedite fee revenue, we do now have in the earnings release itself in the non-GAAP tables GAAP net sales and what the expedite fee revenue is along with the non-GAAP adjusted net sales. So for the nine month period, the numbers are noted there. So, on that basis, year-over-year for the nine-month period, it was a $22 million increase in non-GAAP-adjusted net sales, which was just under 5%.
spk06: Thanks, Lynn, for pointing that out. And then just in terms of some of the business that you de-emphasized, have you put a number to that through the nine months?
spk04: I mean, we talked about in the last quarter, you know, there was kind of a slug of roughly $9 million that we talked about.
spk00: Right.
spk04: The way I would also tend to think about it, though, Jim, it's really at a skew, at an order level, right? So when the orders come in, we kind of, you know, or when we quote stuff, we're going to put a price that works for, you know, bell fees, right? But maybe we ultimately not get there, so we could walk away. So I tend to think of that as regular way skew maintenance. as opposed to kind of big, grandiose walking away. I think we're largely probably behind from these kind of grandiose things, and it's going to become an order-driven event. And remember, orders could be as small as $1,000 or smaller and up to hundreds, thousands of dollars. So it really is going to be done at that kind of line level.
spk06: No, that's clear. Thanks for that. Lynn, I just want to make sure I'm clear on one other thing on commercial air. You gave a bookings number, and did you say what the commercial air revenues were in the quarter? I think my recollection is the revenues from commercial air were $15.9 million in Q2, or was that a bookings number?
spk07: No, you're correct. So the commercial air sales in Q2 were 15.9 million. For Q3, they were down a bit. They were 11.3 million for the quarter.
spk06: Okay. But generally, it sounds like you're still seeing pretty healthy demand in that market. That's right.
spk07: So as we mentioned earlier, we did have a record bookings quarter for that end market in Q3. So the bookings for Q3 was $15.7 million.
spk04: And I think, Jim, the way I kind of think about these end markets, you know, like defense, the ordering patterns and shipping patterns kind of are a little bit maybe more lumpy. So I think that's what I attribute to that. As Lynn noted with the bookings and kind of, you know, and obviously the conversations we're having with our various customers, it's kind of what gives us that sentiment of positivity on outlooks.
spk06: Got it. Thanks very much. Congrats on the quarter, by the way. Thank you.
spk01: Thank you. To ask a question, please press star 1 on your telephone keypad. Our next question comes from Heidi Santos with GetBellyFunds. Please proceed.
spk02: Good morning, Dan, Farouk, and Lynn. Good morning. Hello, Henry. So, Dan, I would like to hear your insight into inventory at customer and distribution across various businesses. We have heard many companies reported broadening weaknesses in industrials, and I'm wondering how much we should factor that in going forward. And then if you look at magnetic, can we assume that inventory correction or digestion is at the bottom of its market? And then I'm also wondering when we may see see a growth recovery in power solution and protection?
spk05: Okay. I think, you know, we talk more power solution protection. A lot of it, again, is coming from the circuit protection area. And that's a very heavily distribution business where most customers buy, you know, circuits, you know, uses through distribution because of the low price. From everything we understand, you know, people like Arrow and Avnet, Digi-Key and Mouser, that they still have to work through their inventory. They've brought away too much inventory at their highest level. We hope and believe, you know, most of it should be flushed out by the first or the middle of the second quarter, and we should get back to normal ordering at that point in time. So I would say, you know, middle, second quarter next year, everybody predicting that life from an audit process will go back.
spk04: Your next question? Sorry, what was the next question? I think that answered it, because your requirement was about return to growth, right, Andy? Yeah, yeah. Yeah. But maybe just to also kind of supplement this, Dan, kind of triggered my memory here. So as a reminder, generally Q2 and Q3 are our strongest quarters. Q1, historically, is our weakest quarter, and then Q4 is somewhere in the middle. So the way we kind of look at just kind of the guidance we gave out is kind of the normal cadence of Q4 with some of the holiday patterns and golden week in Asia and so on. So I just want to kind of throw that out there.
spk02: And then Farouk, how sustainable is the gross margin at 35% level now?
spk04: Yeah, I mean, so if you look at it, right, we do know that there is more cost improvements to be done within the business. Magnetics, while sequentially up on sales, is still down on low margins. So we do expect improvements in the magnetics side of the house. And, you know, so as I think about those two things, coupled with weakness that we do see, you know, a little bit of power, as Dan mentioned, and also a little bit of connectivity. So, you know, we've yet to hit on all cylinders, right? So our expectation is if we can kind of do this in some pockets of weakness, our expectation is between cost and a little bit of recovery across the business, You know, we do think it's sustainable. Now, does it mean that we may be impacted here and there? Sure. But, you know, at the end of the day, I think our expectation is at the gross margin level, at a consolidated level, we're kind of in the zip code of where we should be. But at the same time, we are working through a lot of, you know, things internally and externally here.
spk02: Okay. And then the press release also called out rail application. Would you refresh our memory, like where the opportunity and then where your products are in rail applications?
spk04: So maybe it's not on the rail business. You know, the rail business is really quality business. But as we know, rail – I kind of think of it as a step removed from kind of defense in the sense of ordering patterns, the complexity and demanding nature of rail. It is a business that we've been in for, I think, over 40 years. So this is a great business for us. We've seen more investment coming just quite frankly globally, but predominantly out of Europe and Asia, I would say, as they invest in their rail applications. So we're seeing increased orders there. Also, some of the new kind of products and, quite frankly, we reassigned some more resources to focus on that market. So we're seeing the benefits of that here. I think we started doing that in 2021 or perhaps early 2022 to kind of really focus on that side. In terms of applications, you know, we tend to be on the passenger rail side of the business. And, you know, we have various applications throughout the court anywhere from, I think, the lighting application, signaling, and other kind of components. So it's a pretty diverse business product for us. In terms of size of that business.
spk07: Yeah, so our rail sales in Q3 were 6.4 million. So it represented about 9% of the power segment.
spk02: Got it. Okay. Yeah. Thank you, Dan, Farouk, and Lynn. Thank you.
spk01: Thank you. At this time, I will turn the call back over to management for closing comments.
spk05: Thank you for joining us today, and we're looking forward to speaking to you next year. And have a good day. Thank you.
spk01: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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