RBC Bearings Incorporated

Good morning, ladies and gentlemen, and welcome to the Q1 2022 RBC Bearings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touchstone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Will Stack with Investor Relations.

Good morning, and thank you for joining us for RBC Bearing's Fiscal 2022 First Quarter Earnings Conference Call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer, Daniel A. Bergeron, Director, Vice President, and Chief Operating Officer, and Robert Sullivan, 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 Behring's 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'll turn the call over to Dr. Hartnett.

Thank you, Will, and good morning and welcome to all. It seems like we're having these calls weekly now. It's just a pleasure to speak to everyone every week. Net sales for the first quarter of fiscal 22 were $156.2 million versus $156.5 million for the same period last year, a decrease of 0.2%. We had some delays in shipments in one of our divisions as a result of source inspection, which is beyond our control, so that's where we are. For the first fiscal quarter of 22, Sales of industrial products represented 48% of net sales, with aerospace products at 52%. Gross margin for the quarter was $63.8 million, or 40.8% of net sales. This compares to $59.5 million, or 38% for the same period last year. Adjusted operating income was $31.3 million, 20% of net sales compared to last year's 19.1%. Adjusted EBITDA was $45.3 million, 29% of net sales, compared to $43.8 million and 28% of net sales for the same period last year. We ended the quarter with $296 million in cash and securities and $10.8 million of debt. The quarter was one where the industrial markets continued to show increasing strength. Our industrial OEM businesses, non-marine, demonstrated a quarter-to-quarter bounce of 42% over last year. Demand was strong in virtually all components of the market except oil and gas, but the latter appears to be making a comeback now in the July quarter. Performance in the industrial aftermarket was almost as impressive with a 32.6% expansion over last year. We saw demand ranging from excellent to extraordinary in most markets served, and we are looking forward to a strong second quarter from the industrial businesses and expect a continuing but some moderation in demand through the balance of the year. Our strong industrial markets were construction and mining, industrial distribution, semiconductor machinery, machine tool, wind, and trains. Turning to aerospace and defense, this sector was off 18.3 percent for the quarter. Sequentially, when normalized for production days, it was about flat with the preceding period. Aircraft OEM was down almost 22.5 percent. This can be almost entirely attributed to the slow ramp of the 737 MAX programs through 21 and into calendar year 22. a problem that should resolve itself in the quarters ahead as Boeing steps through their monthly production rates from today's 17 per month to January of 2023 of 42 per month. We are now seeing increases in orders shippable later in the year across all of our plants that service and supply both Boeing and Airbus. Today we are combing through over 2,000 line items, excuse me, bearings and assemblies we supply to the industry to ensure we have materials, logistics, and staff in place to seamlessly support the next two years of build rate increases. Regarding our second quarter, we are expecting sales to be between $158 and $162 million. And I'll now turn the call over to Dan and Rob for more detail on the financial performance.

Thank you, Mike. Since Mike has already covered net sales and gross margin, I'll jump down to SG&A. SG&A for the first quarter of fiscal 2022 was $29.8 million compared to $26.8 million for the same period last year. The increase is mainly due to higher personnel costs of $2.4 million and $0.6 million of other items. As percentage of net sales, SG&A was 19.1% for the first quarter of fiscal 2022 compared to 17.1% for the same period last year. Other operating expense for the first quarter of fiscal 2022 was $3.2 million compared to expense of $3.8 million for the same period last year. For the first quarter of fiscal 2022, other operating expenses were comprised mainly of $2.6 million of amortization of intangible assets and $0.6 million of restructuring costs and other items. Other operating expense for the same period last year consisted mainly of $2.5 million in amortization of intangible assets $1.1 million of restructuring costs and $0.2 million of other items. Operating income was $30.7 million for the first quarter of fiscal 2022 compared to operating income of $28.8 million for the same period in fiscal 2021. On an adjusted basis, operating income would have been $31.3 million for the first quarter of fiscal 2022 compared to adjusted operating income of $29.9 million for the first quarter of 2021. For the first quarter of 2022, The company reported net income of $26.0 million compared to net income of $22.7 million for the same period last year. On an adjusted basis, net income would have been $26.3 million for the first quarter of fiscal 2022 compared to adjusted net income of $23.6 million for the same period last year. Diluted earnings per share was $1.03 per share for the first quarter of fiscal 2022 compared to $0.91 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 22 was $1.04 compared to $0.95 per share for the same period last year. Turning to cash flow, in one of our strongest quarters to date, the company generated $53.3 million in cash from operating activities in the first quarter of fiscal 2022 compared to $48.4 million for the same period last year. Capital expenditures were $3.4 million in the first quarter of fiscal 2022 compared to $3.9 million for the same period last year. total debt as of July 3, 2021, was $10.8 million, and cash and marketable securities on hand was $296.1 million. I would now like to turn the call back to the operator for the question and answer session.

At this time, if you have a question, please press star, then the number one in your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Pete Skibitsky with Olympic Global.

Hey, good morning, guys. Long time no talk. Yeah, nice quarter. I wanted to start out, Mike, I think you talked about delays in shipments from, I think, one unit because of source inspections. Can you guys maybe quantify how much revenue was impacted by that event? And maybe was it, you know, aerospace sales or industrial sales?

Yeah, it was industrial sales, and it's about $2 million. Okay, okay.

Got it. And then on the aerospace, I thought aerospace was interesting because it wasn't, you know, you had had four quarters of down aerospace sales, so this should have been an easier comp quarter. I thought maybe, Mike, you mentioned something about fewer days in the quarter or something. Did I hear that right, or am I completely wrong on that?

Yeah, well, there's – There's more days in our fourth quarter than there is in our first quarter. So when you normalize the two, it's about even.

Okay. In the first quarter, was the same number of days in the first quarter fiscal 21 or no?

Yeah, it's about the same, yeah. Okay, okay.

So are you seeing kind of some recovery in demand for some of the other platforms? It's just mainly the max that was the headwind this quarter?

Yeah, it's mainly the Macs. I mean, the other platforms are, you know, are almost incidental to what's going on here. The Macs is really kind of a big deal because, you know, when we look at, you know, I have to quote industry analysts' numbers because, you know, I'm kind of an insider on the aircraft stuff, and I can't quote the exact numbers. But when I look at what the industry expects Boeing to build this year, it's somewhere between 150 and 160 maxes, right, through the calendar year. And I think that number is a good number. And next year is... 300 to 340, sort of that's the range. And the year after, it's 500. And so there's been a sort of a liquidation of Boeing's inventory, because if you look at our first quarter last year, We still had full order books and we still had full plants and we were shipping orders to subcontractors and to Boeing that we had on the books. That inventory now is clearing the system as well as everybody else's inventory, including Boeing's. We're seeing this in demand to support the bills next year of sort of in our fourth quarter, some in our third quarter. Frankly, I think we should be, if life worked perfectly, and it never does, we should be starting our products a year ahead of their build rate. simply because you know it takes six months to make it simple to make the bearing and of the six months you know probably right now it's 20 of 20 weeks to get this deal so we don't have a lot of time to make the bearing and sometimes the bearing has to get frequent flyer to get all the all the outside processing that has to be done that's the exception to the rule but still it's the rule so Yeah, I think the industry is a little bit delayed right now in turning on the volumes that they need to produce the planes that are expected to be produced. So that calculus falls on us to make sure that we understand what we're obligated to supply and when we're likely to supply it. And so we're going through those planning routines now to make sure that we have the product that the aircraft builders need when they need it. And if you look at the step-up, I mean, those 30 planes to us, or 300 planes next year, 300 to 340 next year, that's probably... worth $45 million to us over the course of 12 months in revenue. So it's a big number for our plants to absorb. And so we want to get way ahead of the game in terms of getting everybody into position to be able to support that. And then you look further at the skyline chart, and there's another 200 plane step up to 23. And so, you know, there's going to be a lot of demand headed our way. And the last thing we want is not to be able to execute it efficiently and service the customer on time.

I appreciate all the color. I guess the last one for me, just looking at your defense revenue the last three quarters, Defense X Marine, I know you have a lot of, you know, you're on the F-35 and stuff, but we've seen defense down for a few quarters, and I know a lot of other suppliers have had some F-35 inventory that have had to kind of flush out as Lockheed has kind of slowed things a bit there on an interim basis. So is that what's going on for you guys, maybe just some interim F-35 headwinds? Or do you think you're maybe expected to step back up later this year or next year? Or, you know, do you just sense that defense is kind of, you know, getting some headwinds there just because of the overall budget flattening?

Well, I see Dan's looking at the tables.

Well, I think on aerospace OEM defense, I mean, Q1 to Q1 last year were only down 3.6%, right? But it's just not big numbers on total sales. It's 20.6 million compared to 21.4 million. on the Aerospace and Defense. So it's a little lumpy with the F-35 and the new lot coming through and some of the work that we're doing on the military helicopters, but some of that's being offset by the strength on our missile programs and that we're working on with Lockheed and others.

Okay. Thanks very much, guys.

Your next question comes from Michael Cermoli with Truist Securities.

Hey, good morning, guys. Thanks for taking the questions here. Nice results. Maybe just sticking on Arrow, what Pete was asking, was there any – I mean, you know, the step-down – I guess on a sequential basis for the Arrow OEM was pretty significant. It seems like a 14% step down. You mentioned the working days. Any other changes on some of the wide-body platforms? I know you've got a lot of content on the 787 or any way to parse that out? Uh, was it, was it more engine? Was it more airframe content? Um, you know, and I, yeah, it seemed like that definitely snuck up on you if, if, you know, they were supposed to be kind of sequential improvements and growth. I mean, it just seemed like a big move down.

Yeah, no, it's, it's, it's, it's all about, um, you know, order, order rates by Boeing and, and, and its subs. And, uh, And I think right now they're trying to sell the planes they built and liquidate what's in the middle. But I would say that their priority to do that maybe is more extreme than it should be, and it could affect their business. ability to build planes in the future if they don't turn on the supply chain.

Okay. Now that's, that's helpful. Um, what about anything on the aftermarket side? Um, you know, I know it's, it's kind of a tale of domestic narrow bodies. You guys were, again, I think sequentially flat there. I mean, are you seeing, you know, any noticeable changes on the aftermarket distribution side of, of arrow?

Well, um, The aftermarket distribution side of the business has been usually at this stage in the cycle, the distributors would be loading up their inventories, knowing that build rate increases were going to be substantial. And the market would be, the buyers would be best with service levels. And that would be normal at this stage in the cycle. What's not normal now is so many of the aftermarket distributors are owned by, have new owners and new management teams. And they don't have the experience to do cycles. So what they should be doing with their capital right now, they don't appear to be doing it. So the aftermarket in terms of distribution is, you know, what does it look like? Dan's got the charts.

Yeah, for Q1 FY22, it was around $12.2 million. But compared to Q4, it was a longer quarter. with 12.3 million. Yeah. So it's kind of just probably ended up doing a little better than Q4 because there's more production days in Q4. Okay. Okay.

What about last one? Oh, go ahead.

Sorry. Yeah, but, you know, the repair side of the aftermarket has been a pleasant surprise for us. That's been strong and... It's producing well.

Got it. Last one, you kind of brought up inventories there, but just to shift it maybe to industrial, I think last quarter you noted that there was so much demand. You had kind of depleted inventory, rushing to replenish. You called out the $2 million headwind, but did you kind of see that same pace of demand persist? I mean, obviously you If I add back the $2 million to you, it's a sequential uptick there in industrial, but were you able to catch up on inventory to meet demand, or did you lose out on some revenue this quarter?

No, we're making it as fast as we can deliver it. And we do have some supply chain challenges getting raw material, which we're working on.

Okay, okay. Perfect. Thanks, guys. I'll jump back in the queue.

Again, for any questions, please press star, then the number one, and our telephone keypad. And your next question comes from Ken Newman with KeyBank.

Hey, good morning, guys. Good morning. You know, I wanted to step back to the Arrow side a little bit. It was good color in terms of the forward outlook for Arrow. Obviously, with the build rates kind of coming up into the second half, I'm curious, how do you weigh that against some of the slower ramps in the larger wide-body platforms as we think about the step-up in the second half for Arrow revenue versus the first half? I guess to simplify it, could that revenue for Arrow be up double digits, like 10%, or is the ramp via the build rate going to slow that a little bit?

No, it can be up double digits in the second half. And it needs to be up double digits in the second half to support the Boeing build rate. So that's how we see it. Let's hope the cards get played that way.

Right. So... I guess with that in mind, you know, obviously you put up really strong gross margins in the quarter. I'm curious how sustainable a 40% plus gross margin could be for the remainder of the year as I kind of think about, you know, potential inventory builds and just the expected step up and arrow growth for the second half.

I think it would be a lumpy journey quarters, but I think by the end of the year we should be close or a little north of that 41%.

Is a lot of that just absorption on higher volumes? Any way to kind of parse out how much of that is better pricing or any color on price cost, either for the quarter or just your forward outlook?

Yeah, well, each division that we have keeps a ledger on what price increases we've seen on materials and suppliers, and what price increases we've instituted into the market to offset the price increases from materials and suppliers. And we always like to be a little bit ahead.

And also, we put significant investment in bringing all these out. side services inside for the aerospace business in 2021, and we still haven't seen the full benefit of that investment because of COVID, right, because the build rates dropped off. So we should see when the aerospace business picks up and the volume picks up, we should see some nice improvement driven by this investment that we made over that 24-month period. Right.

So This will be my last one here. Just trying to put a finer point on price-cost here. I guess obviously the industrial aftermarket sales were up, as you were mentioning to Mike earlier. I'm guessing the pricing increases for those products within that channel are pretty instantaneous. Can you help us kind of put a finer point on just how much price was a contributor to the sales growth in aftermarket for industrial versus just purely volumes?

Yeah, I'd say on the industrial side, especially industrial distribution in our first quarter, it was in price. And on industrial OEM, in some cases it is. Other cases, it's the ability to pass through all material inflation that comes through in the way of surcharges. So every segment's a little different. Every customer's a little different. And every channel is a little different. And there's just a lot of good efficiency happening in the industrial side of our business. When your business is up 30% to 40%, you're really absorbing your assets nicely.

Understood. Thanks for the call. Yep.

Again, that is star one for any questions. At this time, there are no further questions. I will now hand the call back to Dr. Hartnett for closing remarks.

Okay, well, thanks for participating in the call today, and we'll be certainly talking to you again by early November and discussing our third quarter, or our second quarter, which we're anticipating another strong quarter. I think, as I said, we're expecting sales to be between 158 and 162 million, and that's looking very positive.

That concludes today's conference. Thank you for your participation.

You may now disconnect. Music. Thank you. you you

Good morning, ladies and gentlemen, and welcome to the Q1 2022 RBC Bearings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I will now let you turn the conference over to your host, Mr. Will Stack with Investor Relations.

Good morning, and thank you for joining us for RBC Bearing's Fiscal 2022 First Quarter Earnings Conference Call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer, Daniel A. Bergeron, Director, Vice President, and Chief Operating Officer, and Robert Sullivan, 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 Behring's 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'll turn the call over to Dr. Hartnett.

Thank you, Will, and good morning and welcome to all. It seems like we're having these calls weekly now. It's just a pleasure to speak to everyone every week. Net sales for the first quarter of fiscal 22 were $156.2 million versus $156.5 million for the same period last year, a decrease of 0.2%. We had some delays in shipments in one of our divisions as a result of source inspection, which is beyond our control, so that's where we are. For the first fiscal quarter of 22, Sales of industrial products represented 48% of net sales, with aerospace products at 52%. Gross margin for the quarter was $63.8 million, or 40.8% of net sales. This compares to $59.5 million, or 38% for the same period last year. Adjusted operating income was $31.3 million, 20% of net sales compared to last year's 19.1%. Adjusted EBITDA was $45.3 million, 29% of net sales compared to $43.8 million and 28% of net sales for the same period last year. We ended the quarter with $296 million in cash and securities and $10.8 million of debt. The quarter was one where the industrial markets continued to show increasing strength. Our industrial OEM businesses, non-marine, demonstrated a quarter-to-quarter bounce of 42 percent over last year. Demand was strong in virtually all components of the market except oil and gas, but the latter appears to be making a comeback now in the July quarter. Performance in the industrial aftermarket was almost as impressive with a 32.6 percent expansion over last year. We saw demand ranging from excellent to extraordinary in most markets served, and we are looking forward to a strong second quarter from the industrial businesses and expect a continuing but some moderation in demand through the balance of the year. Our strong industrial markets were construction and mining, industrial distribution, semiconductor machinery, machine tool, wind, and train. Turning to aerospace and defense, this sector was off 18.3 percent for the quarter. Sequentially, when normalized for production days, it was about flat with the preceding period. Aircraft OEM was down almost 22.5 percent. This can be almost entirely attributed to the slow ramp of the 737 MAX programs through 21 and into calendar year 22. a problem that should resolve itself in the quarters ahead as Boeing steps through their monthly production rates from today's 17 per month to January of 2023 of 42 per month. We are now seeing increases in orders shippable later in the year across all of our plants that service and supply both Boeing and Airbus. Today we are combing through over 2,000 line items, excuse me, bearings and assemblies we supply to the industry to ensure we have materials, logistics, and staff in place to seamlessly support the next two years of build rate increases. Regarding our second quarter, we are expecting sales to be between $158 and $162 million. And I'll now turn the call over to Dan and Rob for more detail on the financial performance.

Thank you, Mike. Since Mike has already covered net sales and gross margin, I'll jump down to SG&A. SG&A for the first quarter of fiscal 2022 was $29.8 million compared to $26.8 million for the same period last year. The increase is mainly due to higher personnel costs of $2.4 million and $0.6 million of other items. As percentage of net sales, SG&A was 19.1% for the first quarter of fiscal 2022 compared to 17.1% for the same period last year. Other operating expense for the first quarter of fiscal 2022 was $3.2 million compared to expense of $3.8 million for the same period last year. For the first quarter of fiscal 2022, other operating expenses were comprised mainly of $2.6 million of amortization of intangible assets and $0.6 million of restructuring costs and other items. Other operating expense for the same period last year consisted mainly of $2.5 million in amortization of intangible assets $1.1 million of restructuring costs, and $0.2 million of other items. Operating income was $30.7 million for the first quarter of fiscal 2022, compared to operating income of $28.8 million for the same period in fiscal 2021. On an adjusted basis, operating income would have been $31.3 million for the first quarter of fiscal 2022, compared to adjusted operating income of $29.9 million for the first quarter of 2021. For the first quarter of 2022, The company reported net income of $26.0 million compared to net income of $22.7 million for the same period last year. On an adjusted basis, net income would have been $26.3 million for the first quarter of fiscal 2022 compared to adjusted net income of $23.6 million for the same period last year. Diluted earnings per share was $1.03 per share for the first quarter of fiscal 2022 compared to $0.91 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2022 was $1.04 compared to $0.95 per share for the same period last year. Turning to cash flow, in one of our strongest quarters to date, the company generated $53.3 million in cash from operating activities in the first quarter of fiscal 2022 compared to $48.4 million for the same period last year. Capital expenditures were $3.4 million in the first quarter of fiscal 2022 compared to $3.9 million for the same period last year. total debt as of July 3rd, 2021 was $10.8 million, and cash and marketable securities on hand was $296.1 million. I would now like to turn the call back to the operator for the question and answer session.

At this time, if you have a question, please press star, then the number one, and your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Pete Skibitsky with Olympic Global.

Hey, good morning, guys. Long time no talk.

Thank you.

Yeah, nice quarter. I wanted to start out, Mike, I think you talked about delays in shipments from, I think, one unit because of source inspections. Can you guys maybe quantify how much revenue was impacted by that event? And maybe was it, you know, aerospace sales or industrial sales?

Yeah, it was industrial sales, and it's about $2 million. Okay, okay.

Got it. And then on the aerospace, I thought aerospace was interesting because it wasn't, you know, you had had four quarters of down aerospace sales, so this should have been an easier comp quarter. I thought maybe, Mike, you mentioned something about fewer days in the quarter or something. Did I hear that right, or am I completely wrong on that?

Yeah, well, there's – There's more days in our fourth quarter than there is in our first quarter. So when you normalize the two, it's about even.

Okay. In the first quarter, was the same number of days in the first quarter fiscal 21 or no?

Yeah, it's about the same, yeah. Okay, okay.

So are you seeing kind of some recovery in demand for some of the other platforms? It's just mainly the max that was the headwind this quarter?

Yeah, it's mainly the MAX. I mean, the other platforms are almost incidental to what's going on here. The MAX is really kind of a big deal because when we look at – I have to quote industry analysts' numbers because – I'm kind of an insider on the aircraft stuff, and I can't quote the exact numbers. But when I look at what the industry expects Boeing to build this year, it's somewhere between 150 and 160 maxes, right, through the calendar year. And I think that number is a good number. And next year is... 300 to 340, sort of that's the range.

Yep.

And the year after, it's 500. And so, you know, there's been a sort of a liquidation of Boeing's inventory because if you look at our first quarter last year, We still had full order books and we still had full plants and we were shipping orders to subcontractors and to Boeing that we had on the books. That inventory now is clearing the system as well as everybody else's inventory, including Boeing's. We're seeing this pick up in demand to support the builds next year of sort of in our fourth quarter, some in our third quarter. Frankly, I think we should be, if life worked perfectly, and it never does, we should be starting our products a year ahead of their build rate. simply because you know it takes six months to make it simple to make the bearing and of the six months you know probably right now it's 20 of 20 weeks to get this deal so we don't have a lot of time to make the bearing and sometimes the bearing has to get a frequent flyer to get all the all the outside processing that has to be done that's the exception to the rule but still it's the rule so Yeah, I mean, I think the industry is a little bit delayed right now in turning on the volumes that they need to produce the planes that are expected to be produced. So that calculus falls on us to make sure that we understand what we're obligated to supply and when we're likely to supply it. And so we're going through those planning routines now to make sure that we have the product that the aircraft builders need when they need it. And if you look at the step-up, I mean, those 30 planes to us, or 300 planes next year, 300 to 340 next year, that's probably... worth 45 million dollars to us in over over the course of 12 months in revenue so it's it's a big it's a big number for our plants to absorb and so we're little you know we want to get way ahead of the game in terms of getting everybody into position to be able to support that and then you look further at the skyline chart and there's another 200 plane step up to 23 and And so, you know, there's going to be a lot of demand headed our way. And the last thing we want is not to be able to execute it efficiently and service the customer on time.

I appreciate all the color. I guess the last one for me, just looking at your defense revenue the last three quarters, Defense X Marine, I know you have a lot of, you know, you're on the F-35 and stuff, but we've seen the fence down for a few quarters, and I know a lot of other suppliers have had some F-35 inventory that have had to kind of flush out as Lockheed has kind of slowed things a bit there on an interim basis. So is that what's going on for you guys, maybe just some interim F-35 headwinds? Or do you think you're maybe expected to step back up later this year or next year? Or, you know, do you just sense that the fence is kind of, you know, getting some headwinds there just because of the overall budget flattening?

Well, I see Dan's looking at the tables.

Well, I think on aerospace OEM defense, I mean, Q1 to Q1 last year were only down 3.6%, right? But it's just not big numbers on total sales. It's 20.6 million compared to 21.4 million. on the aerospace and defense. So it's a little lumpy with the F-35 and the new lot coming through and some of the work that we're doing on the military helicopters, but some of that's being offset by the strength on our missile programs and that we're working on with Lockheed and others.

Okay. Thanks very much, guys.

Your next question comes from Michael Cermoli with Truist Securities.

Hey, good morning, guys. Thanks for taking the questions here. Nice results. Maybe just sticking on Arrow, what Pete was asking, was there any – I mean, you know, the step-down – I guess on a sequential basis for the Arrow OEM was pretty significant. It seems like a 14% step down. You mentioned the working days. Any other changes on some of the wide-body platforms? I know you've got a lot of content on the 787 or any way to parse that out? Uh, was it, was it more engine? Was it more airframe content? Um, you know, and I, yeah, cause it seemed like that definitely snuck up on you if, if, you know, they were supposed to be kind of sequential improvements and growth. I mean, it just seemed like a big move down.

Yeah, no, it's, it's, it's, it's all about, um, you know, order, order rates by Boeing and, and, and its subs. And, uh, And I think right now they're trying to sell the planes they built and liquidate what's in the middle. But I would say that their priority to do that maybe is more extreme than it should be, and it could affect their business. ability to build planes in the future if they don't turn on the supply chain. Okay.

Now that's, that's helpful. Um, what about anything on the aftermarket side? Um, you know, I know it's, it's kind of a tale of domestic narrow bodies. You guys were, again, I think sequentially flat there. I mean, are you seeing, you know, any noticeable changes on the aftermarket distribution side of, of arrow?

Well, um, The aftermarket distribution side of the business has been usually at this stage in the cycle, the distributors would be loading up their inventories, knowing that build rate increases were going to be substantial, and the buyers would be best with service levels. That would be normal at this stage in the cycle. What's not normal now is so many of the aftermarket distributors have new owners and new management teams, and they don't have the experience in these cycles. So what they should be doing with their capital right now, they don't appear to be doing it. So the aftermarket in terms of distribution is, what does it look like? Dan's got the charts.

Yeah, for Q1 FY22, it was around $12.2 million. But compared to Q4, it was a longer quarter. with 12.3 million. Yeah. So it's kind of just probably ended up doing a little better than Q4 because there's more production days in Q4. Okay. Okay.

What about last one?

Oh, go ahead. Sorry. Yeah, but, you know, the repair side of the aftermarket has been a pleasant surprise for us. That's been strong and... Okay.

It's producing well. Got it. Last one, you kind of brought up inventories there, but just to shift it maybe to industrial, I think last quarter you noted that there was so much demand, you know, you had kind of depleted inventory, Russian replenished. Did you – you called out the $2 million – headwind, but did you kind of see that same pace of demand persist? I mean, obviously, if I add back to $2 million, too, you had a sequential uptick there in industrial, but were you able to catch up on inventory to meet demand, or did you lose out on some revenue this quarter?

No, we're making it as fast as we can deliver it. And we do have some supply chain challenge is getting raw material that's really working.

Okay. Okay. Perfect. Thanks, guys. I'll jump back in the queue.

Again, for any questions, please press star, then the number one, and your telephone keypad. And your next question comes from Ken Newman with KeyBank.

Hey, good morning, guys. Good morning. I wanted to step back to the Arrow side a little bit. It was good color in terms of the forward outlook for Arrow. Obviously, with the build rates kind of coming up into the second half, I'm curious, how do you weigh that against some of the slower ramps in the larger wide-body platforms as we think about the step up in the second half for Arrow revenue versus the first half? I guess to simplify it, could that revenue for Arrow be up double digits, like 10%, or is the ramp via the build rate going to slow that a little bit?

No, it can be up double digits in the second half. And it needs to be up double digits in the second half to support the Boeing build rate. So that's how we see it. Let's hope the cards get played that way.

Right. So I guess with that in mind, you know, obviously you put up really strong gross margins in the quarter. I'm curious how sustainable a 40% plus gross margin could be for the remainder of the year as I kind of think about, you know, potential inventory builds and just the expected step up in arrow growth for the second half.

I think it'll be lumpy during the quarters, but I think by the end of the year, we should be close or a little north of that 41%.

Is a lot of that just absorption on higher volumes? Any way to kind of parse out how much of that is better pricing or any color on price cost, either for the quarter or just your forward outlook?

Yeah, well, each division... that we have keeps a ledger on what price increases we've seen on materials and suppliers and what price increases we've instituted into the market to offset the price increases from materials and suppliers. And we always like to be a little bit ahead.

And also we put, you know, significant investment in bringing all these outside services inside for the aerospace business in 2021. And we still haven't seen the full benefit of that investment because of COVID, right, because the build rates dropped off. So we should see when the aerospace business picks up and the volume picks up, we should see some nice improvement driven by this investment that we made over that 24-month period. Right.

So this will be my last one here. Just trying to put a finer point on price-cost here. I guess obviously the industrial aftermarket sales were up, as you were mentioning to Mike earlier. I'm guessing the pricing increases for those products within that channel are pretty instantaneous. Can you help us kind of put a finer point on just how much price was a contributor to the sales growth and aftermarket for industrial versus just purely volumes?

Yeah, I'd say on the industrial side, especially industrial distribution in our first quarter, it was in price. And on industrial OEM, in some cases it is. Other cases, it's the ability to pass through all material costs inflation that comes through in the way of surcharges. So every segment's a little different, every customer's a little different, and every channel's a little different. And there's just a lot of good efficiency happening in the industrial side of our business. When your business is up 30% to 40%, you're really absorbing your assets nicely. Understood.

Thanks for the call. Yep.

Again, that is star 1 for any questions. At this time, there are no further questions. I will now hand the call back to Dr. Hartnett for closing remarks.

Okay. Well, thanks for participating in the call today, and we'll be certainly talking to you again. by early November and discussing our third quarter, or our second quarter, which we're anticipating another strong quarter. I think, as I said, we're expecting sales to be between 158 and 162 million, and that's looking very positive.

That concludes today's conference. Thank you for your participation. You may now disconnect.