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Earnings call: RBC Bearings sees growth in aerospace, cautious in industrial

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 11:14 a/m
© Reuters.
RBC
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RBC (TSX:RY) Bearings (NYSE:RBC), Inc. (NASDAQ: ROLL), a leading manufacturer of precision bearings and components, reported a 5% increase in sales for the fiscal first quarter of 2025, with notable expansion in its Aerospace and Defense sector and a slight contraction in its Industrial business.

The Aerospace and Defense sector experienced a robust 23.7% increase, driven by a $30 million rise in sales compared to the previous year, while the Industrial sector faced challenges, particularly in the Oil & Gas and semiconductor machinery markets. Despite the mixed performance, the company remains optimistic about the Industrial markets strengthening in the latter half of the year.

Key Takeaways

  • RBC Bearings posted a 5% sales increase in Q1 of fiscal 2025.
  • Aerospace and Defense sectors saw a 23.7% expansion, while the Industrial business contracted by 3.5%.
  • The company reduced debt by $60 million, with a 57.9% increase in net cash from operating activities.
  • Adjusted gross margin improved to 45.3% of sales, and adjusted net income reached $2.54 per share.
  • Executives anticipate growth in the Industrial sector for the fiscal year 2025 and are considering acquisitions in A&D-like companies.

Company Outlook

  • Industrial markets expected to gain strength in the second half of the year.
  • Plans to increase plant capacities to meet additional demand from industrial and Aerospace, Defense customers.
  • Growth in the Industrial sector driven by synergies, favorable mix, plant efficiencies, and supply chain improvements.
  • Gross margin likely to decrease in Q2 due to fewer production days and a favorable mix in Q1.
  • Aerospace revenue grew by 24%; however, the company does not anticipate maintaining 20%+ growth in Q2.

Bearish Highlights

  • Industrial business saw a slight contraction with weakness in Oil & Gas and semiconductor machinery markets.
  • Gross margin expected to decrease in the second quarter.
  • Industrial sector revenue projected to decline sequentially in the back half of the year.

Bullish Highlights

  • Defense sector leads the expansion in Aerospace and Defense.
  • Company well-positioned to support increased demand from both sectors.
  • Aerospace segment benefits from efficient contract execution and increased volume.
  • Solid performance in the Industrial segment attributed to synergies and supply chain improvements.

Misses

  • The company did not provide a backlog due within 12 months but focused on presenting the full backlog.

Q&A Highlights

  • The company is cautious about mergers and acquisitions but is exploring opportunities with A&D-like companies.
  • Planning for Boeing (NYSE:BA)'s MAX production rate is conservative, with potential for accelerated growth in fiscal year 2026 if targets are met.
  • Full backlog presentation reflects the significant part of the business, especially in Defense.

In the earnings call, Michael Hartnett, an executive at RBC Bearings, provided insights into the company's performance and future plans. He highlighted the slowdown in the aftermarket of the Industrial sector and the flat performance expected in the third quarter of the fiscal year. Hartnett also pointed out the potential for growth in various Aerospace programs, such as submarines, missiles, joint strike fighters, and long-range bombers. Furthermore, he discussed the company's conservative planning regarding Boeing's MAX production rate and the potential for accelerated growth in fiscal year 2026.

RBC Bearings remains cautious in its approach to mergers and acquisitions, seeking companies that align with its current operations. The company also expressed its gratitude and anticipation for further discussions in the fall, indicating a forward-looking approach to its business strategy. With a focus on improving gross margins and a recovery anticipated in the Semicon and Oil & Gas sectors, RBC Bearings is positioning itself for success in the latter part of the fiscal year.

InvestingPro Insights

RBC Bearings, Inc. (NASDAQ: ROLL) has shown a promising start to fiscal 2025 with a 5% increase in sales, particularly driven by its Aerospace and Defense sector. The company's financial health and market performance can be further analyzed through key metrics and insights provided by InvestingPro.

InvestingPro Data metrics reveal that RBC Bearings has a market capitalization of $8.04 billion and a high price-to-earnings (P/E) ratio of 40.73, which is slightly adjusted from the last twelve months as of Q1 2025 to 39.74. This high P/E ratio suggests that the stock is trading at a premium compared to its earnings, which is corroborated by an InvestingPro Tip that notes the company is trading at a high earnings multiple relative to near-term earnings growth.

Additionally, the company's revenue for the last twelve months as of Q1 2025 stood at $1.579 billion, with a growth of 5.14%, aligning with the reported increase in sales. The gross profit margin during this period was 43.49%, indicating a solid profitability from its operations. This financial stability is supported by another InvestingPro Tip that highlights the company's ability to cover its short-term obligations with liquid assets.

While RBC Bearings does not pay a dividend, indicating a potential reinvestment of earnings into the company for growth, the stock has experienced significant volatility. This is something investors may want to consider, especially given that RBC Bearings operates with a moderate level of debt and analysts predict the company will remain profitable this year.

For those looking for more in-depth analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/ROLL, which can provide a comprehensive understanding of RBC Bearings' financial health and market performance.

Full transcript - RBC Bearings Inc (RBC) Q1 2025:

Operator: Greetings, and welcome to RBC Bearings Fiscal 2025 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Moffatt, the Director of Investor Relations. Please go ahead.

Rob Moffatt: Good morning, and thank you for joining us for RBC Bearings fiscal first quarter 2025 earnings call. I'm Rob Moffatt, Director of Investor Relations. And with me on the call today are Dr. Michael Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob 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 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. With that, I'll now turn the call over to Dr. Hartnett.

Michael Hartnett: Thank you, Rob, and good morning to everyone, and thanks for joining us. I'm going to start today's call with a quick review of our quarter and fiscal year and hand it over to Rob for some detailed color on the numbers. And then I'll finish with some high-level thoughts on the industry, RBC's positioning, and some -- and our fiscal '25 outlook. First quarter sales came in at $406.3 million, a 5% increase over last year. Strong performance from our Aerospace and Defense sector, showed a 23.7% expansion, where our Industrial business contracted slightly at 3.5%. In Aerospace and Defense, sales expanded approximately $30 million quarter-to-quarter, year-over-year with $149.1 million on the quarterly result. The Defense sector led with a 38.1% expansion rate. Unquestionably, we can expect continued strong showings from our A&D sector through the balance of the year. On the Industrial side, we held our own against our peers showing a small contraction of 3.5% sales. Sales were $257.2 million. Weakened sector performance was seen in Oil & Gas, semiconductor machinery and some general industrial markets. We currently expect and plan for these markets to strengthen in the second half of the year. Adjusted gross margin for the quarter came in at $184 million, 45.3% of sales and almost two full percentage points above last year. Clearly, our manufacturing plants are executing extremely well. We are operating well within our sweet spot in this regard, and many completed synergies and improvement projects contributed to this performance. Still, many more productive concepts and plans are in the breach and/or active today. And these are very productive and promising areas for us to prospect. I'd like to acknowledge and thank our teams for this quarter's performance. Clearly, it is they who are the reason for RBC's continued successes. As a result, adjusted net income was $2.54 a share and adjusted EBITDA was 33% of revenues. Obviously, we're very pleased with this performance and we really can't think of a better way to start our fiscal year. Net cash provided by the operating activities was $97.4 million versus $61.7 million last year, a 57.9% increase. This allowed us to reduce debt another $60 million during the period, bringing the EBITDA to net-debt ratio to approximately 2.1 times, another sweet spot. Overall, we expect more of the same performance from the Aerospace and Defense group through the year-end. Some ups and downs in this regard as a result of normal seasonal impacts of holidays, vacations and supply chain. On the Industrial side, we are planning to see strengthening in the second half of the year and are setting our plans today accordingly. RBC is well-positioned to support additional demand from both industrial and Aerospace, Defense customers as well as space customers. We have the production capacity, the trained and skilled workforces in place and are in the process of augmenting plant capacities to accommodate additional business awards. I'll now turn the call over to Rob for more details on our financial performance.

Robert Sullivan: Thank you, Mike. As Dr. Hartnett indicated, this is another strong quarter for RBC. Total sales growth of 5% in the quarter was surpassed by adjusted EBITDA growth of 11.3%, and adjusted EPS growth of 19.2%. Along with that, we had free cash flow growth of 61% year-over-year. This was driven in large part by strong gross margin expansion with first quarter gross margin as a percentage of sales coming in at 45.3%, an expansion of roughly 190 basis points year-over-year. The two biggest drivers here continue to be the ongoing tailwinds from Dodge synergies and increased utilization of our Aerospace manufacturing assets. We also saw tailwinds from strong plant efficiency, expedites, and a favorable mix. On the SG&A line, we continue to make investments in our future growth. This includes sales force additions to support the international expansion that we have highlighted as part of our Dodge strategy and the resources needed to support that growth, including IT infrastructure and back-office support. With that said, the rate of growth on the SG&A line moderated versus the year-ago period and we were able to extract a modest amount of leverage this quarter. Going forward, we expect SG&A as a percentage of sales to increase in Q2 and Q3 before normalizing in Q4. This led to an adjusted EBITDA of $134 million this quarter, up 11.3% year-over-year; and adjusted EBITDA margin of 33%, which is up almost 190 basis points versus last year's 31.1%. The EBITDA margin is a new record for RBC, eclipsing our recent peak of 31.7% in the second quarter of fiscal '24. The achievement of this milestone was a multifaceted effort with credit being deserved across multiple layers of the company, including the Dodge team for their efforts in extracting synergies and to our operations and plant management teams for running at very high levels of plant efficiency during the quarter. Interest expense in the quarter was $17.2 million. This was down 16% year-over-year, reflecting the ongoing repayment of our term loan. The tax rate in our adjusted EPS calculation was 22.4%, a moderate year-over-year headwind versus last year's 22%. Altogether, this led to adjusted diluted EPS of $2.54, representing 19.2% of year-over-year growth, an impressive result on revenue growth of 5%. In terms of cash, the free cash flow of $88.4 million ran at 144% conversion rate and grew 61% on a year-over-year basis. This was fueled by strong net income growth and improved working capital performance. As usual, we used a meaningful portion of the cash generated to continue to pay down our term loan. We repaid $60 million of the loan this quarter and continue to expect to repay $275 million to $300 million total for the year. The balance on the term loan at the end of the quarter was $615 million, leaving net debt at $1.05 billion and trailing net leverage of 2.1 times. We continue to expect trailing net leverage to be well below the two-times mark exiting the fiscal year, leaving ample room for a return to M&A should the right deal come across our path. As a reminder, our Series A Mandatory Convertible Preferred Stock is expected to automatically convert on October 15, 2024. Using Q1 results as an approximation, the net impact of this conversion is expected to be slightly accretive to earnings per share, assuming conversion at the current share price. It will be more meaningfully accretive, however, to free cash flow as the conversion will remove the cash dividend payment, reducing our future total cash outlays by approximately $23 million on an annualized basis. This is roughly 9.5% of fiscal '24's total free cash flow. In closing, this was another strong quarter for RBC. We remain focused on leveraging our core strengths in engineering, manufacturing, and product development to drive organic and inorganic growth, continued margin excellence and high levels of free cash flow conversion. With that, operator, please open the call for Q&A.

Operator: [Operator Instructions] Thank you. And our first question is from the line of Kristine Liwag with Morgan Stanley (NYSE:MS). Please proceed with your question.

Kristine Liwag: Hi, good morning, everyone.

Michael Hartnett: Good morning, Kristine.

Kristine Liwag: You know with the Industrial end-market kind of starting to decline here, can you provide more content and detail about what you're seeing in the different end-markets, and exactly how far away we are from a trough? And what we've had to see to see improvement because it seems like the issue in the quarter is just a little bit of weakness in the top-line. But that said, I mean, with a 45% gross margin for the business, that's still a pretty incredible performance.

Michael Hartnett: Yes. Well, you know, when we're looking at the Industrial markets, Kristine, there's a few things that where we saw a substantial amount of softness, and we've seen that continued for almost 12 months now. And that's in Semicon and Oil & Gas. And on the, Semicon --

Kristine Liwag: Hello, I think the line dropped.

Operator: [technical difficulty] Ladies and gentlemen, this is the operator. Please, standby we're facing technical difficulties. We'll resume momentarily. [Operator Instructions] Ladies and gentlemen, thank you for standing by. Gentlemen, you may continue. Kristine, please continue with your questions.

Michael Hartnett: Where did I leave you, Kristine?

Kristine Liwag: Great. Mike, you were talking about semiconductors is where you've seen the weakness in Oil & Gas and that's where the line dropped off.

Michael Hartnett: Yes, okay. So those are the two majors. The Oil & Gas is a sort of we have a major customer. We had a planning problem and we bought too much a year ago and now is sort of liquidating that position. We expect them to get better over -- as the year progresses. And the rest of the business, there's a slight downward bias on the rest of the market. Some positive, some negative, but overall bias down.

Kristine Liwag: Great. And just a follow-up in terms of where we're seeing the weakness. Are these mostly on new builds or was the slowdown in buying also in the aftermarket if there was a little bit of an overage in buying before?

Michael Hartnett: Yes, I think it's by and largest slowdown in the aftermarket. So, in the various industrial sectors that support the aftermarket.

Kristine Liwag: I see. And then as you look at the recovery for each of these end markets, at which quarter do you think Industrial revenue could potentially drop? And do you have any visibility into that?

Michael Hartnett: If I had the visibility, I would probably know what stocks to buy and which stocks to sell, right? I don't have that kind of visibility. What we do have is economic models that sort of give us general overall direction. And those economic models are saying, have been telling us that it's flat through our third quarter and very strong in our last quarter. And that's sort of how we're piloting the sector today.

Kristine Liwag: Well, great. Thank you for the color. I'll get back in queue. Thanks.

Operator: Thank you. Our next question is from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.

Michael Ciarmoli: Hi, good morning, guys. Thanks for taking the questions. Maybe just to stay on Industrial, I guess, the quarterly results on revenue came up short of your guidance. Was that -- was the Industrial weakness the biggest driver of that delta or did anything else kind of materialize?

Michael Hartnett: No, that was the biggest driver. It's just -- it's all about consumption rates and -- Industrial consumption rates. Our estimates for those rates at the beginning of the quarter and the actual consumption that we see during the quarter creates a variance.

Michael Ciarmoli: Got it. Got it. Do you have, you know, that -- I guess, ever since the acquisition of Dodge and the amount of Industrial revenues that go through aftermarket distribution now is pretty sizable at the company level. I mean, do you have the level of visibility into the distributors to know if there's really going to be a more pronounced destock in any of these industrial sectors? Or do you even have some sort of min-max thresholds where you have a certain base level of demand that you're shipping to in the Industrial channels?

Michael Hartnett: Well, we have probably the same information that you have. I mean, some of these are public companies and they published quite detailed information on what their situation is. And basically, I didn't -- I don't think there's any much destocking going on. I think part of the year-to-year comp delta there was that a year ago we were still benefiting from a recovering supply chain and cleaning up the backlog. Those are products that have been on the order book for an extended period of time, but as a result of supply-chain difficulties, we couldn't complete those orders. And so last year, we probably benefited from some number that it might be as high as $10 million of that backlog reduction. And this year we -- supply-chain is normal. And so we're just living on the economic consumption rate.

Michael Ciarmoli: Got it.

Michael Hartnett: As is our distributors. I mean, I don't think there's any serious destocking going on anywhere.

Michael Ciarmoli: Okay. Okay. Do you think as you look out for the remainder of '25, I mean, you had a tough comp year-over-year in the first quarter for Industrial, but they certainly get easier. Do you think Industrial grows for fiscal '25? Or do you think it's going to be sort of low single-digit kind of pressure all year?

Michael Hartnett: You know, our plan today has it growing.

Michael Ciarmoli: Okay.

Michael Hartnett: And that's we're expecting, as I said, a recovery and some recovery in Semicon. We're expecting a milder recovery in Oil & Gas and then the rest of it is about the Industrial economic consumption rate.

Michael Ciarmoli: Okay. Okay. Got it. And then just real quickly and then I'll jump off here. Any more detail on the year-over-year growth rates by channel and Aerospace, aero OEM aftermarket distribution? I think you called out the Defense already.

Michael Hartnett: Yes, I think, Rob can give you those. He's looking at it now. So I'll turn the call over to Rob.

Robert Sullivan: Yes, they were very consistent, like they were both right around at 23.7 per OEM, 23.9 per distribution. So very consistent.

Michael Ciarmoli: Okay. Okay. Perfect. All right, guys. I'll jump back in the queue. Thanks.

Operator: Our next question is from the line of Peter Skibitski with Alembic Global. Please proceed with your questions.

Peter Skibitski: Hi, good morning, guys. Nice performance. Hi, Mike, just on the total growth in Defense, I think you said 38%. Was there a few programs that are helping to drive that or because you're just growing just so much above the market, above all the OEMs? So I'm just wondering if you could give us more color on what's driving that. It's like the fourth quarter in a row of that type of really strong growth. And I don't know if you could talk about pricing at all in terms of pricing maybe finally catching up with past inflation because I know you're on a lot of LTAs as well. So just if you could comment there.

Michael Hartnett: Yes. And just to get the pricing thing the way, we're not seeing -- I don't think we're seeing any benefit from that right now. A lot of our contracts roll over in '25 and '26. So we're really still living with prices that were probably set in '21, maybe '20, maybe '19. So, that's basically that headwind for us. But there are several major programs that we're involved with right now that are going to continue to drive that kind of expansion and it's a -- I think the year-over-year comps will become more difficult because it started about a year ago. But when you talk about the need to build a submarine, that's not going away for five years or 10 years, probably 10 years. That's going to be very demanding on us. Missiles, demanding, joint strike fighters, demanding, long-range bombers, demanding. So, there's just a lot of really big programs that we're working on. And also the cancellation of the FARA program for the scout helicopters that impacted Sikorsky and Lockheed, as a result, benefited the other ships that were on tremendously because the other ships were sort of in, some extent hiatus like the CH-47, the Apache (NASDAQ:APA), the Black Hawk. Those are major important platforms for us and the rest of the world didn't know whether they could buy those platforms or not based upon where the -- where the DoD money was heading. And that seemed to -- that environment has cleared and there's a lot of interest for an interest in those platforms. So, we're just -- it's kind of perfect room for us on the Defense side.

Peter Skibitski: Yes. Okay. That makes sense. Just one follow-up for me, maybe on the commercial side. It sounds like Boeing is at about -- on the MAX, they're at about 25 per month now in June and July. Can you guys just remind us where you were over the past couple of quarters? I think they've been maintaining you like in the 30s or so. Does that sound about right?

Michael Hartnett: Yes, that sounds about right. I think they -- I think our planning now is probably at a 33 grade. Although they've indicated they'll be at 38 by the end of year and the new CEO has agreed with that I hope when he goes up at his office he agrees with it even further but you know -- so yes, I think we have a very modest expectation built into our planning with regard to Boeing demand. And that seems to be the way it's playing out.

Peter Skibitski: Yes. And if they make that 38 or 8 by the end of the year, I imagine your -- potentially you could accelerate, I guess, compared to -- in the fiscal '26, it sounds like.

Michael Hartnett: Yes. Well, I think they've got to get the FAA to approve a step-up beyond 38, assuming they can get to 38. And so, obviously, our parts for the most part have to be available six months ahead of -- that's our planning cycle ahead of the aircraft assembly rates. So that's kind of moved -- that moved April into October on the 38 rate. So we should be really, really conservative using the 33 planning rate.

Peter Skibitski: Right, right. Okay. Appreciate it. Thank you.

Michael Hartnett: Yes.

Operator: Our next question is from the line of Jordan Lyonnais with Bank of America (NYSE:BAC). Please proceed with your questions.

Jordan Lyonnais: Hi, good morning. On M&A, could you guys give any color on deals in the pipe, what you're seeing? Any changes in size or scope. And two, if you're looking at anything to get more capacity if the A&D side keeps growing at this rate.

Michael Hartnett: Well, you know, I think -- we're seeing A&D-like companies coming to market. And we're investigating the fit with RBC. We have really nothing to report at this point. Obviously, if one of those companies does come to market, they'll likely come to market with their own capacity. So they probably won't tax ours. But there's just a lot going on in the A&D world and we can either -- we can either -- and we're very pleased with our growth in that sector and the outlook in that sector for the next several years. So we're being -- we're being cautious and conservative about what we take on.

Jordan Lyonnais: Got it. Thank you.

Operator: Our next question is from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your questions.

Steve Barger: Thanks. Hi, Mike, seeing gross margin above 45% with Industrial down 3.5% is a great performance.

Michael Hartnett: Thank you.

Steve Barger: Was that all mix in Aerospace? Yes, sure. You earned it. Was that all mix in Aerospace? Or was there something unusual in there?

Michael Hartnett: No, you know, Aerospace contributed. Its margin is improving. I think it's -- as I said, we have a lot of contracts that we're working our way through that we're -- that we're inked in '19, '20 and '21 that are a little bit of a headwind. We're becoming more efficient in the execution of those contracts just because there's more volume and there's more absorption as a result of that. We have also better methods and a little better capitalization here and there to execute some of those designs. So I would say it was very solid performance on the Industrial side that really, really carry the day.

Steve Barger: So, Industrial margins were up even against negative 3.5% organic?

Michael Hartnett: Yes, that's right.

Steve Barger: And what in Industrial drove that? Because that's a pretty big absorption headwind to overcome, isn't it? Like what was in mix that made that so rich?

Michael Hartnett: Well, you know, we've been talking about synergies for a long time and we're starting to see it. They did have a favorable mix this quarter. I can't say that we're going to see margins like that forever, but we saw it in the first quarter. I think the neighborhood that we'll probably end up living in is more like 44% when the year is all done, but we'll see. That's hard to predict. So there's a lot of synergies that went on. The mix was favorable. Plant efficiencies were absolutely better. There's no question about that. I mean, they're operating in their sweet spot, and we've had methods improvements, and we've had improvements in supply chain cost structure. So you know, everybody sort of has a role when they come to work in the morning and a little piece of each one of these issues and cumulatively it makes a difference.

Steve Barger: So I guess you're guiding fiscal 2Q gross margin down 100 or 200 basis points against what is obviously a tough comp. But is there any specific thing causing that sequential decrease?

Robert Sullivan: I mean, I think you have fewer production days in Q2 and Q3. That's been pretty consistent over time. So you have a little bit of a headwind there. And then you couple that with the favorable mix we had in the first quarter, it just adds up to -- you know, this is where we're seeing things into Q2.

Steve Barger: Got it.

Michael Hartnett: And the right way to look at it is probably more on a year-over-year basis, right, and you know that's the range is calculated from expansion on a year.

Steve Barger: Understood. And then on the revenue side, Aerospace was up 24% against the 21% comp. You talked about all the things that are going right there. Do you expect 20% plus growth again in 2Q?

Michael Hartnett: You know, we're not planning for it but I can't say that it won't happen.

Steve Barger: Well, I guess the question then is, you expect Industrial to recover in the back half? Do you think that's up sequentially from a revenue standpoint or is that more likely down given some of the softness that you're seeing right now?

Michael Hartnett: Yes, that's more likely down.

Steve Barger: Understood. All right. Thanks very much.

Michael Hartnett: Yes.

Operator: Our next question is from the line of Joe Ritchie with Goldman Sachs (NYSE:GS). Please proceed with your questions.

Vivek Srivastava: Thanks. This is Vivek Srivastava on for Joe. I just want to start with a more long-term question. Your EBITDA margin this quarter is 32.9%, the highest we've seen. You've previously talked about mid-30s long-term EBITDA margin, which is not far away from where you are today. So just wondering what kind of updated long-term margins you have your eyes set on? And just how to think about the margin improvement path from here once the Industrial businesses do start inflecting positively.

Michael Hartnett: We're thrilled with the 33% that we achieved this year. We are far ahead coming out of the gate of what we talked about in Q1. We talked about where we're seeing gross margins into Q2. Our mission is to continue to squeeze the lemon to expand margin every quarter as best for our ability. So we're not looking to put out long-term guidance, but we are telling you that we're continuing to strive to eke out that EBITDA margin. And I think we have opportunities in different pockets to develop.

Vivek Srivastava: That's helpful. And maybe just a follow-up on that. As your margin continues to improve Industrial growth, your long-term target probably close to two times GDP, is reinvesting within the Industrial business something that could potentially accelerate a bit more from here to return to that two times GDP growth target?

Michael Hartnett: Can you clarify? I'm sorry.

Vivek Srivastava: Yes, just given you're guiding such strong margins right now, will reinvesting back in the business for growth be something that could potentially accelerate from here on?

Michael Hartnett: Well, I think those are two different things. We're reinvesting in the Industrial business for cost reasons. In other words, we're trying to reduce our cost of sales by putting in capital equipment that will make our plants more efficient and incorporate manufacturing processes that we don't have in-house today and are very expensive to buy in the outhouse. So that's ongoing and we're making not insubstantial investments in that -- those kinds of machinery. And so that's why we're reasonably confident that, that will accrue to gross margin over time. In terms of growth, you know, the Industrial business on an annual rate now is probably running over $1 billion. So in order to really impact that kind of number to get the internal growth mechanism performing at a measurable level, requires some pretty big projects, and ultimately -- and so we have our eye on some pretty big projects. But ultimately those bigger projects take time to implement. And so, we've just got to work through that and that's sort of ongoing right now.

Vivek Srivastava: That's very helpful color. Thanks for that. Maybe one last question from me. Just on the backlog, noticed that, in the press release, you provided backlog beyond 12 months, but we didn't see backlog due within 12 months. Just wanted to understand the rationale behind that and just any color on the backlog due within 12 months?

Michael Hartnett: Yes. We made a strategic decision and communicated last quarter that from here on out, we were just going to be presenting the full-on backlog because that's such a significant part of our business, especially on the Defense side at this point. We think that's the more appropriate way to look at our overall backlog position.

Vivek Srivastava: Very helpful. I'll pass it on. Thanks.

Operator: Thank you. Our next question is from the line of Tim Thein with Raymond James. Please proceed with your questions.

Tim Thein: Yes, thanks. Good morning. Just, I guess, one for me and just on the gross margins and a lot obviously discussed here in terms of the outlook for the second quarter. But thinking in terms of -- I believe the expectation coming into the year was that you may see more of a lift in the back half of the year as you better absorb some of that Aerospace fixed capacity and the Dodge synergies kick in even more. But A) the industrial economy obviously being weaker, does that change the outlook in terms of the Dodge side? And then, I guess related to that, was there some maybe pull ahead that maybe some of those benefits that were expecting more in the later part of the year, maybe they came earlier as a contributor in the first quarter. So, I guess simply stated, you still -- is the expectation still that there's room for more -- even more kind of a second half lift from some of these drivers?

Michael Hartnett: Yes. Well, right now, we continue to expect the second-half lift. One of the things that attracted us to Dodge when we bought Dodge is when you look at the revenue performance at Dodge over a series of years, you know, through various economic cycles, it's a very low beta company. You know, it's so integrated into the U.S. infrastructure that when you're pouring your cereal in the morning, we actually had something to do with that. You know, when you're driving your car over a street or a bridge to get to work, we actually had something to do with that road. So we're -- and whatever we supplied only lasted a few years before nature had its way with it and we had to replace it. So Dodges has a very strong recurring revenue driven by human consumption in North America. And so whether the economy is expanding or it's contracting slightly, it dodges business is probably going to perform well through those cycles. In terms of what we expect for the rest of the year, you know, we expect the Semicon to pick up and we expect Oil & Gas to recover and if there's more tension in the Middle East that interferes with the production of oil, it will -- we will definitely feel the acceleration in our business. So that's sort of where the thing sits right now.

Tim Thein: Got it. Got it. Okay. All right. Thanks a lot. Appreciate it.

Operator: Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call over to Dr. Hartnett for any closing remarks.

Michael Hartnett: Okay. Well, I'd like to thank everyone for participating today. And we look forward to speaking again to you in the fall. So a good day.

Operator: This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.

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