Good day, ladies and gentlemen, and welcome to the Q3 2017 RBC Bearings earnings conference call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will host a Q&A session, and our instructions will follow at that time. If during the conference you do need operator assistance, please press star then zero on your telephone keypad. As a reminder to our audience, this conference is being recorded today for replay purposes. It is now my pleasure to hand the conference over to Mike Cummings with Alpha IR. Sir, the floor is yours.
Good morning, and thank you for joining us for RBC Bearings fiscal 2017 Q3 earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer, and Daniel A. Bergeron, 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 a 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'll 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 Q3 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 Q3 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, mixed timing plays a dominant role here. As discussed in earlier calls, we see margins more reflective of our historical levels as we continue to integrate the Sargent businesses and both rationalize 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, oh, yeah 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 new aircraft products on both continents early next year. This expansion will begin to contribute to revenues in the Q2 of fiscal 2018. I'm pleased to report that we've seemed to be moving through these 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 counts in our lineup. 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 RBC-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%+ 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%, offset 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 defense budget has now troughed. We expect that 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 2-rate and 4-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 3-5 years with 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 new engine introductions including the LEAP engine, the A320neo, and the A330neo. 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 Q4, we are expecting sales over the period to be 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.
Okay, thanks, Mike. SG&A for the Q3 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 Q3 of fiscal 2017 compared to 16.5% for the same period last year. Other operating expense for the Q3 of fiscal 2017 was an expense of $6.1 million compared to an expense of $2.6 million for the same period last year. For the Q3 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 consisted mainly of $2.5 million in amortization of intangible assets and $0.1 million of other costs. Operating income was $28.5 million for the Q3 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 Q3 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 Q3 of fiscal 2017 compared to 19.2% for the same period last year. For the Q3 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 Q3 of fiscal 2017 compared to net income of $17.3 million for the same period last year. Diluted earnings per share was $0.54 per share for the Q3 fiscal 2017 compared to $0.73 per share for the same period last year. On an adjusted basis, diluted earnings per share for the Q3 of fiscal 2017 would have been $0.73 per share compared to 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 in cash from operating activities in the Q3 of fiscal 2017 compared to $21.5 million for the same period last year. Capital expenditures were $4.8 million in the Q3 of fiscal 2017 compared to $4.8 million for the same period last year.
In the Q3 fiscal 2017, the company paid down $35.1 million of debt, and we purchased $1.2 million of company stock. On a nine-month basis, the company paid down $69.4 million of debt, and we purchased $4.8 million of company stock. I'd now like to turn the call back to the operator for Q&A session.
Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question over the phone, please press star and then one on your telephone keypad. If your questions have been answered or you just wish to remove yourself from the queue, please press the pound key. Again, ladies and gentlemen, that is star and then one to ask a question at this time. Our first question will come from the line of Kristine Liwag with Bank of America. Please proceed.
Hi, good morning, guys.
Morning, morning, Kristine.
I wanted to follow up a little bit more on the restructuring. Can you provide a little bit 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 pick up?
Well, you know, with the downturn in industrial demand last year, we were in a situation where we had to sort of rationalize, you know, our production capacity and sort of reduce our overall manufacturing footprint for those products. And so the net result of that was this restructuring charge. Now, you know, 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, you know, 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. We continue to work on that.
Great. And switching gears to aerospace, Boeing is planning to increase the 737 ramp to 47 per month from 42 in 3Q calendar 2017. Are you seeing pickup in demand now to prepare for this increase? I mean, I know your aerospace business is largely narrowbodies, 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 quarter. Our incoming order rate for the aircraft products has been, you know, sort of been normal. We haven't seen that bump in demand yet, but we're contracted on all the products that we've always been contracted for that on that 737. So, we should begin to see that soon.
Great. 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 towards 16% to 16.5% range?
Yeah, I think by the end of the year, we're back in that 16.5% range. It's just that the Q3 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.
Hey, good morning, guys.
Hey, good 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, and,
Oh, sorry. 12 weeks. Great.
Yeah. So it's four weeks. I wouldn't have really mentioned it, but 12 weeks seems like it's worthy of mention. And the second part of your question, you know, 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 construction or mining?
Oh, the end markets? Yeah.
Yeah.
No, no. It's really from oil and gas. You know, what you're reading about is actually turning into orders for us. It's from general industrial products. It's from, you know, 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 expected, but we're happy to participate in it.
Yeah. 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 rate on the industrial side could be, you know, year-over-year for the next five or six quarters?
I think our challenge, Steve, is gonna be to put the capacity back because, you know, we didn't liquidate a substantial manufacturing footprint there. And, you know, all the costs associated with, you know, the normal operating environment is human cost. So, you know, we're 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 a 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. And in the press release, you said you want a position for a period of increasing industrial demand. So why consolidate the facility now and, you know, write down inventory and fixed assets?
Well, there are 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 our outlook is dim. And that one of those product lines was tapered roller bearings for truck axles. So we decided to exit that particular part of our business. And that was.
Was that?
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 yeah, that's the majority. That's the majority of it.
Okay. And that was legacy roller, right, not Sargent?
Right. right.
So, I, I think I'll know I know how you'll answer this, but just looking at the year-to-date numbers, revenue's up almost 5%. Incremental operating contribution margin is less than 1%, so really flat EBIT on up revenue. Has anything fundamentally changed in the price-cost structure here that's limiting incremental margin? Are you at the limit in terms of managing costs in the footprint versus current volume levels?
Yeah. I think what's affecting that is we were at a severely reduced level of industrial demand for a couple of our plants. And so, you know, the overhead absorption equation and all the rest of that doesn't balance very well, and it dilutes your margin. So then you have the choice to make on 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's turning? Is that?
Well, yeah. The cycles 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.
Yep.
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, you know, how much costs are coming out permanently as a result of this? You know, part of that charge was inventory, you know, the fine, but how much is there, you know, plant overhead and kind of other permanent costs that are out now?
Yeah. I'm just gotta dig for that number, Walter. Just.
Oh, sorry about that.
Yeah. So, Walter, the total charge was $7.1 million. Of that, it's $3.2 million mainly of components and inventory that we decided not to finish and to finished goods. And there's $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 was about $0.3 million.
Okay. 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 is this you have the right size for your manufacturing footprint now?
Yeah. I think, well, I think Kristine asked that question already. And, you know, I think the answer we gave her, Walter, was time will tell. And,
Oh, okay. Sorry. Yep. Okay. Great. You know, as you're thinking about the, you know, the increased content in some of the narrowbodies and the growth rates you called out, double-digit growth. I wonder if you could, you know, provide a little bit more description. Are you talking about double-digit annual growth, and you know, what, what's the market opportunity you see over the next three years?
Well, we said low double-digit growth, and, you know, you did.
Okay.
We did mean 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's great.
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, you know, 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 of the, you know, some factor portion of the growth is coming from those aspects, and other parts of the growth are coming from increased rates on the narrowbodies. I think Boeing is still talking about 60 ships a month. And as it was discussed earlier, they're moving to 47 this year. So we have increased rates there.
And we do have new products that either have been qualified or are being qualified. And that'll accrue to the revenues also.
Okay. Great. Okay. In the discussion so far today, we haven't talked too much about gross margin leverage. I wonder what you're thinking about for gross margins. You know, your, your March fiscal year's just about done. You know, what are you thinking about for 2018 and, and where you might be able to get gross margin, especially in the light of some of the industrial recovery and industrial restructuring?
Yeah. 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, you know, accrues substantially to our benefit in that, in on those plants. And secondly, you know, with the acquisition of Sargent, there's certain contracts that they had which were not beneficial to their interest. And, as we renegotiate those contracts or, in some cases, exit the business because the products really don't fit the plant, there'll 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 for to support internal demand and improve margins internally than it would be to produce those products which we think are, you know, really more commodities and sold externally. They're not strategically important to us in any way. So, you know, we've got people working on all aspects of that plumbing.
Okay. Great. Care to take a guess at, you know, 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, yeah. Like, I think this year, Walter will probably end up pretty close or exceed the number last year. I think we ended last 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 Q3, 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 Q4 call when we finally have all of our fiscal 2018 plans in line. But I think we're gonna try to get back to our internal target goal of adding a percent a year for the next few years.
So, but I think we'll be able to give you a little more color on that on our Q4 call when we chat in May.
Okay. That sounds great. Okay. Thanks, guys.
Thank you. As a little reminder, ladies and gentlemen, if you would like to ask a question over the phone at this time, please press star and then one on your telephone keypad. Our next question will come from the line of Larry De Maria with Avondale Partners. Please proceed.
Good morning, guys.
Morning, Larry.
Morning, Larry. So just, you know, on the cash flow and CapEx allocation standpoint, I mean, 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 paydown in fiscal 2018?
You know, you know, right now, for the last two years, our CapEx has been very tame. We've done a good job 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 or this year, around, you know, $5 million a quarter. From a debt standpoint, you know, 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. And 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 1.6x from basically close to 3x when we did the deal.
So I think we're feeling good on where we are from that standpoint. Our availability under the revolving credit facility is $238 million of capacity. You know, we're out working hard trying to find a few other companies to add to our portfolio. You know, we'll continue that as we always have to push hard for to find some new acquisitions to, to add in over the next, you know, 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 as if it was a good aerospace asset.
multiples any different than they've been over the last few quarters?
You know, 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 bank and, you know, auction-type transactions, so. But I think they are a little better than what we were seeing maybe 24 months ago, but not by a lot. Mm-hmm.
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 it'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?
Well, Mike gave it.
I'm talking about 4Q top line.
Yeah. Yeah. Mike gave that in his opening statement, what our Q4 range was.
Yeah. I think I said 158 to 16.
162. Yeah.
Okay. So is that really you're assuming that that big step up in gross margin is coming from the absorption stemming from the industrial products that we talked about earlier?
Yeah. Plus, we're just having quarter-over-quarter improvement in our gross margin. So if you looked at, you know, Q1, we were at 37.3. Q2, we were 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.
Yeah. And I think we got a couple of other things. We got some, you know, the mix can change your gross margins a lot quarter to quarter. And the other thing is that we'll have full absorption in our industrial plants, and that's meaningful.
Yeah. When just holistically for the business, when you think about capacity utilization in the plants, absorption, product margin, would you rather have a 5% increase in industrial or aerospace in FY 2018? What would deliver more absolute operating income?
It depends upon the market sector that it came from. Industrial, if it came from certain market sectors, would be the winner. Aerospace, if it 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, 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 into 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 RBC classic?
Yeah. I think on balance, they perform very well. You know, there's you know, they're good, solid management base, good, solid management teams, strength in lots of positions, and good execution. And 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 remedial work. So I'm very pleased with their execution and, you know, the outlook for most of their business.
Did you so from a free cash flow standpoint, when you think about those products, is that better right now than a legacy role? Or is the aerospace side of legacy still giving more free on a free cash flow basis relative to revenue or fixed assets?
Yeah. We just don't have it broken down that way, Steve, 'cause their businesses flow over both our major market segments, you know, 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 the way to the press release we did and the conference call Mike and I had when we closed the deal that we thought we could pay down $100 million a year in debt, and I think we're pretty close onto that target to be of doing that. So I think from that standpoint, it's a matter of expectation.
Okay. Did you give a free cash flow number for the quarter? I'm sorry if I missed it.
Yeah. He did. I think it was $35 million.
Well, I gave you the if you go to the press release on the last page, I don't wanna give you any non-GAAP information, right? Our cash from operations is $36.1 million, and our CapEx was $4.8 million.
Oh, I got it. Yep. Okay. Great. And then just one last one for me. Would you have any if there was a border adjustment tax? Would you have an issue around that? Or what percentage of product is made in a country other than where it's sold?
Well, you know, I mean, I think all 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 can make your 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.
Mm-hmm.
15%-20% of our domestic sales are direct export sales. 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. 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's really good detail. Appreciate it.
Thank you. We have a follow-up question from the line of Walter Liptak with Seaport Global Securities. 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, you know, your expectations for, you know, sort of the government plans to improve infrastructure or if that's, you know, based on, you know, private infrastructure, water utilities, other, you know, other sources of spending. And, you know, maybe your view on this industrial recovery that we may be in. Is there enough there, you know, for this to be something that we can be talking about a couple of years from now?
Well, you know, 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 eddy. 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, you know, every one 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 will begin shipping those products mid-next year. So we haven't seen any impact on infrastructure from the new administration.
So, you know, 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 be a beneficiary of it. But, you know, we expect to see our expansion independent of the new administration.
Oh, okay. Great. Okay. So all the comments were exclusive of any, Trump bump.
Right.
I guess. Okay. And then just, you know, this cycle has been, you know, kind of a prolonged slowdown for the last couple of years. You know, I wonder if you think that we could 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.
Yeah. That's probably a number. I'm really gonna be guessing it. But I suspect.
Mm-hmm.
Yeah. I suspect our industrial businesses, both, you know, mining, 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. So, I don't have those comparisons, peak to trough. But I, you know, I think 40% is probably a modest guess. You know, we are seeing demand, you know, 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 equilibrates, Walter, I would just be guessing.
I'm happy to you know, I do think if we end up with a 4% GDP expansion that we're gonna be probably living at heights that we hadn't seen in 10 years. If we see a 3% GDP expansion, we're probably gonna go back to 80% of our peak.
Okay. Well, thank you for your comments.
Yep.
Thank you. And as a reminder, ladies and gentlemen, if you would like to ask a question, please press star and then one on your telephone keypad. Our next question will come from the line of Joe Marvan with Loomis, Sayles & Company. 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.
Yeah. Joe, I think for us in Q3, it was a combination of three different things. There was less investment in working capital that 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. But the cash flows have just been strong. We've been trying to keep a good control on our capital allocation. And I think the Q4 will be a good quarter. It won't be the same as Q3, but it'll be on our nine-month run rate.
Okay. Great. And then just, 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'll go toward debt paydown?
Yes. I mean, if we don't have a deal happening that we can finance, all the excess cash will continue to go to paydown debt. And then once in a while, we step in to buy back some of our stock, and when the opportunity presents itself, so.
All right. Thank you.
Thank you. There are no further questions. Now, I'd like to hand the conference back over to Dr. Michael Hartnett, Chief Executive Officer, for closing comments and remarks. Sir?
Okay. Well, I thank everyone for participating in the call today and their interest in RBC Bearings. We will talk again after our Q4. Thank you. Good day.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody.