Good day, ladies and gentlemen, and welcome to the Quarter 1 2016 RBC Bearings Earnings Conference Call. My name is Matthew, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Monica Gupta, Alpha IR Group. Please proceed, ma'am.

Good morning, and thank you for joining us for RBC Bearings' Fiscal 2016 First Quarter Earnings Conference Call. On the call today will be 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 the company's future operating results and financial condition. These factors are also described in greater detail in the press release and on the company's website. In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the company's website. Now I would like to turn the call over to Dr. Hartnett.

Thank you, and good morning. Net sales for the first fiscal quarter of 2016 were $142.3 million versus $113 million last year, up 26% from a year ago. Adjusted operating income was 20.7% or $29.5 million, resulting in an adjusted EPS of $0.78 per share versus $0.69 per share last year. This quarter, we had approximately 2 months of contribution from Sargent Aerospace & Defense. The breakdown of revenue components this period was 63% were aerospace revenues, 37% were industrial revenues. We're trending to 70%, 30% breakdown between industrial and aerospace, aerospace being the 70% and industrial being the 30% going forward. Adjusted EBITDA of $37.3 million was generated during the period. Adjusted gross margin came in at 38.7% versus 38.8% last year. Pre-Sargent RBC margins were 39.8% versus 38.8% last year. Consolidated aerospace sales were up 45% for the quarter. And on RBC aerospace revenues, pre-Sargent, let's refer to them as "RBC classic" revenues, these were down 3.4%. This was driven mainly by defense. Last year, defense was unusually strong in the first quarter. The timing of orders this year versus last year played a role here, plus a small impact from currency. Looking ahead, we see this sector strengthening each quarter this year as both the major plane OEMs have announced the step-up in production rates in calendar '16 and demand from defense customers normalizes, and actually, that demand will increase. RBC classic aerospace OEM revenues were up a few percentage points, and the aftermarket revenues were 11% better than last year. Turning to our industrial markets. Sales expanded 2.9%. Net of the contribution of Sargent, the Sargent acquisition, sales were down 5%. Industrial distribution sales were off 8% -- 8.1% driven principally by a lower demand from our Swiss business. Demand for Swiss industrial products are off…

Okay. Thanks, Mike. SG&A for the first quarter of fiscal 2016 was $23.7 million compared to $19 million for the same period last year. As a percentage of net sales, SG&A was 16.7% for the first quarter of fiscal 2016 compared to 16.8% for the same period last year. Excluding the impact of the Sargent acquisition of $3.7 million, SG&A year-over-year increased $1 million, which was mainly due to $0.4 million stock compensation expense, personnel-related expenses of $0.4 million and other expenses of $0.2 million. Other operating expense for the first quarter of fiscal 2016 was expense of $6.7 million compared to expenses of $0.6 million for the same period last year. For the first quarter of fiscal 2016, other operating expense was comprised mainly of $4 million in acquisition-related costs, $0.8 million in integration and restructuring costs and $1.8 million in amortization of intangibles and $0.1 million in other items. Operating income was $22.4 million for the first quarter fiscal 2016 compared to operating income of $24.2 million for the same period in fiscal 2015. On an adjusted basis, operating income would've been $29.5 million for the first quarter of fiscal 2016 compared to $24.2 million for the same period last year. Adjusted operating income as a percentage of net sales would have been 20.7% for the first quarter of fiscal 2016 compared to 21.4% for the same period last year. For the first quarter of fiscal 2016, the company reported net income of $13.4 million compared to net income of $16 million for the same period of last year. On an adjusted basis, net income would have been $18.5 million for the first quarter of fiscal 2016 compared to net income of $16 million for the same period last year, a growth rate of around 15.3%. Diluted earnings per share was $0.57 per share for the first quarter of fiscal 2016 compared to $0.69 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2016 would have been $0.78 per share compared to the diluted earnings per share of $0.69 for the same period last year, a growth rate of 13%. Turning to cash flow. The company generated $22.2 million in cash from operating activities in the first quarter fiscal 2016 compared to $26.9 million for the same period last year. Capital expenditures were $5.3 million in the first quarter fiscal 2016 compared to $3.5 million for the same period last year. In the first quarter fiscal 2016, the company entered into a new senior credit facility and borrowed $425 million to finance the acquisition of Sargent. The company ended first quarter fiscal 2016 with $61.6 million of cash on the balance sheet. I'd now like to turn the call back to the operator to begin the Q&A session.

[Operator Instructions] And your first question comes from the line of Walter Liptak of Hunter.

I wanted to ask about the classic aerospace trends. The growth in aftermarket, double digits. Was there any sort of channel growth there? Or is that a sustainable growth rate?

No, I don't think it's sustainable. I think it's one of these things that those aftermarket folks sort of deplete their inventories and then seem to all build them back up in the same quarter. So I think it's usually been steady. It's surprising to see it up that strong.

Okay. And is aftermarket -- how are the margins on that? Is that above where the OE margins are?

Not really. They're about the same. I mean, some of the OEs are better. Some of the aftermarkets are better. It's a mix.

Okay. And if I could ask about the OE trend of plus 2%. I remember how OE classic trended for you during the quarter. Were there any supply chain issues or disruptions that you care to comment about?

For which sector? Just in general?

For the classic aerospace.

For the classic aerospace?

Yes.

There are -- in the classic RBC business, it's been steady, and there's no snags or bottlenecks or logistics holdups anywhere. In the Sargent business there are constraints in some of those -- in some of our vendor base that inhibits the ability to produce a product efficiently, and so we're in-sourcing some of that work. And I think on the Sargent aerospace business, there's a -- we have some pretty large contracts, and we're at the very early stages of those contracts. So our -- and there's specification protocols that are being worked out between us and the end customers that are important to maintain production and improve production rates. And so there has been a delay in the Sargent business as a result of a delay in resolving those production protocol issues. And I think those will be resolved this quarter.

Okay. And I guess with those production rates going up, are you expecting that you'll have a better shipment period for the Sargent business, I guess, on a monthly basis?

Yes. I think it will build all year. Yes, I think so. I'm pretty confident about it.

Okay. Okay, good. Now if I could switch gears to the mining and oil and gas. I wonder, you've got the -- I'm sure the percentage of sales is much lower now with Sargent, but just can you refresh us on what oil and gas is now as a percentage of ROLL's revenue and mining?

Yes. Well, the -- Dan is kind of running some numbers here. While he's doing his calculations, I think those sectors are off and they're going to be off. I mean, if you look at oil and you divide oil into 2 components, recovery and exploration, recovery is fairly steady for us. I mean, there's -- the U.S. is still using 10 million barrels of oil a day, and so there's still a certain amount of wells being fracked to recover the oil that's needed. And so the consumption of our product in the recovery side of the business is steady. In the exploration side of the business, it's down. Certainly, from what industry folks are saying, it's going to be down as long as oil is less than $60 a barrel. So how long the Saudis can hold out is anybody's guess. Their national budget breaks even at $90 a barrel. And at 10 million barrels a day at $50 a barrel, you can calculate what it's costing them a day against their national budget. So how much -- how long can they hold out is anybody's guess. So it will be some time, I'm sure. We're not expecting much from the exploration side. We're expecting the mining side to be down but steady going forward as just OEM builds are down, but MRO usage is reasonably steady. I think net-net, the impact on our revenues per quarter going forward is about $2 million.

Okay. Are you -- as we're waiting for Dan on the percentage numbers, are you seeing any pricing pressure on the production side? I think a lot of the producers are trying to reduce their cost per barrel, and they're asking suppliers to drop prices. Is that something that you do? Or do you push back on pricing?

It's the guys on the exploration side that are having those discussions. So we're trying to -- it's hard for them to have those discussions when they don't have any volume to offer right now, and you have existing contracts in place. So we're trying to work with these guys, but there's nothing material has been achieved yet.

And then Walt, on oil and gas, based on a full year run rate at these levels, it's probably around 3% of total.

That's great. 3% for both oil and gas and mining?

No, just oil and gas. Mining is probably another 5% at these levels.

Your next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch.

Mike, you have brushed upon this on your prepared remarks earlier, but I just wanted to clarify. What were the organic growth rates for industrial and aerospace in the quarter? And as a follow-up to that, what was the organic growth rate in your backlog?

Okay. I'll -- so the organic growth rates for the industrial, for combined or RBC alone, the original RBC business?

Both, if I could have both numbers.

Both. Okay. So for the industrial, I've got aerospace here -- the industrial markets with the Sargent addition for the quarter, expanded 2.9%. Net of the contribution of that Sargent acquisition, we were down 5%. Industrial distribution sales, there's not much industrial distribution sales coming from Sargent the way we classify things. So we were down 8.1% there, and that was driven principally by a lower demand rate in our Swiss business.

And for aerospace?

For aerospace, the sales were up 45% for the quarter with Sargent. Without Sargent, these revenues were down 3.4%, driven mainly by the timing of defense orders.

And then your backlog without Sargent?

It's around $205 million.

And I guess in this past quarter, we've seen more signs of global macroeconomic weakness. How should we think about the base case for your industrial business for the full year, fiscal year '16? And which end markets are you more particularly worried about? And as a follow-on to that, how much -- can you offset some of this revenue decline with better performance in margins?

Yes. Well, I'll take them one at a time. One of our largest sectors here, Kristine, there's -- just the general industrial sector, and that is smaller OEMs, and hard to categorize them into any particular market and the aftermarket. There's really steady demand there. It's -- we're seeing the businesses that don't have the mining and the oil exposure growing at 2x GDP kind of rate. And we see interesting new businesses -- new business coming into those sectors. So I think our general industrial business is fine outside of mining and oil.

And another question from me. This quarter, we also saw some weakness from Sikorsky because of, I guess, weakness from their customers from oil and gas-generated wealth. Can you quantify what percent of your sales are from commercial helicopters and what you think -- how you think that kind of weakness will affect you?

Yes, a very small amount of our sales are from commercial helicopters. It's just not what we -- it's not a big factor in our revenues. I mean, it's maybe 1% or 2%. It's a number like that.

And lastly, for Sargent, is your aerospace exposure in Sergeant pretty similar to the aircraft exposure that you have from legacy RBC Bearings aerospace and defense, both the aircraft type and also shipset type?

Yes, it's across -- it's the 737s, 47s, 67s, 77s, the A350s, the A320s. That's the bulk of the aerospace exposure at Sargent. And then there's the sort of a whole aftermarket sector that services airframes and engines across that same commercial fleet. From an aerospace point of view, that's Sargent's principal business. From a marine point of view, a defense marine point of view, which is sort of a different market, that's a very strong sector for them also. And defense aerospace, which is mainly hydraulics, is a very promising market for them.

[Operator Instructions] And your next question comes from the line of Edward Marshall of Sidoti & Company.

So down 3.4% in aerospace for the core RBC. I'm curious if you can break out the components of commercial and defense there. I know you said it was defense kind of timing that led to that decline. But was it flat commercial, down 3% defense? Or was it up 10% commercial, down -- rather down 10% defense and up 7% commercial? What are those core products look like underneath?

Well, it's -- the underlying exposure for commercial aerospace is fine. It was strong. So that was up. Defense was really strong. We had some really strong orders on one of our divisions last year, were in last year's numbers. And we had some big contracts that came in last year for that same division that are commercial aerospace contracts, which will probably flow into our fourth quarter this year and not our first quarter this year. So those are the sort of offsetting factors there.

Right. So if I look at the June quarter, and I mean, it's roughly, I guess, $61 million or so from core aerospace sales, which if I look back over the last trailing 12 months with the exception of the December quarter, which I guess is the seasonally weakest, it is the weakest result of those 4 quarters. So -- but you're saying commercial was up and strong. What was the growth rate on the commercial side of the business?

Well, if I look at the businesses that are commercial aerospace only, on my sheet here, they were up 3% to 5% in total.

Okay. 3% to 5%. And I heard earlier when you were talking about the industrial business, you talked about Sargent, and I thought it was 100% aerospace. Is it ground defense that's in that, that you're including in the industrial side?

Marine and ground defense.

Okay. And what is the contribution of those 2 businesses in total from a percentage of revenue? Maybe of the...

The total dollars were $4 million in the quarter.

$4 million, okay. When I look at -- in the 8-K that was filed regarding Sergeant, and you look at the decline in aerospace in the revenue year-over-year of roughly 10%, I'm wondering if you can kind -- and more importantly, I guess, aftermarket being down 23%. I'm wondering if you can kind of walk me through what happened in the prior year. I know you didn't own the business then, but obviously, you must have dived into those results. I'm just kind of curious as to what occurred then and then maybe what the growth rate you saw in the quarter from just Sargent alone.

I think the biggest item is they are in between 2 programs on their marine business for the Virginia sub. The old program was ending, and there was no volume really flowing through. And now the new program is just starting, and that's what Mike was talking about on getting the timing on this new program up and running to be a nice contributor to the business this year. Plus a little bit of their aerospace business on the defense side was down during that period of time also.

But is the Virginia sub in the aftermarket?

No.

No.

So what happened in the aftermarket business? I mean, that was down, what, 26%?

Yes. Well, that's the aircraft -- commercial aircraft aftermarket business. And the commercial aircraft aftermarket business was -- did not perform well for Dover, and so, for us, it's a turnaround.

It's a turnaround for you guys to -- I'm sorry, to just -- you're just going to -- you mean, spend some time and some money to kind of repair it?

Well, yes, it needs a -- it isn't contributing to the overall profitability of the company nor was it before we bought it. So the question is can we make it a contributing citizen, and so that's the puzzle that we're trying to solve right now.

Got you. I mean, are you prepared to be able to talk about maybe some of the needs of that business and then maybe the steps necessary to kind of rightsize it?

Someday, I will be, but that's not today.

Your next question comes from the line of Steve Barger of KeyBanc Capital Markets.

Just wanted to talk about the sequential change in revenue. I think, for the last quarter, you had guided to $140 million or so, which is basically what we got. Thinking about how Sargent flows through sequentially, do we add in another $10 million or $15 million given the extra month and given what you see on organic growth rates? Is that kind of the best way to think about it?

It would be under normal circumstances, Steve. I think, in this case, it's not -- because when I was talking about the new contracts, new programs, specification protocols, it -- I don't believe those specification protocols will be resolved to the point that we can have good revenue recovery this quarter. So I do think that the revenues that should be in this quarter will be in our third quarter and fourth quarter. I think we have plenty of people, and our customers are working on resolving it. And basically, our customers are overloaded with demand from other suppliers to get all the purchase orders out, all the specifications right and all of the designs updated that need to be updated in order to produce these additional subs. It's just there's a long queue, and I think we're at the head of the queue now.

So does that mean that 2Q looks more like 1Q from a revenue standpoint?

It'll be better. It'll be better. I think the second quarter is going to be in the $150 million to $155 million range.

Okay. And given the puts and takes you're talking about, is it reasonable to think that you maintain margin? Or do you get some of the -- or the extra expense without the revenue, is that going to be a drag on the margin line?

I don't think so. I think the way -- I think we'll be fine there.

Okay. Now that you've had Sargent for a few months and you've obviously been able to get in there and see what things look like, what's been surprising, either positive or negative, versus the call you had a couple of months ago when you first announced it?

I think the -- it's pretty much -- I mean, we didn't -- I don't know how -- I don't remember the call perfectly, but we didn't probably discuss in great detail the Sargent makeup or the issues. And certainly, we've been into the issues quite deeply since. There's really been no surprises that we didn't discover during our diligence period. I think it's a -- what we saw when we made that acquisition was -- Sargent is a -- it's a mix of different companies, and those different companies align really well, for the most part, with RBC's markets. But because they're different companies when Dover acquired them, they have different business models. And some of the business models are very -- are somewhat similar to RBC's, where they're sort of vertically integrated, and they start with product from raw material source and they finish it. They bring it through the completion. And some of it, some of their business models, which are some of their larger businesses, are sort of design, subcontract, manufacturing and assembly, and then back to Sargent for assembly. And some of those larger businesses that they have are -- they don't have a strong manufacturing skill base. Now RBC has a very strong manufacturing skill base, and it really complements well Sargent's design and testing skill base. So RBC's going to be able to in-source a lot of products into our existing plants that currently are outsourced to subcontractors in many different states. So I think there's going to be really, really good absorption in the RBC plants as -- over time as we sort of integrate those product needs into our manufacturing base. So I think that's going to be significant. And I think it's going to be significant for Sargent on the other side because in some markets, they've been very -- it's been very difficult for them to compete with that business model. Because they’re subcontractors, that's where the money is made. And there's not much left in some of those product lines after you sell it to a Boeing or an Airbus or one of those people. We know how to do that. So we can make them much more competitive in some of the important markets where they don't participate to the extent that they should participate today. So we see that is a good alignment with our marketing and sales side of our business as well as the manufacturing side of our business and to have acquired their design and testing expertise. It's really going to be magical.

So yes, I mean, that's -- it's a great comment. As I think back to your FY '11, '12 and '13, you averaged about 200 basis points per year for -- of gross margin expansion. Some of that or maybe a lot of it was you pursuing those same kind of things. I think you were in-sourcing a lot of expensive outsourced activities. Do you think you can drive that same level of gross margin expansion at Sergeant in those businesses that are structured that way?

I think Sargent's business is -- in many cases, has more proprietary ability than RBC's -- some of RBC's bearing businesses, so we ought to be able to get to better margins than RBC.

Wow. Okay, good. Switching gears a little bit, you alluded to this on the distributors stocking and destocking within quarters. Any more color on what's going on in the distribution channel because we've seen some choppiness in other companies that have reported as well? Why is this happening? And how long do you expect it to go on?

I -- we're talking now about aerospace distribution and not industrial distribution, right?

Yes, right, right.

Industrial distribution normally doesn't act like this, but aerospace distribution in our business does act like this. And for our case, it's may be outside the norm because it's such a small population of distributors that they can distort behavior quite a bit. In one case, there was a management change, and with such change in management, believe it or not, they forgot to order bearings. And so when we reminded them that they are going to run out of bearings, they figured out that we were right. And so they ordered a lot of bearings. So I mean, that's just how this thing works. And there's been major management changes at all of our major distributors. And there's been ownership changes, at least one of them. So to some extent, you're working with the new guard who -- and you're kind of training them on what they ought to have in stock in order to service their markets. And once you convince them of that, then the situation changes. And that's what happened this quarter.

Right. Okay. So that should diminish as you go forward as you just kind of get people on the right track again.

Right. It should normalize. It's not going to expand like that every quarter.

Right. Okay. And then one kind of more forward-looking question. We should get a JLTV decision at some point fairly soon. That's not -- that program, obviously, won't get in the production run rates for a couple of years, but do you expect that you'll have content on JLTV?

Yes. Yes, we will.

Is it similar to what you had on some of the MRAP, the MATV programs on a content per unit basis?

It should be depending upon who gets the award.

Right. Okay. So probably too much to ask for you to say who you're skewed more to from a producer's standpoint.

Well, there are some guys that we're hoping for more than others, let's put it that way.

Your next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch.

You've mentioned how Sargent margins played better than legacy RBC Bearings margins. Can you provide timing on when we should see this materialize in your earnings results?

Yes, Kristine, we should see a point of gross margin expansion every quarter for the next 5 years. Now don't work that into your model, I was just -- it's really hard to say, but it's going to -- it's one of the exciting things for me about the acquisition when I was doing the diligence. There's just so many things that we can do to improve their margins. It's -- it gave me goosebumps. I can't really give you a timing, but it'll be sort of a steady but maybe jerky flow.

And I guess for modeling purposes, right, historically, legacy RBC was more like 1% gross margin improvement. So would it be safe -- per year, not per quarter, so would it be prudent to say that if we look at Sargent and we look at the gross margins there that gross margins for that business should increase more than 1% gross margins per year? Is that a fair statement? Maybe 1% to 2%, something like that?

Yes. I think you can use 1%. I don't know if you can use 2%. I think there's -- it's a sizable acquisition given our scale. And so there's -- and there's 5 different business units. And there's -- so there's a lot to do to get there. But it's -- 1% should be modest.

And then when we think about the cadence of revenue for the full year, you already mentioned your $150 million to $155 million range for 2Q. Should we think about 3Q and 4Q to have that same cadence and growth rate with Q2 versus 1Q?

Well, I think 3Q, we have a plan, but until you kind of march up to the threshold of the quarter, it's hard to say that the plan is executable. So we're pretty careful on that. And the third quarter is usually a short quarter. But between the third and the fourth, we should see some pretty nice revenue expansions and -- particularly in the marine, defense business and RBC's classical aerospace business. I think everybody has a pretty common outlook of building revenue in succeeding quarters here.

And lastly for me, and I promise, it's really the last one, if you look at Boeing's production rate, you've got the 737 announced production rates going to 47 a month from 42 for '17 and then 52 in '18. When do you think you will start seeing that increase in production rate pulling your numbers? Is it still a 6-month lead time, 9-month lead time? Can you just give us some sort of outlook there?

Yes. We always sort of use the rule of thumb that the offset for bearings is 6 months. So I mean, we would expect to have to deliver bearings to Boeing's subcontractors or Boeing itself 6 months ahead of that step-up. And as it applies to Sargent, those lead times are extraordinarily long. I mean, it's like a year. So that's one of the things that we're talking to Boeing about, is how to shorten lead times for Sargent's products because it is such a long -- the industry just -- that's the way the industry works, and it's a gas pain for Boeing. So we're talking to Boeing now and gave them some ideas on how lead times could be reduced. But right now, it's a year.

Your next question comes from the line of Larry Pfeffer of Avondale Partners.

So I know there's a lot of moving parts right now, but just looking at kind of the second half of the fiscal year, would you look at aerospace and defense all-in being kind of a mid-single-digit year-over-year growth rate and the diversified industrials piece being down low single digit?

Is that including the Sargent?

So ex-Sargent, kind of an organic trend growth rate.

Could you ask that question again?

So aerospace and defense, kind of mid-single-digit in the back half of the fiscal year, excluding Sargent, and then diversified industrials, down low-single-digit, excluding Sargent?

Yes, I think that would be fair.

Your next question comes from the line of Edward Marshall of Sidoti & Company.

Just 2 quick follow-ups. Dan, any chance you have an idea of what the consolidated business on an SG&A line would look on a quarterly run rate if you were to do $150 million to $155 million in revenue?

Yes, we'd be about 16.5%.

16.5% of sales, okay. And just listening to your comments, Mike, throughout the year, and as I kind of parse it into the model, does it make sense to sink about $620 million in revenue at -- I guess I'm not asking for guidance, but with the acquisition of Sargent, it's kind of hard -- there's a lot of moving pieces, so I'm just kind of wondering if directionally, we're -- that's the appropriate direction.

Well, I'll let Dan answer that question.

Right. You know we just don't give full year guidance, right? And so that's the answer to the question.

Yes. Do you have any idea what to expect from maybe Sargent this year from a revenue perspective?

Yes. I'd say in that $180 million to $190 million range in 11 months so.

11 months. Okay, okay. So really no improvement off the core business from the prior year? Maybe modest, if anything?

Yes. I don't think -- I think industrial will be down a few percentage points on the core business, the core RBC business. And I haven't really put the 2 years together for the rest of the year relative to aerospace. But all of the aerospace units are feeling pretty good about the rest of their year. So I would think we're going to be up to the high single digit on the rest of the year for aerospace.

I see. I was referring, I guess, to the core Sargent business. I mean, Dan, your comments of $180 million to $190 million, and so -- but I think that -- to that it's probably what -- if the math is right, it's kind of flat to up 5% year-over-year based on kind of what they did last year.

Yes. Well, I think there's a couple of things going on here. I think one is we're trying to get this -- the marine business producing, and we have to work our way through those specification protocols that I talked about. That would definitely make a big difference to the year. The other thing that we're doing is we have one business in California, which is a Sargent business, which really has so much demand on that business, it can't produce it all. So we have several -- we have products flowing into several local RBC plants to sort of complement their production capacity. And it's just hard to see how all that's going to come together and work from a revenue standpoint, but there's definitely upside here.

And the California business, is that a function of maybe efficiencies that RBC can go in and use the secret sauce and improve? Or is this a capacity issue?

It's efficiencies. It's definitely efficiencies. And yes, we're going to improve that business.

I see. And the specifications on the marines -- I'm sorry, the marine contract, how big is that for you? Not the contract, but how big is the issue for you? And I guess how far along are we?

How do I put a frame around scale? I mean, it's a large contract. It probably amounts to something -- when it's running steady-state, something like $20 million a year, and it's flowing out at $2 million, $2 million a quarter now or less. So that's the scale of the issue. And as far as how far along are we, I think we're pretty far. I think it's a matter of bureaucracy.

Ladies and gentlemen, I'd now like to turn the call over to Mike Hartnett for the closing remarks.

Okay. Well, I appreciate everybody, everyone's participation today. And hopefully, we were able to answer most of your questions satisfactorily, and we will expect more questions in our October call. Thank you very much.

Thank you for joining in today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.