Earnings Call
RBC Bearings INC (RBC)
Earnings Call Transcript - RBC Q3 2023
Operator, Operator
Greetings, and welcome to RBC Bearings Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Josh Carroll with Investor Relations. Please go ahead.
Josh Carroll, Investor Relations
Good morning, and thank you for joining us for RBC Bearings fiscal 2023 third quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer; Daniel A. Bergeron, Director, Vice President, and Chief Operating Officer; and Robert Sullivan, Vice President and Chief Financial Officer. Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC 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 will now turn the call over to Dr. Hartnett.
Michael Hartnett, CEO
Okay. Thank you, Josh, and good morning, everyone, and welcome to RBC's third quarter conference call. Net sales for our third quarter for fiscal 2023 were $351.6 million versus $267 million for the same period last year, a 31.7% increase. For the third quarter of 2023, sales of our industrial products represented 70% of net sales with aerospace products at 30%. Gross margin for the quarter was $146 million or 41.5% of net sales. This compares to $93.3 million or 35% for the same period last year. Adjusted operating income was $71.6 million, 20.4% of net sales compared to last year's $46.3 million and 17.3%, respectively. Adjusted EPS diluted came in at $1.64 a share. Adjusted EBITDA was $103.3 million, 29.4% of net sales compared to $71.4 million, 26.7% of net sales for the same period last year. During the period, we paid down debt by another $60 million on the term loan, and free cash flow was $54.4 million. Turning now to some of our sectors. On the industrial side, we are seeing continued strength from the OEM sector with RBC Classic industrial up by 14.1%, driven by semiconductor machinery, energy, and mining. Both RBC and Dodge showed a growth of over 12% in industrial distribution revenues. Overall, industrials were up 11.8%, with sector growth somewhat mitigated by Europe and some select OEM weakness. On the aerospace and defense side, we saw an expansion of 13.2%, with aero OEM up over 26%. Demand drivers here are the large plane builders and their supply chain rebounding as the production of Boeing's 737 and 787 ships increases. We are at the beginning of this recovery now, and pandemic inventories are showing less of an impact, and production rate increases are well publicized. We expect to see increased demand creating double-digit growth from the plane builders for many quarters to come, and we continue to add resources and planning to support increased build rates, driven by demand, as well as expanded work statements. In total, RBC saw an organic growth in revenue of 12.7% during the period. There have been questions about backlog, and much of our commercial aircraft business is done in a manner where the backlog isn't represented by the contract, and the orders are published on a portal, and we ship to those orders. So probably 60% of our business there doesn't ever get into our backlog. Regarding the fourth quarter, we are expecting sales to be $375 million to $385 million. This is becoming an increasingly difficult projection to make now post-Dodge acquisition, which means half our sales are stock items where daily shipments are subject to daily orders as opposed to being defined by long-term contracts where quarterly revenues can be well planned. So that kind of puts us into the business of economic forecasting, and we do the best we can. I'll now turn the call over to Rob for more detail on financial performance.
Robert Sullivan, CFO
Thank you, Mike. SG&A for the third quarter of fiscal 2023 was $56.8 million compared to $41.7 million for the same period last year. As a percentage of net sales, SG&A was 16.1% for the third quarter of fiscal 2023 compared to 15.6% for the same period last year. Looking forward, SG&A as a percentage of sales is expected to be between 15.25% to 15.75% in the fourth quarter. Other operating expenses for the third quarter totaled $18.9 million compared to $35.8 million for the same period last year. For the third quarter of fiscal 2023, expenses included $17.4 million of amortization of intangible assets, $1.2 million of costs associated with the Dodge acquisition, and $0.3 million of other expenses. For the third quarter of fiscal 2022, other operating expenses consisted primarily of $23.5 million of costs associated with the Dodge acquisition, $12.1 million of amortization of intangible assets, and $0.2 million of other items. Operating income was $70.4 million for the third quarter of fiscal 2023 compared to operating income of $15.9 million for the same period last year. Excluding approximately $1.2 million of acquisition costs, adjusted operating income was $71.6 million, or 20.4% of sales for the third quarter of fiscal 2023. Excluding approximately $30.4 million of acquisition costs, adjusted operating income for the third quarter of fiscal 2022 was $46.3 million or 17.3% of sales. Interest expense for the third quarter of fiscal 2023 was $20.9 million compared to $11.9 million for the same period last year. We anticipate total interest expense of between $21 million and $22 million for the fourth quarter of fiscal 2023 at an effective tax rate between 23% and 23.5%, excluding discrete or unusual items. For the third quarter of fiscal 2023, the company reported net income of $36.3 million compared to $0.5 million for the same period last year. On an adjusted basis, net income was $53.3 million for the third quarter of fiscal 2023 compared to $40.6 million for the same period last year. Net income available to common stockholders for the third quarter of fiscal 2023 was $30.6 million compared to a net loss of $5.2 million for the same period last year. On an adjusted basis, net income available to common stockholders for the third quarter of fiscal 2023 was $47.7 million compared to $34.8 million for the same period last year. Diluted earnings per share was $1.05 per share for the third quarter of fiscal 2023 compared to a loss of $0.18 per share for the same period last year. On an adjusted basis, diluted earnings per share for the third quarter of fiscal 2023 was $1.64 per share compared to adjusted diluted earnings per share of $1.20 per share for the same period last year. Turning to cash flow, the company generated $60.9 million in cash from operating activities in the third quarter of fiscal 2023 compared to $40 million for the same period last year. Capital expenditures were $6.5 million in the third quarter compared to $14.9 million for the same period last year. We paid down $60 million on the term loan during the period, leaving total debt of $1.46 billion as of December 31, and cash on hand was $82 million. Cumulatively, since November 2021, we have paid $350 million on the term loan, including a $20 million payment in January of this year. I would now like to turn the call back to the operator for the question-and-answer session.
Operator, Operator
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Pete Skibitski with Alembic Global. Please proceed with your question.
Peter Skibitski, Analyst
Hey. Good morning, guys.
Michael Hartnett, CEO
Hey, Pete.
Peter Skibitski, Analyst
Hey. Mike, maybe you could put your economist hat on for a moment, but you probably see a lot of the macro guys out there are concerned that we could tip into a mild recession later this year. Just wondering if you're seeing anything in your industrial end markets that might indicate that – I know you touched on Europe, but wondering if you're seeing anything else there?
Michael Hartnett, CEO
Well, Pete, on our industrial end markets, we're seeing – yes, let me – right now we see a very strong picture from oil and gas and a lot of demand beyond our capacity – substantially beyond our capacity from the oil and gas sector. I suspect that's going to continue given what's going on with world events. And I personally favor fossil fuels, so this is one of my favorite market sectors. Getting down, just – we're also seeing strength for mining. Actually, the mining is challenging the same manufacturing capacity as oil and gas, so we need to do a little bit of an expansion there. Industrial distribution very steady, some inventory adjustments are going on, but they're small, small impact overall, not worth mentioning. Construction of warehouses is down and you've all read the Amazon news, and we were a significant provider of hardware for those warehouses. That demand, which runs between $15 million and $25 million a year, was completely absent from our revenues in the third quarter. And we don't expect it to return in the fourth quarter. So that's the major shift for us. We're seeing a little bit of weakness in semiconductor manufacturing, but that manufacturing capacity that we were opening up is currently being used productively for industrial distribution where we were a little short on product to support that sector. So I think overall, we're just not seeing it. On the defense side, in some sectors, it's unbelievably strong; you haven't seen the shipments yet, but we've got a sleepy supply chain that we're trying to wake up there and shake things out and make them happen, and the aircraft build rates, you know what's happening there with Boeing and Airbus and the 737 and 787 programs. So that's going to be a double-digit growth sector for us for at least the next eight quarters.
Peter Skibitski, Analyst
Okay. Got it. That's very helpful. Let me ask my last one on commercial aerospace, Mike, just – it seems like there still is a lot of inventory sitting at Boeing with regard to the Max and the 787, and they've kind of indicated to us their timeframe for getting rid of that inventory, for delivering that inventory. So are you guys still delivering kind of below their stated rate? Like for instance, on the Max, I think they're 31 a month now, but some of that is out of inventory, so I'm just wondering if you guys are still delivering on the Max if ship set worth more in line with 20 a month or so?
Michael Hartnett, CEO
No, no. For us, it's – and we study this pretty closely to make sure that we've got the right planning in place, and steel is really hard to get now. So, I mean, you have to be out 12 months on your planning with steel, so you really have to be sharp on these numbers, or you're going to create a problem for your customer. So it looks like every time we measure it, we're right in step with their production rate.
Peter Skibitski, Analyst
Okay. Very helpful. Thanks, guys.
Operator, Operator
Our next question comes from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question.
Kristine Liwag, Analyst
Thanks. Mike, you kind of mentioned it seems like backlog is no longer the leading indicator when we think about revenue growth. So when you kind of think about forecasting your business, what do you guys have to do differently, and how much conviction do you have that you're going to see growth even with the risk of the mild recession?
Michael Hartnett, CEO
Let's take the first question. What do we have to do differently? We actually don't have to do anything differently. The thing that we've evolved to, Kristine, is just to understand, for example, when we do a contract with Boeing or Airbus, exactly what mix we have under contract. So we assign a contract with them; it's three years or five years or whatever it is. We have a certain mix that's based on market share—maybe 100%, maybe 80%, something like that by contract for those ships. And so because we're working against the portal and not against the backlog, it's really important for us to understand their production rates and their consumption rates of our product so that we can plan our plants to have more product in place as they relieve the product that we have to build their ships. And so that's basically—we've evolved to that over the last five years, and I would say five years ago, we were really terrible at this, and now we're really, really good at it. We take that information and we actually work with a lot of the subcontractors that use our hardware—our bearings are integrated into a subcontractor produced system and then shipped to Boeing or Airbus. Their planning hasn't reached this level, let’s just put it that way. And so we actually have to call our subcontractors and tell them when to place orders—not in all cases, but in many cases—to be in position and not to create issues, because if they are uncertain, they will blame the bearing guy for not being able to ship that piece of hardware they produced because they couldn't get bearings. So we don't want that to happen. And so we do actually look at their content and do the planning with them. So that’s how we’ve evolved to operate. And so what was the second part of your question?
Kristine Liwag, Analyst
In terms of confidence, in terms of forecasting, I guess the underlying question is, with the changing of your business model to being more book-to-ship, how sensitive is that to the economic environment, and would you still see that grow if we're in a mild recession? How confident do you feel not having a backlog to support that view?
Michael Hartnett, CEO
Yes. It depends on the sector, and we're very confident on aircraft with how to deal with the backlog situation. That's just standard operating procedure now. In terms of where we stand relative to a mild industrial recession, I don't see one showing up in the oil and gas area anytime soon. If you look at Dodge, I mean, their primary markets are grain, aggregate, and mining, and those are markets that they service principally through industrial distribution. And you look at grain—wheat, corn, rice, and soybeans—and consider what's happening in the world, the demand there is strong; that's food. The U.S. feeds the world, and now it has to feed it more due to the problems in Ukraine and Russia. I think their grain sector is going to be good. When we look at the construction sector, the aggregate sector, and we talk to our salespeople, all the cement plants are at 100% capacity. Before the infrastructure built really gets released for commercialization, it looks to me like the sector has a net under it. The other important part of that business is food and beverage. As long as these machines are operating and producing cans, bottles, and boxes, we are strong in that business. So I think that Dodge business is quite resilient in terms of its stability over the past years, and it’s so much of what they do is a staple of life. Their revenues have been impressively stable over many years. When it comes to the aircraft business, I think what's going on there speaks for itself. Our marine business is robust; we have 10 Virginia ships in our backlog and we’re bidding another 10 or 12.
Kristine Liwag, Analyst
Yes. It seems like a good problem to have if you've got strong demand. If I could sneak one more in, Mike, on gross margin, I mean, we looked at the quarter; it's 40.8% for the nine months trailing the quarter, and for the actual quarter itself, it's 41.5%. How much of this was due to the synergies that you guys had outlined with the acquisition of Dodge? Can you give us an idea of where you are in that synergy extraction and where gross margins could go from here? I mean, your historical target was like what, 1 percentage point in gross margin each year? You reinvest 50 basis points, so you have 50 in terms of the net. Is that how we should think about this, or should there be more upside from the synergies? I mean, this is a pretty big jump versus where you were last year.
Daniel Bergeron, COO
Yes. Kristine, hi, it’s Dan. Just to give you a range: Dodge for the last nine months ended December 2021 had an average gross margin around 35% to 36%. For the nine months ended this December, it's around 42.8%. So it's about a 7% to 8% jump in gross margin. So that's not all synergy, but a big half of that or more is synergy based on a $700 million run rate of sales. You were talking about $40 million to $50 million of improvement in gross margin over a 12-month period since we've owned Dodge. I would say on our low-hanging fruit, it's going well on our synergy. The integration of our sales team is progressing well. There's a lot of activity, and I think that's reflected in our industrial growth rates compared to the competition, whose numbers are significantly under ours for growth rates. We are working on our manufacturing processes and footprint, being a better sourcer of intercompany activities between Dodge and RBC and vice versa. We should see the benefit from that activity in fiscal year 2025 and 2026; we are definitely ahead of schedule. Some things we thought would be easy to get done weren't that easy, and things we thought were difficult turned out to be a little easier than we expected initially. I think we're in pretty good shape.
Michael Hartnett, CEO
Yes. Kristine, I can add to that a little bit too. We acquired Dodge in November of 2021, and we were at a rate of sending the previous owner of Dodge $18 million a year to support computer systems and other activities that couldn't be transferred on day one. We've had a team of dozens of internal people and consultants working on putting Dodge on the RBC computer network. As of November 1 this year, that was mission accomplished, and so that $18 million goes away. That was a big project that had to be done safely to complete this acquisition. The second area that we're working on is manufacturing integration. Some of the Dodge plants were very full in terms of floor space utilization, and we needed to open up the Dodge floor space in some of those plants to capitalize on new products or new manufacturing capacity for existing products that were in demand but couldn't be met due to capacity constraints. We're moving some of their processes to Mexico to open up floor space so that they can source some materials from outside suppliers and increase throughput capacity for those products. Therefore, we should see some benefits from this year by opening up some floor space and some Dodge plants using our Mexican resources. Finally, in November, we ran a manufacturing seminar for 125 to 150 people in Tennessee for manufacturing management and engineers selected from our 40 plants with the purpose of presenting and exchanging best practices. Whenever we've done this for the RBC classic business, it has produced amazing results in productivity, and each plant seems to compete with the others in adopting new technology or techniques to improve operations. We expect to see a nice benefit from that seminar.
Kristine Liwag, Analyst
Great. Thank you for all the color, guys.
Operator, Operator
Our next question comes from the line of Steve Barger with KeyBanc. Please proceed with your question.
Stephen Barger, Analyst
Thanks. Mike, you sound pretty optimistic about end markets on both sides of the business, but orders were down 19% sequentially. Can you talk about what parts of the business that came from, and has that deceleration extended into 4Q?
Michael Hartnett, CEO
Yes. Steve, the biggest impact on the backlog was our marine business. For marine in September, our backlog was $118 million, and in December, it dropped to $91 million, which is a drop of $26 million or $27 million. The reason is that we only reflect in backlog what's shippable in the marine product line in the next 12 months. The gross backlog, the marine's total backlog that is shippable past 12 months is $179.9 million, compared to September of $170 million. So it's actually up $10 million. When we factor that in a total backlog, the $25 million has a pretty big impact on the overall backlog. It's just mainly due to the timing of shipments on our submarine business and how we account for that. Dodge was down about 10. Again, September Dodge was about a $100 million backlog, and it was down to $85 million, so their supply chain was clear and their capacity was catching up to their past dues that they had in backlog, so those are the big two contributors.
Stephen Barger, Analyst
Nothing else really notable from an end-market standpoint as to what decelerated?
Michael Hartnett, CEO
No. Steve, it's not decelerating; it's accelerating. We're adding to our legal staff because we have so many contracts that need to be inked and negotiated; there was a booking of $100 million worth of new contracts between December and January. I suspect those haven’t even hit the backlog yet.
Stephen Barger, Analyst
Nice. And Dan, your comment on the $50 million in synergy in the past year or so, if I'm remembering right, the original target was $70 million to $100 million over five years. Now that you've had this for a while, has this changed the upside target? I guess in terms of either time or dollars, how are you thinking about what’s possible?
Daniel Bergeron, COO
I think we're still targeting that range, and as Mike said earlier, on some of the manufacturing integration, it just takes a little longer. You have to pull machines out of one plant, set them up in another, teach that plant how to make the product, put it through testing. That can take six to seven months, make sure it's acceptable to the marketplace, and then supply it. I think we will see activity increase between the Dodge sales team and the RBC Classic sales team, where RBC Classic focuses more on OEM-type activity, and Dodge focuses more on distribution activity.
Stephen Barger, Analyst
Got it. If I can just get one more in; it seems like most companies are working on some sort of digital strategy. Do you guys have any initiatives underway at RBC designed to maximize sales efforts or optimize manufacturing from a data collection standpoint?
Michael Hartnett, CEO
Yes, sure. We do it on both sides. On the front end, Dodge uses the front end of their warehouse consortium that they're part of, and it's called PTplace. That's where independent distributors and customers can come through and electronically place orders to get them delivered within 12 to 24 hours. RBC always had eShop or front-end, where our independent distributors also can come online and guarantee shipping in 12 to 24 weeks to keep them going. We've been making more advances on the manufacturing side, on digital data collection and data mining to better run the plants. If you walk through one of the plants now and took a tour, you'd see many visual screens and a lot of activity at each manufacturing cell reflecting information from the machines, from the operator, and their efficiency. I think this has become increasingly important to our business as we move forward.
Stephen Barger, Analyst
Has that had a material benefit to margins yet or is that more on the horizon?
Michael Hartnett, CEO
No, it all accrues. It's accruing to margins.
Robert Sullivan, CFO
It all has an impact.
Michael Hartnett, CEO
Exactly right. By reducing touch labor, increasing efficiencies, and obviously for customers being able to go online, place an order, and be able to receive their delivery in 12 to 24 weeks, or even shorter.
Daniel Bergeron, COO
That better be in a hurry.
Michael Hartnett, CEO
Yes. Steve, especially when you have—at some of our plants, we have a lot of robotic operations, and so you don't have any people in that sector for every minute of the operating day. You need a screen like this to tell you if there's a problem, if the machine is idle, if it's set up. The manager can dispatch technicians or other talents to remedy the issue.
Stephen Barger, Analyst
Great. Thanks, guys.
Operator, Operator
Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.
Seth Weber, Analyst
Hey. Good morning, guys. Thanks for the question. I wanted to go back to the strong gross margin in the quarter. Can you just give us any color on what you're seeing in the pricing environment, price cost, and your expectations are for price costs going forward, as well as whether you expect to retain price increases if inflation starts to come down?
Daniel Bergeron, COO
Yes. The pricing environment is positive, and I think I've said enough on that.
Seth Weber, Analyst
And so the inflation.
Daniel Bergeron, COO
Yes. The contracts we typically negotiate have an inflation index or some metrics tied to a standard bureau of economics that allow us to change pricing if there's a change in material costs or labor costs or if something else happens that changes volume. To some extent, that's why we have a backlog, on our contract, legal side of contract management; because these contracts are becoming more difficult and time-consuming to manage.
Seth Weber, Analyst
Okay. I guess maybe just historically in a deflationary environment, have you given back pricing or have you historically held price increases?
Michael Hartnett, CEO
I can't remember a single case where we've given anything back.
Seth Weber, Analyst
Okay.
Michael Hartnett, CEO
Now maybe there has been, but it's just not coming to mind.
Seth Weber, Analyst
Okay. And then maybe just pivoting for a minute, just you guys have talked about adding capacity and adding resources and things like that. Can you just level set us kind of where you are, where you're adding some of these additions, and just like how we should think about this ramp, I guess, through next year, or just sort of how we should be able to think about your ability to produce higher volumes going forward?
Robert Sullivan, CFO
Yes. Well, first of all, for the third quarter, our SG&A was a little higher than normal simply because production and sales generally are down due to the number of production days, but SG&A is a fixed cost throughout a quarter. We expect SG&A to normalize into the mid-15s by the end of the fourth quarter. We pretty much stay there. It’s a matter of getting on top of your cost base, and as we increase our sales and production in a given quarter, we may revisit what we're spending on SG&A and let the company earn more SG&A credit. But we're not going to just increase SG&A and hope that it gets absorbed; everyone understands that. That's how we operate.
Seth Weber, Analyst
So a mid-15% SG&A level is a good way to think about the business going forward?
Robert Sullivan, CFO
Yes.
Seth Weber, Analyst
Okay. All right. Thank you very much, guys.
Operator, Operator
Our next question comes from the line of Michael Ciarmoli with Truist. Please proceed with your question.
Michael Ciarmoli, Analyst
Hey. Good morning, guys. Thanks for taking the questions here. Mike, just on this gross margin and what we saw in the quarter—everything accrues, so it sounds like on a go-forward basis, I mean, I don't want to get out in front of our forecast here, but it sounds like you've got a new floor here on gross margins, or should we be thinking about anything that might push these margins down, anything from a mix standpoint that we should be looking at?
Daniel Bergeron, COO
I don't think so. I was actually a little disappointed in our gross margin in the quarter, third quarter.
Michael Ciarmoli, Analyst
Okay, that's good to know. All right, perfect. Just on aerospace, I understand what you said, and earlier this week, we heard Spirit kind of spill the beans. I guess they're going to 38 on the Max, then 42 in October. Presumably, you're kind of at those rates or prepping and kind of aligned?
Daniel Bergeron, COO
Yes. I mean, Spirit spilled the beans. I had the beans right here, but I didn't spill them.
Michael Ciarmoli, Analyst
Perfect. Just on—I know we've been trying to get at this. You mentioned Dodge, not a lot of backlog, and I think you talked about the daily orders. Are you noticing anything from those daily ordering trends of late? I mean, I guess we're all trying to figure out the global macro backdrop, but what are the daily orders telling you as you're looking real-time trying to gauge the health of the industrial markets aside from—I know you talked about the strength in oil and gas?
Daniel Bergeron, COO
Yes. Well, the daily orders for Dodge in the month of January surprised us with their strength.
Michael Ciarmoli, Analyst
Okay.
Daniel Bergeron, COO
And that was a pleasant surprise. I have to perform Chair Powell’s job, you might say, and try to anticipate what the next two months may look like. However, January was very positive. We’re still constrained at Dodge on very key high margin products that just can’t get over the wall, and I think we're going to be there for another year.
Michael Ciarmoli, Analyst
Okay. Last quick one for me. I think you mentioned—so Europe and maybe some specific OEM weakness that you saw. Anything notable with certain OEMs or just kind of isolated?
Daniel Bergeron, COO
Yes. For Europe, I think the OEM weakness we saw is pretty much in the machine tools sector.
Michael Ciarmoli, Analyst
Okay.
Daniel Bergeron, COO
Yes, in China, which is mainly machine tools.
Michael Ciarmoli, Analyst
Got it. Okay. Perfect. Thanks, guys.
Daniel Bergeron, COO
Thanks.
Operator, Operator
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Joseph Ritchie, Analyst
Thanks. Good morning, everybody.
Michael Hartnett, CEO
Good morning, Joe.
Joseph Ritchie, Analyst
So it sounds like Dodge orders accelerated in January. I'm curious, I was just trying to back into it, but what was Dodge revenue for the quarter, and what was it up or down organically?
Robert Sullivan, CFO
Dodge’s revenue in the third quarter was $174.8 million, and it was up 8% from last year organically.
Joseph Ritchie, Analyst
Okay, great. That's helpful. And so, I'm just curious, and I know that it is putting your forecast a little bit, but a lot of the industrial companies that we cover, some of them are kind of flashing yellow on their businesses, downturning or seeing some destock from their distributors. I recognize that two-thirds of your industrial sales now go through distribution. I'd be curious to hear what you're seeing on the distribution side. I know that you called out a little bit of destock, and then how are you thinking about that as we progress through calendar year 2023?
Michael Hartnett, CEO
Well, I think the fourth quarter calendar quarter for the distributors is normally an unusual quarter. We usually see seasonality in that quarter because the distributors are trying to meet some working capital target that they had in order to achieve their bonuses for the year. So they really clamp down on their hardware purchases. Typically, the business can't really run effectively, so you usually see a good snapback in the fourth quarter, and I think that's what happened in January; I think it will continue through February.
Joseph Ritchie, Analyst
Got it. Okay. That's helpful. If I could maybe sneak one more in. Your defense business, you called out, I saw in the Q some of the decline there was due to revenue recognition. Is there any dollar amount, maybe you can kind of quantify how much of the down revenues were a timing impact?
Michael Hartnett, CEO
Yes. We don't have that number in front of us, but I know on the defense side, some of the operations— in order for us to ship a lot of our product, it has to be approved by a government inspector. Sometimes our product isn't ready until the third or fourth week of the month, making it challenging to get a government inspector in when it's the third week of the month and the month is December. We definitely experienced that.
Robert Sullivan, CFO
Yes. It's about $2 million to $3 million.
Joseph Ritchie, Analyst
Okay. Great. Thanks, guys.
Operator, Operator
Our next question comes from the line of Elizabeth Grenfell with Bank of America. Please proceed with your question.
Elizabeth Grenfell, Analyst
Hi, good morning. I was hoping you could give us a little color on your expectations for revenue growth in the fourth quarter. I think your guide implies somewhere between lower than it was in the third quarter; I was just wondering what that's attributable to and where you're seeing it. Is the slowdown on the items you mentioned earlier or somewhere else?
Daniel Bergeron, COO
It’s pretty much the fact that we're not going to see any revenues out of that sector that were building warehouses as fast as they could build warehouses. Last July, those same people were visiting us asking us what it would take to triple our capacity. that's sort of a boom-and-bust area, and it's busted right now. It’s in the range of $15 million to $25 million a year annualized and it doesn’t particularly have good margins, so frankly, we don’t really miss it.
Elizabeth Grenfell, Analyst
Okay. And then you hit on—you said there's some past dues that were the Dodge work through. How many past dues are still there?
Daniel Bergeron, COO
The level of past due at Dodge?
Michael Hartnett, CEO
Their backlog.
Daniel Bergeron, COO
$85 million left in backlog at this point. Those are orders that are shippable but can't be shipped due to unresolved supply chain issues.
Elizabeth Grenfell, Analyst
Okay. Got it. Great. Thank you very much.
Operator, Operator
There are no further questions in the queue. I'd like to hand the call back to Dr. Hartnett for closing remarks.
Michael Hartnett, CEO
Okay, well I appreciate all the interest in the call today and look forward to speaking to you again. I guess that'll be in May. So thanks for your participation and good day.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.