RBC Bearings (ROLL) Q3 2022 Earnings Call Transcript

RBC Bearings (ROLL -0.42%)
Q3 2022 Earnings Call
Feb 10, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the RBC Bearings fiscal 2022 third quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

[Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your host today, Mike Cummings with Alpha IR. Please go ahead.

Mike Cummings -- Investor Relations

Morning and thank you for joining us for RBC Bearings fiscal 2022 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'll turn the call over to Dr. Hartnett.

Michael Hartnett -- Chief Executive Officer

OK. Thank you, Mike, and good morning to all and welcome. This is our first quarterly report after completing the acquisition of Dodge industrial products division from Asea Brown Boveri of Switzerland on November 1, 2022. Two months of Dodge operational performance are included in this report, but three months of financial drag was experienced as we worked through the acquisition mechanics through October and acquired the company November 1st.

We are pleased and excited to welcome the Dodge businesses and teams into RBC Bearings family, and look forward to and can fully visualize a long, fruitful and mutually beneficial relationship for our investors, employees, customers, and suppliers. The Dodge businesses materially strengthen our industrial offering and position us very favorably relative to large and important base of customers with an exciting new platform of products, and I'll talk more about this later. In summary, RBC Bearings net sales for the third quarter of fiscal 2022 were $267 million versus $145.9 million for the same period last year, an increase of 83%. Dodge sales were $110 million over the two-month period.

For the third fiscal quarter of 2021, sales of industrial products represented 65% of our net sales with aerospace products representing 35%. Adjusted gross margin for the quarter was 103 -- $100.3 million or 37.6% of net sales. This compares to $56.4 million, or 38.7% for the same period last year. Adjusted operating income was $44.8 million, 16.8% of net sales compared to last year's $27.9 million and 19.1% of net sales.

EBITDA for the -- was $71.4 million or 26.7% of net sales, compared to $41 million and 28.1%, 72.8% increase. As others have reported, and we concur, the industrial demand today is through the roof. While industrial sectors we serve are performing, demand for industrial products in many cases exceeds our capacity, mostly as a result of supply chain constraints, particularly at the Dodge businesses. We have worked through these constraints with vigor over the past nine months and see improvements ahead, but it's a problem that will linger and continue to bite our ankles at least for the first half of fiscal 2023.

A sample of important sectors we serve with their strengths are mining, sand and gravel, taconite, both surface and subsurface. Steel shortages today drive a substantial demand here for our products. Construction is strong. Aggregate is a very strong outlook for it.

And currently and in 18 months, we expect the increase in order flow from the infrastructure bill for highways and bridges, which has been the typical lead-lag equation in that sector. Food and beverage proteins, beef, cattle, turkey, chicken, canning continues to grow with increased demand for our new product offerings. Oil and gas is very strong, and I'm sure everyone knows the story here when you fill up your tank. In warehousing, there's a great rush to build fulfillment centers to supply the last mile -- to support the last mile strategies underway by Amazon, Tractor Supply, Home Depot, Walmart, Target, etc.

Our products are well integrated into these new businesses. Semi-conductor machinery, very strong. Billions for new plants have been announced by Intel, Samsung, Taiwan Semiconductor, and many others. And industrial distribution as a result of all the demand for the previous sectors mentioned continues to be strong, and that sector is consolidating.

To summarize, we are making as much as we can in every site where we have industrial production. Turning now to aerospace and defense, our third quarter of fiscal '22 net sales were up by 3.5%, led by aircraft OEM, which is up by 10.5%. Weak defense sales held down the expansion. These can be lumpy quarter to quarter depending upon build schedules and milestone achievements in our plants, but we expect these to normalize by the end of the year, while also postponement of the 787 production dampens the OEM rate, capping it at the 10.5% previously mentioned.

Our backlog for this sector is up over $80 million and we are planning for a major volume expansion beginning next year as Boeing and Airbus expand build rates for their single-aisle planes and Dreamliner production resumes. Important airframes in our lineup are the 737 Max, 787, 777X, the 777, the A320, and the A350. We're visited often by the major plane builders to make sure that we have enough capacity in our plants to service the demand that is ahead in the succeeding quarters. So regarding our fourth quarter, we're expecting sales of between $340 million and $350 million in total.

And I'll now turn the call over to Dan and Rob for more details on the financial performance.

Robert Sullivan -- Vice President and Chief Financial Officer

Thank you, Mike. Expanding on gross margin that Mike already covered, gross margin for the third quarter of fiscal 2022 was affected by a $7.0 million inventory step-up related to the Dodge acquisition. Fourth quarter fiscal 2022 gross margin is expected to be affected by a $6.8 million inventory step-up related to that acquisition. SG&A for the third quarter of fiscal 2022 was $43.2 million, compared to $25.7 million for the same period last year.

Excluding $12.0 million in costs from the Dodge business, the increase is primarily associated with an increase in personnel costs year over year. As a percentage of net sales, SG&A was 16.2% for the third quarter of fiscal 2022, compared to 17.6% for the same period last year. Other operating expenses for the third quarter of fiscal 2022 totaled $35.8 million, compared to $3.3 million for the same period last year. For the third quarter of fiscal 2022, other operating expenses included $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.

Other operating expense for the same period last year consisted mainly of $2.6 million of amortization of intangible assets, $0.5 million of restructuring costs and related items, and $0.2 million of other costs. Operating income was $14.4 million for the third quarter of fiscal 2022, compared to operating income of $26.5 million for the same period in fiscal 2021. On an adjusted basis, operating income would have been $44.8 million for the third quarter of fiscal 2022, compared to adjusted operating income of $27.9 million for the third quarter of fiscal 2021. Other non-operating expense was an expense of $1.4 million for the third quarter of fiscal 2022, compared to income of $0.1 million for the same period last year.

For the third quarter of fiscal 2022, other non-operating expenses were comprised of $0.9 million of charges associated with the elimination of a domestic debt facility, $0.4 million of post-retirement benefit costs and $0.1 million of other items. For the third quarter of fiscal 2021, other non-operating income was comprised of $0.5 million of gains on marketable securities, partially offset by $0.2 million of foreign exchange loss, and $0.2 million of other items. For the third quarter of fiscal 2022, the company reported a net loss of $0.1 million, compared to net income of $21.6 million for the same period last year. On an adjusted basis, net income was $26.1 million for the third quarter of fiscal 2022, compared to $22.7 million for the same period last year.

Net loss available to common stockholders for the third quarter of fiscal 2022 was five -- negative $5.8 million, compared to net income of $21.6 million for the same period last year. On an adjusted basis, net income available to common stockholders for the third quarter of fiscal 2022 was $20.3 million, compared to $22.7 million for the same period last year. Adjusted cash net income available to common stockholders for the third quarter of fiscal 2022 was $42.2 million, compared to $33.9 million for the same period last year. Diluted earnings per share was negative $0.20 per share for the third quarter of fiscal 2022, compared to $0.86 per share for the same period last year.

On an adjusted basis, diluted EPS for the third quarter of fiscal 2022 was $0.70 per share compared to adjusted diluted EPS of $0.90 per share for the same period last year. Diluted cash EPS was an adjusted $1.46 per share for the third quarter of fiscal 2022, compared to $1.35 per share for the same period last year. Adjusted cash, net income and adjusted cash earnings per share excludes non-cash expenses for depreciation and amortization of fixed and intangible assets, stock compensation, and amortization of deferred financing fees net of their income tax impact. We believe that adjusted cash, net income, and adjusted cash earnings per share are useful in assessing our financial performance by excluding items that do not affect the cash available to common stockholders.

Turning to cash flow, the company generated $40.0 million in cash from operating activities for the third quarter of fiscal 2022, compared to $36.1 million for the same period last year and $133.4 million in cash from operating activities for the nine-month period of fiscal 2022, compared to $110.6 million for the same nine-month period last year. Capital expenditures were $14.9 million for the third quarter of fiscal 2022, compared to $2.8 million for the same period last year. Approximately $6.2 million of capital spending this quarter was related to the Dodge acquisition and they were submitted post-closing purchase price adjustment costs. Total debt as of January 1, 2022 was $1,790,000,000 and cash on hand was $255.5 million.

I would now like to turn the call back to the operator for the question-and-answer session.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from the line of Pete Skibitski with Alembic Global. Your line is open. Please go ahead.

Pete Skibitski -- Alembic Global -- Analyst

Yeah. Good morning, guys. Mike, I missed a little bit. Did you say Dodge contributed $100 million in sales in the quarter or $110 million? I missed that.

Michael Hartnett -- Chief Executive Officer

I think it was $110 million. Yeah, $110 million.

Pete Skibitski -- Alembic Global -- Analyst

$110 million? OK. OK. And can you give us what they contributed in terms of backlogs? Because backlog was up sequentially pretty meaningfully.

Michael Hartnett -- Chief Executive Officer

I think it was about $50 million.

Pete Skibitski -- Alembic Global -- Analyst

$50 million? OK. OK. So did you did your organic industrial sales rise? Because it sounds like everything's going great guns, but did you have any issues that slowed your organic industrial sales at all?

Michael Hartnett -- Chief Executive Officer

No. I mean, organic industrial sales are up, everything's up. Our legacy, RBC industrial business was up close to 26%.

Pete Skibitski -- Alembic Global -- Analyst

OK. OK, I'll look at that. Mike, so yes, one more. There's kind of a perception out there, I think, in the broad market that ISM PMIs dipped have below 60.

There's maybe a little bit gross scare out there out there combined with inflation rising. You're not -- it sounds like to me, you're not seeing any kind of a growth scare in your industrial markets. You're talking about adding capacity and it sounds like you have some visibility to that as well. Is that a fair characterization?

Michael Hartnett -- Chief Executive Officer

Well I think we have half the capacity to meet demand, if we could get the supply chain to support us with the materials we need to execute. Right now, the -- that's a bit out of balance. And so all the work is going into fixing that supply chain problem, and everybody has that problem. It's -- I've listened to the other conference calls, they're all they're all talking about it, and we have it too.

Pete Skibitski -- Alembic Global -- Analyst

Yeah. OK, understood. And so maybe one for Rob. So this is the segmentation going forward is going to be aerospace and industrial.

And will we get kind of a -- the historic for FY '22 and FY '21 for those -- for the new segmentation?

Robert Sullivan -- Vice President and Chief Financial Officer

You'll see in the Q that comes out this afternoon, the nine-month period year over year for the aerospace defense versus industrial. And then that'll walk you down the line, as you'd expect. And then a year and you'll see the full 12-month picture.

Pete Skibitski -- Alembic Global -- Analyst

OK. OK. OK. Thanks, guys.

Operator

Thank you. And our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open. Please go ahead.

Kristine Liwag -- Morgan Stanley -- Analyst

Hey, guys. Good morning.

Michael Hartnett -- Chief Executive Officer

Good morning, Kristine.

Kristine Liwag -- Morgan Stanley -- Analyst

So congratulations on closing on the Dodge deal. Can you provide an update in terms of how integration is going so far? I know it's a little bit early here, but what are you most focused on in the near term that we should watch out for? And has there is there anything unexpected that has come up so far?

Michael Hartnett -- Chief Executive Officer

Well, I would -- there's always the unexpected with regard to a acquisition. And I would say the unexpected here is not -- has been material. It's just been sort of. It's normal to changes in ownership.

So I don't -- I think one of the things that we've had to deal with in the in the acquisition is they basically moved their entire corporate headquarters to another site, sort of, in December and into January, and they're still sort of settling out that site today. So that's not a normal thing that we experience with an acquisition, and particularly one of this size. So that was a little bit challenging. I think also the -- just getting to our computer systems in place, and currently we have an agreement with ABB to support us with their computer systems until ours are in place.

And so that's taking a lot of focus and effort in BTUs and we're working through it, and it's making the progress it should make.

Kristine Liwag -- Morgan Stanley -- Analyst

Thanks. That's helpful color. And then I'm thinking -- I mean, you guys provided a revenue outlook for next quarter. How should we think about the gross margin mix there because you've got your volume mix, but we've also got some of the acquisition noise.

How should we think about the normalized level of gross margin?

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

So I think for next quarter -- this is Dan. For the fourth quarter, we should expect to see gross margins be at least 1% better than what we experienced in Q3. And then I expect to see that again in the first quarter of the following year. But we'll be able to give you more color on that on Q1 and Q2 of next year once we get on the conference call at the end of the year.

But just keep in mind that for Dodge, it's two months in there. And like RBC, it's the two worst months of the year, right? It was November and December, which is packed full of holidays and the least amount of production days.

Kristine Liwag -- Morgan Stanley -- Analyst

I see. And, Dan, just to confirm, you said that's a one percentage point increase in gross margins sequentially next quarter versus this quarter, right, that's not a year-over-year number?

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

Yes.

Kristine Liwag -- Morgan Stanley -- Analyst

OK, great. And then if I could squeeze in one more. What are you guys seeing from a supply chain and inflation standpoint? What are you seeing in terms of unexpected price increases? And how are you able to or to what degree are you able to pass it through your customers?

Michael Hartnett -- Chief Executive Officer

Well, the supply chain for November and December kicked Dodge right in the shin, and so that that impacted their gross margins. I don't think anybody expected to see what we saw and the -- but it was what it was. And we've rectified the situation in January.

Kristine Liwag -- Morgan Stanley -- Analyst

Well, so can you guys provide a little bit more color in terms of what you had to do to rectify that? And what gives you the confidence of that one percentage point gross margin increase next quarter? Because that's a pretty meaningful jump, especially with the headwind you mentioned.

Michael Hartnett -- Chief Executive Officer

Well, we did a few things. One of the things we did was increase prices. And the next thing we did was do some account management that that was -- we thought could lead to significant improvements.

Kristine Liwag -- Morgan Stanley -- Analyst

Great. Thanks, and I'll pass off to the next person. I appreciate the time, guys.

Operator

Thank you. And our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone.

Michael Hartnett -- Chief Executive Officer

Morning, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

OK, so maybe just that I know you gave it some color around aero trends this quarter. I'm curious like how did how did your MRO business trend this quarter? And then can you maybe give us a little bit more insight on the defense business? I think you guys called that out as being a little bit weaker and I guess we're hearing from some of the other companies we cover that U.S. defense is probably going to be a little bit weaker throughout 2022. So any color there would be helpful.

Michael Hartnett -- Chief Executive Officer

OK. So, Joe, what was your first question?

Joe Ritchie -- Goldman Sachs -- Analyst

Just really about the aero aftermarket MRO business and how that business did this quarter.

Michael Hartnett -- Chief Executive Officer

Well, we don't have much business in the aero aftermarket, but the aftermarket that we do have is doing quite well. And so that business is up and approaching pre-pandemic levels. It isn't there yet but we can see it getting there. It's doing very well.

A lot of our -- what they call aftermarket is really aircraft distribution. And that aircraft distribution is through -- is both aftermarket and also the aircraft distribution. Supplies, small, and maybe not so small subcontractors to the major builders. And so they're going to wax and wane with build rates.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. That makes sense. What about on the defense side? Just a commentary around U.S. defense?

Michael Hartnett -- Chief Executive Officer

The defense business, we have pockets of weakness and pockets of great strength. And normally where we have pockets of great strength, we have very complex products that are not easy to make, and that's why they come to us to make them. And sometimes they don't go out the door when they're supposed to go out the door, according to our plan. And that's what happened in the quarter, and we expect to rectify a good part of that in the fourth quarter.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. OK, that's helpful. And maybe one last one for me, being the being the new person on the block covering you guys. I'm just curious just in terms of the disclosure and now that you've got industrial and aero much bigger businesses like, is there any thought around providing a little bit more detail, granularity around -- like the margins of these businesses so we can see kind of like the mix impact going forward a little bit easier?

Michael Hartnett -- Chief Executive Officer

Well, if you could kind of guarantee our competition wouldn't read that report, we would be happy to give it to you. It's pretty confidential.

Joe Ritchie -- Goldman Sachs -- Analyst

Yeah. I can't guarantee that. I'm sure they'd be interested in it.

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

You will always get -- within the segment footnote, you'll get the definition of the aerospace defense versus industrial, and then we will have the gross margins for each of the segments, as you'd expect. So that'll be in the Q.

Joe Ritchie -- Goldman Sachs -- Analyst

OK. Great. Thanks, guys. I'll pass it on.

Operator

Thank you. [Operator instructions] And our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open. Please go ahead.

Michael Ciarmoli -- Truist Securities -- Analyst

Hey, good morning, guys. Thanks for taking the questions. I guess one. First, it looks like looking at the segment level data for industrial and aero on the trailing basis, you made some adjustments to last year's number.

What moved out of, I guess, the industrial segment and into aerospace?

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

The biggest component move was the marine business, right. The marine business was historically classified within industrial, but it's a defense product, so it was moved over with aerospace and defense.

Michael Ciarmoli -- Truist Securities -- Analyst

OK. Got it. OK, that makes sense. And then are you guys planning to give us any more detail on ongoing costs here for modeling purposes? I mean, I know you have the the transaction costs.

You spelled out the amortization, but do you have an expectation of what we can expect for integration costs, the full sort of amortization? Were there any any other fair value step-ups or if you plan to disclose that just to kind of help us with modeling here?

Michael Hartnett -- Chief Executive Officer

Yeah, I mean, as we mentioned earlier, we've got about another $6.8 million in the step-up of the amortization of the inventory that will come out in the next quarter. We've incurred, I would say, the majority of the one-time acquisition costs. There will still be, I'd say, half a million to a million of additional costs in the fourth quarter kind of onetime costs there. And then the TSA costs, we're probably expecting another $4.5 million next quarter.

And those are bridged out over the 12 months after the acquisition closed date of 11/1. And they'll slowly fall off, so we'll have more color to offer on the next call.

Robert Sullivan -- Vice President and Chief Financial Officer

The depreciation amortization of $110 million.

Michael Hartnett -- Chief Executive Officer

That's right. So depreciation and amortization is going to be just under $28 million next quarter. Total.

Michael Ciarmoli -- Truist Securities -- Analyst

OK, OK. Got it. Got it. And are you guys when you announced this, you talked about $7 to $8 EPS range, I guess cash EPS.

I guess, I've never seen anybody add back depreciation. And if I did an apples to apples, I mean, you guys did $7.15 in fiscal '20 adding back depreciation, adding back stock comp. I mean, it seems like that $7 to $8, again, adding back depreciation, are you trying to get a cash cap cash number, but probably should deduct the capex and it almost seems like it's a free cash flow number. I mean, what's the -- I've just never seen that before.

Just wondering what the thought process there was?

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

Yeah, it's just our -- this is Dan. It's just our view of cash EPS. So just taking our net income available to shareholders. And if we didn't have these non-cash items, tax effective, what would be the cash EPS number? So we define it in the press release.

We gave you a breakdown exactly how to calculate it, and it's just a way that we're measuring our performance on our cash EPS number.

Operator

Thank you. And our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is open. Please go ahead.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. I'm sorry, I got on the call a little late, so hopefully this isn't redundant. But trailing 12-month revenue for Dodge was around $620 million, if I'm remembering right. And I think that's what we basically tracked to this quarter for the two-month contribution.

How should we think about organic growth on that trailing 12-month basis or trailing quarter basis in 4Q? And how does that compare to ROLL organic for industrial?

Michael Hartnett -- Chief Executive Officer

Well. I think their organic growth is to some extent muted by supply chain and their organic growth could be sort of where it rolls, organic growth is. We don't have the kind of supply chain issues that they have. We're a little bit more vertically integrated.

And as a result of that, we avoid some of that. So their organic growth will certainly be up double digits. They'll probably be in the low double digits, but it could be better than that if they can get on the other side of these supply chain issues.

Steve Barger -- KeyBanc Capital Markets -- Analyst

And did you say what you expect for your -- the legacy business, for lack of a better term, will do an organic growth for 4Q?

Michael Hartnett -- Chief Executive Officer

We didn't say it, but --

Steve Barger -- KeyBanc Capital Markets -- Analyst

Would you like to?

Michael Hartnett -- Chief Executive Officer

Well it's going to be in the upper single digits? That's what we're modeling.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So, Dodge will actually do better. I thought you said low double digit there and you're saying upper single digits for your -- the legacy business.

Michael Hartnett -- Chief Executive Officer

Yeah.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. And how are you seeing growth for -- since they have so much aftermarket exposure, what's their aftermarket growth rate versus OEM? Is that is that growing faster for them?

Michael Hartnett -- Chief Executive Officer

It's sort of an 80-20 thing, where 80% of their businesses is what they call aftermarket or distribution market. So it's so biased toward that 80% that the 20% doesn't create much sway. And the -- certainly the difficulty right now is servicing that 80% and servicing it well.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Right. And I know in general, Dodge has good margins, but are there any product lines you need to reprice or exit there now that you've gotten in to look at the at the whole portfolio?

Michael Hartnett -- Chief Executive Officer

So the short answer there is yes.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Is that a sizable portion of the portfolio or is that pretty small?

Michael Hartnett -- Chief Executive Officer

It's not small, but it's -- relative to the size of Dodge, it's not material either.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Right. And now that you've been through the factories more in detail, do you see opportunities for automation or robotics to drive some efficiency or productivity or are they pretty well optimized in terms of that kind of historical capex for programs?

Michael Hartnett -- Chief Executive Officer

They're -- for the most part, I would say 75% of their factories are pretty optimized. There's still 25% that can do better and that basically they just haven't gotten to. They've been working through at one factory at a time. So there's still some upside there.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Gotcha. And just last one, I know there's always a lot of charges and adjustments when you're integrating a big acquisition. But just, I guess supply chain notwithstanding, when would you expect that we start to see what we can consider more normal free cash flow from the complete portfolio?

Michael Hartnett -- Chief Executive Officer

I would say as we enter into the first quarter of next year, you'll start to see it.

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

Yeah, and I think Q4 be pretty clean, too. Yeah. So I think you should -- yeah, it's pretty clean slate on Q4.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. And can you remind us, what do you expect the entire portfolio will run in terms of a free cash flow margin or just what you convert free cash flow from revenue?

Robert Sullivan -- Vice President and Chief Financial Officer

We haven't given that number, but I -- we definitely will at the end of May, when we're talking about fiscal year 2023 and we have a full year Dodge baked into our forecast and a full year of RBC baked in.

Steve Barger -- KeyBanc Capital Markets -- Analyst

All right, guys. Thanks.

Operator

Thank you. And we have a follow-up question from the line of Pete Skibitski with Alembic Global. Your line is open. Please go ahead.

Pete Skibitski -- Alembic Global -- Analyst

Yeah, just a couple other modeling questions. The inventory step-up that you gave for the third quarter and the fourth quarter, does that that just stay in the income statement for kind of that midterm time of kind of time horizon for that six -- $7 million type of a level?

Robert Sullivan -- Vice President and Chief Financial Officer

No, that will be after the fourth quarter. We should be all set with that one.

Pete Skibitski -- Alembic Global -- Analyst

OK. That's gone. And now, just in terms of you guys put out that adjusted EBITDA margin goal of -- I think it was in the mid-thirties, I believe. Can you -- do you have a sense of what the components of that are? Is it half and half gross margin, SG&A improvement or any -- maybe you could walk us through a little bit of how you intend to reach those goals?

Robert Sullivan -- Vice President and Chief Financial Officer

I don't have the exact math to tell you, but I can tell you that, as Dan alluded to, we're expecting steady, strong gross margin improvement in the coming quarters, which is going to bleed right into that. And then the SG&A, you can see the consolidated SG&A this quarter at 16%. As we start to fill another full quarter of Dodge in there, the percentage of -- the SG&A as a percentage of sales will continue to bleed down to that EBITDA line and really benefit that number. So that kind of directionally will start to take us where we want to get to.

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

And, Pete, I think you're referring to also the synergies that we were anticipating on the business. And I'd say that was probably broken down 60-40, 60 impact in sales COGS and 40 impact in SG&A, and all those programs we've started. It's only been two months in, right, so -- but I think we're more than well on target for what we thought fiscal year 2023 would be on our synergies. So I think we'll probably be ahead of the game for what we anticipated for the first year on synergies.

And we'll report more on that on the fourth quarter when we have more firm numbers and we'll talk about it.

Pete Skibitski -- Alembic Global -- Analyst

Appreciate the color. Thank you.

Operator

Thank you. And our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open. Please go ahead.

Kristine Liwag -- Morgan Stanley -- Analyst

Hey, guys. Thanks for taking my follow-up. Mike, earlier you mentioned -- on my question about unexpected things that you found at Dodge. I guess like with the supply chain issue, the inflation issue being solved already and now you guys have had time to look at all the factories thoroughly, is there a reason to change or is there a change in terms of your expected run rate synergy of $70 million to $100 million annually by the fifth year of the acquisition close? Do you see potential upside to that number or downside to that number from what you've seen so far?

Michael Hartnett -- Chief Executive Officer

Well when we gone through the factories in the -- and got a sense of of where the easy synergies are. And so we kind of want to line those up first. The -- I think the consideration here is if we decide to use traditional RBC classic manufacturing capacity, what is the best use of that capacity? Is it to improve the gross margin, which is there's some very obvious things that we could we could do if we embarked upon that path that we identified. And I think that the -- another alternative and another consideration is there's some growth opportunities in some of their products.

If they had a more cost-effective way of getting those products to market. Right now, those products are somewhat throttled based upon cost price pressure and so they promote them lightly. And there's a lot of upside in the marketplace if those products could be manufactured with a better cost structure. So, yeah, I mean, do we want to chase the expansion in gross margin or do we want to chase the expansion in sales? Because once you commit to one of those paths, you de-commit to the other one.

So we're trying to make sure that we use -- we make the best decision possible on what we can do to improve the operating results of the entire company.

Kristine Liwag -- Morgan Stanley -- Analyst

I see. I mean, the net of that right is either through the gross margin expansion or revenue growth, you're going to get some of these synergies, either through cost synergies or revenue synergies. So my net question would be on a net basis, is that 70 to 100 doable, or is it looking like you could do a lot better?

Michael Hartnett -- Chief Executive Officer

Well, we -- if I say we're going to do a lot better, you're going to make it 200.

Kristine Liwag -- Morgan Stanley -- Analyst

Well, I've covered you guys for a long time and you always beat expectations, so I'm just trying to find where that happy medium is but maybe it's too early but it can't hurt to try and ask, right?

Michael Hartnett -- Chief Executive Officer

Yeah, I think let's leave the goalposts where they are right now. And we're still working on the first basis.

Kristine Liwag -- Morgan Stanley -- Analyst

Great. Thanks, guys.

Michael Hartnett -- Chief Executive Officer

Thanks, Kristine.

Operator

Thank you. And our next follow up question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open. Please go ahead.

Michael Ciarmoli -- Truist Securities -- Analyst

Hey, guys. Just one more on the supply chain. I know you talked about that initially at Dodge, the $200 million of component cost per year. Has any of the tightness and bottlenecks in supply chain, giving you the opportunity to accelerate? It sounded like initially you were going to let contracts sort of run their course, but presumably with all suppliers dealing with extended lead times and higher prices, have you thought about accelerating the insourcing of those components?

Michael Hartnett -- Chief Executive Officer

Well, the major issues aren't anything that we produce. I mean, we don't make steel. And right now, the industry has a real problem getting steel. And so everywhere in RBC and to a lesser extent, Dodge, we're moving lead times out because we need to hedge our backlogs with regard to where we're going to get steel products.

So steel is -- steel in some cases has doubled. And so it's something that I think the entire industry is wrestling with right now.

Michael Ciarmoli -- Truist Securities -- Analyst

Got it. All right. Great. Thanks, guys.

Operator

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Dr. Hartnett for any further remarks.

Michael Hartnett -- Chief Executive Officer

OK. Well, I appreciate your attention and your comments and questions to this meeting and we look forward to speaking with you again. I think it's late May by the time we do this again and we'll have much more to speak about and we expect we have some pretty good news by the end of May. So thank you and good day.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Mike Cummings -- Investor Relations

Michael Hartnett -- Chief Executive Officer

Robert Sullivan -- Vice President and Chief Financial Officer

Pete Skibitski -- Alembic Global -- Analyst

Kristine Liwag -- Morgan Stanley -- Analyst

Daniel Bergeron -- Director, Vice President, and Chief Operating Officer

Joe Ritchie -- Goldman Sachs -- Analyst

Michael Ciarmoli -- Truist Securities -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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