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Good afternoon, ladies and gentlemen. Welcome to AAON, Inc.'s third quarter sales and earnings call. There will be a question-and-answer period after management's brief presentation. This call will last approximately 45 minutes to an hour. I would like to turn the meeting over to Mr. Gary Fields. Please go ahead, Mr. Fields.
Good afternoon, I'd like to read a forward-looking disclaimer to begin with. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities and Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q. So now I'd like to turn it over to Scott Asbjornson to discuss the financial results.
Welcome to our conference call. I'd like to begin by discussing the comparative results of the 3 months ended September 30, 2019, versus September 30, 2018. Net sales were up 0.5% to $113.5 million from $112.9 million. Net sales for the quarter are up due to our price increases from 2018 and 2019, along with increases in our part and water-source heat pump sales. Our gross profit decreased 16.4% to $27.4 million from $32.8 million. As a percentage of sales, gross profit was 24.1% in the quarter just ended compared to 29.0% in 2018. During the quarter, we experienced machine downtime that led to decreased sheet metal production and thus lower unit production and efficiency. Selling, general and administrative expenses decreased 1.5% to $13.0 million from $13.2 million in 2018. Additionally, as a percentage of sales, SG&A decreased to 11.4% of total sales in the quarter just ended from 11.7% in 2018. Income from operations decreased 26.5% to $14.4 million or 12.7% of sales from $19.6 million or 17.3% of sales in 2018. Our effective tax rate decreased to 3.9% from 28.2%. The company's estimated annual 2019 effective tax rate, excluding discrete events, is expected to be approximately 24.2%. The decrease in our effective tax rate was the result of favorable return to provision adjustments on our R&D credit along with additional credits we received upon filing amended Oklahoma returns. Net income decreased to $13.8 million or 12.2% of sales compared to $14.1 million or 12.5% of sales in 2018. Diluted earnings per share decreased by 3.7% to $0.26 per share from $0.27 per share. Diluted earnings per share were based on 52,722,000 shares versus 52,627,000 shares in the same period a year ago. The results of the 9 months ended September 30, 2019, versus September 30, 2018. Net sales were up 7.8% to $346.8 million from $321.6 million. Net sales for the 9 months ended are up mainly due to price increases we implemented in 2018 and '19. Our gross profit increased 10.1% to $83.4 million from $75.7 million. As a percentage of our sales, gross profit was 24.0% as compared to 23.5% in 2018. Material costs have started to decline, while the company continues to improve its labor and overhead efficiencies. Selling, general and administrative expenses increased 2.7% to $37.5 million from $36.5 million in 2018. As a percentage of sales, SG&A decreased to 10.8% of total sales as compared to 11.3% in 2018. The company's warranty expense continues to improve. Income from operations increased 16.1% to $45.6 million or 13.1% of sales from $39.3 million or 12.2% of sales. Our effective tax rate decreased to 17.4% from 23.8%. The company's estimated annual 2019 effective tax rate, excluding discrete events, is expected to be approximately 24.2%. As already mentioned, our 2018 (sic) [ 2019 ] effective tax rate was lower-than-expected due to favorable return to provision adjustments and additional credits. That is 2019 -- I'm sorry, for the year. Net income increased to $37.7 million or 10.9% of sales compared to $30.0 million or 9.3% of sales in 2018. Diluted earnings per share increased by 26.3% to $0.72 per share from $0.57 per share. Diluted earnings per share were based on 52,625,000 shares versus 52,715,000 shares in the same period a year ago. At this time, I'll turn the call over to Rebecca Thompson, our Chief Accounting Officer and Treasurer.
Thank you, Scott. Looking at the balance sheet, you'll see that we had a working capital balance of $116.7 million versus $92.8 million at December 31, 2018. Cash totaled $28.4 million at December 30, 2019. Our current ratio is approximately 3.2:1. Our capital expenditures were $30.8 million for the 9 months. We expect capital expenditures for the year to be approximately $48.3 million. The company had stock repurchases of $15.4 million to-date. Shareholders' equity per diluted share is $5.31 at September 30, 2019, compared to $4.70 at December 31, 2018. I'd now like to turn the call back over to Gary Fields, our President.
Good afternoon. So the price increases have not yet all made it into the production floor. Some of those are still in the backlog because of our extended lead time. We did get some of the price increases in, and we look for that to continue to improve. The backlog, as you can see, has reduced a little bit versus last quarter, but it's still up versus 2018. Orders have slowed down very, very slightly due to the extended lead time. So we're working on reducing those lead times. I'll talk about that more in just a minute. Water-source heat pumps are doing quite well, however. So water-source heat pumps at this time year-to-date are 58% more units than this time in 2018. Quarter over -- similar quarter, the Q3 '19 versus Q3 '18, they are up 13%. We've seen recently that water-source heat pump business is beginning to strengthen for us, even more so we look to finish the year very nicely. Looking at the Q, we're at $21,417,000 thus far this year. We had forecast something around $25 million for the year, and it looks like we should achieve that just fine. We've put in a new parts store. We had one parts store here in Tulsa at the plant. We started another parts store. Its grand opening was June 1, and that was a little bit of a soft opening, but we did get it opened then. Right now, that parts store is running just slightly behind our legacy parts store and gaining every day. Our parts business continues to be a very strong growing business for us. Our representative firms have increased their parts stores -- number of stores, effectiveness of stores, and so we're looking for that to continue to grow. We're working on updating and modernizing for 2023 efficiency standards trying to meet those ahead of time. 2018 efficiency standards were somewhat increased, and we were easily above those benchmarks. 2023 is a little bit more challenging. I was just in a meeting with one of our major component suppliers, and they are going -- bringing to us some new prototype materials because of our NAIC test lab facility and our ability to quickly test these prototype parts. And those should take us to some new high water benchmark efficiency levels. The replacement market continues to be an area of focus. We're making some progress on growing that replacement market beyond. Historically, it has been a 50% component of our overall market, and we're working on growing that. We believe that there's a lot to be had in that market that our sales channel wasn't addressing as aggressively as they could. And we've put some specialists in place in our sales process to help them become more aggressive at that. So all of our products are growing pretty equally in the legacy products. And like I said, the water-source heat pump is growing at a rate that is far in excess of anything, but it's a startup business still. 2018 versus '17, it doubled. And 2019, like I said, it's up 58%. So we're doing well with that. Not seeing any real change in the markets we're serving. I've mentioned cannabis and data centers in the past, and those remain at about the same percentage as they have in the past. So I don't see any real change in what markets we're serving at this point. So the backlog, September 30, 2019, is $165.3 million. And that is versus $126.8 million September 30, 2018. So if we had more sheet metal capacity in Q3 than we would have reduced that backlog even further, which is what we're striving to do. But we had sheet metal capacity problems through part of Q3. And what that really boils down to was -- is we had a couple of machines that, while they were producing, they weren't producing at the rate that we needed. So we demoed those machines out in order to make room for new machines. New machines were put in their place and began producing at an initial level in September, but they won't be at full speed until probably next week. So we had declining production from -- through the summer bottoming out in August and then turning around in September. And we ended September not much short of what our expected run rate was, and we've continued to increase that run rate. So we're making headway on it. We've got several more sheet metal machines yet to install. So we'll be adding capacity to our production capacity. And we've already proven on the plant floor that when we get the sheet metal parts built, that we have a good staff on the plant floor to get the units built. We had a grand opening of our new R&D lab earlier this week, and it was a resounding success. I'm sure that if you look at any of the industry publications that you've seen coverage of that, ASHRAE, AHRI, the Tulsa newspapers and so on and so forth. This laboratory is going to propel our innovation long into the future. The capacity for innovation we have now is exponential compared to before that was available. Another thing that you may have seen recently was a press release about the new markets tax credit that we attained for the new facility we're building in Longview. This was a very favorable incentive for us. We appreciate all those that helped us to attain that. And that facility, while we haven't done anything other than the ceremonial break ground, at this point in time, we intend to start moving dirt within the next 30 days. And one year from right now, we intend to be building units in that new building. That will give us considerable expansion capabilities of our products that we build in Longview, Texas. It also frees up a considerable amount of space here in Tulsa that we had used to warehouse coils that we build in Longview. And that space will be reutilized for additional sheet metal manufacturing equipment here. So building the building there not only increases their revenue capability when it comes online, but it also allows for further revenue expansion here in the existing facility in Tulsa. So with that, Norm, do you have any comments today?
Yes. I'd like to make a couple comments. Those of you -- many of you have been with us for quite some time. And I'd tell you this is kind of where I see us being at this point in time. We've made the transition from my management over to Gary's. And while I was the manager, some of the long-term managers who were working with us elected to stay on, and we were going to try and make it more of a total management changeover, which is what occurred. A lot of them stayed. When I turned reins over to Gary, they retired. That presented us with 2 things. First of all, gave Gary a chance to staff the organization with his people and not have a lot of older people who were ready for retirement to contend with. They were gone. It also presented us with a lot of problems for while we had a lot of young people who were being groomed for those positions, they didn't have much experience. I think we've, at least, equaled the capability of the new management staff, but short some experience. We paid a penalty for that shortness of experience over the last couple, 3 years, but those days now are rapidly dwindling and going behind us. I see us going back into another period like we ran for so many years earlier in our history where we were getting very fine growth both in volume as well as profitability. Everything is lining up very nicely. I feel very happy and comfortable with what has taken place as we've gone through this. I've been unpleasant and unhappy with momentary times for the past couple, 3 years, but those times are all pretty well behind us. So thank you for staying with us. I think we are going to deliver and meet your expectations going forward. Turning the mic back over to you for questions and answers.
[Operator Instructions] Your first question comes from Brent Thielman from D.A. Davidson.
Congratulations on the opening of the R&D lab. I know there's a lot of work behind that. I guess first on that, any updated thoughts. I know it won't be much in terms of contribution this year. But is that -- is up and running? And how we can kind of think about the contribution from that into 2022 to the revenue and earnings line?
Well, it has made some contribution in 2019 in that there were 3 projects that were very critical performance, either operating strategy or acoustical performance. The design team was not comfortable with any manufacturer that didn't have these testing capabilities. So we were awarded 3 separate contracts that were each fairly significant, so that these would be tested. One of those was the Jacob Javits Convention Center addition in New York City. We were awarded a contract for 26 very large units, 3 medium-size units, so 29 units total. And this was based on our ability to prove acoustical performance and thermal performance and airflow performance all simultaneously under load. It's something that's unique to our lab in that the largest unit was 77 feet long, 12 feet wide and 8.5 feet tall, and it had a capacity of about 180 tons of air conditioning capacity. And so no one else in the world is able to test that unit to those test conditions they requested. And so that was paramount in us landing that order. We were competing against one of the legacy top players in the market that has, we'll say, political connections that we do not have in New York City. So we won it strictly based on our technological capabilities with this lab. Another project was Nike. We had completed a project for them a couple of 3 years ago for their world headquarters. It was a prototype design from not only the equipment design, but also the system type design. It really haven't ever been done before. So there was a lot of in-the-field learning in the commissioning process. When it came time for their next addition on that campus there in Portland, it was called the [ Merch ] building. We were awarded that because we were able to bring those units into our laboratory and test them at 14 different points of operation. And these were, again, large units, larger than the environmental chambers of any of our competitors. So we were able to do that and land that project, again a very, very substantial project. The final one is called One Willoughby tower. It's a high-rise office building in Manhattan. And again, this was because of our acoustical capabilities along with our airflow and thermal performance capabilities in our laboratory to be able to do that simultaneously. So there's 3 significant projects that contributed to 2019 revenue that I can identify from the lab. The go-forward on the lab -- there is 3 primary purposes. Each will have their own contribution. Some will be very tangible and measurable. Some will be a little less so. So this witness testing like I described for Javits, One Willoughby and Nike. We're assigning a value of about 1/3 of the utilization of the lab in chamber time for that type of activity. 1/3 of the activity we are scheduling for development of new innovative ideas. As I mentioned earlier in the call, we have various component manufacturers that manufacture things like fans and compressors and coils that are bringing new innovative ideas to us because of the qualified staff that we have, because of the qualified laboratory that we have and the capabilities we have to get that done that don't exist elsewhere in the world. So that will propel our products to maintain our leading position as the greatest value equipment in the HVAC industry. And then the third and final use of the laboratory is the vast majority of our products are certified by AHRI. And AHRI tests these units from time to time. There's a certain percentage of every product model type that they pull to test in their lab. So it's incumbent upon us to -- for us to test those things also to make sure that we're in compliance with our published ratings on the equipment. So that kind of sums up what we're going to do with the lab.
Okay. I guess my next question would just be -- I mean I think you had some recent materials cost tailwinds here. Recognize you still have got some of that old pricing in the backlog. Is there a way to kind of sort out either in dollar terms or percentage terms what the drag was from production and efficiencies versus presumably some tailwinds from materials cost front in the quarter? Just so we can get a better feel of kind of the underlying business going forward.
Sure. About 65% of all the materials we purchase are 90 basis points lower cost today than they were a year ago. The other percentage -- we don't have as good a tracking metrics because there is just a myriad of small purchases. It feels like those are stable, though. Our cost has been increased. Salaries and wages has been one significant issue in this low unemployment, I guess you'd call it, environment that we're operating in. What are we here, Scott, 3%?
3.2%.
3.2%, and so we're competing for workers. So we've raised our entry-level wage considerably this year. What is that percentage, Scott?
Well, I remember it was 9%.
That's what I recall as well, about 9%. And that entry-level position is roughly half of the people on the plant floor. So there's a considerable number of people that got a 9% wage increase. And of course, as you go up through the ranks, nobody is standing there without some wage increase. So that's put some pressure on us. The real burden in Q3 was that we didn't meet revenue projections, revenue goals because of the production status of some of the sheet metal equipment. So we didn't get great absorption on some of the fixed cost. So now that we have -- we actually bottomed out in August with the lowest production rate on a daily basis that we had all year, and we finished September at nearly the peak of what we had ever done, and we continue to accelerate past that. And so as we keep adding more of these sheet metal machines, we'll be able to increase the revenue. And when we increase revenue, we'll get more absorption. So I think that the wage rates will be somewhat offset by the materials when you look at everything in the proper proportion. And so that will stabilize going forward. And so the additional price increases that we get that are in the backlog, that are not yet produced, those will be accretive to the bottom line.
Okay. And I guess given the challenges this last quarter, but the fact that you've got -- it seems like you've got more things in order here. Would you expect a sequential step up in revenue?
Yes. Yes. Monitoring on a daily basis, we've restored to our peak level production and begin to accelerate past that. And so from a revenue standpoint, yes, we look to have a step up there. So that will get some better absorption of those fixed cost. Plus we're getting more of the price increased backlog out on the plant floor.
Okay. All right. My final question is just more -- I'm curious from, call it your boots on the ground. What do you hear about the end markets? How is kind of quotation activity, bidding activity out there? And so you general sense on the nonres markets.
I'm so glad you asked that. I don't know how it is for our competitors. But for us, the demand outstrips our ability to produce, and that's why we've got such a strong emphasis on getting our production capabilities increased. That's why we've got the CapEx for the new building. That's why we've got the CapEx for new sheet metal equipment. We believe that there is a lot of runway left out in front of us with our sales channel that we have. They tell us how much that we've missed this year because of lead times. So as we are able to bring lead times in, they're all confident that we can recapture that going forward. So I'm very strong on what's going to happen for 2020. Now, this election and impeachment talks and all of that can certainly have an effect. But when we're sitting there with $165 million backlog, that represents about 4 to 5 months of production and orders haven't quit coming in the door. So the backlog's kind of stabilized around that point or really close to it at this point in time. So I think it's going to be a seesaw battle. As we increase production and shorten lead times, I think more orders are going to come. And so that backlog's just going to ebb and flow a little bit. I don't know what the equilibrium is going to be.
[Operator Instructions] Your next question comes from Joe Mondillo from Sidoti & Company.
So just to jump on that last line of questioning. When I look at the AHRI shipment data, it looks like you ordered a 200- to 800-ton shipments recently, which I believe is sort of your sweet spot. It looks like that market -- the shipments in the market have been actually flat to down actually. And your orders in this quarter were up, I believe, 25%, the orders were up, and the backlog's up 30%. So I'm just wondering what -- in terms of your opinion, how are you able to generate such strong 25%, 30% growth when the market is flat to down seemingly?
That's been our secret sauce for a long time, Joe. I think that the years that I spent in the sales channel have equipped me to know exactly what appeals to not only the end-user customer and their markets, so that I can help us position our products accordingly, but it also helps me to understand what people that we should ally with as our sales channel partners. As we've had discussion before, I spent years for the company as a consultant helping them with the sales channel. And then when -- tomorrow is my third anniversary as President. And as I have gone along these 3 years, I've continued to refine that sales channel. And right now, my opinion is, and I know about the independent sales channel for a lot of manufacturers, there are no manufacturers that have a sales channel as good as ours, period. I'll put ours up against anyone's. And I think that's a big part of it. So we give them the tools they need to win, things like the new laboratory, the NAIC laboratory. That gives them tools to win. I just earlier told you about 3 projects in particular. Well, our sales channel partners, they use those as case studies when they're talking to their customers. You're out there trying to sell a complex project with acoustical considerations, and they hand the case study of Jacob Javits to their prospective clients, say, well, they met Jacob Javits Convention Center requirements. I think we can meet yours. So the confidence level swells. So again, we're giving them a lot of great tools to be successful with, but we also have the very best players in that arena.
All right. And I just wanted to also get an update on -- I assume given the inefficiencies that continued through the third quarter, that lead times continue to be extended, if not maybe extended a little further than earlier in the year. I'm just curious, given these extended lead times that we've seen for a while, what's the update with customer feedback, customers going elsewhere? What's the update there?
Well, of course, you can find a story for just about any way you wanted to spin it. There is no doubt customers have gone to other manufacturers as a compromise because we couldn't meet their needs. But more so -- and again, I attribute our sales channel and their competency. For instance, our school business, normally, we don't start seeing much spool up in orders until sometime in February, maybe March. For the upcoming summer season, we've already begun to see orders. And next week, I've got several people coming in here with their customers to sit down and talk schedules when they need to have their orders in, in order to meet their schedules. So they are becoming longer-term planners, so they've worked around that. But I'm proud to tell you that 2 weeks ago, we announced a reduction in lead time because we've turned that production rate around and increased production. So about half of the units that we produce, we reduce the lead time 2 weeks, and that was -- that took place 2 weeks ago. We review that every week for applicability. And I'm going to say that over the next 6 weeks that we will have other announcements on reducing lead time, again, because of the increased production capability that is coming into play. So it's been manageable. It's been difficult. And yes, there's been some lost opportunity. But there's been an awful lot of creativity in the sales channel and with their end-user customers that are very loyal AAON customers that say, "Hey, it's worth waiting for, and let's just make sure we're ordering it soon enough."
Yes. Well, it certainly seems like it's coming through with the orders in backlog. So it doesn't seem like it's affected it too much. In terms of -- just to clarify where you are with production, operational efficiencies with the new Salvagnini machines and capacity and such. Did you say September was running at the highest efficiency of the year?
No, just short of. We are currently running at the highest efficiency of the year in dollars going out the door, and we're doing it with one. So we peaked clear back in April. Our best dollars per day going out of the plant here in Tulsa occurred in April. And then we had some deterioration in May and it just continued to deteriorate as we were trying to push those machines. And then when we finally took the machines out, it bottomed out in August. Then we got that activity kind of cleared out. We got some new machines in place. By mid-September, we had partial use of the first ones. And there were 3 machines put in place. And as of today, we've got about 1.75 machine capability with the full 3 machine capability forecast to be next week. So then, we're adding about one machine per month to add 5 more machines. So in the month of October, we're back at our peak -- slightly above the peak that we established in April, and we're doing it with 100 fewer people as well. So there's been a lot of efficiency gain.
Something that I've been thinking about also is with the higher capacity, the higher volumes, do you have to bring on new personnel going into 2020? And if so, does that create any lingering inefficiencies as you have to sort of train new personnel? Is that a factor at all?
Well, we have a very slight turnover at the entry level, a few people per week. So we'll maintain that. For several months now -- about how many months, Scott, have we been at that stable number we're at right now probably?
I'll say three months since stable.
Yes, 3 to 4.
And the turnover has been on a downward trend. So we think we've seen the worst of our turnover problems. But we do have substantial overtime in our Longview, Texas operations, which we're replacing with some head count increase.
Yes. So in the Oklahoma operations, we've already proven when we get the sheet metal out to the plant floor that we have additional production capability with those people. And we will have to add a few, but it's not anything consequential. It's not like we need to add a huge percentage. We will have some slight head count growth as we get sheet metal production growth. But it's not anything that is out of the ordinary that it's going to be difficult to overcome.
Okay. And then so last question for me, and I'll hop back in queue. What would your -- if you had to sort of think of something, what's the biggest risk of getting back to sort of the 30%, 31% gross margins in 2020?
Well, we've got overhead that we didn't have in those 30%, 31% days. We've got overhead with a startup business in the water-source heat pump. We still don't have -- even if what looks like is going to be about $25 million this year, that's still not enough revenue to absorb the overhead of depreciation and other things on that line. So that one dilutes us a little bit. The new laboratory, that one dilutes us a little bit as well. Now, there's an intangible long-term benefit that I described earlier that helps propel that growth. So you have to invest in order to grow. Those are investments. We believe we're targeting 28% to 32% as the range that we're going to manage this to. And once we achieve -- we're at 24% right now. Wasn't it? If not, what this quarter was? Yes. We were 24% now. We've got some price increases that haven't yet hit the plant floor. It was a 5% price increase, which we got -- it was in June. We got part of it in the third quarter. So I want to say that maybe 3% to 4% would be accretive.
In December.
In the December numbers. And then in December...
We have a small increase.
Yes. We have a small price increase on select items coming up in December. So we're trying to manage to get to that 28%. And then as we absorb this fixed cost overhead with the additional production capability, then I think we'll hone this knife. And if we were to gradually go from 28% up through the year of 2020, then that's a reasonable expectation, but it's not going to be wake up tomorrow and it's here.
Your next question comes from Chuck Myers from Myers Family Office.
I was hoping -- I had a couple quick questions. One was, on the last call, you were nicely able to give us what the real-time backlog was. Can you do that again today? What is the backlog as of today?
I was told that I'm not supposed to be doing that, actually. That's forward-looking. So I'm not going to do that again. I got scolded the last time actually.
Well, well, okay. What...
I will tell you that...
As of today, but okay.
Well, I will tell you that it's not had a substantial change from the end of the quarter. How is that?
Okay. Fair enough. I wanted to make sure I was understanding this correct as it pertains to Joe's question because clearly the backlog is still up substantially year-over-year, which is great. Though, it looks like, in this last quarter, obviously, it was down about $14 million from the end of Q2, which, if you impute that as to how much sales were written in the quarter, it was just about $100 million or maybe slightly below, if my calculations are correct. Is that -- is there -- is it your sense in Q4 is there any seasonality? Meaning is Q3 usually -- is there any seasonality to sales written in general or not?
Historically, there has been seasonality. The anomaly occurred when I came here, and there were a lot of things that we were able to put together that we'll call it stored energy in the flywheel that I was able to get out. And so we didn't have the seasonality up until now. And so now the curve looks more traditional looking back for the last many years. There has been some seasonality to it.
In this backlog 4 years out, we expect that.
Yes. So, right. As Scott was pointing out, if this backlog starts to burn down, then we will pick it back up. The luxury we have now that we have not gone into Q4 and Q1 of the following year we have in the past is we've always gone in at kind of a precarious level where you had to be careful you didn't burn off so much backlog that you didn't have anything to build. We don't have that problem. There is an intent to burn the backlog down to get the lead times shorter because our lead times, in general, are about 2x what they need to be.
Okay. Because I was just looking at the sales written for each of the last 4 quarters starting in Q4 of 2018, and it was about $137 million, then $128 million, then $132 million last quarter, and then down to, what, $99 million this quarter. Based on what you're saying, is it reasonable to think that sales written in Q4 would be higher or lower than the $99 million we did this quarter?
They're going to be slightly higher for the reason that we shortened up some lead times. And like I said earlier in the call, we've got some customers that in the face of the longer lead times are trying to get their orders in sooner.
Okay. And then my last question just going back to -- I think this is one of Joe's questions -- on the gross profit margin. It just seems like you're going to end this year, just based on where the first three quarters were, at something like 24%, 25%, something like that. And obviously, we're all expecting some reasonably large sales gains over the next year as long as something doesn't strange happen in the economy, et cetera. But based on what you just said in response to the last question, it sounded unreasonable to me to think that we would be back at 30% gross margins for next year, and that it's going to take maybe a few years to get there. Did I understand that correctly or did I misunderstand and actually 30% gross margins might be achievable next year?
Well, for the year, as a whole, I don't believe we can do that. If you look at it quarter-by-quarter and said, are we going to incrementally increase the gross margins such that we end the year in the range of 30%, I think that might be reasonable to expect.
And just to make sure we understand the order of magnitude -- this will be my last question. So if you expect that -- we did, I think, 24%, 25% gross margins this quarter. Let's say, they go up 1% or 1.5% every quarter getting to 30% by the end of next year, so you average out at, I don't know, 28% or something for next year. What sort of run rate revenues do you think you need to be at to get to that gross margin?
I think we can get to the gross margin, what you're talking about, with our current revenue rate simply because we have the price increases going into effect. And we have a good control over our labor cost at this point and have seen that kind of stabilize. Certainly, if we're able to increase revenue on a quarter-over-quarter basis in the coming year, we might improve faster than we anticipate as we absorb our overhead.
Okay. Great. I appreciate the clarification on the gross profit margin just so we're sort of all on the same page, and no one's disappointed as we sort of ramp slowly to that 30% goal over time.
Yes. So I'm going to answer one more question for you that you've asked about the Q4 bookings, orders in the door. I just had a young lady hand me a note what we booked today and kind of how we finished out the month. So I'm very confident in the statement that Q4 bookings will be higher than Q3. We've already seen the effect of shortening the lead times, and we've also given some indication to our sales channel that we're potentially going to shorten lead time some more, so they're engaging with some more commitments. What we've booked through today is very nice.
We have no further questions. I turn the call back over to the presenters.
All right. I'd like to thank you for participating in the call today. We'll talk to you in February of 2020 for our Q4 '19 results. Have a nice day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.