RBC Bearings Inc
NYSE:RBC
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Earnings Call Analysis
Q1-2025 Analysis
RBC Bearings Inc
RBC Bearings began their fiscal year with a robust performance, showing a total sales growth of 5%, reaching $46.3 million. The growth was predominantly driven by their Aerospace and Defense (A&D) sector, which saw an impressive 23.7% increase, contrasted by a slight 3.5% contraction in the industrial segment.
The Aerospace and Defense sector's contribution stood out, expanding to $149.1 million from the previous year. Within this segment, the defense sector led the way with a 38.1% growth rate. This robust performance is anticipated to continue throughout the fiscal year, ensuring strong revenue streams from A&D.
The industrial side faced challenges, with sales decreasing by 3.5%. Specific weaknesses were noted in the oil and gas, semiconductor machinery, and general industrial markets. However, there is an optimistic outlook for the second half of the year, with expectations of market strengthening.
A standout achievement for the quarter was the strong gross margin of 45.3%, representing approximately a 2% increase from the previous year. Enhanced plant operations, completed synergies, and improvement projects were key contributors to this performance. Adjusted EBITDA also saw a significant increase of 11.3%, driven by plant efficiency and favorable product mix.
RBC Bearings demonstrated effective cost management, with net cash flow from operating activities rising to $97.4 million, up by 57.9% from the previous year. This financial strength allowed the company to reduce its debt by $60 million, bringing the net leverage ratio to 2.1x. The focus remains on continuing to pay down debt and improving the financial structure.
Looking ahead, the company expects consistent performance from the Aerospace and Defense Group, with normal fluctuations due to seasonal factors. The industrial segment is projected to rebound in the latter half of the year. Strategic investments in plant capacities and workforce training are in place to accommodate anticipated demand. Additionally, the upcoming automatic conversion of Series A mandatory convertible preferred stock is expected to be accretive to earnings and significantly boost free cash flow by reducing annual cash outlays by approximately $23 million.
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Greetings. Welcome to RBC Bearings Fiscal 2025 First Quarter Earnings Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Moffatt, the Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us for RBC Bearings Fiscal First Quarter 2025 Earnings Call. I'm Rob Moffatt, Director of Investor Relations. And with me on the call today are Dr. Michael Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob 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 due to a variety of factors. [indiscernible] RBC Bearings recent filings with the SEC for more detail action 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 now turn the back -- the call over to Dr. Hartnett.
Thank you, Rob, and good morning to everyone, and thanks for joining us. I'm going to start today's call with a quick review of our quarter and fiscal year and hand it over to Rob for some detailed color on the numbers. And then I'll finish with some high-level thoughts on the industry, RBC's positioning and some -- in our fiscal '25 outlook.
First quarter sales came in at $46.3 million, a 5% increase over last year. Strong performance from our aerospace and defense sector, showed a 23.7% expansion where our industrial business contracted slightly at 3.5%.
In Aerospace and Defense, sales expanded approximately $30 million quarter-to-quarter year-over-year with $149.1 million the quarterly result. The defense sector led with a 38.1% expansion rate, unquestionably we can expect continued strong showings from our A&D sector through the balance of the year.
On the individual side, we held our own against our peers, showing a small contraction of 3.5% of sales. Sales were $257.2 million.
Weakened sector performance was seen in oil and gas semiconductor machinery in some general industrial markets. We currently expect and plan for these markets to strengthen in the second half of the year.
Adjusted gross margin for the quarter came in at $184 million, 45.3% of sales and almost 2 percentage above last year. Clearly, our manufacturing plants are executing extremely well, operating well within our sweet spot in this regard and many completed synergies and improvement projects contributed to this performance.
Still many more productive concepts and plans are in the breach and/or active today. And these are very productive and promising areas for us to prospect.
I'd like to acknowledge and thank our teams for this quarter's performance. Clearly, it is they who are the reason for RBC's continued successes. As a result, adjusted net income was $2.54 a share and adjusted EBITDA was 33% of revenues. Obviously, we're very pleased with this performance and really can't think of a better way to start our fiscal year.
Net cash provided by the operating activities was $97.4 million versus $61.7 million last year, a 57.9% increase. This allowed us to reduce debt another $60 million during the period, bringing the EBITDA to net debt ratio to approximately 2.1x, another sweet spot. Overall, we expect more of the same performance from the Aerospace and Defense Group through the year-end. Some ups and downs in this regard as a result of normal seasonal impacts of holidays, vacations and supply chain.
On the industrial side, we are planning to see strengthening in the second half of the year and are setting our plans today accordingly. RBC is well positioned to support additional demand from both industrial and aerospace defense customers as well as space customers. We have the production capacity, the trained and skilled workforce forces in place. and are in the process of augmenting plant capacities to accommodate additional business awards. I'll now turn the call over to Rob for more details on our financial performance.
Thank you, Mike. As Dr. Hartnett indicated, this is another strong quarter for RBC. Total sales growth of 5% in the quarter was surpassed by adjusted EBITDA growth of 11.3% and adjusted EPS growth of 19.2%. Along with that, we had free cash flow growth of $0.61 year-over-year. This was driven in large part by strong gross margin expansion, with first quarter gross margin as a percentage of sales coming in at 45.3%, and an expansion of roughly 190 basis points year-over-year.
The 2 biggest drivers here continue to be the ongoing tailwinds from [ Dodge ] synergies and increased utilization of our aerospace manufacturing assets. We also saw tailwinds from strong plant efficiency expedites in a favorable mix.
On the SG&A line, we continue to make investments in our future growth. This includes sales force additions to support the international expansion that we have highlighted as part of our Dodge strategy and the resources needed to support that growth, including IT infrastructure and back office support.
With that said, the rate of growth on the SG&A line moderated versus the year ago period, and we were able to extract a modest amount of leverage this quarter. Going forward, we expect SG&A as a percentage of sales to increase in Q2 and Q3 before normalizing in Q4.
This led to adjusted EBITDA of $134 million this quarter, up 11.3% year-over-year an adjusted EBITDA margin of 33%, which is up almost 190 basis points versus last year's 31.1%. The EBITDA margin is a new record for RBC, eclipsing our recent peak of 31.7% in the second quarter of fiscal '24. The achievement of this milestone was a multifaceted effort with credit being deserved across multiple layers of the company, including the Dodge team for their efforts in extracting synergies into our operations and plant management teams for running at very high levels of plant efficiency during the quarter.
The tax rate in our adjusted EPS calculation was 22.4%, a moderate year-over-year headwind versus last year's 22%. Altogether, this led to adjusted diluted EPS of $2.54, representing 19.2% of year-over-year growth, an impressive result on revenue growth of 5%.
In terms of cash, free cash flow of $88.4 million ran at 144% conversion rate and grew 61% on a year-over-year basis. This was fueled by strong net income growth and improved working capital performance. As usual, we used a meaningful portion of the cash [indiscernible] to continue to pay down our term loan. We repaid $60 million of the loan this quarter and continue to expect to repay $275 million to $300 million total for the year.
The balance on the term loan at the end of the quarter was $615 million, leaving net debt at $1.05 billion and trailing net leverage of 2.1x. We continue to expect trailing net leverage to be well below the 2x mark exiting the fiscal year, leaving ample room for a return to M&A should the right deal come across our path.
As a reminder, our Series A mandatory convertible preferred stock is expected to automatically convert on October 15, 2024. Using Q1 results as an approximation, the net impact of this conversion is expected to be slightly accretive to earnings per share, assuming conversion at the current share price. It will be more meaningfully accretive however, to free cash flow as the conversion will remove the cash dividend payment reducing our future total cash outlays by approximately $23 million on an annualized basis. This is roughly 9.5% of fiscal '24's total free cash flow.
In closing, this was another strong quarter for RBC. We remain focused on leveraging our core strengths in engineering, manufacturing and product development to drive organic and inorganic growth, continued margin excellence and high levels of free cash flow conversion. With that, operator, please open the call for Q&A.
[Operator Instructions]. And our first question is from the line of Kristine Liwag with Morgan Stanley.
With industrial end market kind of starting to decline here, can you provide more content in detail about what you're seeing in the different end markets and exactly how far away we are from a trough and what we'd have to see to see improvement? Because it seems like the issue in the quarter is just a little bit of weakness in the top line. But that said, I mean, with a 45% gross margin for the business that's still pretty incredible performance.
Yes. Well, when we're looking at the industrial markets, Kristine, there's -- there's a few things that where we saw a substantial amount of softness, and we've seen that continued for almost 12 months now. And that's in semicon and oil and gas. And on the semicon --
Ladies and gentlemen, this is the operator, please stand by. We're experiencing technical difficulties. We will resume momentarily.
[Technical Difficulty]
Ladies and gentlemen, thank you for standing by. Gentlemen, you may continue. Kristine, please continue your question.
Where did I leave [indiscernible] to Kristine?
Great. Mike, you were talking about semiconductors is where you've seen the weakness in oil and gas, and that's where that line dropped off.
Yes. Okay. So those are the 2 majors. The oil and gas is sort of -- we have a major customer, we had a planning problem and [ got ] too much a year ago and now is sort of liquidating that position. We expect him to get better over the -- as the year progresses. And the rest of the business, there's a slight downward buy on the rest of the market. Some positive, some negative, but overall [indiscernible] down.
Great. And just to follow up in terms of where we're seeing the weakness. Are these mostly on new builds? Or was the slowdown in buying also in the aftermarket if there was a little bit of an [ overage ] in buying before?
Yes. I think it's, by and large, it's a slowdown in the aftermarket in the various industrial sectors that support the aftermarket.
I see. And then as you look at the recovery for each of these end markets, which quarter do you think industrial revenue could potentially trough? And do you have any visibility into that?
If I had the visibility, I would probably know what backs to buy and which stocks to sell, right? I don't have that kind of visibility. What we do have is economic models that sort of give us a general overall direction. And those economic models are saying -- have been telling us that it's flat through our third quarter and very strong in our last quarter. And that's sort of how we're piloting -- the piloting the [ tip ] today.
Our next question is from the line of Michael Ciarmoli with Truist Securities.
Maybe just to stay on industrial. I guess the quarterly results on revenue came up short of your guidance. Was that -- was the industrial weakness, the biggest driver of that delta? Or did anything else kind of materialize?
No. That was the biggest driver. It's just -- it's all about consumption rates -- industrial consumption rates. Our estimates for those rates at the beginning of the quarter and the actual consumption that we see during the quarter creates [ severance.]
Got it. Got it. Do you have that -- I guess ever since the acquisition of Dodge and the amount of industrial revenues that go through aftermarket distribution now is pretty sizable at the company level. I mean do you have the level of visibility into the distributors to know if there's maybe a more pronounced destock in any of these industrial sectors? Or do you even have some sort of min-max thresholds? Will you have a certain base level of demand that you're shipping to in the industrial channels?
Well, we have probably the same information that you have. I mean -- some of these are public companies and they published quite detailed information on what their situation is. And basically, I didn't -- I don't think there's any much destocking going on.
I think part of the year-to-year comp delta there was that a year ago, we were still benefiting from a recovering supply thing and cleaning up backlog. Those are products that have been on the order book for an extended period of time. But as a result of supply chain difficulties, we couldn't complete those orders.
And so last year, we probably benefited from some number that it might be as high as $10 million of that backlog reduction. And this year, we -- supply chain is normal. And so we're just living on the economic [ tension ] rate. And as is our distributors, I mean, I don't think there's any serious feedback in going on in there.
Do you think as you look out for the remainder of '25, I mean, you had a tough comp year-over-year in the first quarter for industrial, but they certainly get easier. Do you think industrial grows for fiscal '25? Or do you think it's going to be sort of low single-digit kind of pressure all year?
Our plan today [ as it ] growing. And that's -- we're expecting, as I said, a recovery in [indiscernible], we're expecting a milder recovery in oil and gas. And then the rest of it is about industrial economic consumption rate.
Okay. Okay. Got it. And then just real quickly, and then I'll jump off here. Any more detail on the year-over-year growth rates by channel and aerospace, OEM aftermarket distribution, I think you called out defense already?
Yes. I think Rob can give you those. He's looking at it now. So I'll turn the call over to Rob.
Yes. They were very consistent. Like they were both right around at [indiscernible] per OEM, [ 23.9 ] [indiscernible]. So very consistent.
Our next question is from the line of Pete Skibitski with [ Global. ]
Nice performance Mike, just on the torrid growth in defense, I think you said 38%. Was there a few programs that are helping to drive that? Or because you're just growing just so much above the market, above all the OEMs. So I'm just wondering if you can give us more color on what's driving that.
It's like the fourth quarter in a row that type of really strong growth. And I don't know if you can talk about pricing at all. In terms of pricing maybe finally catching up with past inflation because I know you're on a lot of LTAs as well. So just if you could comment there.
Yes. Just to get the pricing thing out of the way, we're not saying -- I don't think we're seeing any benefit from that right now. A lot of our contracts roll over in '25 and '26. So we're really still living with prices that were probably set in '21, maybe '20, maybe '19.
So that's basically -- that's headwind for us. But there are several major programs that we're involved with right now that are going to continue to drive that kind of expansion. And it's a -- I think the year-to-year comps will become more difficult because this started about a year ago.
But when you talk about the need to build submarine, that's not going away for 5 or 10 years, probably 10 years. That's going to be very demanding on us. Missile, the [indiscernible] joint strike fighter, demanding, long-range bomber, demanding. So there's just a lot of really big programs that we're working on. And also, the cancellation of the viral program for the [ Skout ] helicopter that impacted the [indiscernible] course and [ Lockheed ] as a result benefited the other [ ship ] that we're on is because the other ship we're sort of in, to some extent, a [indiscernible] the [ Apache Black Hawk, ] those are major important platform for us and the rest of the world doesn't know whether they could buy those platforms are not based upon where the DoD money was having.
And that environment has cleared, and there's a lot of interest for an interest in those platforms. So we're -- it's kind of a perfect one for us on the defense side.
Yes. Okay. That makes sense. Just one follow-up for me, maybe on the commercial side. It sounds like Boeing is at about on the [ MAX, ] they're at about 25 per month now in June and July. Can you guys just remind us where you were over the past couple of quarters? I think they've been maintaining you like in the 30s or so. Does that sound about right?
Yes, that sounds about right. I think the -- I think our planning now is probably at a 33 rig. Although they've indicated, they'll be at 38 by the end of the year. And the new CEO has agreed with that. I hope when he goes up, it is [indiscernible] he agrees with it even further.
But -- so yes, I think we have a very modest expectation built into our planning with regard to Boeing demand. And that seems to be the way playing out.
Yes. And if they make that [ 38% rate ] by the end of the year, I imagine your -- potentially you could accelerate, I guess, into fiscal '26, it sounds like.
Yes. Well, I think they've got to get the [ FAA ] to approve a step-up behind 38, assuming they can get to 38%. And so obviously, our parts for the most part, have to be available 6 months ahead of -- that's our planning cycle ahead of the aircraft assembly rates. So that's kind of moved -- that moved April into October on the 38. So we should be really, really conservative using a [indiscernible].
Our next question is from the line of Jordan Lyonnais with Bank of America.
On M&A, could you guys give any color on deals in the pipe you're seeing any changes in size or scope? And two, if you're looking at anything to get more capacity if the A&D side keeps growing at this rate?
Well, I think we're seeing A&D like companies coming to market and we're investigating it with RBC. We have really nothing to report at this point. Obviously, if one of those companies does come to market, they'll likely come to market with their own capacity. So they probably won't tax ours.
But there's just a lot going on in the A&D world, and we can either we can -- and we're very pleased with our growth in that sector and [indiscernible] in that sector for the next several years. So we're being cautious and conservative about what we take on.
Our next question is from the line of Steve Barger with KeyBanc Capital Markets.
Mike, seeing gross margin above 45% with industrial down 3.5% is great performance.
Thank you.
Sure. You earned it. Was that all mix in Aerospace? Or was there something unusual in there?
No. Aerospace contributed. Its margin is improving. I think it's -- as I said, we have a lot of contracts that were in our way through that were inked in '19, '20 and '21 that are a little bit of a [indiscernible]. We're becoming more efficient in the execution of those contracts just because there's more volume and more absorption as a result of that.
We have also better methods and a little better capitalization here and there to execute some of those designs. So I would say it was very solid performance on the industrial side that really carried the day.
So Industrial margins were up even against negative 3.5% organic?
Yes. That's right.
And what in industrial drove that? Because that's a pretty big absorption headwind to overcome, isn't it? Like what was it mix that made that so rich?
Well, we've been talking about synergies for a long time, and we're starting to see it. They did have a favorable mix this quarter. I can't say that we're going to see margins like that forever, but we saw in the first quarter.
I think the neighborhood that we'll probably end up living in is more like 44% when the year is all done, but we'll see. That's hard to predict. So there's a lot of synergies that went on.
Mix was favorable. [ Plant ] efficiencies were absolutely better. There's no question about that. I mean, they're operating in their sweet spot, and we've had methods improvements. And we've had improvements in supply chain cost structure. So everybody sort of has a role when they come to work in the morning and a little piece of each one of these issues. And they [indiscernible] it makes a difference.
So I guess you're guiding fiscal 2Q gross margin down 100 or 200 basis points against what is obviously a tough comp. But is there any specific thing causing that sequential decrease?
I think we have fewer production days in Q2 and Q3. That's been pretty consistent over time. So you have a little bit of a headwind there. And then you couple that with the favorable mix we had in the first quarter, you just added up to this is where we're seeing things in Q2.
And the right way to look at it, it's probably more on a year-over-year basis, right, and you don't know the range is calculated from expansion on a year.
Understood. And then on the revenue side, Aerospace is up 24% against a 21% comp. You talked about all the things that are going right there. Do you expect 20%-plus growth again in 2Q?
We're not planning for it, but I can't say that it won't happen.
Well, I guess the question then is, you expect industrial to recover in the back half. Do you think that's up sequentially from a revenue standpoint? Or is that more likely down given some of the softness that you're seeing right now?
Yes, that's more likely down.
Our next question is from the line of Joe Ritchie with Goldman Sachs.
This is Vivek Srivastava on for Joe. I just want to start with a more long-term question. Your EBIT margin this quarter, 32.9%, the highest we've seen -- you've previously talked about mid-30s long-term EBITDA margin, which is not far away from where you are today. So just wondering what kind of updated long-term margins you have your eyes set on and just how to think about the margin improvement part from here once the industrial businesses do start inflecting positively?
We're thrilled with the 33% that we achieved this year. We're far ahead coming out of the gate of what we talked about Q1. We talked about where we're seeing gross margins into Q2. Our mission is to continue to squeeze the lemon to expand margin every quarter and invest for our ability.
So we're not looking to put out long-term guidance, but we are telling you that we're continuing to drive [indiscernible] that EBITDA margin. And I think we have opportunities in different pockets.
That's helpful. And maybe just a follow-up on that. As your margin continues to improve, industrial growth, your long-term target, probably close to 2x GDP. Is reinvesting within the industrial business, something that could potentially accelerate a bit more from here to return to that 2x GDP growth target?
Can you clarify? I'm sorry.
Yes. Just given you're getting such strong margins right now, will reinvesting back in the business for growth be something that could potentially accelerate from here on?
Well, I think those are 2 different things. We're reinvesting in the industrial business for cost reasons. In other words, we're trying to reduce our cost of sales by putting in capital equipment that will make our [ plants ] more efficient and incorporate manufacturing processes that we don't have in-house today and are very expensive to buy in the outhouse.
So that's ongoing, and we're making not in substantial investments in that -- those kinds of [indiscernible]. And so that's -- that's where we're reasonably [indiscernible] of that, that will accrue to gross margin over time.
In terms of growth, the industrial business on an annual rate now is probably running over $1 billion. So in order to really impact that kind of number, to get the internal growth mechanism performing at a measurable level requires some pretty big projects. And ultimately -- and so we have our eye on some pretty big projects. But ultimately, those bigger projects take time to implement. And so we've just got to work through that. And that's sort of ongoing right now.
That's very helpful, [indiscernible]. Maybe one last question from me. Just on the backlog, I noticed that in the press release, you provided backlog beyond 12 months, but we didn't see backlog due within 12 months. Just wanted to understand the rationale behind that? And just any color on the backlog due within 12 months.
Yes. We made a strategic decision and communicated last quarter that from here on out, we were just going to be presenting the full on backlog because that such a significant part of our business, especially on the defense side, at this point, we think that's the more appropriate way to look at our overall backlog position.
Our next question is from the line of Tim Thein with Raymond James.
Just -- I guess one for me on the gross margins and a lot obviously discussed here in terms of the outlook for the second quarter. But thinking in terms of, I believe, the expectation coming into the year was that you may see more of a lift in the back half of the year as you better absorb some of that aerospace fixed capacity and the Dodge synergies kick in even more.
But a, the industrial economy obviously being weaker, does that -- does that change the outlook in terms of -- on the Dodge side? And then I guess, related to that, was there some maybe pull ahead that maybe some of those benefits that you're expecting more in the later part of the year, maybe they came earlier as a contributor in the first quarter.
So I guess, simply stated, do you still -- is the expectation still that there's room for more -- even more kind of a second half lift from some of these drivers?
Right now, we continue to expect the second half lift. One of the things that attracted us to do that when we bought that is when you look at the revenue performance at Dodge over a series of years, through various economic cycles. It's a very low beta company.
It's so integrated into the U.S. infrastructure that when you're pouring your cereal in the morning, we actually had something to do with that. When you're driving your car over a street or a bridge, to get to work. We actually had something to do with that road.
So we're -- and whatever we supplied only lasted a few years before nature had its way with it, and we had to replace it. So Dodge has a very strong recurring revenue driven by human consumption in North America. And so whether the economy is expanding or it's contracting slightly Dodge's business is probably going to performed well through the cycle. In terms of what we expect for the rest of the year, we expect the [ semicon ] to pick up, and we expect oil and gas to recover. And if there's more tension in the Middle East that interferes with the production of oil, it will -- we will definitely feel the acceleration in our business. So that's sort of where the thing sits right now.
Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the call over to Dr. Hartnett for any closing remarks.
Okay. Well, I'd like to thank everyone for participating today, and we look forward to speaking again to you in the fall. So a good day.
This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.