RBC Bearings Inc
NYSE:RBC
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Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 RBC Bearings' Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 speaker today, Brooks Hamilton of Alpha IR Group. Thank you. Please go ahead, sir.
Good morning, and thank you for joining us for RBC Bearings' fiscal 2020 fourth quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; and Daniel A. Bergeron, Vice President, Chief Financial Officer and Chief Operating Officer.
Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. These factors are also described in greater detail in the press release and on the Company's website. In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website.
Now I'll turn the call over to Dr. Hartnett.
Thank you, Brooks, and good morning. Net sales for the fourth quarter of fiscal 2020 were $185.8 million versus $182.2 million for the same period last year, a 2% increase. The fourth quarter of fiscal 2020 sales of industrial products represented 36% of our net sales; and aerospace products, 64% of our net sales.
Gross margin for the quarter was $76.6 million or 41.2% of net sales, a record reflecting years of work on methods improvement, improvements in capitalization and mix management. This compares to $73.0 million or 40.1% for the same period last year, a 5% increase overall.
Operating income was $43 million, a 23.1% of net sales. EBITDA was $56.3 million, a 6.2% increase over last year. The quarter started as the best of times and finished with the plague of government interference in the economy and COVID uncertainty.
We were able to execute a normal quarter from an operating perspective by taking extraordinary measures to protect the health and wellbeing of our employees by adopting strict procedures for environmental management as published by the Center for Disease Control. As a result, we were able to accommodate the needs of our customers, operate our plants in a manner where our employees knew they worked in a zone of safety.
Sales for the industrial products were down 1.9% from last year. The prime variance from last year fell in the natural resources markets of mining and oil. Sales to industrial aftermarket were about the same as last year, down just less than 1% overall.
Aerospace and defense markets continue to perform well for the first two months of the period, and demand lessened in March. The fourth quarter organic net sales were up 4.3%. Aerospace sales were driven by both OEM and defense, which accounted for one-third of the sales we classified in the Aerospace segment.
Aero and defense OEM were up 2.1% from an organic basis. Defense OEM was up 7%. Important contributors were helicopters, aero engine, space and missiles. The uncertainty around today's 737 MAX outlook continued, but now had taken second priority for the challenges and industry uncertainty presented by the COVID epidemic.
The major airframe producers appear to gain their footing in May, providing strong direction on continued production rates by model to us. We are now reworking our production schedules to integrate those directions into a production and sales plan over the next several quarters.
Regarding our first quarter of fiscal 2021, we are expecting sales to be in the range of $150 million to $155 million. We have very substantial amount of order book, and the issue often occurs around customer credits and whether or not the customers are on time with their payments, which seems to be in the Aerospace sector, somewhat of a problem right now.
I'll now turn the call over to Dan for a more detail on our financial performance.
Thanks, Mike. SG&A for the fourth quarter of fiscal 2020 was $31 million compared to $29.5 million for the same period last year. The increase was mainly due to $0.8 million of additional incentive stock compensation and $0.8 million of additional personnel-related costs, offset by $0.1 million of other savings. As a percentage of net sales, SG&A was 16.7% for the fourth quarter of fiscal 2020 compared to 16.2% for the same period last year.
Other operating expense for the fourth quarter of fiscal 2020 was expense of $2.1 million compared to expense of $3.2 million for the same period last year. For the fourth quarter of fiscal 2020, other operating expenses were comprised mainly of $2.6 million of amortization of intangible assets, $0.8 million of restructuring expense, $0.1 million of other items, offset by a $1.4 million gain on the sale of our building in Houston. Other operating expenses for the same period last year consisted mainly of $2.3 million in amortization of intangible assets and $0.9 million of restructuring expense.
Operating income was $43.5 million for the fourth quarter of fiscal 2020 compared to operating income of $40.3 million for the same period in fiscal 2019. On an adjusted basis, operating income would have been $43 million for the fourth quarter of fiscal 2020 compared to adjusted operating income of $41.2 million for the fourth quarter of fiscal 2019.
For the fourth quarter of fiscal 2020, company reported net income of $33.8 million, compared to net income of $31.4 million for the same period last year. On an adjusted basis, net income would have been $33.1 million for the fourth quarter of 2020, compared to an adjusted net income of $32.9 million for the same period last year.
Diluted earnings per share was $1.35 per share for the fourth quarter of fiscal 2020, compared to $1.27 per share for the same period last year. On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2020 was $1.33 per share, compared to an adjusted diluted EPS of $1.33 per share for the same period last year.
Turning to cash flow. The company generated $44.4 million in cash from operating activities in the fourth quarter of fiscal 2020, compared to $29.5 million for the same period last year and $155.6 million in cash from operating activities for the full-year fiscal 2020, compared to $108.5 million for the same period last year.
Capital expenditures were $9.7 million in the fourth quarter of fiscal 2020, compared to $12.1 million for the same period last year. On a 12-month basis, CapEx was $37.3 million, compared to $41.3 million for the same 12-month period last year.
In the fourth quarter of fiscal 2020, the company paid down $0.5 million of debt, and for 12-month period, we paid down $46.3 million of debt. Total debt as of March 28, 2020, was $23 million and cash on hand was $103.3 million.
I would now like to turn the call back to the operator for a Q&A session.
Thank you. [Operator Instructions] Your first question comes from the line of Steve Barger with KeyBanc Capital Markets.
Hey guys. Steve Barger here. Can you hear me?
Yes, Steve. How are you doing?
Hey, good. Thanks. Can we talk about the bridge to your 1Q 2021 guide by end market? Maybe just how much are you expecting aero down versus industrial?
I think they're probably – we haven't actually broken it out that way, Steve, but I would guess they're down about the same.
So you're guiding the entire quarter down mid- to high-teen, you think that is appropriate way to model it for both sides of the business?
Yes, I think so. We have – it's a little difficult to sort that through right now in terms of the industrial products given the short-cycle nature of those products. But on the other hand, we have all sorts of additional programs that are phasing in that are a little bit – some of which are a little bit unique and we haven't seen before sort of offsetting some of that – some of the softness we see in the short-cycle business. So we're thinking that's probably down less than 15%, but we're using kind of a 15% number is our guidance.
Okay. And so just singling that for a minute, I think you said in your prepared comments, the aftermarket was down 1% overall. What did that look like in the back half of March? And how did April and the first part of May trend from an industrial distribution or the products go through distribution on the industrial side?
The quarter was much stronger than I ever anticipated. Of course, you get to the end of March, and you hear all of the horror stories about the country closing down and you wonder exactly what that is going to mean to demand. And we saw really good demand through most of the quarter. Now that demand is, it seems to be tailing off in this last six weeks here, but it's still decent, and it's certainly within our guidance.
And you said there's some unique programs that are coming in. Can you give a little more commentary around that?
Yes. Well, we're seeing – our marine program is for some reasons is really showing some good strength. That's going to be up substantially this year. It’s probably going to be up as much as 20% this year for us.
Ground defense is showing strength. The whole defense sector, whether we classify it as industrial or aerospace is really strong. We have a new program, which offshore wind, which we've booked, which will – which is brand new to us, and I'm not sure that we had any shipments in the fourth quarter of 2020.
We might have had a minimal amount of that product in that fourth quarter, but that program phases in a nice way for the next few years. And we've picked up some good submarine business in Europe that was a little bit of a surprise. And our semiconductor manufacturing business is strong. So some of these elements are cycling in at exactly the right time for us.
That's good color. Thank you. And I know you don't want to get too far ahead, but can we talk about the back half of your fiscal year? There is tough comps in aero in 3Q and 4Q. So just given what you know today about OE markets, aftermarket and the backlog, how should we think about revenue cadence as the year progresses? Back half lower than the front half? Back half better? Just kind of what are your high level thoughts?
We're thinking the back half is going to be stronger than the first half for certain. And there's a lot that has to happen in the world. And I think people kind of understand where the aircraft cycle is and what has to be done in that whole world. But the fact that Boeing raised that $25 billion has given them tremendous confidence in their build rates, and so they're giving us very strong direction with regard to what they want for product from us. We're encouraged by that. We're reworking on manufacturing schedules accordingly. If you look at Boeing's investor webpage, which I did this morning because I don't want to disclose anything that I shouldn't, so I'm staying pretty close to their webpage.
They're planning on a 31 per month ship build of 737 MAX-es. They're very confident that they'll achieve certification by August and we're confident with them. And so that gives us a lot of direction with regard to how we should be running our plants and what our revenues are going to look like. So I think that back half of the year is going to be good.
And you would make those same comments for the industrial side of the business as well?
Well, the industrial side of the business, as long as I've been involved with this business, which unfortunately, is 30 years now, every time we've had a recession, the industrial side of the business has led us out and that short-cycle industrial business has been the leader. And I don't expect this is going to be any change at all as these states open up and all these plants come back online and all these – all of the maintenance that has to be done and has been deferred has to be cared for. We expect to see a good strong industrial short-cycle business.
Got it. One more and I'll jump back in line. I read that Delta reported they're retiring their 18 777s early. Just thinking about that, how does that impact your planning around the 777X?
Well, I look at the 777X, and Boeing's plan is to build 5 777 series with 1.5 being the X, per month going forward, beginning every month that their plants are open. They have 350 planes on backlog. So if somebody likes the ship, I can't say I know exactly why, but somebody likes the ship and they've got their rates. They've got five years of backlog. So I can't say I know – I'm completely knowledgeable about the marketing aspects of the 777.
Understood. Thanks for the time.
[Operator Instructions] Your next question comes from the line of Michael Ciarmoli with SunTrust.
Hey. Good morning, guys. Thanks for taking the questions here. Maybe if we could just stay on kind of that second half 2021 forecast, I guess, I'm just a little bit confused as we're seeing material rate reductions across commercial aerospace, including nearly all the Airbus platforms. It seems like most of the peers out there are calling for OE revenues to be down anywhere from 30% to 50%.
And if I just run back of the envelope on your shipset content of rates where they were and where they're going, it would seem to imply about a $100 million revenue headwind when you think about where the A320 is going down to even if the 737 gets back to 31, it's still coming off 42. The 787 gets cut, the A350. And that's not even accounting for any destocking in the supply chain. Can you just maybe reconcile how you're really confident in the stronger second half?
Yes. I think we're seeing a stronger second half then first half. We're not seeing a stronger second half comps relative to last year. Let's make sure that's clear, right.
Okay.
So we're saying the first half is going to be what it is maybe more reflective of the first quarter than it was than anything else. And the second half will be a better second half. We expect a nice bounce in the industrial business. We expect the marine business to continue to strengthen. Right now, we're capacity constrained in some of our marine and helicopter businesses. Definitely, capacities are constrained.
Boeing hasn't built a 737 ship in January, February, March, April, or May, so they haven't produced anything during those periods. So the fact that they're going to build volume to 31 ships per month effective January is – means that some hardware is going to have to flow. And so we're encouraged by that. And right now that hardware for the 737 MAX is not flowing.
Okay.
So in the first and second quarter, we're not expecting to flow much of that hardware at all.
Okay. And what about – do you guys have any visibility as to what's been in the supply chain? Not so much on the MAX, but certainly on the A320, the 787, the A350. I mean, it would seem like there's going to be some potential destocking that might exacerbate the rate reductions on those platforms. Do you guys have visibility there?
All we can do there is make our best guess. We don't have great visibility. We're planning on running the plants at a destocking level for the next two quarters, and that's just the way it is.
Okay. And then what about on the aerospace aftermarket side. It seems like that's really been under much more pressure just given that the airlines are sort of at 80%, 90% reduced capacity, do you have any visibility as to what happens to that piece of the business, the distribution side?
I think that's going to be soft for a considerable period. I mean, these carriers have to be flying their ships in order to generate the MRO requirements, and they're just not. So we're not expecting any great things from that sector until they start selling seats on these planes.
Okay. And then clarification. You said, I think in your remarks, on the aerospace side, you said the order book looked good, but payments haven't really been coming in. Can you sort of just elaborate on that, and what you're seeing from I guess, your customers regarding – maybe just more detail around that comment?
Sure. Yes, we have plenty of order book. And the question is, who's it for and how is he paying his bill? And so some of these people that are in the subcontracting supply chain are struggling financially. And so you don't want to get them too far removed from reality in terms of what they owe you. And so you have to sort of lighten up on what you're willing to ship them until they clear their account. And so that's just added a level of complexity that we don't normally have to deal with, but we're in a very good, very sound position to deal with things like that.
Okay. And then just the last one, I'll jump back in the queue. You guys over the past, I guess, 12, 24 months brought on a lot of capacity, capabilities, qualification, plating, pigmentation, treating. Is that – as the volumes in aerospace go down as you were trying to alleviate a lot of those bottlenecks, how does that impact your margin profile? And I mean, gross margins were phenomenal in the quarter, but do you see that extra capacity being a drag on a go-forward basis?
Short answer is no. I can give you a long answer unless you're not satisfied with no.
I mean, yes. I would love to know how you're absorbing all that overhead. Yes. If you have any additional color, that would be great.
Yes. Well, at RBC, by and large, we're a variable cost business. So we bring in materials, and we add value to them, and we ship them to the customer. And we ship them to the customer in accordance to designs that we’re uniquely qualified to execute.
And so if the volume goes down – our major expenses are materials and outside processing. And that's typically half of our manufacturing costs. And the other half is burden labor, and the labor is burdened with overhead. And the largest component of that overhead are factory salaries and benefits.
And as you adjust your population in the plant, you adjust your cost structure, and you ease up on your material input, and as long as you have plenty of topline to work with, everything will balance out for you again. And so that's basically how we run the business, and we actually budget and visit the budgets for every plant every month to make sure that we're executing in accordance with good principles there.
So we don't – the fact that we've added capacity in terms of floor space, a lot of the plants we own, and capital equipment, well, those were paid for out of our cash flow, so there's no debt associated with those. And the depreciation as a percentage of our sales is still something 3% or 4%. It's small. So that aspect of the overhead is a little tiny factor that actually – it doesn't really impact our ability to achieve our margin levels very much at all.
So basically what we have to do is we have to figure out at what rate do we want to run the plant? How much product do we want to make? How much cost input do we want to achieve to make that product? And given the fact that mix is known, we've been executing this mix for years and years. There's not many secrets left in terms of what our margins are going to be.
Got it. That's helpful.
Yes. You might leave a little bit more cost in the plant and charge it against margin. If you think you're into a short-term situation where there's going to be growth in the second half of the year, and you don't want to have to go back and reassemble the band. So on the other hand, if you don't see that happening for you, then what you have to do is clear.
Got it. Perfect. Thanks, guys. I'll jump back in the queue here.
Your next question comes from the line of Pete Skibitski with Alembic Global.
Hey. Good morning, guys. I’ll echo Mike's comments on the great gross margin. So Mike, you've given first quarter revenue guidance and basically said that the second half will be better than the first half. So should we all expect basically that the second quarter revenue will be kind of the trough quarter for the year?
We're still working our second quarter projections right now. And we're not expecting much and we're not expecting a big surge in the second quarter. This whole thing has been an exercise and dead reckoning. You know what dead reckoning?
Generally speaking, yes.
Yes. Well, that's when you get on a sailboat and you're sailing along in the fog, you don't know where the hell you are, but you know where you started from. And so you keep taking a compass heading, and every 15 minutes, you check your depth and you would just make an assumption on where you are on the map. And after doing that for three or four hours, you don't know where the hell you are. So that's dead reckoning.
So I'd say after the result of this COVID-19, we almost have to run this company under a dead reckoning proposition and take each quarter as it comes and execute it to the best of our ability. And we pretty much rebudgeted our entire year and we understand exactly what the years looking like. We're not ready to talk about that today.
And we’ve rebudgeted every quarter and now we're reassessing our mathematics around each one of those assumptions and taking the necessary actions in order to make it all come out right. So I don't think the second quarter is – I think the second quarter is going to look more like the first quarter than it's going to look like the fourth quarter.
Okay. Yes, I just wasn't sure if the headwinds in commercials and the rate reductions in commercial were going to maybe – I was thinking maybe they wouldn't impact the first quarter much and we'd see it more of those headwinds in the second quarter. I guess that was my line of thinking.
Okay. And then just on margins, you spoke about that, but if we went back to the last cycle, I don't have the adjusted margins back that far, but the GAAP margins came down six points or seven points during the last cycle. And I would think the rate reductions are steeper this time around on the commercial side. So are you saying you think margins can stay flat this year even in a down environment? Or maybe you're expecting some modest degradation? How are you thinking about that?
Yes, I'd say modest degradation. I don't know what happened in the last cycle, and I don't really want to think about it. You're right. This is completely different cycle than the last cycle, and a lot of it is dependent upon what the government is going to do next, and you never know what the hell they're going to do.
So I think we're restructuring things so that the margins aren't going to be the record level that they were in the fourth quarter. They can get back there over time and we're just going to give it a little time and see how this world develops. And I think the margins will be reasonable. And I think our cost structure is under control. I think our understanding of what our revenues look like is definitely under control, and I don't think anybody is going to be disappointed in the result.
Yes. You expect to be free cash flow-positive, I guess then, net-net?
Oh yes, definitely.
Okay. Last question for me. I don't know how much you can say about this. But on the last call, you mentioned some gains on some missile programs that one of your divisions secured. I think it was related to this different relationship between the U.S. and Turkey kind of a fallout from that. Can you maybe talk about the size of that opportunity, the business that you gained? And maybe which unit came through?
Yes. Well, actually it's probably in the $8 million to $10 million per year range and it's doing nicely to fill in some of the loss in one of our commercial aerospace divisions.
Okay. Yes, that's all incremental for fiscal 2021 basically?
Well, it's substituting rather than making parts that we plan to make for one of the ships, we'll be making this other material.
Okay. Great. Thank you, guys.
Your next question is a follow-up question from the line of Michael Ciarmoli with SunTrust.
Hey, guys. Thanks for taking the follow-up. Just wanted to get any thoughts, I mean obviously valuations have come in a bit here. Have you given any more thought to capital deployment, M&A? Certainly the balance sheet looks pretty solid, but how are you thinking about capital deployment, and maybe more specifically, M&A?
Well, I mean we continue to look for the right partner and right acquisition candidate that would fit what we do. And some of them fit nicely. I think given the whole situation that the world is in right now, I think our appetite to do something large is – has lessened until we understand what the prospects for these businesses are. But there are some small intermediate-sized businesses that looked like good candidates.
Got it. Thanks guys.
There are no further questions at this time. I would turn the call back over to management for any closing remarks.
Well, I think that concludes our fourth quarter and fiscal 2020 conference call. We appreciate everybody participating today, and we will talk to you again in July. Good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participating. You may now disconnect.