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RBC Bearings Incorporated (NASDAQ:ROLL)

Q4 2013 Earnings Call

May 29, 2013, 11:00 am ET

Executives

Rory MacLellan - IR, Senior Consultant, FTI Consulting

Michael J. Hartnett - Chairman, President & CEO

Daniel A. Bergeron - VP & CFO

Analysts

Edward Marshall - Sidoti & Company

Josh Chan - Robert W. Baird

Operator

Good ladies and gentlemen and welcome to Fourth Quarter Fiscal 2013 RBC Bearings Earnings Conference Call. My name is Gwen and I'll be your operator for today. At this time, all participants are in listen-only mode. At the end of the speakers’ remarks, we will have a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to the host for today, Mr. Rory MacLellan, Investor Relations. Please proceed.

Rory MacLellan

Good morning and thank you for joining today for RBC Bearings’ fiscal 2013 fourth quarter earnings conference call. On the call today will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer and Daniel A. Bergeron, 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 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 in 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 would like to turn the call over to Dr. Hartnett.

Michael J. Hartnett

Thank you, Rory and good morning and welcome. Net sales for the fourth quarter of fiscal 2013 were $103 million versus $111.3 million for the same period last year. Our Industrial Markets were down 18.9% on a year-over-year basis. Sales of Aircraft and Defense products were up 4.9% over the corresponding quarter last year.

For the full-year, net sales were $403.1 million, an increase of 1.4% over the last year. Our Industrial Markets were down 8.2%, and our Aerospace and Defense products were up 12.1% over the last year. For the 12-months period, sales of the Industrial Products represented 48% of our net sales, and Aerospace and Defense products were 52%.

Gross margins for the period came in 39.5% versus 37% in fiscal ‘12. Adjusted operating margins were 22% for the quarter and 21.1% for the full-year.

Demand for our products in the industrial markets were normal this quarter. The construction machine producers lightened their OEM build schedules but steady demand from their aftermarket filled in our requirements. With regard to mining equipment, as we mentioned last call, this segment had a strong run over the past few years and is now operating at more level pace. We are now expecting this rate to be steady but not over heated to continue all year and beyond.

Revenues from our Ground Defense business were minimal during the period as a result of the completion of some of the programs associated with upgrading the mine resistant vehicles for the military and we discussed that last call. We expect to see more activity in this sector late in fiscal ‘14 and into ‘15 and beyond, as the demand for foreign military customers comes online. Several countries are now retooling their ground armament as a result of lessons learned in Iraq and Afghanistan. Overall, our industrial distribution sales were about even with last year with the softness in the semiconductor customer base being offset by strength from general industrial accounts.

Sales to European distributors were equal to last year, but up sequentially about 8%. We are seeing a continued increase in business activity overseas as a result of some of the marketing initiatives taken over the past 12 to 24 months. The news remain the same as last quarter the principle reasons for the year to year contraction in industrial OEM volume can be directly attributed to moderation in demand from our OEM mining equipment customers and completion of some ground defense programs. Dan will have a little bit to say about that later in the call.

Relative to our Aerospace and Defense business, these markets grew 12.1% in the year and showed quarter-to-quarter growth of 4.9%. We continue to see strong interest in our core products and continued encouragement from our customers demonstrated by contract awards for new products developed for both the airframe and engine sectors of our business.

In calendar ‘12, the big four aircraft producers Boeing, Airbus, Embraer and Bombardier sold 1,345 planes and booked 2,433 aircraft. In the first quarter of this year, the big four booked 660 large transport and freighter aircraft in total and sold 298 planes. Clearly, this is a healthy indicator for future RBC Bearings business.

Our bookings continue to be solid and our new program initiatives are too numerous to elaborate here, but they continue to grow. We expect several years of expansion ahead as significant new airplane management programs come online and core products are sold in higher volumes.

As we stated, we are in an excellent position to execute our business strategies today and this continues to be demonstrated by gross margin improvements. On Defense, our activity has remained steady and is up slightly over last year. It would on a year-over-year changes demonstrated in gross margins; I am pleased with the progress made today which is the result of completing very long cycle projects associated with the execution of several manufacturing strategies.

All plants have their target list of strategies needed to elevate their performance and each has made real progress against these goals. The manufacturing methods of core product lines that have formed the bases of our revenues for many years has been largely redesigned to improve the efficiency of execution, lessons learned from these projects are now quickly implemented into learning curve improvements for new products. The result is a significant consolidated margin improvement has demonstrated over this year. Of course, we expect these overall improvements to continue, but remember that they will be influenced to some extend quarter-to-quarter by mix and absorption differences driven by the accounting calendar.

So in summary, we ended fiscal 2013 at $216.5 million in backlog compared to $215.8 million over the same period last year. And looking ahead, we expect the first quarter of 2014 net sales to be in the neighborhood; a very similar quarter to the one that we just demonstrated, perhaps just a little bit better on the revenue side.

I'll now turn the call over to Dan who will provide more details on the financial performance.

Daniel A. Bergeron

Thanks Mike. SG&A for the fourth quarter of fiscal 2013 increased $0.8 million to $17.3 million compared to $16.5 million for the same period of last year. As a percentage of net sales, SG&A was 16.8% for the fourth quarter of fiscal 2013, compared to 14.8% for the same period of last year. The increase in SG&A year-over-year was mainly due to an increase of $0.6 million in incentive stock compensation, $0.4 million in professional fees, offset by lower miscellaneous expenses of $0.2 million.

Other operating expenses net for the fourth quarter of fiscal 2013 was an expense of $7.6 million, compared to an expense of $0.6 million for the same period last year. For the fourth quarter of fiscal 2013, other expense net consists of $6.7 million related to large bearing consolidation and restructuring, which we had previously announced, $0.4 million of amortization of intangibles and $0.5 million in costs associated with other asset disposals and other items.

Operating income was $15.8 million for the fourth quarter fiscal 2013 compared to operating income of $24.1 million for the same period in fiscal 2012. Operating income excluding costs associated with the consolidation restructuring of large bearing facilities and disposal of other fixed assets would have been $22.7 million compared to an operating income of $24.1 million for the same period of last year.

As a percentage of net sales, operating income excluding these charges would have been 22% compared to 21.6% for the same period last year. For the fourth quarter fiscal 2013 the company reported net income of $10.6 million compared to net income of $15.5 million for the same period last year.

Excluding the after-tax impact of the large bearing consolidation and restructuring, loss on disposal of other fixed assets and a small discrete tax benefit net income would have been $15.9 million for the fourth quarter fiscal 2013, an increase of 2.6% compared to $15.5 million for the same period last year.

Diluted earnings per share was $0.46 per share for fourth quarter fiscal 2013, compared to $0.69 per share for the same period last year. Excluding the after-tax impact of the large bearing consolidation and restructuring, loss and disposal of other fixed assets and the discrete tax benefit diluted earnings per share for the fourth quarter fiscal 2013 would have been $0.69 per share compared to $0.69 per share for the same period last year.

Turning to cash flow, the company generate $17 million in cash from operating activities in the fourth quarter fiscal 2013 compared to $13.1 million for the same period last year. On year-to-date basis, the company generated $66.3 million in cash from operating activities compared to $45 million for the same 12-month period last year.

On a year-to-date basis capital expenditures were $42 million compared to $17.8 million for the same 12-month period last year. We expect our capital expenditures to be approximately $25 million to $30 million in fiscal 2014. A large part of the fiscal 2013 capital number of $42 million was associated with the acquisition of land and building, our Swiss company was leasing for approximately -- was leased and we acquired for approximately $50 million and $9 million for the purchase and renovations of new or existing properties in California, Connecticut, Georgia, Mexico and South Carolina, all these expand in our aerospace capacity.

Excluding these projects, our capital expenditures would have been $18 million right in line with our rate of 3.5% to 4.5% of sales. The company ended the fourth quarter fiscal 2013 with a $115.8 million of cash and short-term investments and $10.3 million of debt on the balance sheet.

I would now like to turn the call back over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Edward Marshall with Sidoti. Please proceed.

Edward Marshall - Sidoti & Company

The first question was on the industrial business which the performance on a sequential basis looks a lot different than the year-over-year change. And I was curious if we can kind of maybe look at it or cut the data a little bit and look at it maybe from a daily sales run or some other kind of performance metrics that we can kind of measure a little bit easier. Has it bottomed or recovering slowly from the bottom versus just the seasonality in December skewing a data little bit?

Daniel A. Bergeron

We’re trying to take in what you just asked us Ed. In the fourth -- I mean in the third quarter fiscal 2013 industrials was $43.3 million and in the fourth quarter, it’s $46.9 million.

Edward Marshall - Sidoti & Company

Right.

Daniel A. Bergeron

So we have some sequential growth there and I think we’re seeing those types of levels carrying into our first quarter on the industrial side.

Edward Marshall - Sidoti & Company

Okay. I mean arguably I guess there is a year-over-year comp, was pretty tough last year?

Daniel A. Bergeron

Yeah, if you think about it last year, our fourth quarter last year, if you compared fiscal year 2012 to fiscal year 2011, our industrial business grew at 25.4% and our aerospace business grew 25%, so tough quarter to comp against and obviously the growth rates will get a little stronger during the year as these comps get a little easier as we go through Q2, Q3 of next year.

Edward Marshall - Sidoti & Company

Okay. So the big drops are past, I guess, is what I am trying to get that. It seems still there is some sequential improvement. Even though looking at the seasonality in the fourth quarter and trying to normalize that, it looks like we’ve kind of bottomed and start to track back out of the (inaudible)?

Michael J. Hartnett

Yes, I’d say that’s true, that’s how we see it. We have other projects coming through other markets and they just haven't phased in into the current quarter and probably won't phase in until the end of our fiscal 14, but certainly the core industrial business has bottomed and it looks like it’s growing back with the parts of the sector healthy and parts of the sector just sort of normal.

Edward Marshall - Sidoti & Company

So there is no need to further increase your restructuring, you have already announced, so you are not going to bring in any further than you have already done, correct?

Daniel A. Bergeron

Correct, I think when release that we have put out this morning, you see we spent $6.7 million, it will have a little bit of period cost that go through 2014 and about a $1 million. Some of it is depreciation on the building until we get to a conclusion either lease sell the building and some of it's for continued moving cost to complete the restructuring and consolidation but there is no new projects or consolidation projects on the radar at this point.

Edward Marshall - Sidoti & Company

Okay, and then the cadences, where I guess two-thirds almost of the way through the quarter, albeit a few days, I think you mentioned that the performance so far on the industrial side has been relatively the same to your fourth quarter. Aerospace as well or is that in the same kind of ball park or any comments, you can make at the cadence through April and May so far this year?

Michael J. Hartnett

The question is --

Edward Marshall - Sidoti & Company

[Some] sales--

Michael J. Hartnett

First quarter to fourth quarter?

Edward Marshall - Sidoti & Company

Yes.

Michael J. Hartnett

Yeah, I'd say we're expecting it to be about the same. We are seeing some accelerations in the aerospace market with people looking for products earlier than we anticipated producing them and delivering them which is always a pleasant surprise but we expect a normal quarter-to-quarter rate on aircraft also.

Operator

Your next question comes from the line of Peter Lisnic with Robert W. Baird. Please proceed.

Josh Chan - Robert W. Baird

Hi, good morning. This is Josh in filling in for Pete. So we talked a little bit about industrial in the first quarter. Just curious about your thoughts on industrial as you kind of progressed through the entire year of fiscal 14. How do you think that would trend? Are you a subscriber to the notion of second half calendar 13 industrial recovery if you would?

Michael J. Hartnett

Well, I think the second half '13 industrial recovery is all based under the theory that mining gets better. And I'm not a big subscriber to that theory. I don't expect it to get better I hope I am wrong. I think it's going to stay where it's been here for the last two quarters. That's how we've created our planning. I think there is other industrial sectors, we see strengthening and the general industrial marketplace is good. We think oil and gas will get better. And there's some other smaller markets semicon and other places where there seems to be upside in the fiscal year. So we're thinking industrial is okay, I mean it's not a barn burner and aerospace will just continue to get quarter to quarter stronger as new projects and new products come online.

Josh Chan - Robert W. Baird

Okay. Thanks for the color, and little bit of a follow-up on the aero side, the fourth quarter growth was a little bit less because of the tough comp and do you think that you can resume the more double-digit type growth in the next year or do you think that comps have been difficult enough that that might not be possible?

Michael J. Hartnett

Well, I think it's a little lumpy, I mean it's to some extent the delay in 787 program is going to slow things down a little bit and they're back on the gas with that. So we're seeing pull ins, as the 350 comes online, that will generate additional volume. We have a substantial amount of new projects and products going into these aircraft and these engines. So as the new engines and the new airframe are released we are absolutely going to see additional volumes and Boeing is now looking at stepping up the production rate on the 737 again. So that'll create more volume in the system. So I would think the double digit rate is within reach.

Josh Chan - Robert W. Baird

Okay, great. And then the last question from me is there a way to quantify the annual cost savings from the consolidation of the Houston facility. And then also like what portion of that savings would be cash?

Daniel A. Bergeron

That was one - it's about $800,000 a quarter of gross margin of which 50% of that was cash and the other 50% was depreciation. So it's going to -- we're going to obviously see a positive impact on gross margins from the consolidation throughout the year. I think it will be slow in the first half of the year. Because we're still on the middle of moving things around, setting things up and getting back to efficiency levels that make sense. So, I think from a gross margin standpoint, we're looking at -- for the year that we should be around that 38% range and once we get further down the road on the consolidation maybe on the second quarter we'll disclose what our new internal target is for gross margin for fiscal year 2014.

Operator

(Operator Instructions) Your next question comes from the line of [Christine Lagarde] with Bank of America. Please proceed.

Unidentified Analyst

So my question first is on with your Texas facility, I was wondering if the closure of that changes your strategy at all regarding like oil and gas market.

Michael J. Hartnett

No, they have a very little to do with each other, that was principally wind.

Unidentified Analyst

Sure, and then in terms of gross margin, how should we think about that in fiscal year 14 and are there further opportunities for gross margin expansion there?

Daniel A. Bergeron

Yeah, like I just said on the last comment, I think for this year, we're targeting 38% and once we get low further down the road with the consolidation and getting those plans all working again we'll come out and get everybody what our internal target is to gross margin for fiscal year 2014.

Unidentified Analyst

Sure. And then on for your defense business, what are you hearing from your customers regarding sequestration and how much of the headwind is factor again or are you thinking about defense in fiscal year '14?

Michael J. Hartnett

Well, we're not seeing defense as a big growth leg for us in 2014 but there's still a lot of active programs, and they're all associated with either maintenance or airframes that have been or systems that have been committed and funded, so we're still seeing good demand and we're really not feeling much affect from sequestration from our major customers.

Unidentified Analyst

Sure, and then for commercial aero, I was wondering for -- where you are in terms of compared to line rates announce by OEMs? Are you guys currently delivering to customers the same kind of announced rates that Boeing and Airbus have scheduled or are you shipping below or above that?

Michael J. Hartnett

Well, usually in order for to work right, we have such strong planning for both of those customers and such a strong logistics supporting the flow of product to both of those customers that if they are announcing a step up in build rate, that’s effective January 1, we're probably shipping bearings at that rate, somewhere in July or August of the preceding year. So we're right in step with them.

Operator

Our next question comes from the line of [Joe Marver with Lumicell]. Please proceed.

Unidentified Analyst

My question is on gross margins and I realized Q4 is generally seasonally strong from a revenue standpoint, but a 39.5% was a very strong number. Normally you can look at incremental margins which in this case is a negative number divided by another negative number. So I am wondering if management could help me out and give me some idea of gross margins, what would they have been if revenues were flat? So an incrementally $8.5 million in revenue, would we be looking at gross margins of 40.5% or maybe 41%? Thank you.

Daniel A. Bergeron

Yeah, Joe, probably we would have seen a little bit better gross margin, but we definitely would have seen a little bit better operating income because pretty much our sales and administrative costs are pretty much fixed cost with that small differential in volume. So you would have seen a better EBIT line and a little bit better gross margin line. There is no question about it.

Operator

There are no other questions at this time.

Michael J. Hartnett

Very good. Well, at this time, I’d like to thank everybody for participating in the call today and their continued interest in support of RBC Bearings as part of your investment strategy and we will be talking to you, I think, very shortly here in the next 45 days as we report the results of our first quarter. Thank you very much.

Operator

Ladies and gentlemen, that concludes presentation. Thank you for your participation in today’s call. You may now disconnect. Have a wonderful day.

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