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RBC Bearings (NASDAQ:ROLL)
Q4 2018 Earnings Conference Call
May. 30, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 RBC Bearings earnings conference call. [Operator instructions] I would now like to turn the call over to Chris Donovan with the Alpha IR group. You may begin.

Chris Donovan -- Alpha IR Group

Good morning, and thank you for joining us for RBC Bearing's fiscal 2018 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.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Thank you, and good morning. Net sales for the fourth quarter of fiscal 2018 were $179.9 million, versus $160.2 million for the same period last year, a 12.3% increase. Excluding the surge in Canada sales from last year, organic growth for the quarter was 13.5% and 10% for the full fiscal year 2019. For the fourth fiscal quarter of 2018, sales of industrial products represented 40% of our net sales, with aerospace products at 60%.

Gross margin for the fourth quarter of fiscal 2018 was $69.7 million, or 38.8% of net sales. This compares to $63.2 million, or 39.5%, for the same period last year, a 10.3% increase. On a full-year basis, gross margin as a percentage of net sales in fiscal 2018 was 38.2%, compared to an adjusted 37.9% for the same period last year. Adjusted operating income was $38.3 million, versus $34.4 million last year, an 11.

5% increase. On a full-year basis, fiscal 2018 ended at $136.1 million adjusted, or 20.2% of net sales, compared to $121.4 million, or 19.7% of net sales operating income. Clearly, this is a nice quarter for the company and an excellent year all around. Industrial products showed 26.4% year-over-year growth rate and we continue to see strong overall demand for these products.

Industrial OEM was up 29.9% and distribution and aftermarket was up 19% on a year-over-year basis. Mining, oil and gas, semiconductor machinery, machine tool, and general industrial equipment continue to demonstrate exceptional strength during the period. On the aerospace and defense side, the fourth-quarter net sales were up 6.7%, on normalized revenues generated by Canada last year. This was mainly driven by OEM.

Aero and defense OEM was up 9.1% on an organic basis. We see our aerospace volumes building through subsequent quarters as we add additional capacity, floor space, equipment and staff. This is in order to support expansion in volumes driven by new contracts as well as the additional airframe and engine builds schedule for the coming years. There's no question that our aerospace margins were impacted this quarter by start-up expenses related to new programs being introduced at several facilities in both the airframe and engine product segment.

The effect here was approximately one half plus percent, probably larger, and will likely continue for the next few quarters as these programs are assimilated, tooled, and brought to maturity. Another half-point plus was mix-related as aftermarket spares volumes was lower than normal. This aftermarket demand can ebb and flow quarter to quarter, but it's expected to strengthen as a result of the new defense bill with increased spending budgeted for repairs and readiness. Regarding our first quarter, we are expecting sales over the period to be between $171 million and $174 million, compared to $160.8 million last year net of Canada, an increase of 6.7 -- 6.8 to 8.7%.

I'll now turn the call over to Dan, who will give you more detail on our financial performance.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Thanks, Mike. SG&A for the fourth quarter of fiscal 2018 was $29.6 million, compared to $26 million last year. The increase is mainly due to higher personnel cost of $2.2 million, $0.3 million of additional incentive stock compensation, and $0.9 million of other items. As a percentage of net sales, SG&A was 16.4% for the fourth quarter of fiscal 2018, compared to 16.4% for the same period last year.

Other operating expense for the fourth quarter of fiscal 2018 was expense of $2.2 million, compared to expense of $2.6 million for the same period last year. For the fourth quarter of fiscal 2018, other operating expenses were comprised mainly of $2.3 million in amortization of intangible assets, offset by $0.1 million of other items. Other operating expense for the same period last year consisted mainly of $2.4 million in the amortization of intangible assets and $0.2 million of other items. Operating income was $37.9 million for the fourth quarter of fiscal 2018, compared to operating income of $34.4 million for the same period in fiscal 2017.

On an adjusted basis, operating income would have been $38.3 million for the fourth quarter of fiscal 2018. Adjusted operating income as a percentage of net sales would have been 21.3% for the fourth quarter of fiscal 2018, compared to 21.5% for the same period last year. For the full-year fiscal 2018, adjusted operating income was 20.2% of net sales, compared to 19.7% for the same period last year. For the fourth quarter of fiscal 2018, the company reported net income of $26.7 million, compared to net income of $21.6 million for the same period last year.

On an adjusted basis, net income would have been $26.4 million for the fourth quarter of fiscal 2018, compared to net income of $21.6 million for the same period last year. Diluted earnings per share was about $1.09 per share for the fourth quarter of fiscal 2018, compared to $0.90 per share for the same period last year. On an adjusted basis, diluted EPS for the fourth quarter fiscal 2018 was about $1.08 per share, compared to adjusted diluted EPS of $0.90 per share for the same period last year, a 20% growth rate. Turning to cash flow.

The company generated $37.8 million in cash from operating activities and spent $7.4 million in capital expenditures in the fourth quarter of fiscal 2018, compared to $26.7 million for the same period last year. For the full-year fiscal 2018, the company generated $130.3 million in cash from operating activities and spent $30 million on capital expenditures. In the fourth quarter of fiscal 2018, the company paid down $25.1 million of debt. And for the full-year fiscal 2018, the company paid down $98.2 million of debt and ended the year with $54.2 million of cash on hand, compared to $38.9 million of cash on hand for the same period last year.

I'll now turn the call over to the operator to begin the Q&A session.

Questions and Answers:

Operator

Thank you, sir. [Operator instructions] And our first question comes from the line of Kristine Liwag from Bank of America. Your line is now open.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, guys.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Good morning, Kristine.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Mike, you mentioned a few headwinds in the quarter in commercial aerospace, but I thought that with your significantly higher content on the MAX and NEO, that revenues would have been higher in the quarter than they were. With the announced production rates from Boeing and Airbus, are you at the volume that you expected to be? Or is there something going on in the supply chain, either with inventory in the pipeline that's preventing you from being at the volume that you expected to be?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Well, the MAX is really in its early production phases, Kristine, right now. So we're not really seeing the mature numbers. I mean, that's ahead of us, and our content on the MAXes is really good. But there was -- at RBC, there was just a lot going on this quarter in our aircraft business, and -- both in the new engines and new airframe categories.

And we're moving from an initial WAP production phase in some of our plants to a mature production phase once these airframes and the engines start to get into significant numbers. And the other thing is there's a number, you know, there's a number of contracts that are rolling over in the next couple of years, and we expect to benefit substantially from that. So, you know, during this quarter, one of our plants we've asked to develop and deliver -- design and deliver over 50 new products for the 777X. So -- and there's just a big acceleration at Boeing on that ship.

And so of course, we had to put everybody on it and turn the plan upside down and move heaven and earth. And needless to say, this doesn't -- does not have a positive impact on production efficiency when your plant is focused on, you know, making 50-plus samples. So I think we delivered 45 of the 50 plus during the quarter, and we have a few left this quarter to finish, and we'll be through that phase. But the plant was -- we had one plant that was really distracted as a result of that, and I think we chose the right priority to get on that ship and take care of that customer, and so we did.

We -- so that was one example of some of the start-up expenses that we had, and we have similar examples in two other plants where we're starting up other plant -- other programs, which I can't talk about.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

I see. And so as these samples tail off and as initial lots transition to mature production, how should we think about gross margins into fiscal year '19? Does this mean that fiscal year '19 should see gross margin expansion of greater than 1 percentage point?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Well, if we were through the production start-up on some of these projects, that would certainly be the case. But we're not going to be through the production start-up. I mean, we're -- we have another -- we're expanding two other plants to accommodate some of the business that we've been contracted on structural components. And so I think the start-up will be -- that those plants are both in the United States and in Mexico.

So I think the start-up of those programs is going to also have some impact on us through the quarter as through the year -- through the fiscal year. I'm thinking, probably, it's going to be -- the bite, it's probably going to be at least half a point during the fiscal year as we ramp up these volumes. But the volumes are significant. We're going to basically triple revenues from between now and 2022, and we expect these revenues to be in the low eight figures.

And so we're applying manpower and capital and talent to put in these production systems. So I think the bite will be about 0.5% going forward, next year.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

And is that 0.5% incremental to the fiscal year '18 numbers? Or is that already included in the fiscal year '18 numbers?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Yes. That's included in the fiscal '18 numbers. So I think you can use fiscal '18 as a baseline, all right. Where we normally try to expand our margin a percentage point a year, I think now, we're probably going to say, OK, we're going to expand it 1 percentage point a year, but back it off to half a percentage point because we have start-ups on these various programs.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

I see. That makes sense. And then if I could squeeze in one more question. Can you discuss the effects of higher fuel prices in your business? Is that relevant, or not relevant? Is that a pass-through cost, or can you increase pricing to adjust?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Yes, it's kind of mix and match. In some cases, we have contracts where we've negotiated a collar. And So if the material moves plus or minus 5% from some baseline, we can debit or credit accordingly. In some cases where we don't have that collar.

The material component of the cost is very low. So it's just not administratively worthwhile to worry about the collar. And then in some cases, we've made extensive material buys and brought in material early before these tariffs, and so we have sort of a cache of material that will at least last us through next year.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Yup.

Operator

Thank you. And our next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is now open.

Pete Skibitski -- Drexel Hamilton -- Analyst

Good morning, guys, Nice year.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Thank you, Pete.

Pete Skibitski -- Drexel Hamilton -- Analyst

Dan, would you be able to give us the full-year EBIT by segment of fiscal '18?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Yes, Pete, I just don't have it in front of me, but we'll be filing the 10-K in about three hours. So you'll have it.

Pete Skibitski -- Drexel Hamilton -- Analyst

OK, great. Great. You guys win an award for speedy 10-K filing there. Mike, when you were talking about the tripling of revenue to 2022 to the low-eight figure, was that specifically sort of moving from 777 to 777X? I wasn't quite sure what you're referencing.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

No. That has more to do with structural components for all the ships.

Pete Skibitski -- Drexel Hamilton -- Analyst

Specific for structural components as opposed to bearings?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Well, structural components with bearings. We like to make sure that they have bearings with them. So all these structural components have bearings.

Pete Skibitski -- Drexel Hamilton -- Analyst

OK. OK. Got you. And then just was wondering if we could do some housekeeping.

Maybe your expectations in fiscal '19 for CAPEX and D&A, and wasn't sure if you could give tax rate or not either.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Yes. On CAPEX, we'll still be in that 3% to 4% range, and we'll probably spend a little more money in fiscal '19 than we did in '18, because we're building out a few more plants to handle the capacity that's coming toward us. On the depreciation, we'll be running around $7.7 million a quarter. That's depreciation and amortization.

Pete Skibitski -- Drexel Hamilton -- Analyst

OK, great. Great. And the tax act -- excuse me, the tax rates?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Twenty-two percent.

Pete Skibitski -- Drexel Hamilton -- Analyst

Twenty-two percent. OK, great. Great. OK.

And then, Mike, just to close it out, on A&D overall, you've grown kind of low single digit the last couple of years, but it sounds like you're implying that the best of the narrow body ramp for sure is ahead of you, and we have got this fiscal '18 defense bill signed as well. So does it make sense to think that on the AV side you'll be accelerating in terms of growth the next couple of years?

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Yes. I would expect so. I mean, we have some really, really good programs that are lined up and are inbound, which is one of the reasons -- right now, we're going through expansions in four plants. We probably should be working on six, but how much can you work on at once, right?

Pete Skibitski -- Drexel Hamilton -- Analyst

Yeah. Understood.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Right. So yes, I think we -- there's these new engines are very important to us, and of course, the build numbers on the LEAP and the gear turbo fan are basically low. I mean, they really haven't hit their mature numbers. They start to hit those mature numbers in this year and '19 and '20.

They become very perky. So those are important engines to us, and we have good content in those places. So, and also, we've been advised that a major European engine-builder has selected us to be a supplier of some major components beginning in 2020, so I think we'll probably be expanding our plant in Poland a little bit, once we take care of the U.S. and Mexico, to accommodate some contracts over there.

So our content on these engines and these air frames is going up.

Pete Skibitski -- Drexel Hamilton -- Analyst

All right. That's great. [Inaudible] thing about the industrial side as well, because you've got explosive growth here in fiscal '18. You talk about the PMIs, you talk about a lot, are still fairly high.

With the more difficult comp, does the growth slow down? Or are things so good out there you can maybe still do double-digit-type growth in industrial? How do you think about that?

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Industrial is, because of the way industrial works, different sectors that we're servicing, you have to be a Bernanke-level economist to figure out what the future's gonna hold. We try to make sure that we have the capacity that our customers require and right now we're taxing, we're definitely taxing our capacity, so if it slowed down to the low-double digits, it might be a good thing.

Pete Skibitski -- Drexel Hamilton -- Analyst

Got it. Very good. Appreciate the color, guys. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from the line of George Godfrey from C.L. King. Your line is now open.

George J. Godfrey -- C.L. King & Associates -- Analyst

Thank you. Morning, Michael and Dan. Nice quarter and finish to the year. Just wanted to drill down on that industrial -- the aerospace is very clear, with the build rates there, 'bus and Boeing, and you highlighted that.

On that industrial segment, if we can go into the mining, oil and gas, or machinery or segments that are specifically -- do you see segments that are specifically benefiting now but perhaps won't continue in the future? Are there projects, larger-scale projects? I just would like to get a little more granularity on the 26%. I would not think that that is sustainable as such a strong growth number, so I'm just wondering if there are moving pieces that you can see that are visible today before the Bernanke Ph.D. Thanks.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

I'll let Dan answer that one.

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

So, George, in that segment we have, as Mike talked about, oil and gas, construction, mining, general industrial, and general industrial just goes all over the industrial complex in the U.S. and in Europe, and then we have our [Inaudible] business in Europe. So all them are behaving very nicely. I think, as Mike said, six months into the year, the comp's gonna get really difficult, as we talked about, right, because we had a really good year this year in the industrial side.

But other items that are in our industrial segment would be submarine and we're going to see some nice growth on the Virginia and the Columbia subs coming in in two to three years from now, so that's a nice growth story that we'll continue to see, and the military vehicles, where we're just starting to see some good activity from the Department of Defense on new builds and repair work on military vehicles. So I think on the industrial side right now oil and gas has been really strong. We think that's going to continue, and I think for us, on mining, we're always talking about large hauling trucks for Caterpillar, Komatsu, Liebherr, folks like that, and I think that's continuing to go in the right direction. [Crosstalk]

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

We have one other sector that we can talk about, and that is, there's an awful lot going on in China, building out the rail complex for high-speed trains and for city trams and so our products for those systems are very well-accepted, to the extent that we've had to build out an office in Shanghai with engineering customer service people this year in order to support that network of demand and also mapping across that is our machine-tool business, and now our largest consumers of machine-tool products is China, and the growth there seems to be, and the acceptance of our products seems to be, extremely good, and so the mechanism for, that's driving the economy over there, if anybody has a good idea of where the Chinese economy's going, it's, we're going with it.

George J. Godfrey -- C.L. King & Associates -- Analyst

Understood. Thank you for the commentary and the call.

Operator

I'm showing no further questions at this time. I would now like to turn the call back over to Dr. Hartnett for closing remarks.

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Thanks, everyone, for participating in the call today and we look forward to speaking again in the mid-summer. Good day.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Chris Donovan -- Alpha IR Group

Michael J. Hartnett -- Chairman, President, and Chief Executive Officer

Daniel A. Bergeron -- Director, Vice President, Chief Financial Officer, and Chief Operating Officer

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Pete Skibitski -- Drexel Hamilton -- Analyst

George J. Godfrey -- C.L. King & Associates -- Analyst

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