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RBC Bearings Inc (NASDAQ:ROLL)
Q2 2020 Earnings Call
Nov 1, 2019, 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 RBC Bearings Fiscal 2020 Second Quarter Earnings Conference Call. [Operator Instructions]. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

I would now like to turn the conference over to your host Mr. Chris Donovan with Alpha IR. Sir please go ahead.

Chris Donovan -- Investor Relations

Good morning and thank you for joining us for RBC Bearings fiscal 2020 second 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 Act -- 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.

Now I'll turn the call over to Dr. Hartnett.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Thank you and good morning. Net sales for the second quarter of fiscal 2020 were $181.9 million versus $172.9 million for the same period last year, a 5.2% increase. Organic growth for the quarter was 6.8%. For the second fiscal quarter of 2020, sales of industrial products represented 35.5% of our net sales with aerospace products at 64.5%. Gross margin for the quarter was $71.1 million or 39.1% of net sales. This compares to $67.8 million or 39.2% for the same period last year, a 4.9% increase. Operating income was $37.3 million versus $35.9 million last year, a 4% increase. EBITDA $51.2 million versus -- a 7.7% increase over last year. We're pleased with the performance this quarter and continue to be encouraged with the strong outlook of our aircraft businesses and are seeing green shoots in the -- as early as the fourth quarter in some of our industrial markets. Sales of industrial products over the period were down 5% last year the expansion was 7% so we were up against some difficult comps. Industrial OEM was down 4% and distribution in after market was down and organic 7.2% on a year-over-year basis. Aerospace and defense markets paint the opposite picture. The second quarter organic net sales were up 14.4% aerospace and industrial markets today are night and day. Aerospace sales were driven by OEM and aftermarket. Aero and defense OEM were up 15.1% on an organic basis. Supply chain constraints internal and external continued to ease as we bring new capacity and approvals online.

Some plants continue to be production-constrained, and we will continue to add capacity in these areas. This sector will likely continue to perform at the double-digit growth level for the next several quarters as we introduce additional manufacturing capacity and convert new contracts to revenues. At this point in our year as we enter our third quarter most of our aerospace businesses are well -- are booked well into 2021. When the 737 Max receive its FAA certifications we hope in calendar Q4 and production is accelerated. We expect our aircraft products growth rate to steepened further. Today we are beginning to see the impact of the Max in the Q3 outlook as we are beginning to feel the effects of the reduced production rate for that plane implants where production is not constrained. We continue to add both capacity and new processes and support of our customers' requirements and should be well positioned in this regard for FY '21 and beyond. With regards to our second quarter we are expecting sales between $177 million and $179 million which results in an organic growth rate of approximately 4% over last year.

I will now turn the call over to Dan for more details on the financial performance.

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Thanks Mike, SG&A for the second quarter of fiscal 2020 was $30.8 million compared to $29.3 million for the same period last year. The increase was mainly due to a $1 million of additional incentive stock compensation higher personnel costs of about $0.4 million and $0.1 million of other items. As a percentage of net sales SG&A was 16.9% the second quarter of fiscal 2020 compared to 17% at the same period last year. Other operating expense for the second quarter of fiscal 2020 was expense of $3 million compared to expense of $2.6 million for the same period last year. For the second quarter of fiscal 2020 other operating expenses were comprised mainly of $2.3 million and the amortization of intangible assets and $0.9 million of acquisition costs offset by other income of $0.2 million. Other operating expense for the same period of last year consisted mainly of $2.6 million in the amortization of intangible assets. Operating income was $37.3 million for the second quarter of fiscal 2020 compared to operating income of $35.9 million for the same period in fiscal 2019. On an adjusted basis operating income would have been $38.4 million for the second quarter of fiscal 2020 compared to adjusted operating income of $35.9 million for the second quarter of fiscal 2019.

For the second quarter of fiscal 2020, the company reported net income of $31.3 million compared to net income of $30.1 million for the same period last year. On an adjusted basis, net income would have been $32.3 million for the second quarter of fiscal 2020 compared to adjusted net income of $30.2 million for the same period last year. Diluted earnings per share was $1.26 per share for the second quarter of fiscal 2020 compared to $1.22 per share for the same period last year on an adjusted basis alluded earnings per share for the second quarter of fiscal 2020 was $1.30 per share compared to an adjusted diluted EPS of $1.22 per share for the same period last year. Turning to cash flow the company generated $24.5 million in cash from operating activities in the second quarter of fiscal 2020 compared to $24 million for the same period last year and $64.6 million in cash from operating activities for the six month period fiscal 2020 compared to $57.9 million for the six month period last year. Capital expenditures were $8.2 million in the second quarter of fiscal 2019 compared to $10.8 million for the same period last year. On a six month basis capex was $20.2 million compared to $17.7 million for the same period last year. In the second quarter fiscal 2020 the company pay down $13.1 million of debt and for the six month period we paid down $30.2 million of debt. Total debt as of September 28 2019 was $37.8 million and cash on hand was $36.4 million.

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

Questions and Answers:

Chris Donovan -- Investor Relations

[Operator Instructions] And your first question comes from the line of Pete Skibitski with Alembic Global.

Pete Skibitski -- Alembic Global -- Analyst

Good morning guys. Hey guys just want to get a sense of how you're seeing margins -- operating margins in the second half of the year. It looks like the first half you're up year-over-year in the first half. Second half I think it's a little tougher comp wise on the margin side but it looks like you're feeling good about volumes. So should we expect margins to be up period-over-period in the second half and kind of how much are they tied to whether or not we can have Max return to service?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes. Well, at the beginning of the year we gave guidance 50 bps on gross margins. So for the first six months this year we're at 38.9% compared to 38.9% last year. So a little short on the target for gross margin but we were able to keep the cost in mind. So on adjusted operating income year-to-date we're at 21.1% compared to last year 20.6%. So we're a 50 bp improvement. So I think that's going to stay steady through the year. I think we'll see the margins improve going into Q3 and Q4 and we'll try to keep the cost under control also. But I think we're comfortable with the 50 bp improvement falling down to operating income.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Sounds, great. And then Mike can you maybe expand on your comments about green shoots and industrial maybe starting to do more in the fourth quarter or are those maybe certain subsectors within industrial are already showing signs there?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well there are a couple of things that normally go on on the industrial section. Right now what you have in the third quarter or our third quarter the calendar year fourth quarter is everybody in the kingdom is trying to manage their inventories to some turn objective that they had set for their bonuses. And inevitably the businesses can't run with that artificial level of working capital. So every year what you see is in our fourth quarter the calendar first quarter all these companies hit the gas in terms of replenishing inventory so they can run their businesses properly. So I mean that's just sort of standard operating procedure in the industrial world for us. But in addition to that we have some new contracts coming in on existing accounts which are very promising which are going to bring us some industrial volumes -- increased industrial volumes next year. And we have some new contracts on new accounts which are equally promising. And we see -- we're seeing a pickup in mind?

Pete Skibitski -- Alembic Global -- Analyst

That sounds great. And is that all incremental to I think you've been expecting the submarine business to get better next year. So the commentary you just gave kind of in addition to the submarine kind of optimism?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

That has nothing to do with the submarine business. That just yes...

Pete Skibitski -- Alembic Global -- Analyst

Great, Okay. Gentlemen last question for me. Mike you're talking about inventory. It looks like and maybe this is more for Dan but it looks like you guys just looking at the cash from ops number that you've built a lot of inventory yourselves this quarter and through the first half of the year. Should we think that's not reverse maybe it's not the third quarter by the fourth quarter?

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Yes. It's been slowing down going in decelerating going into this year. At September we're going to file the Q this afternoon but we ended September at the 353.9 million in inventory compared to the year end of 335. So now some of it's backing off on the industrial side and some of it's being offset by builds on the aerospace side.

Pete Skibitski -- Alembic Global -- Analyst

Okay great. Thanks guys.

Operator

Your next question comes from the line of Kristine Liwag with Bank of America.

Kristine Liwag -- BofA Merril Lynch -- Analyst

Hi good morning guys, Mike last quarter you mentioned for the 737 that you're producing generally at 42 per month with some at 52 and some at 32. With your commentary today it sounds like there's a change with that production rate. Can you give more color of where you are today? And then also how is your supply chain coping with lower 737 volumes than previously anticipated?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well we are relative to the supply chain. We are the supply chain. So we're coping just fine. I think what we see is depending upon which products are being produced in each of these products have come from a different plan. But what we're seeing is some sectors of the aircraft business are running at 52 some are running at a little more than 52. The summer running is in the high thirties. So you just see this widespread of demand for these planes. And it kind of is what it is. In one of our plants which has capacity is being throttled by the Max demand. So that's probably a few million dollars in our quarter which we are believers that the Max will come back into production someday and this all gets corrected. So but in the plants where we're production constraint we're using this interim period to catch up. Did I answer your question or did we get off track?

Kristine Liwag -- BofA Merril Lynch -- Analyst

Well I guess it's more with the production. I guess the nature of my question just understands where you are today and then how these lower volumes in general could affect your margin outlook for the year. And then also if you're seeing some maybe a supplier to you how they're coping in that. Are we going to see bottlenecks for the -- once the airplane goes into service you'll eventually see some sort of rate ramp that Boeing's planning to see how you guys and some of your peers your suppliers could cope with that eventual rate increase.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well this bottlenecks now Kristine there's serious bottlenecks now in sector. And that's the reason that we built a new plant and that's the reason we installed a lot of these special processes in the plant. And we're going through the approval cycle now and one by one we'll be able to turn these processes on in and use them for internal production and sort of bypass the constraints that a lot of the industry's feeling right now that uses a lot of these subcontractors. So if the 737 and when the 737 comes back into production the timing is going to be just perfect for us in terms of internal production for these products. Now if the 37 is delayed through our fourth quarter which is calendar first quarter it'll probably have a couple of million dollars more impact on our revenues. If it's not delayed then the plants that aren't constrained will sort of have a great day and the plants that are constrained I think we're going to be coming out of that constraint problem soon. So I think we're going to be really well positioned to service that business certainly by the end of our fourth quarter.

Kristine Liwag -- BofA Merril Lynch -- Analyst

That's really helpful color. And in your general industrial business can you talk about the end markets and what you're seeing in terms of growth and also order activity?

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Yes. So Kristine on the industrial side for the quarter we were down about 2.8% and organically about 5%. So if you take out the Swiss Tool acquisition we just took. And the major drivers there first the big one is the oil and gas was down 54% in the quarter and that's equivalent to about $1.8 million of sales in the quarter. So if we took that out of the equation we basically would've been flat year-over-year on our industrial sales. So I think the slow points we're seeing Q2 oil and gas mining and general industrial distribution where Mike was talking about a little earlier they're correcting their inventories where we had some positive signs on the industrial side was back in semiconductor equipment and on our marine side of the business. So that's kind of on the industrials.

Kristine Liwag -- BofA Merril Lynch -- Analyst

Thank you very much.

Operator

Your next question comes from the line of George Godfrey with CLK.

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

Good morning, Thank you for taking the question. I heard all the comments about the production of the Boeing 737 Max coming back in just want to take or get some thoughts on a more pessimistic outlook. And is that something that you have thought about? What if what if production were to go down to like 10 or 15 plants or the coming back into service gets pushed out to next summer? Have you thought about what that means for your business and supply chain or taking more or what is a more dire scenario that you're thinking about? Thanks.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well I mean our business the dimensions of our business are far beyond the 737 Max. Although the 737 max is an important contributor to for what we do. I think it's no secret we have more than a $100000 per plane. So it's a delay in the production wouldn't be a great news but we'd get through it. On the other hand there's other programs that are alive and coming through and when one door closes the other door opens.

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

And is that something you could ramp up if owners from the Max started winding down or production had to go down in the A320 Neo to ramp up? Is that something you'd be prepared to address or meet?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes. Well I mean it's the Neo and the Max to a large extent use this same kind of product that we produce. It's a sort of a generic bearing set that we produce for both ships and they have different part numbers but basically the same bearing in many cases. So a lot of that mix is the same. Some of that mix is different so it isn't all generic mix.

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

Got it, And then my last question in the press release you call out the four or five fewer production days in the next quarter or the current quarter that we're in now. But relative to last year there would be no difference in the days correct?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

That's correct. This was the same last year.

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

Okay, thank you very much.

Operator

Your next question comes from the line of Josh Sullivan with Seaport Global.

Josh Sullivan -- Seaport Global -- Analyst

Good morning. Just keep talking about the 787 program? Is that a large program for you? I don't know if you've ever given ships that values on that. And then did you see that already working its way through the supply chain on the cut? Just where do you think you are on the 787 at this point?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well 787 is equally important plane to us. And I think what are they backing off one ship per month? Is that what I heard? I think that's the right thing.

Josh Sullivan -- Seaport Global -- Analyst

I think it's two.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes. I mean it's -- it doesn't have much of an effect on us I think it's probably particularly if the Max replaces it and the 777x comes onboard and if the 777x comes on board in a reasonable timeframe whatever we'll have our hands full.

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

And the most important platform for us would be the 777x.

Josh Sullivan -- Seaport Global -- Analyst

Have you seen any changes in the poll on that program right now? Just given some of voting sky and guidance on entering the service?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes, we have seen some delay but at the same time they're bringing up the 777 to sort of accommodate their market demand. So our content on the 777 is very good. Our content on the 777x is probably 50% better.

Josh Sullivan -- Seaport Global -- Analyst

And then just switching over to the submarine business I think earlier this year there were some timing delays just on the block five changeover if I remember correctly. Do you see any changes to that progression going forward on the negotiations in the block five? Has it gotten better? Has it accelerated? Is the CR having any impact on that?

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

I think it's right on time where we thought it was going be we are going through final terms and conditions negotiations and so we should be in pretty good shape.

Josh Sullivan -- Seaport Global -- Analyst

All right, Thanks for the time.

Operator

Your next question comes from the line of Michael Ciarmoli with SunTrust.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Hey good morning guys. Thanks for taking the question. Just on I mean we've been talking about aerospace here. I mean the 87 is going down 24 units per year that the 777X is getting delayed. If the 737 never goes to 57 a month I mean how are you guys looking at you've had a lot of capacity you've insourced a lot. I mean you kind of suggested that some of your facilities are feeling lighter volume already. I mean could you be looking at a situation where you've got too much capacity and you're going to have some overhead absorption issues.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

We don't see that scenario developing for us. We have only one facility that is being affected by the 737 Max slow down. The other facilities are very much as I said production constraints. So yes I mean if the Max doesn't come back into service I think this is a disaster for the industry but I think a likelihood of that is zero. I think they'll get through it. It's a matter of timing and maybe a new CEO or two but they'll get through it.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

When you say if the Max is delayed more I mean if we get a return to service later -- December we get a February starts flying but they opted to not take that rate to 57. If they hold this rate at 42 does that keep this headwind on you guys?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

No. I don't first of all I don't think that supply chain is capable of making 57 notwithstanding their optimism about its robustness. I don't think that I don't think it's there. I think the supply chain would have a very great amount of difficulty maintaining 52 our models for next year are based around 52. And if it's more it's better if it's less we'll deal with it. So that's kind of where we are right now. And I think the whole -- and I think everybody is waiting for the next shoe to drop on the program.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. And then maybe just one more on that topic. I mean I knew you guys talked about that you were picking up some share. Is that still the case? Is that softening maybe the blow of being at a lower rate can you just I think you hinted at that a quarter or two ago that you were in fact taking share -- challenged to suppliers out there?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes that's definitely mitigating the volumes. That's one of the reasons why we're so production constraint in some of our plans as our competition is having a great deal of difficulty getting these products to their plants.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Okay. All right. Thanks guys. I will jump back in the queue.

Operator

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Hey good morning. Mike I just wanted to go back to the industrial inventory commentary and the thought about replenishment. Can you remind us of your exposure to things like off-highway and construction equipment? Because we're seeing some pretty sizable year-over-year order contraction which is going to lead to lower production next year and in some of those end markets and that should flow through to general industrial and distribution at some levels. So just any color on that?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

On our our exposure to the...

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Highway construction equipment cranes that sort of thing.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes. We don't have the kind of exposure that Timken seems to have. It's a smaller sector for us but it's a meaningful sector. I think Dan's probably more current on the numbers in that sector than I am but I'll let him speak to it.

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Yes. For us in that sector it's the big hauling trucks where we have a lot of our content on. And so it's mainly driven by the mind activity and commodity activity in the mines.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Okay. So not much exposure to that kind of traditional construction equipment at all?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well we have exposure to it but it's not a sizable market like we would see in heavy haul and mine trucks.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Right. So more of the size of like oil and gas as you described earlier something like that.

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Yes probably even around there maybe $5 million to $10 million type market.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Got you. Okay. And switching gears can you just talk about the strategic rationale for buying Swiss Tools?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes. What would you like to know?

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Probably it looks like a niche supplier of tools for turning and boring right? So how does that fit with your portfolio?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well we make tools for turning and boring and grinding and machining and the like in Switzerland we liked the market. It's a market that -- yes it's definitely a razor blade market. And we like those markets like bearing markets where you sell the product once and it has to be replaced 5x or 10x in its life cycle before a new product replaces it. So that's the nature of that product level and we liked that sector a lot and we intend to do more work in it.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

So this is really a market consolidation and scale play?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Well it is in a market that where we feel we know how it operates and we know the players and we know the manufacturing technologies needed to support it. And we look for companies that have good strong defensible franchises in those markets.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

And that's great. And I know it's small but can you talk about the margin profile?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Big

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Is it accretive to corporate?

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Yes substantially.

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

Got it, Thanks

Operator

[Operator Instructions] And at this time we have no questions. I will now like to turn the conference back to Dr. Hartnett.

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Okay, well thanks once again for participating in our conference call and that completes the call for the second quarter. And we look forward to talking to you again in January. Good day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Chris Donovan -- Investor Relations

Michael Hartnett -- Michael Hartnett-President and Chief Executive Officer

Daniel Bergeron -- Vice President, Chief Financial Officer and Chief Operating Officer

Pete Skibitski -- Alembic Global -- Analyst

Kristine Liwag -- BofA Merril Lynch -- Analyst

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

Josh Sullivan -- Seaport Global -- Analyst

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Steve Barger -- KeyBanc Capital Mmarkets -- Analyst

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