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RBC Bearings Inc (NASDAQ:ROLL)
Q3 2020 Earnings Call
Feb 4, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2020 RBC Bearings Earnings Conference Call. At this time all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today Bruce Hamilton with Alpha IR. Please go ahead.

Bruce Hamilton -- Investor Relations, Alpha IR

Good morning and thank you for joining us for RBC Bearings Fiscal 2020 third 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 further 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 will turn the call over to Dr. Hartnett.

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

Thank you, Bruce, and good morning. Net sales for the third quarter of fiscal 2020 were $177 million versus $171.5 million for the same period last year, a 3.2% increase. Organic growth for the quarter was 3.6%. For the third fiscal quarter of 2020, sales of industrial products represented 34% of our net sales and aerospace products at 66%. Adjusted gross margin for the quarter was $70.9 million or 40.1% of net sales. This compares to $68.1 million or 39.7% for the same period last year, a 4.1% increase. Adjusted operating income was $37.8 million, 21.4% of net sales. EBITDA was $50.9 million, a 6.3% increase over the last year.

The quarter certainly had its challenges and noises. Accommodations made to support Boeing's schedule changes driven by MAX rescheduling began to challenge our logistics and suppliers causing other products to be accelerated in the schedule to replace the delayed MAX products. As you can see, we were able to accommodate many of these changes and came in at the bottom end of our revenue guidance for the period. We did miss some sales on products, as a result of last-minute technical delays, which is typical in a quarter short on production days and long on holidays.

Sales of industrial products were down 7.5% from last year. The prime variance here fell in our ring [Phonetic] products area with the completion of very complex assemblies missed schedule. Without this delay, sales of industrial products would have been flat with last year. Sales to the industrial aftermarket expanded by 13.2%. The organic sales component of this was 0.9%.

The weak markets in our classic industrial OEM lineup continue to be mining and oil and gas. The strong markets were general distribution, semiconductor capital goods, ground defense and international train. Aerospace and defense markets continue to perform well. The third quarter organic mix net sales were up 13%. Aerospace sales were driven by both OEM and defense. Aero and defense OEM were up 14.7% on an organic basis. Important contributing markets here were airframe, aero engine, space and missiles. We also see some benefit as a few of these products previously made in Turkey are now being made by RBC Bearings.

The Fog around today's 737 MAX outlook creates a certain amount of challenge in setting production rates and sales outlook for the fourth quarter and beyond. As you know, our trailing content per ship has been approximately $120,000. This will climb toward $160,000 per ship over the next year, plus as new contracts mature. This matter, its impact on sales and production rates has our greatest attention as we move into our new fiscal year in April. We've received broad monthly guidance from Boeing on a monthly MAX rate and are standing by for a flow down of specific production schedules from our customers.

Regarding our fourth quarter, we are expecting sales to be $187 million $191 million, which results in organic growth rate of approximately 1.9% to 3.5% over the last year. We have baked into this projection $4 million of revenues. We expect to shift into next year as a result of the MAX production reschedules. We think this is a fair estimate for the impact on Q4. I will now turn the call over to Dan for more details on the financial performance.

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

Hey, thanks, Mike. SG&A for the third quarter of fiscal 2020 was $30.7 million compared to $29.1 million for the same period last year. The increase is mainly due to higher personnel cost of $0.4 million and $1.2 million of additional incentive stock compensation. As a percentage of net sales, SG&A was 17.4% for the third quarter of fiscal 2020 compared to 17% for the same period last year.

Other operating expense for the third quarter of fiscal 2020 was expense of $2.5 million compared to expense of $19.1 million for the same period last year. For the third quarter of fiscal 2020 other operating expenses were comprised mainly of $2.5 million in amortization of intangible assets. Other operating expense for the same period last year consisted mainly of $16.8 million of cost associated with the sale of the Miami division and $2.4 million in amortization of intangible assets, offset by other income of $0.1 million.

Operating income was $37.5 million for the third quarter of fiscal 2020, compared to operating income of $19.8 million for the same period in fiscal 2019. On an adjusted basis, operating income would have been $37.8 million for the third quarter of fiscal 2020 compared to adjusted operating income of $36.6 million in the third quarter of fiscal 2019.

On a year-date basis, operating income was $113.3 million for the first nine months of fiscal 2020, compared to operating income of $91.7 million for the same period in fiscal 2019. On an adjusted basis, operating income would have been $114.7 million or 21.2% of net sales for the first nine months of fiscal 2020, compared to adjusted operating income of $108.5 million or 20.9% of net sales for the first nine months of fiscal 2019. As a percentage of net sales this is a year-over-year improvement of 30 bps.

For the third quarter of fiscal 2020, the company reported a net income of $30.5 million, compared to net income of $16.2 million for the same period last year. On an adjusted basis, net income would have been $30.4 million for the third quarter of fiscal 2020 compared to adjusted net income of $28.5 million for the same period last year.

Diluted earnings per share was $1.22 per share for the third quarter of fiscal 2020, compared to $0.65 per share for the same period last year. On an adjusted basis, diluted earnings per share for the third quarter of fiscal 2020 was $1.22 per share compared to adjusted diluted EPS of $1.15 per share for the same period last year.

Turning to cash flow, the company generated $46.6 million in cash from operating activities in the third quarter of fiscal 2020, compared to $21.1 million for the same period last year and $111.2 million in cash from operating activities for the nine-month period of fiscal 2020 compared to $79 million for the same nine-month period last year.

Capital expenditures were $7.3 million in the third quarter of fiscal 2020, compared to $11.5 million for the same period last year. On a nine-month basis, capex was $27.6 million compared to $29.2 million for the same nine-month period last year. The company repurchased $1.7 million of common shares in the third quarter of fiscal 2020, compared to $1.2 million for the same period last year. On a nine-month basis, common share repurchases were 11.5 million compared to 4.7 million for the same nine-month period last year.

In the third quarter of fiscal 2020, the company paid down $15.5 million of debt and for the nine-month period, paid down $45.8 million of debt. Total debt, as of December 28, 2019 was $22.8 million and cash on hand was $60.3 million.

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

Questions and Answers:

Operator

Thank you. Our first question in the queue comes from Kristine Liwag with Bank of America. Your line is now open.

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

Hi, good morning, guys.

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

Good morning.

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

Good morning, Kristine.

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

Can you provide more details about the Boeing 737 pause, how much it affects you? I know in your press release you gave out ship set content. But what kind of rate will you be producing during this time? And then also, how do you expect the change in volume to affect margins?

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

You always ask us the easiest questions, Kristine. But I expected that one. So, the impact on fiscal '21 sales is about $40 million as a gross number. Let me work it down to a net number because that's offset by the increase in the 777-777X [Phonetic] production rate. And that production rate is about equivalent to five MAX ships. That increase in production rate is equivalent to about five MAX ships per month. So, we -- we have a rough idea of -- from Boeing on what their monthly production rate is going to be next year, and I'm sure that's subject to change. And we looked at what the production rate was last year and as near as we can tell, between the 737 MAX and the 737 NG, there were 534 ships produced and that's equivalent to about 44.5 ships per month.

We're under the guidance that the Boeing reschedule is going to be averaging about 25 ships per month over the -- over the next 12-month period. So, if I take those 25 ships per month against the 44.5 ships per month produced last year and I add five ship equivalents for the increase in -- in the 777X program, I come to about 30 ships per month. And at $120,000 per ship, that's about a $17.4 million decrease from last year's rate. And that's going to be offset by what we're seeing as an increase in spares for the older 737s that have been put into production, and we're seeing a bump in demand there. And that's probably going to offset that $17.4 million by about $5 million. So, the net comes to $12.5 million over the 12-month period. So that's something like $3 million to $4 million per quarter of headwind as a result of the -- of the MAX delay.

And the extra time required to bring the MAX on line actually has as a positive side to it also. It allows us to bring more vertical integration and process approvals into play so that -- so that we're producing these parts more efficiently when the volume turns on. So that's -- that's how we're viewing the situation right now, Kristine.

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

That's really helpful. Thank you very much.

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

Okay.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Hey, good morning, guys. Mike, just a follow-up on that. So I mean assuming Boeing kind of starts to slowly restart production in the summer time, should we think your headwinds on the MAX will be more first-half weighted and they start to kind of reaccelerate in the second half of calendar '20, is that maybe the way it will work?

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

Yeah, that's how we see it exactly.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay, OK. So, we should think about aerospace overall maybe having -- maybe being down in the first half of fiscal '21 or close to that and then accelerating pretty heavily in the back half.

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

Yeah, I think that's how we're seeing it. I mean there is some -- some additional aerospace volumes being -- that are flowing in from the defense side that will offset that some more. So, we may -- we may see a flat aerospace for the first quarter maybe spreading into the first and second quarter, but we may be a little bit better than that.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Okay. Yeah, I guess a follow-up on that Lockheed some but bring obviously you've touched on bringing the F-35 work out of Turkey, it sounds like that benefited you. Can you quantify that at all or maybe talk about your content on the F-35?

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

Yeah, I think the, there were a lot -- the biggest benefit that we're seeing is there were other non-F-35 programs that were being produced in Turkey, which are benefiting us in a significant way and it has more to do with missiles.

Peter Skibitski -- Alembic Global Advisors -- Analyst

I see. I see, OK. So, this is related to the F-35 decision, but just a different program.

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

Yeah, it's a different program. It's not a small, it's not a small addition for us, it's a, it's a meaningful impact to one of our divisions.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Okay, great. Maybe last one for me. Just curious on the industrial side. We saw the ISM, PMI pickup in January. For the first time in several months. So, just wondering, you how kind of early days in the fourth quarter for you, are you kind of seeing any recovery there based on this kind of indicated from the of PMI?

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

Pete, on the industrial distribution side in the quarter, Q3, it was up 13%. Now, some of that was due to Swiss tool, a big chunk of it. So, if I pull Swiss tool out of there, the company, we just acquired two quarters ago. Our growth on industrial distribution was about 0.9%. So, we've seen that stop and we're starting to see that move in a very traction going in to the fourth quarter.

As Mike said on our classic RBC type markets like mining and oil and gas, meaning frac that will continue to be down and going into our fourth quarter but it's being offset by some other traditional markets that we operate in, like semiconductor military vehicles. And then just general industrial activity. And then in the third quarter our marine business was down significantly, mainly just a timing and so that will be up nicely in the Q4, again offsetting some of this headwinds that we're getting from our classic RBC Markets.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Okay. So, maybe the worst of the industrial headwinds are kind of behind us. Is that what you're thinking?

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

Yeah, I think in certain markets, they're not and others they are already improving and doing better. Oil and gas, still, we have a ways to go. I think an oil and gas on fracking, but once bottomed out in the fourth quarter, the comps will get a lot easier start in Q1.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Right, OK. And you saw the Colombia kind of production ramp ahead of you, I know that's going to be a nice program for you right?

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

Yeah. What we're trailing off. Now the block 4 Virginia program and that's -- these last complicated parts that we're getting through in this fiscal year. And then going into next year. So, we're kind of at the single boat build now right because block 5 a single boat in a nine-boat program. So, we're starting to go into this program and a single boat in the second half of the year. Back to probably two ships running average a month. And so, we should see some nice growth next year on the marine side of the business. And of course, we're continuing to do engineering and design work on the Columbia, but that really doesn't go into production. I think into 2022, 2023.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay, thanks for the color, guys. Appreciate it.

Operator

Thank you. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. When you think through the revenue headwind whatever happens to margins and how you manage inventory through this process on the aerospace side. What do you expect the free cash flow impact is next quarter and into next year?

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

Yeah. Steve, I don't think it's anything major. I think going into next year on total company, we're not going to be at a negative growth rate. So, it all depends where our top-line is coming out and we'll give more guidance on that, on where we expect in 2021 the look, when we get on our fourth quarter conference call at the end of May. But I think right now we'll probably close to the top of our inventory build program and most of our divisions. And so, we should see a pretty good year for cash flow generation from operations.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay. And going back to the last question on the industrial side, the comps get a lot easier into next quarter. You talked about Marine timing. Given the puts and takes, do you think industrial organic is down next quarter or can you be flat or up?

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

I think for Q4, we should be pretty much flat. I mean our classic industrial will be down a little, but it will be offset by our Marine.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, OK. And just given the weakness that you're seeing in some of the classic markets to use your term. Are you seeing competitors coming more aggressively on price that are causing share shifts or is this really a volume function?

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

It's purely volume function if anything we're picking up market share in the marketplace. And then Mike had talked a little bit about that on Q2, we referenced green shoots that we've been working on the industrial side that we feel will definitely impact Q1 and Q2 in fiscal ' 21.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So, just so I understand you think you're taking share on in mining and oil and gas or on the other kinds of industrial?

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

On other markets.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay. Got it, thanks.

Operator

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Dr Michael Hartnett for closing remarks.

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

Okay. Well, we appreciate your interest in RBC and look forward to speaking to you again after our fourth quarter. And thank you for your interest.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Bruce Hamilton -- Investor Relations, Alpha IR

Dr. 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 Merril Lynch -- Analyst

Peter Skibitski -- Alembic Global Advisors -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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