Good day, ladies and gentlemen, and welcome to the Q4 2019 RBC Bearings earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Chris Donovan with Alpha IR. Mr. Donovan, you may begin.
Good morning, and thank you for joining us for RBC Bearings fiscal 2019 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.
Good morning and welcome to the RBC conference call. Net sales for the fourth fiscal quarter of 2019 were $182.2 million versus $179.9 million for the same period last year. Excluding the sales from Avborne Miami, a business that we recently sold, organic growth for the quarter was 4%. The fourth quarter of fiscal 2019, sales of industrial products represented 37.2% of our net sales, aerospace products 62.8%. Gross margin for the quarter was $73 million or 40.1% of net sales on an organic basis. This compares to $69.8 million or 38.8% for the same period last year, a 9.6% increase. Adjusted operating income was $41.2 million versus an adjusted $38.5 million last year, 22.6% of sales. For the full year, adjusted EBITDA was $195.5 million or 27.8% of revenues, which is a record.
The business performed very well for the quarter as we are beginning to overcome our own production supply constraints, which are the same as those currently plaguing much of the aerospace industry. Industrial products showed a 5% organic year-over-year decline during the period against the strong comps of a year ago. Industrial OEM sales expanded 6%, and distribution and aftermarket was up 7% for the full year. Aerospace and defense showed a 10.2% expansion on an organic basis. Shipments on the defense side were up 11.8%, while aero-commercial OEM was 11.2%. Aerospace was up a total of 7% for the year. The increased build rate and new content at the major airframe and engine producers continues to drive very strong demand as we race to bring capacity and processes online across our manufacturing network.
We saw no impact from the 737 MAX problem in Q4, and at this stage of the quarter, we don't expect to see any this period. We are making good progress on business development across the breadth of both the aerospace and defense sectors, which will be reflected in our results throughout FY 2020 and beyond. We remain on track to bring additional plant capacity online this year to address the increases in demand as well as internalize many processes that have been traditionally outsourced to our subcontractors. The purpose here is to augment industry capacity in support of the unprecedented expansion in the aircraft industry and to create an infrastructure that is more responsive to the needs of our customer base. Aerospace demand drivers this year will be the major airframe and engine builders.
We continue to see supply of an ever-expanding range of products, including, of course, bearings as well as bearing-integrated structural components, fasteners, engine seals, and hydraulic actuators, among other products. Today, we are preparing to support the accelerated build rates of the 737 MAX and the 787 ships as well as the introduction of the Boeing 777X, which will be a very important ship to RBC Bearings. On the defense side, the submarine business continues to show strong current demand and future promise as plans for the expansion of future sub builds become firm. As funding for the nine boat Block V is underway, there is a movement underfoot for an 11-boat Block V, which will mean a three boat Virginia-class build starting as early as 2020.
The Joint Strike Fighter build rate increases again this year, another high-profile program for us, and more funding is allocated for offensive weapon systems, including missiles and advanced bombers. Both systems use products core to our business. Last but not least is space. We are working with the major rocket system and satellite manufacturers on the new century of space technology. New designs for bearings and actuating devices to be used in rocket guidance, rocket engine turbopumps, and communication satellites are being created, turned into operating hardware, and sold in low-production quantities to the principal manufacturers. Our belief is that this will be a very productive area for our products in the future. It's very hard to put a limit on the future business that could be developed if interplanetary travel becomes a reality. However, the explosion of disposable communication satellites is very close at hand.
Regarding our first quarter, we are expecting sales to be between $182 million and $184 million compared to $171 million last year net of the Avborne Miami contributions. I will now turn the call over to Dan. He'll give you more detail on our financial performance.
Hey, thanks, Mike. SG&A for the fourth quarter of fiscal 2019 was $29.5 million compared to $29.6 million for the same period last year. As percentage of net sales, SG&A was 16.2% for the fourth quarter of fiscal 2019 compared to 16.4% for the same period last year. Other operating expense for the fourth quarter of fiscal 2019 was expense of $3.2 million compared to expense of $2.1 million for the same period last year. For the fourth quarter of fiscal 2019, other operating expenses were comprised mainly of $2.3 million in amortization of intangible assets and $0.9 million of restructuring expense. Other operating expense for the same period last year consisted mainly of $2.3 million in amortization of intangible assets offset by other income of $0.2 million.
Operating income was $40.3 million for the fourth quarter of fiscal 2019 compared to operating income of $38.1 million for the same period in fiscal 2018. On an adjusted basis, operating income would have been $41.2 million for the fourth quarter of fiscal 2019 compared to an adjusted operating income of $38.5 million for the fourth quarter of fiscal 2018. For the fourth quarter of fiscal 2019, the company reported net income of $31.4 million compared to net income of $26.7 million for the same period last year. On an adjusted basis, net income would have been $32.9 million for the fourth quarter of fiscal 2019 compared to adjusted net income of $26.4 million for the same period last year. Diluted earnings per share was $1.27 per share for the fourth quarter of fiscal 2019 compared to $1.09 per share for the same period last year.
On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2019 was $1.33 compared to an adjusted diluted EPS of $1.08 for the same period last year. Turning to cash flow, the company generated $29.5 million in cash from operating activities in the fourth quarter of fiscal 2019 compared to $37.8 million for the same period last year and $108.5 million in cash from operating activities for the full year of fiscal 2019 compared to $130.3 million for the same period last year. Capital expenditures were $12.1 million in the fourth quarter of fiscal 2019 compared to $7.4 million for the same period last year. On a 12-month basis, CapEx was $41.3 million compared to $28 million for the same period last year.
In the fourth quarter of fiscal 2019, the company paid down $70.1 million of debt and for the 12-month period, paid down $130.5 million of debt. Total debt as of March 30, 2019, was $43.6 million, and cash on hand was $29.9 million. I would now like to turn the call back to the operator to begin the Q&A session.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star, then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Steve Barger of KeyBanc Capital Markets. You may proceed with your question.
Hey, good morning, guys. This is Ken Newman on for Steve.
Hi, Ken. How are you doing?
Good. Just curious, could you just talk about the decline in industrial? Obviously, you had a really tough comp this on the prior year, and the comp gets a little tougher or is still tough into the first quarter of your new fiscal year. Did you just talk through which end market categories were down versus what's still showing strength?
Sure. Remember, last year, Q4, we grew the industrial business at 26.4% in the quarter, so it's a really tough comp. But it's kind of just down a little on oil and gas, marine, semiconductor, and machine tool collets. And so it's kind of evenly spread across those four end markets for us. But we're still confident in fiscal year 2020 that we'll be able to achieve that normal goal of two times GDP on growth on the industrial side of the business.
Okay. That's helpful. And then switching gears here, I just wanted to talk about free cash flow. Obviously, there's been a lot of CapEx geared towards some of the capacity additions and other restructuring actions that you took this year. As you think about free cash flow in your fiscal 2020, do you think conversion could kind of return back towards that 100% or better that you've done in more normalized portions of the cycle?
Yeah. As you know, Ken, we consider ourselves a growth company, so we're going to invest in growth. So that means organic growth and acquisitions. I think on the organic growth side, we're pretty much there. Well, it all depends on how much more capacity that we want to put in, depending on what's going on with some of these new programs that are coming at us over the next 24 months. But I don't think we'll be at $41 million next year on CapEx. It'll be a little less than that. And we did end this year with a little bigger investment in working capital, mainly AR because of the big pickup in revenues in the fourth quarter and in strategic inventory coming out of this year to prepare us for fiscal year 2020 and 2021. And that will normalize over the next 12 to 18 months also.
We'll be back to that conversion of over 100% of net income to cash.
Got it. And then lastly, before I jump back into queue, I just wanted to ask about the margin profile. In past years, I think you'd always had a goal for about 100 basis points in gross margin expansion. First, do you think that's still possible with tough comps in industrial in fiscal 2020? And I'm also curious, did you see anything unusual in the quarter to drive operating income dollars higher than the revenue growth in the quarter? I'm trying to think about how you think about the forward mix of industrial versus aerospace growth.
Well, I'll answer the first part of your question. I'll let Mike answer the second. So, remember, when we began this year, we gave the street our point of view on what our internal goal was on growing gross margin. It was 50 basis points. And we ended the year at about 108. And a part of that came from the sale of our Miami division because it was a lower gross margin product offering. But a big chunk of it came from more efficiency and better pricing in the marketplace. Our internal target for fiscal year 2020 is around 50 basis points again. And because we have a lot going on, we have to start up all these new facilities that will be coming through. And so we do have some headwinds in those expenses as we go through the year. Well, that might answer.
Do you see anything unusual? I don't.
Unusual in the basis points?
I don't think so. Last quarter or looking forward?
I mean, looking specifically at the quarter, but I mean, the takeaway on the forward look would be great as well.
Well, we've had several businesses over the quarter, this past quarter, actually for the year where we were our book-to-bill was 150%. And that leads to a very strong environment for pricing.
Yeah. Perfect. That's very helpful. I'll jump back into queue.
Thank you. And our next question comes from Michael Ciarmoli of SunTrust. You may proceed with your question.
Hey, good morning, guys. Thanks for taking the question. Real nice margin performance in the quarter. Maybe just to go back to Ken's line of questioning on industrial. I mean, I know last quarter, semi was softening, and you had some other end markets leveling off. Can you give us color? Did the trends outside the tough year-over-year comp, did any of the trends worsen in any of those end markets? And maybe if you could talk about the you had nice backlog growth. Was industrial kind of strong on the booking side, or what drove that backlog growth?
Yeah. I think on the industrial side, I mean, with oil and gas, when you get to that certain level, it's just getting a little lumpy now, right, from quarter to quarter since we grew that business over 20-something% over the last year and a half. And none of these are really kind of connected. On the machine tool collets for us, that's mainly our European business that serves in the industrial base in Germany and Switzerland and in China. And then on the marine side, that's just because we're transitioning off of Block IV, which is coming to an end on the marine Virginia builds, and we're transitioning into the Block five, which is starting off as a one-boat build and then going to two and then hopefully to three.
We discussed that on the last call, I think, in depth on what we felt was going to the impact of marine was going to be. Going into April, our order book was very strong on the industrial side, and then it calmed down again a little in May. I think it's always going to when you get to that certain level on the industrial side, after growing the business double-digit for two years, it's going to get back to a normalized growth rate where we need to focus very hard on market share gains, which we're doing.
Got it. You mentioned the Virginia-class again. Does the three-boat the staying at two versus three have any implications? I know the House Appropriations Committee just kind of made a surprise move and cut that third boat, and it looks like they're moving more money into ship maintenance. Does that have any impact on what your run rate would be in that business if that third boat doesn't come through?
Well, we'd love to see the third boat come through, but it doesn't have that would have influence on our runway rate for sure because that boat is probably worth anywhere, depending on how it's configured, from $12 million-$15 million to us. So yeah, that would have a reasonable impact. But with that said, since we've owned Sargent Aerospace, we're in a position where they're building three boats a year. It's always up to.
Yeah. Got it. Got it. And then just more on the 737. I know we've got the summit today, and it certainly looks like this is going to be more of an extended downtime. I know it's a pretty important platform for you guys. Are you seeing any indications from some of your customers? It sounds like everybody's still shipping at 52 per month. But how are you sort of framing that risk in your fiscal 2020 planning horizon if you see any risk? It seems like there's a big unknown right now, and I guess Spirit's continuing to produce at 52. I just don't know how a lot of these suppliers are managing this unknown. So any more color you could see there? Any discussions with any of your customers what the cadence of production might look like or how you're framing that risk and unknown?
Well, it's a simple question with a complicated answer. First of all, the demand on the industry right now to produce componentry for this system is right at its maximum. I mean, if there's a delay in the 737 production for a few months, which we expect there's going to be, it would be a blessing more than anything else because, as I said earlier, when we're booking these businesses at 150% book-to-bill ratio, the bathtub is completely filled to the brim with water industry-wide in terms of capacity versus demand. So to move from the 52 ships to the 57 ships is going to be very difficult for the infrastructure to support that demand. Do I think that Boeing can solve the technical problem relative to the system that actually, I don't the question is, did the system malfunction, or did they have incompetent pilots?
That's a question I think that'll go around and around forever. But to make the system more sailor-proof, shall we say, is, I think, very Boeing is very capable of doing it, has the technology to do that. And now that they're focused on it, no question will apply their skills to making that system sailor-proof. The question is, why wasn't that done in the past? I mean, who was ever putting the airplane together as product program manager? I mean, they've made a choice that maybe he wished he didn't make right now. But I think the problem has moved from one of a technical problem to one of a political problem. How does the political problem get solved? By politics over time. We're expecting that time frame to be sometime into the fall. Will the 737 MAX fly again? Yes. Will it be a successful ship? Yes.
Will Boeing catch up their production rates? Yes. Will the industry stumble trying to support Boeing to these production rates? Yes. That's how we see it.
Got it. Last one then, just I mean, if they stay at 52 a month here through maybe May or June of next year, does that have an impact on your growth rate?
No. It absolutely does. It absolutely will not. If they go to 57 a month, it will be extremely difficult for us to achieve that support rate. Basically, what happens in this industry is when the other suppliers can't supply the product, the subcontractor base comes to RBC for the supply. And that's one of the reasons why we're up 150% versus where we expected to be last year, is that the industry is sort of defaulting to RBC for supply requirements. And at 57, I don't think we can take on everybody's requirements.
Got it. No, that's really helpful color. I'll jump back into queue, guys. Thanks.
Thank you. Our next question comes from Kristine Liwag of Bank of America. You may proceed with your question.
Hey, guys. Good morning.
Morning, Christine.
Gross margins are pretty much at the highest level you've had in history. When you look at margin expansion opportunities from here, how reasonable is it for you to get another one percentage point each year?
Are you going to put that into your model, Kristine? You're dialing in 1% a year for the next five years.
Well, that's what you've said in the past, and you've pretty much delivered on it. So I want to see where the future lies.
Yeah. Well, I think given the products that we make and given the environment that we're in right now, I would say that that's other things aside, that's probably achievable. Dan just fainted. Let me help him up off the floor here. But offsetting that, we have startup costs on new plants. And it's very hard to predict the impact and the timing of these costs and when those plants will be sort of big margin contributors. And so that's a little bit of an unknown. So we're not so terribly bullish on the 1%, although if we were just a steady state running our business against our current mix and current volumes, that's eminently achievable. But we're not. So we're growing volume. We're going to grow margin. It's hard to tell you that it's going to be 1%.
It'll probably be 0.5% for the next year.
Great. And then looking at that plan, I think what you guys have said before is that you expect 150,000 sq ft of capacity additions to come online by the first half of fiscal year 2020. So that's about three-quarters of the capacity additions you had announced. So I was wondering, does that mean that first half of 2020 should bear the brunt of that startup cost? And then at what point would those facilities be accretive? I mean, these are, I think, a lot of the pieces you're insourcing because of supply constraints in the market. So presumably, you should get a pretty healthy margin from those additions in the long run.
That's exactly how we see it too. It'll be the first six months. We're a little ahead in some areas and a little behind in others. I'd say six months kind of clears the deck.
And then the net of it is basically, as you said, 1 percentage point gross margin for the business, and then you have startup costs, but it nets out to about 50 basis point gross margin improvement for fiscal year 2020, but margin's kind of back-end weighted. Is that fair?
That's fair.
Great. Thank you.
Thank you. Our next question comes from George Godfrey of CL King. You may proceed with your question.
Good morning. Thank you for taking the question. I just wanted to understand the capacity constraints, what you can ultimately control and then what you're subject to other suppliers. I'm thinking the processes that you want to bring in-house, the lead times on the equipment and machines you need versus other suppliers that you really can't alter their process or production. You just have to wait. Can you quantify where you are in controlling the constraints that you have control over the next nine months versus what you can't? Thanks.
Yeah. We're in very good shape, George. We have most of these processes coming online. It's not to say that we're not going to buy some of these processes from our subcontractors going forward. We are, but they have not. We can see industry-wide, a lot of these subcontractors are small people. They don't have big balance sheets. They're conservative. They're not willing to expand their businesses. They're happy with what they've got. But it doesn't address the industry problem of needing more supply of these products. So the capacity that we're adding sort of augments the industry capacity and takes care of that problem. The other issue is because of the products that we make, our very high pedigree products that have to have processes done only by certain specified agents in the country. So we make bearings in Connecticut.
Those bearings have to go to California for some of their treatments and then back to Connecticut for the next step in the process, and sometimes back to California again for subsequent treatment and then back to Connecticut for finishing. So the bearing has to travel 5,000, 6,000 miles in its journey from raw material to finished goods. So internalizing those processes, the bearing is completed in the same plant. And it's just going to have an amazingly positive effect not only on rate of throughput but also on obviously, when you have a bearing going back and forth to California with frequent flyer miles, it ends up having a lot of extra WIP in the system because you just have to because your lead times are expanded for those travel delays.
Those treatments that you're bringing in-house, do you think that process of bringing that treatment and getting that certification is completed, which is my understanding, and that's done so that by the December quarter is what I'm trying to get at, that you are not capacity constrained on customer orders from what you can control? That's what I was trying to get at. Thanks.
Yeah. Is it the December ending quarter, or is it the January beginning quarter?
I was thinking the December ending quarter, so your fiscal third quarter of 2020.
Yeah. I mean, we should be in that kind of position by then. Yeah. Certainly, by the December ending quarter. The only fly in the ointment there is, can we get the approval by the OEMs for each one of these processes in place? We have the processes effectively in place today, and we're working through the approval cycle with these OEMs now. That's a little bit out of our control.
Understood. Thank you for taking the question.
Thank you. Our next question comes from Pete Skibitski of Alembic Global. You may proceed with your question.
Yeah. Next quarter, guys. Mike, I just want to talk about revenue a little bit more. So for the full year fiscal 2019, you grew revenue about 4%, but backlog grew about 13.5%. So do you just feel a lot more comfortable heading into fiscal 2020 in terms of your visibility and the nice guidance you gave for the first quarter? I think it's 6%-7% off the top of my head, organic growth. Is that kind of the growth you're expecting for the full year, or do things kind of accelerate as the capacity comes online?
Yeah. It should accelerate as the capacity comes online.
Okay. Okay. That's great. At this point.
Given our backlogs, it almost has to. Our backlog really isn't that reflective of our business anymore because a lot of the orders that we get, we get through an internet portal that are released by the big OEMs. So the OEMs say, "For part XYZ, ship me 50 pieces." And so we know that's coming because it's under contract. So we have the 50 pieces. We ship it right away. A lot of our business is done through those portals.
Got it. Okay. Okay. And just to put a finer tooth on it, should aerospace grow faster, do you think, than industrial in fiscal 2020 just because you've got that Virginia-class headwind in industrial?
Yeah. Well, aerospace will grow faster just because we need to get the product out of here to take care of our customers.
Got it. Okay. Okay. And then I had another question on capacity as well. It wasn't clear to me. So capacity comes online by kind of mid-fiscal 2020. Are you able to hit 57 a month at that point, or would you have to add even more capacity in order to get to 57 a month? Should you be required to?
If we talk about the existing mix that we have and the existing business and the contracts and so on and so forth that we have, yes, we won't have any trouble with the 57 a month. The problem is we keep getting more and more business and more and more contracts on top of the ones that we already have. And it's because the other guys, whoever those other guys are, they're having difficulty supporting the build rates. So they're defaulting on their contracts, and we're picking up their contracts. So we can't handle the entire industry's default position. We can handle our own plus a little bit.
Tough spot to be, right?
Yeah.
Last question for me. I was curious, and just to put it broadly, what do you think of this Parker acquisition of Lord? Do you think that's any impact to you guys? Then more broadly, just how's the M&A funnel and environment look like?
Well, I think that's a nice acquisition for Parker. I mean, Lord is a highly respected company. They have some great products. I wish we acquired them. So congratulations, Parker. I think they'll do very well with Lord. Our acquisition pipeline is very productive right now, and we should be talking about it soon.
Got it. Okay. Okay. Just to follow up, was LORD one of those companies that was having troubles executing, and maybe they'll be doing better as part of a company with a bigger balance sheet?
Yeah. LORD isn't really in our space. We like a lot of their product offering. We don't have those products. We don't make those products, but we cut at those products.
Got it. Thanks so much, guys.
Thank you. As a reminder, ladies and gentlemen, that's star then one to ask a question. Our next question comes from Josh Sullivan of Seaport Global. You may proceed with your question.
Hey. Good morning.
Hey, Josh.
Morning.
Just a question on the A320 platform. There's been some comments that the forging side's constraining deliveries. Are you seeing anything either on the engine or airframe side on the A320 as it relates to RBC? And then just tying that together, you mentioned that getting to 57 on the 737 has some challenging hurdles. But what about the A320 plans here to raise plan production? Are there any similar type hurdles for the A320 plans?
No. I'd say on the A320, we don't see any issues with forgings. We're not aware of any of that. But on the A320, I mean, that plane pretty much uses a standard mix that we produce, and we have plenty of capacity for that standard mix.
Okay. And then just with regard to the aerospace aftermarket, are you seeing any changes in demand for older model parts on the aftermarket at this point? Just looking at, are you seeing a response to the grounding of the 737 for increased usage of older aftermarket parts? And then how do those margins for those legacy platforms kind of compare to the average at this point?
Well, we are seeing continued increasing demand in the aftermarket, and the margins are very favorable. We're focused on F-35 engine groups, and our business, which is small but growing, it's something I don't have the number in front of me right now, but something like 20%-25% a year. As a matter of fact, we just added 30,000 sq ft to one of our aftermarket plants to support the growth of new business. So margins are good. Volume is good. The impact of the 737 isn't a factor.
Great. Thank you.
Thank you. Our next question comes from Michael Ciarmoli of SunTrust. You may proceed with your question.
Hey. Thanks for taking the follow-up. Just you were hinting at those share gains, other suppliers faltering, defaulting. Do you guys see these as temporary gains, or is this new sort of permanent market share gains going forward?
Well, this is how it works. Glad you asked that question because this is how it works. If we have a customer we have customers that are tried and true and that are with us through the good times and the not-so-good times, right? And then we have other customers that we don't see. We only see at times like this. And they have a crisis. They need parts. They have a crisis. And we can help them with their crisis. But if we could sell the part for if the part's worth $1, and we can sell it for $10 and solve their crisis, we don't want to do that. What we do want to do is we want a commitment from them, contractual commitment for their business for five years. That will help them with their crisis.
Got it. Got it. No, that's really helpful. Last one. Any updated views on tariffs and ability to pass through pricing?
The pricing environment has been very, very, very good. The tariffs are a very weak voice in a strong pricing environment.
Got it. Helpful. Thanks a lot, guys.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Hartnett for any further remarks.
Okay. Well, I think that concludes our conference call for today. Appreciate everybody's interest and support for RBC Bearings, and we'll be looking to talk to you again in July. Good day.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.