Good day, ladies and gentlemen, and welcome to the RBC Bearings Fiscal 2016 Fourth Quarter 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 be given at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference call may be recorded. I will now turn the conference over to Mike Cummings. Alpha IR Group, you may begin.
Good morning, and thank you for joining us for RBC Bearings Fiscal 2016 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 and Chief Financial Officer. Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings' recent filings with 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.
Thank you, Mike, and good morning and welcome. Net sales for the fourth quarter, Fiscal 2016 were $162.3 million versus $113.4 million for the same period last year, a 43.1% increase. Our aerospace markets increased 70% on a year-over-year basis, and our industrial markets increased 9.4%. For fourth quarter Fiscal 2016, sales of industrial products represented 34% of our net sales, with aerospace products at 66%.
Gross margin for the fourth quarter was $60.4 million or 37.2% of net sales, compared to $44.9 million or 39.6% for the same period last year. On a year-to-date basis, adjusted gross margin as a percentage of net sales was 37.8%, compared to 39% for the same period last year. The reduction is principally the result of adding the Sargent businesses to the consolidation. Adjusted EBITDA for the year was $154.9 million versus $119.8 million last year, a 29% improvement.
Adjusted EPS for the quarter was $0.86 per share, and for the full year, $3.14, a 14.6% improvement. We continue to implement RBC's manufacturing philosophy and methods into the Sargent facilities and are seeing improvement in margin performance that will continue indefinitely. As I discussed in our last call, the four sources of improvement are, number one, insourcing.
That means converting some of Sargent's direct material purchase to purchases to RBC plants as the sources, as well as, we are well along in this product project now and expect to see quantifiable impact in Fiscal 2017. Improvement of planning and manufacturing methods at the Sargent plants was, point number two. Risk management through pricing, as well as focusing our technical resources on what we can do or should do well that is supported with considerable market scale.
Of course, continued improvement of RBC core gross margins resulting from maturing and/or new cost reduction projects. Our markets for industrial products saw an expansion of 9.4% for the fourth quarter. Demand continued to be mixed, strong for marine products, which added 15.7%, steady and up slightly for general industrial products. The weak industrial markets continued to be mining, which seemed to have formed a base in oil and gas and semiconductor manufacture.
We saw strength in ground military, train, Europe, U.S., and Asia, machine tool, home construction, and industrial gas turbines. Semiconductor machinery so showed considerable strength strengthening late in the quarter, and we expect a lift from this section this year. Relative to our aerospace business, sales were up 70% on a year-over-year basis for the fourth quarter. Aerospace OEM was up 88.1%, and aerospace distribution in aftermarket increased 3.7%.
We remain tremendously busy in the quoting, proposal, and contract negotiation phases today as the major worldwide aircraft producers redefine their supply base for the next five years. Of course, we are doing all we can to play a larger role in that supply network, and are very optimistic about our future content in this regard.
The Sargent acquisition has opened some important new aero industry doors in terms of new products for old customers that are complementary to the classic RBC offering. Just to speak a little bit about our first quarter of Fiscal 2017, we are expecting to see sales in the first quarter of Fiscal 2017 in the neighborhood of $151 million-$153 million, compared to $142.3 million last year. I'll turn the call over to Dan, who provides more details.
Okay, thanks, Mike. SG&A for the fourth quarter of Fiscal 2016 was $26.2 million, compared to $19.1 million for the same period last year. As percentage of net sales, SG&A was 16.1% for the fourth quarter of Fiscal 2016, compared to 16.9% for the same period last year.
Excluding the impact of the Sargent acquisition of $5.1 million, SG&A year-over-year increased $2 million, which was mainly due to $0.9 million stock compensation expense, $0.9 million in personnel-related fees, and $0.2 million in other expenses. Other operating expenses for the fourth quarter of Fiscal 2016 was expense of $3.3 million, compared to expense of $0.5 million for the same period last year. For the fourth quarter of Fiscal 2016, other operating expenses were comprised of $2.4 million in amortization of intangibles, $1.7 million in the litigation reserve offset by $0.8 million of other income.
Operating income was $30.8 million for the fourth quarter of Fiscal 2016, compared to operating income of $25.3 million for the same period in Fiscal 2015. On an adjusted basis, operating income would have been $32.5 million for the fourth quarter of Fiscal 2016, compared to $25.4 million for the same period last year. Adjusted operating income as a percentage of net sales would have been 20% for the fourth quarter of Fiscal 2016, compared to 22.4% for the same period last year.
For the fourth quarter of Fiscal 2016, the company reported net income of $18.9 million, compared to net income of $14.9 million for the same period last year. On an adjusted basis, net income would have been $20.2 million for the fourth quarter of Fiscal 2016, compared to net income of $17.1 million for the same period last year, a growth rate of 18.7%.
Diluted earnings per share was $0.81 per share for the fourth quarter of Fiscal 2016, compared to $0.64 per share for the same period last year. On an adjusted basis, diluted earnings per share for the fourth quarter of Fiscal 2016 would have been $0.86 per share, compared to a diluted adjusted EPS of $0.73 per share for the same period last year, a growth rate of 17.8%.
Turning to cash flow, the company generated $21.6 million in cash from operating activities in the fourth quarter of Fiscal 2016, compared to $9.4 million for the same period last year. Capital expenditures were $6.2 million in the fourth quarter of Fiscal 2016, compared to $5 million for the same period last year. In the fourth quarter of Fiscal 2016, the company paid down $21.9 million of debt.
For fiscal year 2016, the company paid down $65 million of debt and repurchased $10.5 million of company stock. The company ended the fourth quarter of fiscal 2016 with $39.2 million of cash on the balance sheet. We'd now like to turn the call back over to the operator to begin the Q&A session.
Well, ladies and gentlemen, if you have a question at this time, please press star, and then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself into queue, please press the pound key. Our first question comes along with Steve Barger of KeyBanc Capital Markets. Your line is now open.
Hey, good morning. It's Ken Newman on for Steve.
Morning, Ken.
Morning. You may have already said this in your opening comments, but I may have missed it. Can you split out how much Sargent contributed to sales for both industrial and aerospace in the quarter?
For the quarter, Sargent was, total aerospace was $49,175.6, and industrial was $7,946.
That's helpful. Thank you. You gave a little bit of color on strength in industrial sales that you saw. You mentioned marine products as well as just mixed demand there. As we look into Fiscal 2017, do you have any color or any kind of opinion as to where you see the most strength for industrial end markets going forward?
Well, I can look at the past, and I think that's a pretty good proxy for what's gonna happen for the next 12 months. Certainly, on the mining side of our business, you know, I think we formed a good base there, and I think we're probably gonna run at the levels that we ran in the fourth quarter all next year. That sector is supplying their aftermarket. Our industrial business, ex-mining and oil and gas, was actually up, sort of worldwide. We expect that industrial business to be a good performer next year. Europe led the way, as a matter of fact, with about an 18% year-over-year improvement in revenues.
W e see some pretty good things happening in some sectors in the industrial businesses, and so I think it forms a very nice very nice base for us.
Great. And then, switching over to aero, can you give us an update on aero build rate visibility you have? You mentioned some, some platform wins or any contracts that are in the pipeline currently. And I guess as a follow-up to that, you know, what's your take on inventory levels of the OEs you serve, and how do you see that changing over the next year?
How much time you got? So, long answer. Yes, we know which platforms we're on. We know our content by platform. It's very considerable for some of these platforms, for both aerospace and defense. We're, you know, we're very secure with where we are contract-wise and offering-wise, and sort of happy about the outlook for the next 5+ years. So, if the industry continues to build according to their projections, it's a great story. You know, on the defense side, there's considerable things going on in the defense area that are sort of favorable to us. Number one, it's been the spares on the defense side have been depressed a little bit over the past few years. We're seeing a nice pickup in some sectors for that.
We see the Joint Strike Fighter coming on board in significant numbers over the next three or four years, where we have considerable content on that ship. And you know, we see some in Europe, we see a lot of ground military activity taking place with new builds of equipment as a result of Ukraine and Paris and Brussels. And it appears that the people there are taking their defense budgets more seriously and are starting to fund some considerable builds of equipment. So, I don't know if I answered your question completely, but that's a very long and complex answer with a short summary.
Yeah, no, this is very, very helpful. I do have one more question, and I'll jump back in line here. In terms of the margins, you did say that insourcing initiatives should convert, or you should see, expect to see some quantifiable results this upcoming year. Can you give us any kind of color on margin expansion here in the first quarter or 2017, or I guess put another way, how high could incremental margins go in 2017? Do you think you could match 2016 levels or do better?
Well, you know, the timing is a big issue on how quickly we can absorb some of this work, and how quickly we can absorb it, given the demands of some of the other pieces of our business. I think our overall goal for the year is to expand that consolidated margin another percentage point. You know, that's not gonna be linear quarter to quarter, because as these programs phase in, they have a compounding effect. I think over the course of the year, our goal is to increase it by 1%. Over a longer cycle, we're trying to bring the whole company into the 40s.
Ken, just keep in mind, Q1 last year only had two months of Sargent in it, and this year we'll have three months. So it does have a little impact on gross margin %.
Understood. Thanks for the time today.
Yep.
Thank you. Our next question comes along with Kristine Liwag of Bank of America Merrill Lynch. Your line is now open.
Hi, good morning, guys.
Morning, Christine.
Mike and Dan, just kind of putting together some of the comments you made. If mining and oil and gas is bottoming in or it bottomed this quarter, and you're seeing some pickup in other end markets like marine, semiconductors, and ground military vehicles, just to name a few, should we think about overall industrial sales for fiscal year 2017 to be up mid- to high-single-digit? And if not, are there other headwinds that we should factor in?
T he mining business has formed a base, and that base is aftermarket. There's, you know, there's nothing new being built. So, you know, I think we're kind of steady state feeding parts into the aftermarket. And so we have a strategy to grow our business in the aftermarket, which seems to have some legs right now. I think oil and gas, really, you know, it can't really affect our revenues any further. I mean, that business is about as low as it can go in this period in this current quarter. So, you know, the rest of the industrial business seems to be doing quite well.
I would say if you wanted to put a growth number on there, our objective has always been 2x GDP to grow that, you know, industrial business. I think that's still a realistic number this year.
Great. And then you mentioned specifically in the aerospace contract negotiations, I was wondering, are these negotiations business as usual as contracts expire, or was there a specific event driver that was out of the ordinary that would make you highlight those five-year negotiations?
Well, I can't say that business with the aircraft builders is business as usual anymore, you know, given Boeing with their sourcing strategy and Airbus trying to come up with something, and it's egregious. So it's, you know, these are challenging events normally to negotiate. But, you know, where there's risk, there's also opportunity. So we have an opportunity to substantially increase our offering in our mix as a result of what's going on here. And we're taking advantage of that opportunity every way we can.
Thanks. And if I could do one last one on Sargent. I think in the past, you've mentioned that there were a couple of businesses that were underperforming, and there were a few of that. I think there was one. There's the near-zero gross margin businesses in Miami and Canada, and there's also the undermanaged facility in Torrance. I was wondering if you could provide an update about those business lines and if they're doing better, and are they tracking towards more of the RBC Bearings corporate run rate for margins?
Yes. Well, Torrance, because of its scale, obviously was high on the priority list in terms of understanding what to do and how to do it and creating a, you know, executable strategy that could be achieved in a short time cycle. And we're a long way down the road with Torrance, and both in improving their planning, improving their plan execution, improving the technical quality of their staff, and improving the access to world-class purchased materials, and also improving their sourcing alternatives into some of the RBC businesses.
Torrance is gonna do very well, and it was our first early initiative. Miami is doing extraordinarily well. We're very pleased at the progress we're seeing out of Miami and both on the revenue side and the gross margin side.
And, it's improving on a scale much quicker than we thought it would be. So, that's certainly upside to our plan. In Canada is running third. You know, the sort of the resources have been consumed by some of the other plants. And Canada is now, you know, this year is one of our focal points for improvement.
Thank you very much. That was great color.
Yep.
Thank you. Again, ladies and gentlemen, if you have a question at this time, please press star, then the one key on your touch-tone telephone. Our next question comes along with Walter Liptak of Seaport Global. Your line is now open.
Hi. Thanks. Good morning, everyone.
Good morning, Walter.
wanted to ask a follow-on in the industrial part of the business and wondered about the comps in the fourth quarter and if they're getting easier now in April and May. And so I guess I'm asking about your comments with regard to oil and gas. It looks like if you back out Sargent, you had double-digit industrial declines. You know, are you seeing those declines now more stable and growing in April and May as we're getting into easier comps? Is there something else going on, like you're getting industrial distribution to recover?
Well, Walter, as usual, you're deep into the numbers. Let me explain to you how we see it. Overall, the classic industrial business, net of FX effect, it was down 5.6%. So, it's down roughly $3 million on $50 million. The oil and gas and mining part of that business is down $5 million on $50 million. And so the rest of it's up $2 million on $50 million, 4%. Europe, in that equation, is, as I said, leading the way. They're up 18%. And that's principally driven by train and tram and renewed interest in ground defense.
Okay. That sounds great. Thanks for that color. You know, thinking about the industrial distribution, how are how are trends in North America? You know, you're up 2, I guess, through March. Are you seeing any improvement, as you get further into your, your 2017?
2017's very early. I mean, we're just, you know.
Yeah.
Into May right now. It's only this, you know, month and a half.
Well, I think we're all hoping for some recovery in industrial. I think industrial distribution is where you would see that first.
Yeah. I would say that, you know, in the, if you look at calendar 2017, it's kind of, you know, net of the oil and gas and mining impact, it's kind of flat up a few percent. It's not burning the barn down.
Okay.
But it's very stable. I mean, it's a very stable source of revenues.
Okay. Sounds good. Yeah, thanks for the comments on the 100 basis points of gross margin improvement in 2017. That sounds really excellent. I wonder if you could comment, is that coming equally from classic RBC, or are you expecting more benefit from implementing your process at Sargent?
Well, it's both. You know, 1% is sort of our goal. Obviously, internally, we're pushing all the buttons we can push, both in the classic RBC and at the Sargent. I'd say in the Sargent business, there may be a little bit more room for upside. And, you know, for every $1 million of outsourced work that we can insource, you know, the contribution margin's probably 40%-50%. So it, you know, it's enormous. It's an enormous impact.
Okay. Okay. Great. And if I could ask one for Dan on the cash flow, you know, I wonder what you're thinking about for 2017 free cash flow and debt paydown?
Yeah. We're, you know, we'll be on the same kind of trajectory we are now, but you know we don't give guidance for that. But, I think, from where we thought we had been at the beginning of this year, if you add back the one-time charges we cash that went out the door for the bank facility and for the acquisition, we'll be right on that $100 million mark that we had for the 12-month period, going into the first quarter.
W e're, we're happy with we're with the cash generation. We made some strategic investments in Sargent and working capital. Our CapEx is under control. It was very good levels in 2016, and we don't expect major impacts in 2017 from that. So I think we'll have some nice upside to what we were able to achieve this year.
Okay. Great. At what point do you feel that you've got the bandwidth to do acquisitions again? Are you actively looking for M&A at this point?
No. We're, you know, we continue to look. You know, right now, obviously, we've got a lot of housekeeping to do with the businesses that we have. We've, you know, we continue to work that. But we have, we continue to read the books that are sent to us by nice folks like yourselves. And we continue to bid on businesses that are sort of strategic and synergistic with us that are, I would say, they're more in the bolt-on category right now is what we're seeing. But we need some technical augmentation of our existing skill set to do some things in the markets that we think are gonna be very, very valuable to the company.
So that we're looking at certain companies that are sort of in the $15 million-$30 million range that have those technical skill sets that can be applied to some of RBC's markets. So, that's where our focal point is right now. If we saw an acquisition that had the characteristics of Sargent, and those characteristics would be something like synergistic to our markets, products that we know how to make, manufacturing processes that we're very comfortable with, undermanaged businesses that can show considerable margin improvement, and well-regarded product lines, we probably would be tempted. But at this point, we haven't been tempted.
Okay. All right. That sounds great. You did a great job with, with Sargent. And so I think we all look forward to the next one.
Thank you, Walter.
Thank you. Our next question comes along with Joseph Gallary of Bradley, Foster & Sargent. Your line is now open.
Hi, Mike and Dan.
Morning, Mike.
Just a quick question. So a recurring theme at, from a lot of the presentations at last week's Electrical Products Group conference, was that, you know, there's little to no economic growth global, globally, and we're operating in an onerous regulatory environment, bad political climate, etc. Customers are scared to invest. Just wanted to ask for your thoughts on the overall operating environment and how you, how you guys see things.
You know, if you start with aerospace, I mean, you know, it right now, it's the great aerospace build rate race, right? And so there's lots of investment going into that sector. There are no question about it, sort of nationwide, worldwide. And you know, we're optimistic and participate in it. Some of the industrial sectors are, you know, are soft.
I mean, we're not big into ag, but we see what's happening there. Doesn't seem to be much of an opportunity to participate in any upside in the ag business. But housing, very strong. Auto, reasonably strong. To record strong depending upon region of the world. And in aerospace, it's still very, very good.
So I think you have to and semiconductor now is starting to ramp back up. I mean, look at Applied Materials stock and read their analyst coverage, and you can see what's driving that. And so there's places in the world that are doing extremely well. Fortunately, in the bearing business, everything that moves needs a bearing.
That's how it moves. It moves through a joint with a bearing. Might be a simple little thing. Might be the most complex thing in the whole world, but it needs a bearing in that joint. And so fortunately, in the bearing business, you can sort of decide what industries you wanna participate in based upon the future of those industries and develop, you know, a game plan and a strategy to enter.
We try to stay close to our existing markets to the most to the greatest extent because we have people that understand those, that customer base in those markets and how those machines move and what they need for bearings. But if we saw an interesting market developing that had the financial characteristics that were attractive to us, we would definitely retool our infrastructure and our engineering and marketing staff to get into that business. And we do that all the time. And right now, we're doing it with train.
Great. Appreciate the color.
Thank you. I'm showing no further questions at this time. I'd like to hand the call back over to Dr. Hartnett for any closing remarks.
Okay. Well, I thank everyone for participating in today's call and asking the good questions that you ask. And, you know, we'll be issuing the proxy pretty soon. So we'd like to have you all vote in favor of management's recommendation. Thank you. And we'll talk again in August.
Ladies and gentlemen, thank you for participating in today's conference. That does include today's program. You may all disconnect. Have a great day everyone.