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 speaker's presentation there'll be a question and answer session. To ask a question during the session you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance please press star then zero. I would now like to hand the conference over to your speaker today Brooks Hamilton with Alpha IR. Please go ahead.
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 for 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.
Thank you Brooks and good morning. Net sales for the third quarter 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 last year.
The quarter certainly had its challenges and noise as accommodations made to support Boeing's schedule changes driven by 737 MAX rescheduling began to challenge our logistics and suppliers causing other products to be accelerated in the schedule to replace to delayed 737 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 marine products area where 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 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 on 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 towards $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 slowdown on or of specific production schedules from our customers.
Regarding our fourth quarter, we're expecting sales to be $187 million-$191 million, which results in our organic growth rate of approximately 1.9%-3.5% over 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 to the impact on Q4. I will now turn the call over to Dan for more details on the financial performance.
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-to-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 basis points.
For the third quarter of Fiscal 2020 the company reported 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 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.
Thank you. Our first question in the queue comes from Kristine Liwag with Bank of America. Your line is now open.
Hi, good morning, guys.
Good morning.
Morning Kristine.
Can you provide more details about the Boeing 737, how much this 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?
You always ask us the easiest questions, Kristine. But I expected that one. So the impact on Fiscal 2021 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 777X production rate. And that production rate is about equivalent to 5 737 MAX ships. That increase in production rate is equivalent to about 5 737 MAX ships per month. So we, you know, we have a rough idea of from Boeing on what their monthly production rate is gonna be next year and I'm sure that's subject to change.
We looked at what the production rate was last year and as near as we can tell between the 777X, 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 guidance that the Boeing reschedule is going to be averaging about 25 ships per month 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 5 ship equivalents for the increase 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 is 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 gonna offset that 17.4 by about $5 million. So the net comes to $12.5 million over the 12-month period. So that's something like $3 million-$4 million per quarter of headwind as a result of the 737 MAX delay. And the extra time required to bring the 737 MAX online actually has a positive side to it also. It allows us to bring more vertical integration and process approvals into play so that we're producing these parts more efficiently when the volume turns on. So that's how we're viewing the situation right now, Kristine.
That's really helpful. Thank you very much.
Thank you. As a reminder to ask a question you would need to press star then one on your telephone. Our next question comes from the line of Peter Skibitski with Alembic Global Advisors. Your line is now open.
Yeah, good morning, guys. Mike, just to follow up on that. So, I mean, assuming Boeing kinda starts to slowly restart production in the summertime, should we think, you know, your headwinds on the 737 MAX will be, you know, more first half weighted, and they start to kinda reaccelerate in the second half of calendar 2020? Is that maybe the way it'll work?
Yeah, that's how we see it exactly.
Okay. So we should think about aerospace overall, maybe having, you know, maybe being down in the first half of Fiscal 2021 or close to that and then accelerating pretty heavily in the back half?
Yeah, I think that's how we're seeing it. I mean, there's some additional aerospace volumes that are flowing in from the defense side that'll offset that some more. So 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.
Okay. Yeah, I guess to follow up on that Lockheed's, you know, bring obviously you 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?
Yeah, I think 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.
I see I see okay. So this was related to the F-35 decision but just a different program?
Yeah, it's a different program. It's just not a small addition for us. It's a meaningful impact to one of our divisions.
Okay, okay, great. Maybe last one for me. I'm just curious on the industrial side. You know, we saw the ISM PMI pick up in January for the first time in several months. So, just wondering, you know, kinda early days in the fourth quarter for you. Are you kinda seeing any recovery there based on this, you know, kinda indicator from the PMI?
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 the right direction going into the fourth quarter. As Mike said on our classic RBC type markets like mining and oil and gas meaning fracking that will continue to be down 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 the timing, and so that will be up nicely in the Q4, again offsetting some of these headwinds that we're getting from our classic RBC markets.
Okay, okay, so maybe the worst of the industrial headwinds are kinda behind us? Is that what you're thinking?
Yeah, you know, I think in certain markets they're not, and others they're already improving and doing better.
I could die on that.
In oil and gas, I'd still say we have a ways to go, I think, in oil and gas on fracking, but once that's bottomed out in the fourth quarter, the comps will get a lot easier starting Q1.
Right, okay. And you saw the Columbia kind of production ramp ahead of you. I know that's supposed to be a nice program for you, right?
Yeah, well, we're trailing off now the Block IV Virginia-class 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 kinda at the single boat build now, right, because Block V's a single boat and a 9-boat program. So we're starting to go into this program in a single boat, and in the second half of the year back to probably 2 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-class, but that really doesn't go into production, I think, into 2022-2023.
Okay. Thanks for the call, guys. Appreciate it.
Thank you. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.
Hey, good morning, guys.
Morning Steve.
When you think through the revenue headwind and whatever happens to margins and how you'll 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?
Yeah, I think, Steve, I don't think it's anything major. I think going into next year on total company we're not gonna be at a negative growth rate. So it all depends where our top line's coming out and we'll give more guidance on that on where we're expecting 2021 to look when we get on our fourth quarter conference call at the end of May. But I think right now we're probably close to the top of our inventory build program at most of our divisions and so we should see a pretty good year next year for cash flow generation from operations.
Okay. 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 flatter up?
I think for Q4 we should be pretty much flat. I mean our classic industrial will be down a little but it'll be offset by our marine.
Yep okay.
Okay.
Just given the weakness that you're seeing in some of the classic markets to use your term, are you seeing competitors come in more aggressively on price that are causing share shifts or is this really a volume function?
It's purely a 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 where we referenced green shoots that we been working on the industrial side that we feel will definitely impact Q1 and Q2 in Fiscal 2021.
So just so I understand, you think you're taking share in iron mining and oil and gas or on the other kinds of industrial markets?
On other markets.
Got it, thanks.
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.
Okay, well, we appreciate your interest in RBC and look forward to speaking to you again after our fourth quarter. Thank you for your interest.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.