I would like now to turn the conference over to your host, Mr. Chris Donovan.
Good morning, and thank you for joining us for RBC Bearings Fiscal 2021 first 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 available on the company's website. Now, I'll turn the call over to Dr. Hartnett.
Thank you, and good morning. Net sales for the first quarter of fiscal 2020 were $182.7 million, versus $176 million for the same period last year, a 3.8% increase. Organic growth for the quarter was 6.5%, and we think that's a respectable start for FY 2020. For the first fiscal quarter, sales for the industrial products represented 36% of our net sales, with aerospace products at 64%. Gross margin for the quarter was $70.7 million, or 38.7% of net sales. This compares to $67.7 million, or 38.5% for the same period last year, a 4.4% increase. Operating income was $38.5 million versus $36 million last year, a 6.9% increase.
EBITDA was $50.8 million, a 7.9% increase over last year. We're very pleased with the performance for this quarter, and it follows an excellent year for the company. During the first quarter, industrial products lost some ground over the period and were down about 7.2%. Last year, the expansion in that quarter was 18.3%, so we're up against some pretty difficult comps. Industrial OEM was down 7.2%, and distribution in the aftermarket was 7.1% down year-over-year. On the aerospace and defense side, the first quarter organic net sales were up 16.3%. This was driven by both OEM and aftermarkets. Aero and defense OEM were up 14.6% on an organic basis.
Supply constraints, internal and external, have been significantly mitigated as a result of our internalizing many processes certified to date. More internalization of processes will follow. This sector will likely continue to perform at double-digit growth level for the foreseeable quarters as we introduce additional manufacturing conversion capacity and convert new contracts currently in the breach. At this point in our year, we enter our second quarter. Most of our aerospace businesses are booked at or beyond fiscal 2020. If the 737 MAX receives its FAA certifications in calendar Q4, and production is accelerated, it may be difficult to support the demand by the subcontracting base. We continue to add capacity to support our customers' future requirements and should be well-positioned for FY 2021 in this regard.
Regarding our second quarter, we are expecting sales to be between $180 million and $182 million, which results in an organic growth rate of 6.5%-7.7% over last year. If we can, if we can produce more, it will, it will be, we'll have a greater turnout in sales, but it's, it's largely on the aerospace and defense side, capacity constrained. I'll now turn it over the call to Dan for more detail on the financial performance.
Thanks, Mike. SG&A for the first quarter of fiscal 2020 was $30.1 million, compared to $29.6 million for the same period last year. The increase is mainly due to about a million of additional incentive stock compensation and zero point one million of other items, offset by zero point six million of lower professional fees. As a percentage of net sales, SG&A was 16.5% for the first quarter of fiscal 2020, compared to 16.8% for the same period last year. Other operating expense for the first quarter of fiscal 2020 was expense of $2.1 million, compared to expense of $2.2 million for the same period last year.
For the first quarter of fiscal 2020, other operating expenses were comprised mainly of $2.3 million in amortization of intangible assets, offset by $0.2 million of other items. Other operating expense for the same period last year consisted mainly of $2.4 million in the amortization of intangible assets, offset by $0.2 million of other items. Operating income was $38.5 million for the first quarter of fiscal 2020, compared to operating income of $36 million for the same period last year. Other non-operating expenses were $0.2 million for the first quarter of fiscal 2020, compared to $1 million for the same period last year.
...for the first quarter, fiscal 2020, other non-operating expenses was comprised of $0.4 million of foreign exchange loss, offset by $0.2 million of other items. Other non-operating expenses for the first quarter of fiscal 2019 consist, consisted primarily of $1 million, a loss of early extinguishment of debt. For the first quarter of fiscal 2020, the company reported net income of $30.5 million, compared to net income of $27.5 million for the same period last year. On an adjusted basis, net income was $30.5 million for the first quarter of fiscal 2020, compared to an adjusted net income of $28.1 million for the same period last year.
Diluted earnings per share was $1.23 per share for the first quarter of fiscal 2020, compared to $1.12 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2020 was $1.23 per share, compared to an adjusted diluted EPS of $1.15 per share for the same period last year. Turning to cash flow, the company generated $40.1 million in cash from operating activities in the first quarter of fiscal 2020, compared to $33.8 million for the same period last year. CapEx was $12 million in the first quarter of fiscal 2020, compared to $7 million for the same period last year.
In the first quarter of fiscal 2020, the company paid down $17.1 million of debt and ended the quarter with $32.7 million of cash. I'd now like to turn the call back over to the operator for the Q&A session.
Thank you so much. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. We'll pause for just a moment to compile the Q&A roster. All right, your first question comes from the line of Peter Skibitski of Alembic Global Advisors. Your line is now open.
Welcome to that quarter. Can you give us maybe a sense of where you saw the weakness in industrial OE? Kind of, you know, is it across the board, you know, general economic weakness? And, you know, do you sense that things could get worse, or maybe by the fourth quarter, by that point, I think maybe things would normalize on a comp perspective. So we'd just be interested in your thoughts there.
Yeah, it's the same four major industries that we've discussed in Q4. It's mining, energy, which is oil and gas for us, semiconductor, and general distribution were mainly impacted. I think if you look quarter-over-quarter, our industrial OEM Q1 compared to Q4 is actually up 1.8%. So we continue to push hard on the OEM side. Distribution, I think there's a lot of restocking and inventory deleveraging that the distributors in the industry have gone through over the last four months, and so that impacted the business. We're starting to see long-term orders actually picking up into our Q3 and Q4. And so for us, it's really gonna count on our in and out business within the quarter to see how the quarter comes out.
We count on about at least 30% of our revenue on the industrial side, on in and out activity within the quarter.
Got it. Okay. I'll just ask one more, and I'll get back in the queue. Can you talk about the strong first quarter margin? You know, you guys have talked about a good pricing environment in the past and, and then the margin benefits of insourcing and, you know, automation. So is there one thing that you can maybe point to, to, to pin down what the driver was of the great margin? And I'd love to hear more about kind of trends going forward as well on that, on that front.
Yeah, well, I think the margin could have been better, Pete. You know, we have several programs that are still in startup, and these are major programs for us. And we continue... You know, we're gonna see margin expansion all the way through the rest of this year. And you know, I just came back from Southern California, spending a week with the operations over there. And I think, you know, we're making really good progress in several of our sites on major programs in terms of execution and getting approvals on key processes that we need to insource. And so that's gonna all accrue to better margins in the future.
Yeah, the margins were strong this quarter and, you know, what do they say? You ain't seen nothing yet.
That, that's great, Mike. That's great news. And so you guys are actually talking about insourcing even more beyond what you had previously planned and talked about over the last year?
Well, you know, we probably just didn't talk about it, you know, in the with the detail that maybe was needed. But yeah, I mean, if you look at the kinds of things that we're insourcing, I mean, we're insourcing Cad plate, copper plate, chrome plate, heat treatment, HVOF processing, zinc nickel plate, aluminum pigment coating, powder lubrication, and elastomeric bearings. We're insourcing all of that stuff, and we're, you know, we're pretty far along in terms of the industrialization of those processes and the certification with the OEMs to supply from those internal processes. So I'd say we're about maybe a third of the way through the process approval with the OEMs, which is sort of the long pole in the tent. And...
But I think that's, you know, that's accelerating now. I think the more difficult processes have been approved, and we, I would expect by the end of December, we'll be two thirds of the way through approval. We have some new equipment coming in, which can't be approved until it's sited, and so that'll be sited in our third quarter, and probably those processes approved in our fourth quarter. So, it's significant. It's a big deal.
That's great. That's great. Thanks for the call, guys. I appreciate it.
Thank you. And your next question comes from the line of Steve Barger of KeyBanc Capital Markets. Your line is now open.
Hi, good morning, guys.
Morning, Steve. Morning.
I'm gonna, I'm gonna stick with the industrial question. We've seen revenue coming in light, but not so negative year-over-year for some end markets. Are you able to track market share, or do you think there's been any shift in the, the served end markets? Any aggressive pricing from competitors or new products that are getting some momentum?
No, I don't think, I don't think we have, Steve. I think it's just, you know, some of these markets are fairly big for us, and they're all, you know, for oil and gas and mining. Both of them are, you know, 10-15+ size markets for us, and we had a really nice quarter last year. So, it's put a little bit of pressure on that comp. But distribution was down, and offsetting some of this was our marine business, and which is, as we talked about on the Q4 conference call, was gonna be a light year on growth. It's still gonna have growth because we're only down to 1 boat build, with Newport News on the Virginia-class subs. But that's gonna definitely jump up in the coming years in 2021.
Okay. And so just from a mix standpoint, as I think about next quarter, would you still expect down revenue industrial and more like a double-digit growth rate for aerospace? Or are you starting to see aerospace moderate more and maybe more of a recovery in industrial? How should I think about that for the quarter coming up?
I think, once again, industrial has another tough comp, so we'll be down on industrial, and we'll have double-digit growth, somewhat like we've experienced in Q1, for aerospace and defense.
Gotcha. You talked about those four big end markets for you. We are seeing some construction orders start to moderate. Is that construction equipment a big market for you or historically, or what are you seeing there through the channel?
It's not a huge market for us. On, on, you know, mining for us would be heavy haul trucks for Caterpillar, Komatsu, Liebherr, folks like that. And, and we're starting to see that coming back in again, but it's booking into our Q3 and Q4. Those, those lead items are a little longer than the normal in-and-out business that we get in the quarter.
Gotcha. But, like cranes, aerial work platforms, that sort of thing, not as big?
No.
Got it. I'll get back in line. Thanks.
Thank you. Your next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch. Your line is now open.
Good morning, guys.
Morning, Christine.
On the 737 MAX today, could you discuss the volume that you have and the implied production rate that you're currently producing? And then also, if Boeing were to go ahead and have a temporary pause in the program, what would that mean for you?
Let's see. So, you know, our current, you know, we're currently feeding the 737 MAX at the 40-42 ship per month rate. Some operations, a little more, some operations, a little less. I don't know why that occurs that way, but it is what it is. We noticed in some operations that the demand rate is 32, and in other operations, the demand rate is 52. So, it's a little confusing. You know, from the information that we're getting from Boeing, they expect to turn that ship on in October. Now, I'm sure they know more than I know, so I have no comment on that.
But they're telling the supply base to get ready to turn that ship on in October at such and such a rate, and to bring that rate up substantially quarter after quarter. So let's hope, let's hope that's the case. If it doesn't, if there is a pause, I'm not sure how that's gonna affect us, 'cause really, our schedules are loaded, and we have new contracts that we're, we expect to be signing soon, which will more than offset any of the push outs that we would expect as a delay. So I think our aerospace business is really kind of locked and loaded for the balance of fiscal 2020.
... That, that's helpful. And maybe switching gears, you ended the quarter with a net cash position, and your stock's pretty close to record highs, so you've got currency there if you want to use it as well. Can you discuss the pipeline then for M&A? And what are your strategic and financial requirements?
Well, the pipeline for M&A is good, and so, you know, we continue to look at small and large M&A options. And we would expect to actually complete something small in our second quarter. Whether that actually occurs or not is anybody's guess, but it looks pretty positive. What was the second part of your question?
What are your hurdles, so strategic hurdles, financial hurdles, that you're looking at, either return on invested capital or some sort of metric?
Well, Chris, you know, for us, Kristine, we, you know, we look at it to, to have a business that we can bring in, that would have the same synergies and, and products that we can bring across our current customer base. And we're, we're looking for it to be accretive in the first year, and to be able to meet and exceed our current targets on return on invested capital, which is, you know, a little north of 12% now. And from a leverage standpoint, you know, we've, when we did the Sargent deal, we, we levered up to a little close to 3 times, so that wouldn't scare us. And we told the Street we'd pay that down 5 years, and we paid it down 4. So if we could find another Sargent deal, that'd be great.
And in the meantime, we're also looking at a lot of, like Mike said, a lot of tuck-in opportunities that are really nice product line extensions to our current business model.
Thank you, very helpful.
Thank you so much. Next question comes from the line of George Godfrey of CL King. Your line is now open.
Thank you. Good morning, gentlemen. Thank you for taking the question. Two questions. The first one is, just for the sake of argument, if Boeing, on the 737, were to lose customers to the Airbus A320, would it be a difficult issue for you to ramp up A320 production for your ship set versus the Boeing 737, or would that take time to reconfigure factory and volume floors?
Well, we have substantial content on the A320 also. So, you know, it would move not as much contract content. You know, we probably have 80% of the content on the A320 as we have on the MAX. So-
But from a production standpoint, it wouldn't be difficult to then ramp up that production versus, and pushing down the 737? That's what I was trying to get at.
It's pretty much what we're tooled on. And actually, a lot of the parts that are used on both ships are virtually identical. You know, many parts are not, but a lot of them are. And so, it wouldn't be difficult. And obviously, the LEAP engine is the same engine on both ships.
Right.
And your turbofan is, you know, the engine on the A320, and we have presence, you know, substantial presence on both engines.
Got it. And then the second part is, on the capacity constraints, I just want to delineate between shop floor space and equipment versus OEM certification. By the end of September, from an infrastructure standpoint, will you have the equipment and shop floor space ready to go, and now you're just waiting for the OEM to be certified, or the process to be certified? Or would that also need more equipment and more space in the December or March quarter of next year? Thanks.
Well, you know, on an 80-20 basis, 80% of the equipment is in place. The plants are built. The processes have been installed. Some have been certified already, more than a third of them have been certified already. And we have OEM representatives in here every week, working to certify the other sites. So, I think we're kind of where we need to be.
You know, we have some very substantial contracts that we're expecting to convert over the next 8 weeks, which will push the machinery issue a little bit in some of the plants, and we'll have to tool some of the plants with more of the same.
Got it. Thank you for taking my questions.
Thank you. Next question comes from the line of Michael Ciarmoli of SunTrust. Your line is now open.
Hey, good morning, guys. Thanks for taking the questions. Just back to the 737, I mean, it sounds like even if we get, you know, certification, you know, Boeing potentially talk and picking up, it sounds like it's gonna, you know, take about 2 years to burn down the inventory of 737s. I mean, does that have any impact on, you know, how you guys are looking at sustaining, you know, these double-digit growth rates in Aero? If, you know, even in the best case, we see a flattish production rate of 52?
... Yeah, I mean, I don't see a two-year burndown rate. I mean, that's, you know, 'cause they've only been out of production, I mean, they've got the backlog, and they, you know, they just have been out of service, you know, shipping the ships for the last three or four months.
Well, that's, I mean, that's what, I mean, Spirit AeroSystems gonna have, you know, even into October, they're gonna have, you know, close to 100 fuselages, and they basically said they're gonna be at 52 all of next year, regardless if Boeing, you know, if they get that plane. So it... You know, I mean, the unfinished product's gonna be out there. You know,
Yeah.
Just again, the airline's ability to take delivery of these planes is gonna slow that process as well.
Yeah, well, I don't think the subcontracting base can be put together, back together that fast because, you know, some of these guys stayed in production at the 52 rate. Some of them didn't have the working capital to support the 52 rate. Some of them didn't believe Boeing that they were gonna come back that strong. I mean, everybody had their own opinion on how to run their operation, and so to put Humpty Dumpty back together again is gonna take some time and a lot of glue. So I think if they can get back to the 52 rate next year, they'll be doing good. Their objective is obviously higher than that, so as it should be.
Frankly, if they get back to the 52 rate, we're still, you know, we've got so much content on some of the other platforms that are new and tooled. We'll, I suspect we're still gonna be in that double-digit range.
Okay. Is that, and you mentioned the content. I mean, 'cause as we look into, you know, these coming quarters, you know, there's quite honestly not that much growth in terms of deliveries. You know, the 787 is at rate, A350 is at rate, 777 looks to be delayed. I mean, we just covered 737 , A320 might have a little bit. So are you, I mean, it sounded like from the last call, too, market share gains, content expansion, is that gonna be the supporting driver behind the double-digit growth rate?
Yes. Yeah, it's market share gains and yeah, content expansion. That's exactly right.
Got it. And then just last one on the industrial. Can you give us, you know, you talked about the four key, you know, OEM markets. Can you just give us a sense from last quarter to this quarter, which ones got better sequentially and which ones got worse sequentially?
No, I can't, because I don't have last quarter in front of me. I have last year, Q1, and just the ones we talked about. But I'm sorry, I don't have the Q4 numbers in front of me.
Okay, got it. But, I mean, everything leads you to believe that sequentially, you know, the ordering trends, I think you mentioned, you know, you've got some pretty good line of sight. You haven't seen any, you know, erosion, you know, in any of those end markets. I mean, I know semi's been having a pretty trying time, but nothing that really jumps out?
No. Matter of fact, we're starting to see semi starting to point up again, so it won't impact Q2. We'll feel it more in Q3 and Q4, but it's more positive.
Okay. Okay. Perfect. Thanks a lot, guys. I'll jump back in the queue.
Thank you. Again, if you have any questions, you may press star and number one on your telephone keypad. Your last question comes from the line of Josh Sullivan from Seaport Global. Your line is now open.
Hey, good morning.
Morning, Josh.
Just, just on the aerospace side, to, to follow up on, on the various 737 shipping rates you mentioned, I think you said anywhere from, you know, 32 to 52 per month. You... Are your products, do they, do these products carry large inventories, or are these short cycle products? And, and I guess what I'm getting at, you know, is there any pre-production inventory for these products, you know, at 32 per month, you know, that's pretty low, that, that still needs to be burned off at this point?
Yeah, I'm trying to think of what the answer to that is. You know, we try to maintain an inventory. You know, there's so many line items that we're in production on, that we try to maintain an inventory position, a finished goods inventory position on most of these line items so that we can ship them from stock and have MRP flexibility on the plant floor. No, I don't see any burndown issue.
I think, I think the issue is, you know, if they, if they, if and when they turn the max on, and that looks like it's more and more likely to be sooner rather than later, you know, are the inventory positions deep enough?
Okay. And then I think last quarter you mentioned, you know, the tightness in your markets here, you know, even getting to 57 per month next year was a challenge. I mean, do you still see that dynamic, or do you think that, you know, they can get to 57 next year?
I don't see how it happens. I'm not, you know, a believer that it can get there. You know, we'll get there. I mean, we'll have the capacity to support it if they do get there. But there's an awful lot of subcontractors in the system here, and I suspect that they... I'm hearing that they still have shortages on the 737, on the current build rate.
Right. Okay, thank you for that, that detail. And then just switching gears over to the industrial side, you know, what are your thoughts on the PCD bearing market? You know, is that an area where you guys have some applications? Are you seeing PCDs take any meaningful share of traditional markets at this point?
What's a PCD?
Yeah, I'm not sure we understand.
Oh, you know, the synthetic crystal bearings that are coming to the market, you know, particularly in some energy applications.
No, I'd love to read about them. Maybe, maybe, maybe I'll-
Okay.
You know, I'll go to YouTube and see what the hell those things are.
Got it. Thank you for the time.
Yep.
Thank you so much. I'm showing no further questions at this time. I would now like to turn the call over back to Dr. Hartnett.
Okay, well, thank you again for your interest in RBC Bearings and your participation in the call today, and we'll look forward to speaking to you again in October.
All right. Thank you so much, presenters, and thank you for everyone who participated on today's conference call. This concludes today's conference. You may now disconnect.