Good morning, ladies and gentlemen, and welcome to the Q1 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 turn the conference over to your host, Mr. Chris Donovan, with Alpha IR. Please go ahead.
Good morning, and thank you for joining us for RBC Bearings Fiscal 2019 First Quarter Earnings Conference Call. With me on the call today are Dr. Michael Hartnett, Chairman, President, and Chief Executive Officer, and Daniel 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 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, Chris, and good morning, everyone. Net sales for our first quarter fiscal 2019 were $176 million, versus $163.9 million for the same period last year, a 7.4% increase. Excluding the Sargent Canada sales from last year, organic growth for the quarter was 9.4%. We consider that a very good start on fiscal 2019. For the first fiscal quarter of 2019, sales of industrial products represented 41% of our net sales, with aerospace products at 59%. Gross margin for the quarter was $67.7 million, or 38.5% of net sales. This compared to $62 million, or 37.8% for the same period last year, a 9.2% increase.
Operating income was $36 million versus $32 million last year, a 12.5% increase. EBITDA was $47.1 million, an 11.3% increase over last year. Clearly, this is a nice quarter, and it follows an excellent year for the company, and we continue to develop momentum in all of our major markets. Industrial products showed an 18.7% year-over-year growth rate, and we continue to see strong overall demand for these products. Industrial OEM was up 18.1%, and distribution and aftermarket was up 20.3% on a year-over-year basis. Mining, oil and gas, semiconductor machinery, machine tool, and general industrial equipment continue to show remarkable strength. On the aerospace and defense side, our first quarter net sales were up 3.9% when normalized for the revenues generated last year by Canada.
This was mainly driven by OEM. Aerospace and defense OEM was up 5.6% on an organic basis. Supply chain constraints, both internal and external, contract timing, and short-term plateau in aircraft build rates, driven by supply constraints and engine availability, are the reasons this gross growth rate was not solidly in the double digits. In some of our aerospace plants, if we could have made 10 or 20% more product in the quarter, we would have, we would be able to sell it. But we can't, we're bumping up against production constraints that are mainly driven by external concerns. We see our aerospace volumes building through subsequent quarters for at least the next eight quarters as we add additional capacity, floor space, equipment, and staff.
This is in order to support the expansion of, in volumes driven by new contracts, as well as the additional airframe and engine builds scheduled for the coming years. We expect to see some meaningful variance from our normally demonstrated expenditures for machinery and floor space as we add capacity to address the industry demands for our products. Primary aerospace platforms where we see growth include the 737 MAX, the A320, 787, 777X, the Joint Strike Fighter, and of course, the supporting engine programs, LEAP and the Geared Turbofan. Regarding our second quarter, we're expecting sales over the period to be between $171 million and $174 million, compared to $161.2 million last year, net of, net of our Canada sales, at an increase of 6.1%-7 .9%.
I'll now turn the call over to Dan for more detail on financial performance.
Yeah, thanks, Mike. SG&A for the first quarter of fiscal 2019 was $29.6 million, compared to $27.8 million for the same period last year. The increase is mainly due to higher personnel costs of $1.2 million, $0.5 million of additional incentive stock compensation, and $0.1 million of other items. As a percentage in net sales, SG&A was 16.8% for the first quarter of fiscal 2019, compared to 16.9% for the same period last year.
... Other operating expense for the first quarter of fiscal 2019 was expense of $2.2 million, compared to expense of $2.3 million for the same period last year. For the first quarter of fiscal 2019, other operating expenses were comprised mainly of $2.4 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 $0.1 million of other items. Operating income was $36 million for the first quarter of fiscal 2019 compared to operating income of $31.8 million for the same period in fiscal 2018.
Other non-operating expenses was $1 million for the first quarter of fiscal 2019 compared to $0.4 million for the same period last year. For the first quarter of fiscal 2019, other non-operating expenses was comprised primarily of $1 million in loss on early extinguishment of debt, and other non-operating expenses for the first quarter of last year consisted of a $0.3 million of foreign exchange translation losses and $0.1 million of other income. For the first quarter of fiscal 2019, the company reported net income of $27.5 million compared to net income of $21.8 million for the same period last year.
On an adjusted basis, net income would have been $28.1 million for the first quarter of fiscal 2019 compared to adjusted net income of $22 million for the same period last year. Diluted earnings per share was $1.12 per share for the first quarter of fiscal 2019 compared to $0.90 per share for the same period last year. On an adjusted basis, diluted EPS for the first quarter of fiscal 2019 was $1.15 per share compared to an adjusted diluted EPS of $0.91 per share for the same period last year. Turning to cash flow, the company generated $33.8 million in cash from operating activities in the first quarter of fiscal 2019 compared to $39.8 million for the same period last year.
Capital expenditures were $7 million in the first quarter of fiscal 2019 compared to $5.7 million for the same period last year. In the first quarter of fiscal 2019, the company paid down $30.1 million of debt and ended the quarter with $55.7 million in cash. I'd now like to turn the call back to the operator to begin the Q&A session.
Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question is from the line of George Godfrey with CL King. Please go ahead.
Morning, George.
Mr. Godfrey, your line is open. Please go ahead. Your next question is from the line of Michael Ciarmoli with SunTrust. Please go ahead.
Good morning, guys. Thanks for taking the questions here. Maybe I think the comment you used regarding you know, some of the supply chain constraints was you know, plateauing build rates. Can you maybe just elaborate a little bit on the supply chain constraints? I mean, most of the you know, the programs are ramping. I know there's been you know, definitely some challenges on the engine side, but maybe you know, a little bit more color you know, in terms of what you're seeing there you know, regarding you know, kind of progression for the rest of the year and into early next year on terms of the build rates and sort of your internal constraints.
Sure. You know, I think what I said is we have both internal and external constraints, and actually, the external constraints are creating internal constraints because when we can't get the product turned around quick enough from our subcontractors, we have to shuttle other product in its place and manufacture that in order to keep the plant in its efficiency mode. So, typically, you know, our subcontractors do special processes, and they're very, you know, for the most part, unique industry processes for the aerospace industry. And these processes require a substantial amount of pedigree and OEM approvals.
As a result of that, there's not many people that have this pedigree, and there's not very many choices of suppliers that you can go to. So, right now, what we see in the supply chain is there's considerably more demand on these special processes than there is capacity. So, in answer to that, we've been working for some time on insourcing some of these processes to remedy the situation. We are adding machinery and floor space to four of our plants to address these requirements and expect to have beginning in our fourth quarter of 2019, we're gonna be phasing in that capacity beginning in one of our plants in Connecticut.
So, it kind of, it is what it is, and, there's not much you can do about it. We've been working for a couple of years on planning,
... Planning to insource at least to augment the capacity requirements that we see are needed. And so fortunately, we're in a pretty good position in terms of planning to execute this. And we didn't expect the industry to be bound up the way it is, but it is what it is.
Got it. That's helpful. And then just, I mean, maybe even segueing in there to the insourcing and bringing that capacity online, I think you called out sort of some expense variance. I mean, coupling the new capacity, the new equipment being layered on with, you know, just some of the, you know, the program startup costs, I mean, should we be calibrating ourselves for some potential margin headwind? And I think you guys, you know, called out previously, you know, some headwind there, but has anything changed in regard to the level of expenses or what you think we might see flow through the P&L?
No, I think we're okay there. I think it's you know, because we've been incurring these expenses and sort of flushing them through the P&L all along. So, I mean, in terms of any changes to our rates, you know, you probably won't see that. So, you know, as I say, we have about 200,000 sq ft of new floor space coming online next year, and that should materially address this. On the other hand, we have also some major new contracts coming online next year. So there's you know, it'll be a race.
Got it. And then last one for me, and I'll just jump back here. You didn't really comment on aerospace aftermarket or spares, and I know there was, you know, some, you know, I think it was a little bit lower than normal last quarter. Any color on what's happening in the broader aftermarket?
For us, you know, the aftermarket is the aftermarket. Our aftermarket supplies the MRO some MRO requirements, but they also supply, to a large extent, the smaller OEMs that are subcontractors to the industry in general. And so, I don't know if you could call that true aftermarket. We do see some shifts going on between our traditional suppliers, aftermarket customers, and OEMs coming to us directly, or Boeing coming to us directly, or Airbus coming to us directly, that would normally have, in the past, gone through those people. So it's been fairly flat. And, what was the last quarter, Dan?
Yeah, Q1, it was $20.6 million, compared to Q1 last year of $21.1 million, excluding Canada. So it's been pretty flat year-over-year for the last quarter.
Got it. Got it. That's helpful. Thanks a lot, guys.
Yep.
Your next question is from Kristine Liwag with Bank of America Merrill Lynch. Please go ahead.
Good morning, guys.
Morning.
Good morning, Kristine.
Mike, following up on the constraints question. In the past, you've highlighted that you're insourcing plating, heat treating, and High Velocity Oxygen Fuel techniques. Are the capacity that you're adding today addressing these items, or are there new items that are coming up that you're looking at?
Well, they're definitely addressing those items. And there's ... What did you list? You listed heat treating, plating, and HVOF?
High Velocity Oxygen Fuel technique.
Yeah. Well, we'll also add, you know, certain quality inspections that we outsource today also, and dry film and aluminum pigment. So these are all sort of bottleneck operations, external.
And then, when you add these capacity, I think you've said before that you got approved by Boeing to do this in-house already. Have you gotten the other OEMs, like the engine guys, to approve this insourcing as well? And then when you mentioned that, 4 Qs when you're gonna get these online, is that when they're qualified, or is that when, you'll be at full rate?
Well, we won't be at full rate in the first quarter. I mean, we'll start to phase in this activity in that quarter. And until that activity is in on the plant floor, is demonstrated, and we can show that we have the appropriate quality procedures and management, that's when the OEM comes in and signs us off. So that's on the new plant where we're, you know, insourcing all this business. For some of the existing plants, where we're doing some of the plating and some of the HVOF already, those have already been signed off.
So, what I'm saying is we're adding capacity, a substantial amount of capacity, that to our existing capacity by establishing a new facility.
Great. And maybe to take a step back, the capacity that you're adding today, I guess, maybe taking a step back before that, your existing capacity today, are you able to produce the contracted volume that you need to deliver to your customers, or are you starting to see some sort of backlog build up because you don't have this capacity in place yet?
... Yeah, you were breaking up pretty good there, Christine, but I think what you asked was, you know, do we have the amount of capacity we need to service our existing customers? We could—we definitely could use, in some of our plants, more capacity. And so in this new facility that, one of the new facilities that we're adding, we're adding additional manufacturing capacity beyond the coating technologies. And then, let's see, two of the plants that we're adding are to support a new contract demands that really begin in calendar 2019 in a substantial way.
So, you know, two of the plants will be consumed immediately with new contract demands, and so it won't be incremental capacity to the RBC-based business.
That's really helpful. And maybe if I could squeeze one last one. I mean, at this point, when we look at Sargent, we look at your gross margins today, it looks like you've completely absorbed that business. Your margins are right back up to where you were before you did the deal, and you've now also delevered as well. What are your plans for uses of cash generated? Because at this point, it seems like you already have the capacity in place to build the production rates, and you have that in order. Do you have an appetite to do more deals at this point?
Yeah, well, you know, I think, you know, our best use of cash, well, our first use of cash is going to be obviously going into expanding our capacity, our existing capacity, to take care of our current customer base. And beyond that, we've considered a number of acquisitions, some small, some not so small, and, you know, we would expect some of those to convert over the next six to nine months.
Great. Thank you.
Again, 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. Your next question is from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.
Hey, good morning.
Morning, Steve.
Mike, what are the lead times for the machine tools you need right now? Do you have enough on order for current visibility? And just broadly speaking, how do you plan for where you need to take machine capacity right now, given the environment?
Okay. Yeah, I think you asked three questions there, Steve.
I think so, too.
Yeah, it depends, you know, the machinery lead time is dependent upon what kind of machinery you wanna install. I mean, if you're installing machining equipment that cuts metal and turns chips, you know, that's basically readily available unless it's highly specialized. The lead time on that is typically less than 90 days. Often it's available immediately. So, there isn't much of an issue there. If you're looking for specialized grinding equipment, that's probably a year. We're not looking for too much of that. What we are, the grinding equipment that we're putting in place has been on order for some time, so, you know, we're good there.
And if you're looking for specialized heat treating and heat treating equipment, that's a year cycle also. And that can be a tricky cycle because of, you know, the equipment has to be tested and demonstrated in place before it's disassembled and shipped to your site. So that's kind of where we are. And for the long lead time items, we've been in contract with our suppliers for some time, so we're good there.
In terms of timing, normally, when we contract new business, and what happens there is, if there's an existing supplier, and we're displacing the existing supplier, the existing supplier will have a contract, and that contract will phase out over 18-20 months, something like that. And our new contract will begin at that point and then go for typically five years. So there's a number of contracts that we have today that are in that mode, where we have plenty of runway here to plan through our production needs and establish the footprint and establish the capital equipment needed to support that contract.
Get it all in place well ahead of the performance period, which is really important to do because you don't wanna be behind on the performance period, because my experience has been you never catch up. So, that's, you know, it's all part of the cycle, and, we're in good shape in terms of planning, to the extent that I know of.
Great. And, and in the past, you've talked about the bigger issue around capacity being skilled labor. Do you have the workforce available to, to man the machines as they come in? Or what are you doing to, to recruit those guys?
Well, you know, we're really focused disproportionately on automation. And so, as we automate our processes, it frees up labor, and that labor can go to work elsewhere in our plant to work on other projects. Or it just, you know, through attrition, it just leaves the plant. And that's been very manageable for us.
Okay. And then just last question on all on this issue, but a similar question in terms of engineering and design. Do you have program managers that can take on new quotes? Are you limited at all on that front?
You know, it's for the most part, we're not limited, but that's very, you know, business unit dependent. Some of them are, you know, overwhelmed with what they have on their plate today, and some of them have more capacity than what they have on their plate. So my job is to run around and make sure their plate's full.
Got it. You mentioned several industrial end markets that remain really strong. Can you talk about the forward look for pricing, for existing or new programs? Just in general, how sensitive are industrial customers to price right now?
Well, we have a lot of industrial customers calling us up, asking us, you know, about these tariffs and when we're gonna give them a price increase, and so we're doing our best not to disappoint them.
Last one for me. Dan, you went through your numbers pretty fast. Did you talk about free cash flow expectations for the year, given the required investments that you guys need to take?
Yeah, I think CapEx, you know, normally our CapEx runs around 3.5%-4% of sales. I think this year will be a little higher at 4%-4.5%. A lot of these projects are kinda gonna be folding over this fiscal year and 2020. So, I kinda think that's where we'll be in that range.
Operating cash flow convert, similar metric to net income as it has in years past, you think?
Yes. I think, you know, we've spent a little more in Q1 on getting some raw material and get on the floor, so we've built a little inventory in Q1. So I don't see that type of investment going forward each quarter for the rest of the year. So I think we should be in pretty good shape. And our goal internally is once again to pay down at least $100 million of debt.
Perfect. Thanks.
I am showing no further questions at this time. I would now like to turn the conference back to Dr. Hartnett.
Okay. Well, thank you. I, I appreciate everybody's interest today, and look forward to speaking to you again after the second quarter. Good day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all now disconnect.