Good day, ladies and gentlemen, and welcome to the RBC Bearings first quarter 2018 Q1 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 assistance during today's conference, "please press star then zero" on your touch-tone telephone. And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Chris Donovan, with Alpha IR. Sir, you may begin.
Good morning, and thank you for joining us for RBC Bearings fiscal 2018 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 today's statements will be forward-looking or 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 risk 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 press release and is available on the company's website. Now I'll turn the call over to Dr. Hartnett.
Thank you, Chris. Good morning and welcome. Net sales for the first quarter of fiscal 2018 were $163.9 million versus $154.6 million for the same period last year. For the first fiscal quarter of 2018, sales of industrial products represented 37% of net sales, and aerospace products were 63% of net sales. Gross margin for the first quarter was $61.9 million or 37.8% of net sales compared to $57.3 million or 37% for the same period last year. We continue to experience gross margin improvement across the company due to cost initiatives, manufacturing process improvements, cost and consolidation programs that have been put into motion over the last three years. We are also experiencing startup and low production run costs in several facilities, primarily associated with new programs that, when mature, will accrue further benefit to consolidated margins.
We expect to see further benefit here beginning in our second quarter. Adjusted diluted EPS for the quarter was $0.91 per share. Free cash flow for the quarter was a strong $34.1 million, and corresponding debt was reduced by another $32.6 million during the period. EBITDA came in at $42.1 million at 25.7% of revenues. Industrial products showed a 12.1% year-over-year growth rate, and we continue to see good sequential demand for these products. Industrial OEM was up 12%, and distribution and aftermarket was up 12.3% on a year-over-year basis. European demand was particularly strong with 14% year-over-year growth showing. Strength was demonstrated in most of our key markets, including mining, oil and gas, marine, semiconductor machinery, machine tool, rail, and general industrial distribution. On aerospace and defense products, for the quarter, this sector was up 2.8%.
Several plants produce both aerospace and industrial products, and as a result, classification of markets can at times be a little bit murky. The shortened lead time cycle in some industrial markets—semiconductor machinery as an extreme example—can create demand spikes that, despite the best planning efforts, can cause immediate short-term customer needs. In these circumstances, it is often the case that aerospace capacity can be allocated to commercial products. This occurred during the first quarter and cost the aerospace growth component about 1% or so on a year-over-year comparison basis. We also deemphasized sales of certain products by extending lead times while a change in the site of manufacturing was implemented. This caused another 1+% on a year-over-year comps for aerospace-bearing revenues. We expect to recover these sales volumes at better margins later in the year.
Overall, we expect to see the OEM component of the aerospace revenues increase as the year rolls out. The outlook for this sector this year is in the mid to high single-digit growth. Regarding our second quarter, we are expecting sales over the period of between $164 and $165 million compared to $153.9 million last year, an increase of between 6.6%-7.2%. The total year is looking very solid to us today. I'll now turn the call over to Dan for more detail on the financial performance.
Yeah, thanks, Mike. SG&A for the first quarter of fiscal 2018 was $27.8 million compared to $25.8 million for the same period last year. The increase was mainly due to higher personnel cost of $1.3 million, $0.5 million of additional incentive stock compensation, and $0.2 million of other items. As a percentage of net sales, SG&A was 16.9% for the first quarter of fiscal 2018 compared to 16.7% for the same period last year. Other operating expense for the first quarter of fiscal 2018 was expense of $2.3 million compared to expense of $2.2 million for the same period last year. For the first quarter of fiscal 2018, other operating expenses were comprised mainly of $2.4 million in amortization of intangible assets offset by $0.1 million of operating income. Other operating expense for the same period last year consisted mainly of $2.2 million in amortization of intangible assets.
Operating income was $31.8 million for the first quarter of fiscal 2018 compared to operating income of $29.2 million for the same period in fiscal 2017. On an adjusted basis, operating income would have been $31.8 million for fiscal year 2018 compared to $29.6 million for the same period last year. Adjusted operating income as a percentage of net sales would have been 19.4% for the first quarter of fiscal 2018 compared to 19.2% for the same period last year. For the first quarter of fiscal 2018, the company reported net income of $21.8 million compared to net income of $18 million for the same period last year. On an adjusted basis, net income would have been $22 million for the first quarter of fiscal 2018 compared to net income of $18.1 million for the same period last year.
Diluted earnings per share was $0.90 per share for the first quarter of fiscal 2018 compared to $0.76 per share for the same period last year. On an adjusted basis, diluted earnings per share for the first quarter of fiscal 2018 was $0.91 per share compared to an adjusted diluted EPS of $0.77 per share for the same period last year. The adoption of ASU 2016-09 added approximately $0.09 to diluted and adjusted diluted earnings per share in the first quarter of fiscal 2018. Turning to cash flow, the company generated $39.8 million in cash from operating activities in the first quarter of fiscal 2018 compared to $19.2 million for the same period last year. Capital expenditures were $5.7 million in the first quarter of fiscal 2018 compared to $5.2 million for the same period last year.
In the first quarter of fiscal 2018, the company paid down $32.6 million in debt and ended the quarter with $45.5 million in cash. Now I'd 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 one" key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from it, "please press the pound key". Also, to prevent any background noise, we ask that you place your line on mute once your question has been stated. Our first question comes from Walter Liptak of Seaport Global Securities. Your line is open.
Hi. Good morning, guys.
Good morning, Walter.
Morning, Walter.
Wanted to ask you about, in your prepared remarks, you talked about gross margin and some startup costs for new programs. Can you give us a little bit more detail on that? Was that in industrial or aerospace products? It also, you kind of alluded to benefits in the second quarter. Were you talking about revenue benefits or just less startup costs rolling through the gross margin?
Yeah. Well, to answer your question sort of, the last part of your question, Walter, there's revenue benefits and some margin benefits that begin in the second quarter. So, most of the startup costs are being experienced in the aerospace side of the business right now. And, I mean, we have a number of new product lines that are coming on stream for the 787, the 350, the 320, and the 330. So, all of those and they're spread across a number of different plants. So all of those are really at just initial production rates right now. And we're talking about probably five different plants being involved.
Okay. Okay. Great. And switching over to industrial, you know, very nice double-digit growth there. You know, I wonder if it's possible to talk about it as kind of sell-through that your customers had versus inventory refresh, that's that could be going on. And, you know, do you, I guess, when you think about, you know, next quarter and, and a little bit further out into the year, can you envision, you know, double-digit growth in industrial continuing?
Well, you know, that's the hard part for me is to kind of project out what industrial's doing. I mean, with aircraft, you know, you have how many planes and what your content per plane and what your new product adds are. And you can kind of do the math. And industrial has a broader market with many more customers and is very GDP dependent. So, it's a little more difficult for us to answer that question directly. But there are some micro things going on in the world that are driving some of that demand.
I think some of that is, you know, when you look at what's going on in the semiconductor industry and the retooling of the semiconductor plants for the new technology associated with light-emitting diodes. And I mean, there's a whole treasure chest of literature about what's happening there. That's certainly driving a fair amount of our semiconductor demand. I think when we're looking at materials right now, we see the major demand coming from supply to the aftermarket. And inevitably, on the materials and mining side, the major producers typically cycle to cycle deplete their working capital to a very extreme extent as they come down the cycle and then have to rebuild it as the cycle normalizes.
And I think we're in a normalized cycle now where, where that demand should continue at least at the current rates. That's, that's what we're seeing in terms of input right now. And certainly, I think everybody knows what's happening in the oil and gas business and, you know, with oil around $50 a barrel, and everybody figured out how to make money in the Permian Basin. There's a whole land rush going on down there with the frackers and the machinery people. So there's just good demand coming out of that sector. So, will it continue with double digits? Walter, you're the analyst. I listen to you on that side.
All right. Good one. Then you mentioned the oil and gas markets. I wonder if you could refresh what was what you had, like what the mix of, you know, of revenue is for oil and gas. And then if I recall correctly, I thought a lot of it was offshore that's gonna be down and out for a while. You know, so, you know, what products are there that go into land-based oil and gas, and how big is that business?
Well, it's, you know, it's the basic, you know, it's bearing products for the most part. And, you know, they're the products that go into fracking machinery. They're the products that go into downhole injector systems, which are used to introduce piping into the wells to clear out the well flow. It's like a stent in a heart operation, I guess. And so there's a lot of bearings that are consumed in those kinds of markets. There's just the ground-based downhole drilling is consumes a fair amount of product just in the consumption rate. So for us, I mean, it's, you know, it's a market that was pretty soft during the 2015 to 2016 period.
It's certainly coming back at a good rate. So we're optimistic that oil holds around $50 a barrel, and the frackers and the Chevrons and the people that are active in that space continue to be bullish about investing in it.
Okay. All right. Great. Thank you.
Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.
Hey. Good morning, guys. This is Ken Newman on for Steve.
Hi, Ken.
Morning. So, just wanted to get your thoughts on how you're thinking about free cash flow for the year. Are you expecting that it will increase versus last year, or do you think working cap or increases in working cap will bring that down?
I think we'll increase a little this year. I don't I don't think we'll be investing as much in working capital as we have in the past two years. As you see when you see the Q this afternoon, you'll see that was definitely the case. We'll continue to pay down debt as always. We're out looking hard to find acquisitions.
Got it. I guess as a follow-on to that, in terms of the acquisition pipeline, can you talk a little bit about how active it is and, where are you looking for deals in terms of, in terms of industry or in size?
Well, we like both industrial and aerospace assets. So we've been looking everywhere. It's a lot of books crossing our table, and there's a lot of activity going on. But it's always hard to find that right one that fits what we're looking for and fits the profile that we're looking for.
Got it. For my second question, going back to gross margin, I think last year you had mentioned a 100 basis point gross margin expansion target. Is that reasonable for fiscal 2018 and based on how you're seeing the end markets come together?
Yeah. I think that's still our internal goal for the year. I think it's gonna be more second-half related, as based on the comments that Mike made a little earlier on this call and last call about some of these startup costs and low production run costs that we have on some new products entering the market. I think for the year, yes, we're still trying to get to that 39%.
Okay. And then lastly, you mentioned, you know, some headwinds to margin from lead times and just the allocation of aerospace capacity allocated to commercial. How, I guess, how are you expecting or looking at the timing of those issues to be resolved? Is that something that's already being fixed, or is that something that, you know, really comes out in the third or fourth quarter?
Yeah. Well, if you're referring to Mike's comment, he was referring more to top-line sales that we reallocated some capacity internally from aerospace capacity to industrial capacity. That will neutralize itself over the next 3 quarters. And on the gross margin, on the cost, that will also by the, you know, third, fourth quarter, you know, we should definitely see the improvements coming through.
Great. I'll get back online.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star then one on your touch-tone telephone. Our next question comes from Kristine Liwag of Bank of America. Your line is open.
Hey, guys. Good morning.
Morning, Kristine.
Mike and Dan, when we look at your largest program, production rate of the 737 is ramping up. I think from the announced rates today, it will go up about 12% in volume next year. Plus, you've got incremental content on the MAX versus the NG. Additionally, on the F35, we've seen higher procurement rates from Lockheed too. I know it's a little early, but it seems to me that if you start looking at fiscal year 2019, you'd have a sizable acceleration in your aerospace business. I was wondering if you could walk us through maybe puts and takes of why and why wouldn't your fiscal year 2019 aerospace business grow double-digit next year?
next year is calendar 2018, right? So I.
Yeah.
Yeah. I get 'cause we're in 2018 now for fiscal. Yeah. What we see here is, you know, if you look at our major programs which are coming on, and we have some major programs that are sort of backing off, and then there's sort of a netting. So the calculus gets a little complicated. So the major programs that are coming on with new products concern the 787, the 350, the 330 Neo, and the 320, both the old 320 and the 320 Neo. So those are sort of new products that are coming through on those programs, both for the airframe and the engine, both the LEAP and the Geared Turbofan engine. So then we see the volume increases on the 737 build rates, and we see the volume increases on the 330 Neo.
But, you know, a big program for us has been the 777. And the 777 backs down for a year or two as they convert it from the 777 to the 777X. So when it goes to the X version, our content on the X increases by 50% over the content on the basic 777 version. So that's what's going to sort of hold our growth in the single digits, high single digits this year, because of the backing down of that particular program.
Great. And just to confirm, did you mean for calendar year 2017, or do you expect that step down to also hold in calendar year 2018 as the rate comes down?
Well, yeah. I think fiscal years. I think in fiscal years 'cause I have to. So, I think for our fiscal year, you know, that's kind of where we're gonna be. When I look at that program for next year for calendar 2018, yeah. Calendar 2018, it's a little soft too. And then calendar 2019, it comes back pretty strong.
Great. That's helpful. And maybe a bigger picture question. Lately, we've seen a lot of news coming from Boeing, and it seems like Boeing's relationship with the supply chain is becoming more contentious. As we look at, you know, Partnering for Success 2.0, how do you expect that to affect you? And would you be able to offset maybe what the pricing concessions that Boeing wants with better operational efficiency or anything like that?
Well, I don't see PFS 2.0 impacting us today. The, you know, pretty much our Boeing contracts are in place through, I don't remember the exact date, 2021 to 2025, depending upon the contract. So, you know, we've kind of reached an agreement with Boeing on various things. And so, there hasn't been much discussion on PFS 2.0. It'd be interesting to hear what you've heard from other people on that regard. But that's kind of where we are. You know, we're always looking for a way to improve the manufacturing efficiencies through either methods improvement or through better capitalization or through, you know, moving to places where the overhead rate is lower and the labor content is high. So we're always looking for that balance. And we continue to do that.
We continue to make decisions quarterly on what's the best approach to achieve an improved execution. To some extent, when in my prepared remarks, we talked a little bit about moving one of the product lines from one plant to another that's better tooled and more efficient. In order to do that, we had to move out lead times and sort of relieve the pressure on the home plant to give the away plant time to spool up and probably cost us 1% of our sales growth for the first quarter. So, that's just an example of kind of what we talk about and think about every month.
Great. Thank you very much.
Thank you. Once again, ladies and gentlemen, if you do have a question, "please press star then one". I'm not showing any further questions in queue. I would like to turn the call back over to Dr. Hartnett for closing remarks.
Okay. Thank you, Chris. I wanna thank everybody for their participation today and, for your continued interest in RBC Bearings. We'll be speaking to you again, I think, in October. Good day.
Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.