RBC Bearings Incorporated (RBC) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 RBC Bearings Earnings Conference Call. My name is, Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Adam Sigel, Vice President, and you have the floor, sir.

Good morning and thank you for joining us today for RBC Bearings' fourth quarter and fiscal year 2012 earnings conference call. On the call today, will be Dr. Michael J. Hartnett, Chairman, President and Chief Executive Office; and Daniel 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 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 would like to turn the call over to Dr. Hartnett.

Thank you, Adam. Good morning and welcome. Fiscal 2012 exceeded our expectations and ended on a high note with organic growth of 18% in both our diversified industrial and aerospace markets and a total net sales hitting a historical level of approximately $400 million. We continue to experience solid order volumes across our key markets and our manufacturing facilities are executing to maintain a high service level to our customers. During the fourth quarter, our sales were $111 million, an increase of 25% over the same period last year. The strength of our industrial markets continued through the fourth quarter with sales up 25% on a year-over-year basis. This increase was driven by strong demand from both distribution and OEMs with year-over-year growth rates of 17% and 28% respectively. Our major markets continue to respond well to our product offering, support and outstanding service levels. Sales of industrial products in the period represented 52% of our total revenue with aerospace and defense sales coming in at 48%. Demand for our products from our industrial markets remain strong. The market support continues at a good pace from the sectors in industrial distribution, mining, ground defense and oil and gas. We are also seeing demand from commercial nuclear industry for our products and expect this market component to play a larger role in our business this year than it has in the past. With regard to the oil and gas market, as you know this sector remains strong with deep backlogs reported among the major OEM producers. We expect another good year in these products, with some shift in equipment from natural gas to oil. We don’t see a major impact on our business as this shift transpires. Construction of the large equipment for mining sector continues to impress us. The climate…

Thanks, Mike. Since Mike already covered sales and gross margin, I'll jump down to SG&A. SG&A for the fourth quarter fiscal 2012 increased by $2.6 million to $16.5 million compared to $13.9 million for the same period last year. As a percentage of net sales, SG&A was 14.8% for the fourth quarter of fiscal 2012 compared to 15.6% for the same period last year. The increase in SG&A year-over-year was mainly due to increase in personnel-related costs. Other net for the fourth quarter fiscal 2012 was expense of $0.6 million compared to expense of $0.4 million for the same period last year. For the fourth quarter of fiscal 2012, other net consisted of $0.4 million of amortization of intangibles, $0.1 million of bad debt expense and $0.1 million of other miscellaneous expenses. For the same period last year, other net consisted mainly of $0.4 million of amortization of intangibles. Operating income was $24.1 million for the fourth quarter fiscal 2012, an increase of 49.9% compared to operating income of $16.1 million for the same period in fiscal 2011. As a percentage of net sales operating income was 21.6% for the fourth quarter compared to 18.1% for the same period last year. Income tax expense for the fourth quarter fiscal 2012 was $8.4 million compared to $5.3 million for the same period last year. Our effective income tax rate for the fourth quarter was 35% compared to 35% for the same period last year. For the fourth quarter fiscal 2012 the company reported net income of $15.5 million compared to net income of $9.9 million for the same period last year. Diluted earnings per share was $0.69 per share for the fourth quarter fiscal 2012 compared to $0.44 per share for the same period last year. Turning to cash flow, the company generated $13.1 million in cash from operating activities in the fourth quarter compared to $9.6 million for the same period last. Capital expenditures were $6.5 million in the fourth quarter fiscal 2012 compared to $3.2 million for the same period last year. We expect our capital expenditures to be approximately $12 million to $15 million in fiscal 2013. The company ended the fourth quarter fiscal 2012 with $68.6 million in cash and $1 million of debt on the balance sheet. I would now like to turn the call back to the operator for our Q&A session.

[Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company.

The industrial business, which grew I guess 25% in the quarter but I was particularly interested in the OEM up 28%. First of all, what's the split of the OEM to aftermarket first? And then I guess if you can comment is it share gains that's driving that 28%? It seems unusually high.

Ed, the split of OEM to aftermarket -- well we kind of break out of the industrial distribution OEM in the call there. So it's 25% is what we call OEM. But probably 60% of that OEM business is going to that OEM's aftermarket. We really don't measure that or know about which market is consuming it. I think the growth is number one, the markets that we're servicing there on the OEM side are growing. Certainly mining, oil and gas are the big growers in that region. I think ground defense probably didn't grow as much as the other 2. So a lot of it is just keeping up to the pace of expansion in those industrial markets and also the introduction of several new products that we've developed for those markets over the past 3 or 4 years.

So by several new products -- I mean, I can infer then that you are seeing -- I guess I can infer it also by the rate of growth versus the market growth. You're outpacing -- there's certainly market share gain there. And we've talked about oil and gas before but are there other markets that you think that you're seeing some share gain in.

Well, certainly in the mining and construction area, we're probably picking up share gain just because of the expansion in that market has been difficult for its current suppliers to keep up with. Some of those suppliers are in Japan and the tsunami sort of put some of them out of business or made it difficult for them to continue supply. So I would say I don't know if that's share gain or its expansion for everyone.

So in other words, it is somewhat sustainable at the new share levels because it's not like there's a reloading of the whip [ph] or something along those lines where -- these are structural changes to your business that this is a good base to work off of.

Yes. I don't think it's a one-time event. There's no one-time events that we can put our finger on that sort of pushed the sales. It's just an expansion of what's going on in those markets and an acceptance of several of the new products that we've developed.

Okay. And then CapEx was I guess unusually high for the fourth quarter. I would say double or even triple some of the numbers you’ve put up over the last 8 quarters or so. Was there anything in particular that was in that? I know that you had talked about, last call, about some additional aerospace kind of capacity. Is that where the money was spent? Any highlight you can provide?

Yes. There was one building that we acquired and that accounted for about $1.3 million of it and that's to service mainly aerospace. It was really just moving out of one building into a bigger space. And then the rest was just spread across our 24 manufacturing facilities and the normal CapEx that we normally run at, at around 3.5% to 4% of sales.

And then finally, the inventory number in the quarter? Looks like maybe working capital was a bit of a drag.

Yes. The inventory for the quarter was $158.8 million, so it was down $3.5 million from December. So the investment in working capital was in AR. So we should see that all coming out, a nice chunk of that, in the first quarter, which will drive the cash number.

Right. So the fourth quarter was just more of a timing thing with the cash and nothing else?

Yes.

Our next question comes from the line of Peter Lisnic with Robert W. Baird.

I guess the first question if you could maybe talk about productivity and any sort of metrics that you're willing to disclose this year. And then what the potential for productivity improvement might be in the coming fiscal year.

In productivity, do you mean output per man-hour kind of a productivity number?

That's right.

That's how I think of it too, Peter. Well, it's a number that we focus on. It's a number that we talk about at many of our operations meetings. It's a number that on a year-to-year basis we try to budget an improvement in that ratio. We measure it total labor not just direct labor, value-added labor, but total labor divided into total sales. And that's kind of the focus that we keep track of and so a price increase would be on that metric, would be the same as more production per man-hour. But frankly we don't care how we get it. Price increases is fine. If we're going to improve our productivity that way. So we normally manage and expect something around 3% to 6% per year depending upon the state of the business. If the business has been doing well and is -- some of those ratios can be as high as 20, we probably are going to plateau a little bit. But if the business is doing -- is one of our earlier businesses in terms of business development and maybe we acquired it in the last 36 months and it isn't quite on the production level that some of the others are, we'll probably budget a stronger expansion there.

Okay. All right. That is perfect. And then if you take that productivity improvement and then translate that into some of the gross margin commentary that you had talked about previously, the 100 basis points of improvement for fiscal 2013 is sort of the plan I guess. A, can you maybe give us an update on whether or not that's still the plan for this coming fiscal year and then, B, it sounds like if you do get anywhere from that 3% to 6% that maybe that 100 basis points of guidance would again seem to be conservative.

I know Dan's been working hard on those sorts of metrics, so I'll defer to him.

Well, Pete, as you know we really exceeded the expectation in 2012 but I think internally, our internal target is to get to that 36% and like always if we're able to beat that internal target, we'll be happy about that.

Okay. All right. And then with the business kind of running full steam both in aero and industrial, I'm just wondering if you're seeing any sort of bottlenecks or extended lead times in product delivery to your customers. Any issues on that front?

No. Not in any major way. We're very cautious about that and I think the -- I think if you look at our backlog one of the things that we've been able to do is bring up our throughput and maintain our backlog to be reasonably steady because we try to maintain competitive lead times on a lot of the products that we don't have under contract. And the products that we do have under contract we manage in a different way.

Okay. All right. And then what's your guess, you could plead the Fifth if you want on this one, but what's your guess as to whether or not you're competitors can make that same claim? In other words, are their delivery times being extended or are they at a competitive disadvantage at this point in your opinion?

Well, I thinks it's -- we have a lot of competitors but no major competitor in any direct lineup with RBC's business. So, depending upon which product line we're talking about we'll have a different competitor for that product line. But it may be only a $10 million or a $20 million product line for RBC. So, we end up with a lot of different competitors. Now, we have heard that lead times in some of the markets, which are brisk right now, particularly in aircraft, are moving out towards 50 weeks. And so I would say that those guys are probably either have a really great business franchise or they're not keeping up. Ours are not 50 weeks.

[Operator Instructions] Ladies and gentlemen, since there are no further questions that concludes the Q&A portion of the call. I'd now like to turn the presentation over to Dr. Michael Harnett for closing remarks.

Okay. Well, in closing I want to thank, everyone, for their continued interest and support of RBC Bearings and for participating in today's discussions. And we look forward to speaking to you again soon, probably end of July. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.