Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal 2013 RBC Bearings’ Earnings Conference Call. My name is Dominique and I’ll be your coordinator today. [Operator Instructions] At the end of the speakers’ remarks, we will have a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today, Mr. Michael Cummings, Vice President. please proceed.

Good morning, and thank you for joining us today for RBC Bearings’ fiscal 2013 second quarter earnings conference call. On the call today will be Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer; and Daniel A. 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, and good morning. Net sales for our second quarter of fiscal 2013 were $100.4 million, an increase of 2.7% over the same period last year. Our industrial markets were down 6.9% on a year-over-year basis while sales of aircraft and defense products were up 13.8% over the corresponding quarter last year. Sales of our industrial products for the period represented 49% of our total revenues and aerospace and defense represented 51%. Demand for our products from the industrial markets, although not as robust as last year, remained steady. Industrial distribution was off 4.3% from last year reflecting a soft second quarter versus a year ago. When we eliminate the effects of European distributors the second quarter North American distribution sales were up 3%. Industrial OEM was off 7.8%. The principle reason for year-to-year contraction in the industrial OEM can be attributed to the reductions in demand from our customers in the mining, heavy truck and semiconductor markets. I’m sure everyone on the call today has an understanding of what’s transpiring in these markets, and I am sure that there will be several questions that will address these markets individually, so for now I’ll move on. For us, we expect these markets will perform at or slightly better than this level for the balance of the year as we have seen our bookings strengthen in September and through October and as some of the new product programs come online. Relative to our aerospace and defense businesses, these markets grew 13.8% in the second fiscal quarter of 2013 compared to the same period last year. Demand for aircraft worldwide remains strong with Boeing’s build rate up 25% and Airbus up 8% on a year-to-date basis. With Boeing’s gross orders this year up 66%, we expect the sector to continue to…

Thanks, Mike. Since Mike has already discussed sales and gross margin, I’ll jump down to SG&A. SG&A for the second quarter of fiscal 2013 increased by $0.6 million to $15.8 million compared to $15.2 million for the same period last year. As a percentage of net sales, SG&A was 15.7% for the second quarter of fiscal 2013 compared to 15.6% for the same period last year. The increase in SG&A year-over-year was mainly due to an increase of $0.5 million in incentive stock compensation and $0.4 million in miscellaneous expenses offset by lower professional fees of $0.3 million. Other net for the second quarter of fiscal 2013 was expense of $0.6 million compared to $0.4 million for the same period last year. For the second quarter of fiscal 2013, other net consisted of $0.4 million of the amortization of intangibles and $0.2 million in costs associated with moving manufacturing facilities. Operating income was $21.2 million for the second quarter of fiscal 2013, an increase of 15.4%, compared to operating income of $18.4 million for the same period in fiscal 2012. As a percentage of net sales, operating income was 21.1% for the second quarter of fiscal 2013, compared to 18.8% for the same period last year. Income tax expense for the second quarter of fiscal 2013 was $4.4 million compared to $6.2 million for the same period last year. Our effective income tax rate for the second quarter of fiscal 2013 was 21.1% compared to 35% for the same period last year. The effective income tax rate for the second quarter of fiscal 2013 includes $2.8 million benefit due to the reversal of unrecognized tax benefits associated with the conclusion of federal and state income tax audits. The effective income tax rate without these discrete items would have been 34.7%…

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

So you said, you were a little bit more optimistic than some of your, did you say competitors or customers? And you mentioned European distribution is one of the weakness points for your industrial business. Kind of interested in your comments kind of piece-by-piece here if we could through some of the businesses including energy if you would, for the industrial side and what you guys are seeing that gives you some optimism in that market?

Okay. Well, I’ll just start with the European business. Most of our sales there are machine tool products that go into local distributors. And so we saw a fairly soft summer. We were down about 20% over the summer for incoming demand and the demand, that demand never even gets to order book; it just goes, it flows right out back into the customers. I think, we all watch the news about what’s happening in Europe. So I think there was a lot of uncertainty in those markets. Since the close of the quarter, however, that market has seemed to bounce back almost completely for us. So we are cautiously optimistic about where we are in the current quarter on European machine tools. I think the other part of your question concerns defense.

I was actually discussing some of the industrial businesses in particular in some of the different markets such as energy and what else you’re seeing in there with the 7% decline year-over-year?

Yes.

That’s not unexpected, but…

Yes. Well, I think the major part of that decline. certainly, the European machine tool component was a significant piece of it. Another significant piece of it was in our mining business with the reduction in demand as a result of building equipment to do mining for the big equipment producers and we all know who they are, right. And I think that was coupled with another problem in that industry; there was sort of an over planning of demand as a result of an estimate of spares requirement that sort of got ahead of itself. And during the second quarter, there was sort of an inventory correction and a couple of customers that we have got caught up in that web. And now that issue seems to be back to normal. Those customers are back to normal. But that whole sector is going to be producing less equipment for a while. So we’re down, but we’re stable.

So you are saying your business is seeing more of the trends and say weaker July, maybe weaker August, picking up a little bit in September and continuing to pick up a little bit in October similar to what we’re seeing on the say North American ISM?

Yes. I think that’s probably a good practice.

Okay, good. Can you talk maybe about the energy business? And we’ve asked this question a few times over the last couple calls, and I know you’ve made some inroads there and kind of how that business is going, maybe where we’re running on a run rate basis from a revenue perspective, et cetera.

From a run rate basis on a revenue perspective. Well, I think during the second quarter, the energy business kind of performed pretty close to plan where our plan was a ski up for the balance of the year. We don’t see that ski up happening.

Okay.

It appears that there is sort of the move from fracing gas to fracing for oil has sort of left the industry in a situation where there has been a somewhat of a reduction in demand. So I think that situation will work itself out, but it’s going to take a couple of quarters to work itself out.

And finally the $4…

So I think overall, the energy side will probably perform in our third quarter about where we were in the second quarter.

Okay. And then finally with the $4 plus of cash on the balance sheet that is a lot of ammunition for you, especially since you generally look kind of $10 million, $15 million acquisition pieces. You haven’t done one in quite a while. I’m assuming you have quite a few on your radar; we’ve talked openly on the conference calls about those. Where does that stand?

Well, we still have a few on our radar and we’re just working through them. It takes a little time to go through the diligence, and it seems like every one of these deals dies a 100 times before it’s consummated, and that’s nothing new; it’s always been that way. So we’re just working through several transactions right now, and hopefully, a few of these transactions will get to the finish line.

Your next question comes from the line of Walt Liptak of Barrington Research.

I wondered, I got onto the call few minutes late, but the comments on 2013 gross margin improvement of 100 basis points of 125 basis points. It appears that you are running a little bit above that right now?

Right.

And I wonder if you can give us some color or if it’s conservatism that you’re working with where you could do better than that or is there something about the mix in the back half of your 2013 that we should know about?

Well, great question. I think, we set a certain margin improvement objective at the beginning of the year that we would like to achieve as part of our plan. And we’re always happy to be a little bit above our objective. And so there is nothing special going on about the mix, it’s just the activities that we’ve put in place over several years are now producing great results, and I’ll talk a little bit about margin improvement. Let me just break it into some of the components first. The way, we measure these plants, the cost buildup of our products is material labor and overhead, right. So the material, as a result of the economic weakness, we’ve been able to get some pretty good contracts on material for our products, and I would say that the effects of that still hasn’t really flowed through our statements. So we’re seeing improvements on our ability to buy materials. Sometimes in the material classification, we purchase components. We’ve been able to tool up some of our plants in Mexico to actually produce some of those components. So you do a make by kind of analysis and see whether or not you can improve your performance by internalizing some of that, and we’ve been able to do that. And so we’re seeing really nice gains on the material side of the business there. And on the value added side, with our mix, if your mix is stable and it’s long-term and there are significant revenues associated with it, then you can decide whether or not your methods are what you want them to be, and whether you’re appropriately capitalized to produce those products or with some capitalization investment produce, allow you to achieve better methods and reduce the touch time associated making these products. So we’ve been able to do that with a lot of our programs that have big revenues associated with them, redesign the way we make them, add some capital equipment appropriately. And that’s having a big effect on our overall performance, and I would have to say that if I classified the two in terms of which was more important, it’s probably 70% in value added component and 30% material component.

Okay. And I understand that about the capital investment, the productivity. I wonder, as we look out into the next quarter or two and with your revenue guidance, is there something also impacting the gross margin with where you’re covering your overhead cost that third component that you mentioned that if revenue is below $100 million that maybe there is just not as much leverage of manufacturing cost?

No, I don’t think that’s going to be a problem, a lot of our overhead cost is associated with -- is variable and associated with the labor, medical benefits, and vacations, and all that sort of things. So there’s a lot of variability in the overhead, that’s a function of labor. And so, if you can manage that appropriately, and you can work your way through the revenue swings fairly graciously.

Okay, okay, that sounds great. I wonder too, I may have missed early comments about aerospace market, and if you can just let us know what you’re seeing in terms of the supply chain and inventory levels, production rates and things like that?

Well, it’s just, I don’t know how late you dialed in there, but our aerospace revenues this year were up -- or this quarter were up 13.8%, we haven’t really seen the bump up effect in the 787 or 737 program or some of the Airbus volume. And so that’s yet to come. We’re seeing really good demand from that sector. It’s very encouraging; our new products are being accepted at a rate that’s even surprising to us. So we’re seeing an ability to expand our mix and just be a bigger provider of this equipment to the aircraft industry. So we’re very bullish, and we have a lot of new programs, new projects, new contracts, new opportunities, new customers that we’re working with, and it just takes time and energy and a lot of good intelligence to make a part of our business program.

Your next question comes from the line of Samuel Eisner of William Blair & Company.

Can you just give a little color, I know you don’t provide the cash flow statements; we’ll get them in the Q. But can you just provide the reasonings behind the decline in cash from operations, and kind of what’s going on with working capital, in particular, what’s going on with inventories for you guys?

Yes. On the investment and working capital for the quarter, we invested about $5 million in inventory, AR was pretty flat. And then we have about $4 million investment prepaid federal taxes that will filter its way out in the next six months. So when you look at it from a year-to-date basis, and we’re close to $30 million in cash for the six months compared to last year around $17 million.

Gotcha. And then that investment in inventory is that primarily just you’re buying raw materials due to your favorable pricing or is that finished goods, any just further detail on that?

I would say a portion when you see the K, a big chunk is raw material, then you’ll see parts in WIP, and most of that is associates with the ramp up on the aerospace side of the business.

Great. The investment that you made, I guess, subsequent to the quarter. I guess may be just the decision making process behind that, is this going to allow you to have greater capacity, was this just better terms? Just any kind of details, you have on that.

Well, financially this is better terms, this is a building that we've leased since the acquisition of that company over 11 years ago, and it also gives us the ability to make changes to the facility to give us additional capacity, and we are also able to lock in 2.9% finance and fixed for 20 years for close to 75% of the purchased price. So from a financial standpoint it made a lot of good sense and it gives us lot better control of our future, on capacity and how to use that building in a most appropriate manner.

And then Mike, you gave some details about I guess orders maybe accelerating throughout the course of the quarter then into October. Can we just parse that out, I guess in terms of orders in terms of industrial, is that strengthening or is that aerospace that you have seen strengthening through October, just want to get a little bit greater detail on that.

Well, certainly we have been focused on the industrial side of the business, just given where we were in the second quarter and that has been certainly improving. I think the second quarter we had an August effect where July was reasonably normal, August was extraordinarily weak, and September recovered nicely, September didn’t recover all of August, but recovered nicely. So we are seeing that situation continue on the industrial side. The aerospace side has been strong and continues to be strong. So there isn't much to talk about there. And the defense side is just -- it is fine also, it's exceeding our expectations.

Just one last quick question, that was great. You gave some commentary regarding raw material purchases and favorable pricing there, but anything on your end product pricing? Are you guys being able to realize pretty good pricing here, just kind of any commentary on that given potentially deceleration in volumes on the industrial side?

The pricing climate has been favorable overall. I can't, and certainly in the aircraft markets it’s been favorable. The industrial markets, I can't think of a circumstance where it has been adverse -- a significant circumstance where it has been adverse. So there is no degradation there on the industrial side whatsoever.

The next question comes from Pete Lisnic of Robert W. Baird.

This is Josh Chan filling in for Pete. Could you talk a little bit about your commercial aerospace aftermarket business? It sounds like demand there was pretty solid. Are you seeing any cautiousness by end customers, inventory adjustments, things of that nature?

No, it is a little bit of a mixed situation there. Our aerospace aftermarket, distribution aftermarket, really those distributors supply a lot of OEMs, small OEMs buy from these distributors, because people like Boeing have just so many subcontractors. And we don't give everybody credit. I mean we sort of refer the smaller people to our authorized distributors. And so the distributor aftermarket OEM side of the business is very mixed. In total that sector has been strong for us all through the year.

Okay, great. And then kind of to ask the gross margin question a little bit differently. Given your strong performance year-to-date, if there is nothing unusual like a demand decline that disrupts you, is it reasonable to assume that you will exceed your internal target? Is that a fair assumption?

Yes, I think it’s a very fair assumption.

Okay. And then just finally, you mentioned that you were a little bit more optimistic than some of your peers in the defense business. Could you elaborate on that a little bit?

Well I mean in defense, the situation in defense is if you are on the right programs you are going to be fine. If you are on programs that don't form the basis of the military and you probably have a lot of exposure. And we look at where we generate our major revenues and our major revenues are generated from platforms that form the basis of today’s military, and are in use every day and are going through refurbishment cycles now. And because of the war in Afghanistan and Iraq, a lot of equipment needs to be refurbished. And so contracts are being led to that end. So we are part of all those programs. And we have fairly significant positions on the new products that -- like the joint strike fighter that’s going into production. So it is all a matter of being in the right place at the right time, right now, in the defense era.

Your next question comes from the line of Steve Barger of KeyBanc Capital Markets.

I’m going to take one more round on the gross margin question. Thinking about the nice uptick year-over-year I’m wondering was that all driven by aerospace, offset by a decline in industrial gross margin or did you have positive gross margin in the industrial even with the lower volume?

We have positive gross margin in the industrial sector even with a lower volume.

So can you -- was industrial up just very modestly and you had a, I mean, was the majority of it driven by the aerospace or can you characterize the two?

Yes, I would say if I had a guess, and I’m absolutely guessing now, it is probably a 70-30 with the 70% going to the aerospace side.

And how did you, in terms of the industrial, I mean it's pretty impressive to be up on gross margin with a 7% decline. Is that price or specific cost actions that you took in the quarter that helped preserve that?

It’s not price. No, it is not price. It is not cost actions that we took in the quarter; it is just a result of strategies that we have been, that are starting to generate good results for us that we put in place several years ago. And some of those strategies are to make our own components in our plants in Reynosa and Tecate and now those plants are too old and making components and we’re seeing very positive variances.

So it is a structural change to gross margin, but it will be even better as volume returns?

That’s what I expect.

So when I think about operating margin, you have been above 21% for the last three quarters. Any reason to think that's not achievable as you go into your fiscal third quarter?

No.

That’s great. And just switching gears to my last question. There is a lot of talk about acquisitions on all these calls. You do have $100 million in cash. Since the acquisition front has been quiet for a while, does the Board ever talk about a dividend, whether it is regular or special, in terms of uses of cash?

They talk about it -- about what a bad idea it is. I think that’s the only air time that it gets.

And just a bad idea because you think with whether it is acquisitions or internal investments you can get a much greater return and you still see plenty of opportunities?

Yes. There is plenty of opportunities. And I think $100 million in cash looks like a lot, but a third of that is in Europe. And so it's more like $70 million in cash. And any acquisition of scale, and we have been looking at a lot of business that have scale that are outside our normal transaction size, will consume a fair amount of that.

I understand. And they may be outside your normal scale, would they still be in your normal scope of operations or product exposure?

Yes, they would we look for acquisitions that have a customer base that's similar to our own, so that we can get good leverage out of our SG&A expenses. And not have to learn a whole new way of doing business.

Right. So maybe related products, but in the same end markets?

Right, exactly right.

This concludes our question-and-answer session for today's call. I would like to hand the call back over to Dr. Michael Hartnett for closing remarks.

Okay, well we thank you and thank you for participating in today's call. And thank you for your continued interest in RBC Bearings and we will be looking forward to the next call in late January, early February. Good day.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.