RBC Bearings Inc (RBC) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's RBC Bearings fiscal third quarter 2009 conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Mr.

Mike Cummings.

Please go ahead, sir.

Thank you, Michelle.

Good morning and thank you for joining us today for RBC Bearings fiscal third quarter 2009 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.

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 web site.

In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's web site.

Now, I'd like to turn the call over to Dr.

Hartnett.

Thank you, Mike.

I'd like to welcome each of you for taking the time today to join us.

And, as always, we appreciate your continued interest in our company.

Today we'll follow the usual format.

I'll touch on the highlights and Dan Bergeron will go through some of the details on the accounting treatments.

This morning we released our results for the third fiscal quarter of 2009, and to summarize them, overall, we're satisfied with our performance this quarter, given the number of external events that occurred during the period.

We generated $85.3 million in revenue and adjusted operating income of $14.5 million.

This represents a top line growth of 6% from the prior year and adjusted operating income within our previously stated expectations.

Recall last time we spoke that we felt our guidance for the quarter was a bit more challenging due to certain unusual circumstances.

And those were that Boeing just came back from a 60-day strike and the schedules had to be adjusted accordingly for the interruption.

We see these schedule changes extending into our last fiscal quarter and have reflected this in our guidance for that quarter.

Secondly, we had to adjust our -- the slowing demand for our industrial products.

While we are not immune to the current declines in the global industrial demand, which impacted our results and performance in the current quarter, we are fortunate to have much of our business booked through the end of our fiscal year and have a reasonably positive outlook for 2010, beginning with our first quarter starting in April.

We continue to generate strong cash flow from operations.

We generated $8.6 million during the third quarter and it brings our nine-month total year to date to $32.6 million.

This compares favorably to $24.6 million generated in the comparable period last year.

Our ability to deliver a good performance in these difficult times reflects the value we provide our customers and the diversification of our end markets.

Clearly, we are all in a challenging environment today, but in the past 16 years we've expanded our product offerings through 19 acquisitions and internal development.

As a result, we are more diversified and less concentrated from a market and customer standpoint.

No one customer represents more than 8% of our sales.

Finally, our financial health continues to be in great shape, and we view this as a key competitive advantage.

Now let's talk a little bit about our current market conditions.

Aerospace and defense sales for the quarter were about $50.5 million, up 21% compared to last year.

Despite some pockets of slowness and the impact of the Boeing strike, we consider this to be a very satisfactory achievement.

The demand for product from our customers from which 56% of our aerospace and net sales are derived continued to experience growth as a result of new product introductions, acquisitions, and market share gains.

This helped offset the slowdown in new plane builds as a result of the Boeing strike.

That said, we remain encouraged by the recent build [grades] forecasted by Boeing and Airbus for the year ahead.

In the defense sector, we continue to see steady demand for replacement bearings, particularly those used in harsh environments, and stronger demand for products to support full-scale production of new weapon systems.

Replacement and development of products for weapons and aerospace programs have also contributed to the growth in this sector for our fiscal year to date.

Turning now to our industrial markets, our industrial markets slowed.

Our sales to those markets were about $34.8 million, down 10% from last year.

Overall, global industrial market experienced a significant slowdown in the quarter given deteriorating macro-economic conditions, which resulted in lower industrial capital spending.

This had a negative impact on our business and we expect similar pressures to continue into our fiscal fourth quarter and are restructuring our cost base in those operations accordingly.

Moving back to the P&L, gross profit for the quarter rose 3.4% to $28.5 million, compared to $27.6 million for the same period last year.

Gross profit as a percentage of net sales was 33.4% in the third quarter of fiscal 2009, compared to 34.3% last year.

This reflects our large bearing startup costs.

Excluding $0.8 million of startup costs, gross profit as a percentage of net sales was 34.4%.

And Dan will have more to talk about in this regard later in the call.

Operating income for the quarter was $12.8 million, down 15.3% for the quarter on a GAAP basis, and down 5.1% to $14.5 million on an adjusted basis versus the same period last year.

The adjustments to our GAAP operating income will be covered later in this call by Dan.

Third quarter GAAP net income was $7.7 million, down 19.6% versus $9.6 million last year.

Adjusted net income of $9 million decreased 5.9% over adjusted net income of $9.5 million in the same period last year.

In spite of the current economic situation, our order book remains healthy, expanding to $221.4 million, representing a 14.9% increase over last year, although it is down slightly from last quarter's $239.9 million.

Challenging times such as this serve to remind us of some of the prudent capital decisions we've made over our time as a public company.

Our current capital position reflects some of these decisions we have made over these years and are confident that the liquidity and financial strength position us well in the short term without putting our long-term growth objectives at risk.

Today we operate with a leverage of less than 0.7 times and have no significant debt coming due in the near term, and our pension programs are fully funded.

Our large bearing expansion plans are moving forward.

The very large wind-bearing component of the plan is on schedule, and we -- with an expected completion date of April or May of this year.

This means the plant will be postcard ready at that date and expect most of fiscal '10 to be in the LRIP mode, Low Initial Rate Production mode.

We continue to see good activity on the customer/demand side of the business, but we are not prepared to discuss the activity further at this time.

Further, we are reassured that this product initiative is in line with the priority of the new administration in Washington.

Our expansion into large industrial bearings is, of course, being impacted by the current global slowdown, but we are seeing good internal progress on the development of our capabilities.

In this regard, we plan to make initial shipments of gearbox bearings for wind turbines in the first quarter of our new fiscal year beginning in April, and very large bearings for that market shortly thereafter.

Now I'll turn the call over to Dan to provide you some more clarity on the financials.

Thank you, Mike.

Since Mike has already discussed sales and gross margin, I'll jump down to SG&A.

Our SG&A for the third quarter of fiscal 2009 was $14.4 million, compared to $12 million for the same period last year.

As a percentage of sales, SG&A was 16.9% for the third quarter of fiscal 2009, compared to 15% for the same period last year.

The increase of $2.4 million was mainly due to an increase of $1.3 million for personnel necessary to support our increased volumes over the year and our expansion plans, higher stock compensation expense of $0.4 million, and $0.6 million due to the inclusion of three acquisitions -- A.I.D., BEMD, and PIC Design.

Other net for the third quarter fiscal 2009 was $1.3 million, compared to $0.4 million for the same period last year.

This mainly includes $0.4 million of amortization of intangibles, $0.8 million related to the consolidation of our Waterboro, South Carolina operations, and $0.1 million of miscellaneous items.

Operating income was $12.8 million for the third quarter of fiscal 2009, a decrease of 15.3%, compared to an operating income of $15.1 million for the same period in fiscal 2008.

Operating income, excluding the facility consolidation costs, disposals of fixed assets, and the startup costs associated with the expansion into new bearing products was $14.5 million, a decrease of 5.1% compared to adjusted operating income for the same period last year of $15.3 million.

Operating income, excluding these items, for the third quarter of fiscal 2009 of $14.5 million is at the low end of the Company's quarterly guidance range of $14 million to $16 million.

Other non-operating expense for the third quarter of fiscal 2009 was $0.3 million.

This was comprised of $0.4 million of income from the CDSOA payment, offset by $0.6 million of foreign exchange losses on British pound sterling inter-company loans to our Phoenix division in the UK Since these inter-company loans are not considered long term in nature, the resulting translation losses or gains in the future are included as a component of net income.

Interest expense net for the third quarter of fiscal 2009 was $0.7 million, a decrease of $0.1 million, from $0.8 million for the same period last year.

For the third quarter fiscal 2009, the Company reported net income of $7.7 million, compared to net income of $9.6 million for the same period last year.

Diluted earnings per share was $0.35 for the third quarter fiscal 2009 compared to $0.44 per share for the same period last year.

Excluding the after-tax impact of the startup costs associated with the expansion into new bearing products, facility consolidation expenses, disposal of fixed assets, the foreign exchange loss, and the CDSOA income, net income decreased 5.9% to $9 million in the third quarter of fiscal 2009 from an adjusted net income of $9.5 million for the same period last year.

Diluted earnings per share, excluding the after-tax impact of these items, was $0.41 for the third quarter of fiscal 2009, compared to $0.44 per share for the same period last year.

Turning to capital expenditures, we expect to be in the range of $22 million to $24 million in fiscal year 2009, mainly driven by the expansion into new bearing products and our normal CapEx run rate.

During the first nine months of fiscal 2009, the Company provided $32.6 million in cash from operating activities, used $17.7 million for capital expenditures, and used approximately $6.6 million of cash for the acquisition of PIC Design, and used approximately $3.7 million of cash to pay down debt.

Total debt minus cash on hand for the period ended December 27, 2008 was $39.1 million, compared to $42.1 million for the same period last year.

At the end of the third quarter of fiscal 2009, the Company's net debt to total capital was 13.5%, compared to 16.8% for the same period last year.

I'll now turn it back to Mike to discuss our guidance for the fourth quarter of fiscal year 2009.

Thanks, Dan.

And before we take your questions, I'd like to take a moment and share our thoughts on our position leading into the final months of 2009.

We expect softness in the industrial sector to continue, offset by strength in the aerospace and defense products.

I believe we're well positioned with a diverse setof end markets and timely product introductions to balance this change in market demand, with the requirements of one market offsetting the weakness of another going forward.

Our strategy of building a pipeline of new products, expanding market channel access, and adding complementary and timely acquisitions have served us well during all economic periods and continues to be the recipe of choice today.

This moves us to our guidance for the fourth quarter of the year.

In the fourth quarter of 2009, we expect our sales to be between $84 million and $87 million, and we believe this will provide adjusted operating income in the range of $14 million to $16 million for the period.

I'd like to turn the call back over now to the Operator and ask for questions.

Thank you.

(OPERATOR INSTRUCTIONS.) And we'll go first to Walt Liptak with Barrington Research.

(Technical difficulty) I wonder if you could break out how the backlog looks in industrial versus aerospace.

How much is industrial down?

Well, we don't break it out that way.

Usually, the backlog is normally represented, disproportionately represented, by the aircraft products because of the lead times associated with those aircraft products.

Okay.

So it would be sort of distorted towards aircraft in the normal sense, but we don't usually break it down between those two groups.

Okay, fine.

Maybe another to approach is that maybe you could talk about some of the sectors within industrial that are down, you mentioned 10% during the quarter, which are down significantly, which are holding in there.

Well, the ones that we see down are the ones associated with housing -- the smaller construction equipment.

That's certainly down.

The equipment for expandable lifts for building construction is down.

Hydraulic pump market is down because of the -- because Class A truck is down.

So that's where we're seeing the pressure.

We see some market down in the industrial distribution side of the business, I think because of the plants in and around Detroit are all shut down for an extended period of time.

So, from the industrial point of view, that's where we're seeing the weakness.

Where we're seeing some of the strength is obviously in wind -- wind gearbox, train, and in defense equipment, which is non-aerospace.

Okay, and then I wonder if you could talk at all about the -- we've heard about de-stocking going on at customer as well as distributor levels.

If you can provide any visibility on how your bearings may have gone through a de-stocking during the quarter?

I'm not sure that it was as much a de-stocking program, Walt, as a -- normally in the industrial sector at the end of the calendar year there is special programs to accelerate sales, which the industrial distributors receive special discounts or some other kind of compensation for buying a large amount of product.

In this particular era, I think the large industrial distributors were more in the mode of managing their inventory positions and their working capital than they were in buying product, so we didn't see many of those year-end sales, which normally occur, occur.

Okay.

Which going into our next quarter should be, next quarter or two, should be positive, because in a normal year it would be -- they would be stocked with an excess amount of inventory entering January.

Okay, got it.

And I'll get back in queue in a second, but I wondered if you could maybe talk a little bit more about restructuring or cost takeout programs in those industrial businesses that you mentioned?

And how did incremental expenses for facility move play into any kind of cost takeout that you're using to mitigate the industrial slowdown?

Well, I think with any industrial business, I think the first step is to try to make a realistic assessment of what the revenue over a quarterly period is going to be and sort of press out, as best you can, where those components of revenue are filling in based upon history and based upon maybe some new information that might distort or change that history.

And I think once -- I think that's where the major heavy lifting has to be done and the major risks associated with restructuring occur is in those revenue estimates.

Once you do the revenue estimate in the quarter, then you build out your cost structure under that revenue estimate.

And building out most of that cost structure is variable, and most of that cost structure is manageable on an intermediate time horizon, not a short-term time horizon, not within two weeks or four weeks or six weeks, but certainly within 90 days, or after 90 days, most of that cost structure is variable and manageable.

So it's determining how much cost to put in place and leave in place and how to manage that differential within the revenue constraints to achieve operating margins that are acceptable and sustainable for the business.

And in the capital goods industry that's what it's all about right there.

Okay, and with that said, have you already made those actions to take out variable costs, or is that something that is still going to happen?

No, we go through a cycle at RBC where we re-budget the business quarterly, and I think you and I have discussed this in the past, not publicly, but sort of on the side.

But we re-budget the business quarterly and then try to verify that the re-budgeting exercise was correct monthly.

And so, certainly for our fourth quarter, we have resized the business according to what we feel is the representative revenue production for the business over the January to March time period.

Okay, good; so it's done already?

Yes.

Okay.

And it's -- okay, I'll get back in queue, but the last question would just be facilities, it sounds like you're not taking facilities out, it's just other variable costs.

No, we're not -- there's -- we haven't, to any extent, taken any facilities out.

We don't see a reason to do that.

We think there's enough variable costs in the cost structure to manage the differentials right now.

Okay, understand.

Okay, thanks very much.

And our next question comes with Edward Marshall from Sidoti & Company.

Good morning, guys.

Good morning, Ed.

Was organic revenue up or down in the quarter?

Organic growth for the quarter was 0.2%.

0.2%?

Okay.

Industrial after-market, can you talk a little bit about that?

In quarters past, we've discussed what the growth of that business has been.

Can you kind of talk to that a little bit further - the industrial after-market?

Sure.

I mean, over the quarter, the industrial after-market was down about 12%.

Okay.

And we -- and I think most of that, a good part of that 12%, probably half of it, can be explained by the lack of any year-end programs with the major distributors.

Okay.

Now you had mentioned earlier that you expect them to continue to manage, or rather they're managing their inventory for year-end purposes.

Is there any reason to believe that they will continue to manage their inventory given the uncertain times here in an economic situation?

Well, I think they're good at managing their inventories.

That's what they do, and I think they'll continue to do that.

At some point, the inventory is depleted and it has to be replaced.

On the other hand, with the contracting GDP and industrial production, I think we're all going to be living at a different level for a while.

Sure.

And you had mentioned recurring revenue in the press release.

Can you remind me exactly what percentage of the business is recurring?

We think of it as about 60%.

Okay.

And then was there a benefit or a loss to the revenue as far as FX, or financial, or currency?

It was a loss.

Loss?

And that's down below the line in other non-operating.

Well, that's the translation loss, but was there one that was on the particular top line due to foreign revenue?

Yes, I don't have that calculated, but definitely year over year we had some erosion of that top line because of the dollar.

I see.

Okay, guys, thank you very much.

And we'll take our next question from Peter Lisnic with Robert Baird.

Good morning, it's actually John Haushalter on for Pete.

Hi, John.

Can you just talk, I guess, in the quarter, or I guess looking at the [4Q too,] just how much kind of the Boeing strike maybe impacted margin?

I mean it sounds like just to deal with the shifting production schedule you guys may have been running extra shifts or just kind of doing other things that had extra costs for you guys?

Well, I think the Boeing strike, because of its length, affected the industry in many different ways.

We had several customers who took the product, although they weren't shipping their final assemblies to Boeing.

We had other customers who stopped taking the product almost immediately.

And we had people sort of in the middle of that.

So, I think, net/net, the strike probably affected our total revenues for the quarter somewhere between $3 million and $5 million.

Now we didn't -- because we had already entered the quarter and it was -- and we had assumed they would be on a 60-day strike, somehow we made the right assumption, and that was just a lucky guess, we decided that we would moderate our build rates, to the extent it was practical, but we would continue to build the Boeing product where we had purchased materials and those materials had started to move through the plants and they would be absorbed in a later time period.

And so that's how we ran the operations.

We didn't put any extra time or overtime into the operations of the plant and backed down the schedules accordingly to even out the production process.

Okay, so if you look at kind of the -- using kind of midpoint of guidance, it looks like the margin for the fourth quarter is going to be flat.

I mean is that a -- that's kind of clean for you guys, having scaled already kind of industrial production level, or your industrial business, you've taken the restructuring out, and then Boeing kind of going back to a level you're comfortable with going forward?

Yes, we don't see Boeing getting there actually all the way back in our quarter because of just the logistics.

They really didn't start issuing new logistics until probably the second week of December.

And so I don't believe things will be completely back to normal with Boeing until the first quarter of our new fiscal year.

And, John, the bigger impact on our margins is really the startup costs that we're incurring more as an investment in the large bearing side of the business.

If you added back those startup costs, you'd see our margins were pretty much in line with last year.

So, in the fourth quarter, we're still going to have those additional costs coming through.

So your assumption is correct that our margins will be pretty much flat to Q3, at that 33.5% mark in Q4.

Okay, that's helpful.

And then just switching over to the large diameter bearing expansion you guys talked about.

I mean part of the logic for expanding into that was just there had been a global shortage in certain markets, and I think your initial ones had been oil and gas and I think construction, and I think within that aggregates.

Just with deceleration you've seen and kind of the current macro-economic conditions, I mean is that -- are those still markets you're targeting, because it sounds like wind has become a more important end market for that on a relative basis?

Well, I think, yes, wind is a more important market.

I think there are still some needs in those other markets but they are not as acute as they were a year ago.

Okay, but your ability, or when you've talked about kind of previous revenue run rates or the capacity you're putting in the ground, I mean you still feel you can definitely get traction towards that goal in fiscal 2010?

Certainly on the very large bearings we can.

And on the sort of intermediately large bearings, it -- we have very -- some productive projects that we're working on and if we convert these projects effectively then we're good to go.

Okay, thank you.

I'll get back in queue.

Okay.

(OPERATOR INSTRUCTIONS.) And we'll take our next question from Steve Barger with KeyBanc Capital Markets.

Good morning, Mike and Dan.

This is actually Joe Bach filling in for Steve.

Hello, Joe.

Can I just dig into your backlog a little bit?

There seems to be a modest decline sequentially but it was still up year over year.

Did anything get pushed beyond the 12-month period, or was it more along the lines of just weaker end-market demand that caused the sequential decline?

Well, to answer the first part of that, if it's not within the 12-month period, it wouldn't be reflected in our backlog number.

Our backlog number is everything that has a delivery date within 12 months.

Yes, I think the other thing, Joe, is if I had to ascribe that drop in backlog to any one factor, I would say that it was the Boeing strike.

Because taking -- because of the 60 days that came out of their schedule, there was 60 days of Boeing product that didn't get ordered, but there was also 60 days of Boeing product which we either built, put in our stock, or we shipped to a customer who held it in his stock and it didn't get to Boeing.

So I think most of that can be ascribed to the Boeing interruption.

Okay, that's helpful.

Can you also give us an update on the pricing environment right now?

Are you seeing some of your larger customers come back to you looking for any sort of price relief or, at least, lower prices on some of the new contracts that you're signing?

Well, I think we have -- when raw materials were inflating and we were passing increases on to customers for the change in our material costs, our customers understood it and most of them graciously accepted it.

The fact that raw materials now are deflating hasn't been lost on our customer base.

And so I think, yes, I think we'll probably end up giving back some material adjustments over the next period of time here until either commodity prices go back up or they stabilize.

It shouldn't affect margins if we get the math right.

Is any of that baked into your 4Q revenue guidance?

No.

No, none of that has taken place yet.

Okay.

Last question for you and then I'll turn it over.

Can you give us some commentary on what your mining-related customers are telling you right now, either on the OE side or the after-market side?

And maybe if they're talking about cancellations in 2009 or if they're taking down, or talking about taking down, their production schedules?

Yes.

What we're hearing, what they're telling us, is that it varies account by account.

I think in aggregate, if you look at all of the accounts, we're seeing maybe a 25% kind of reduction in build rates for our FY10, and we're sort of baking that into our FY10 plan.

On the other -- we're not seeing anybody coming back with expecting their volumes to be up.

I think all of their volumes are down, and probably 25% is representative right now of their thinking.

Whether that thinking is right or wrong is debatable.

Okay, and just to be clear, that 25% reduction, is that versus your previous plan or is that versus your FY09?

That's the number of mining equipment trucks and construction equipment that they were going to build last year versus what they expect to build next year.

Great, that's helpful.

Thank you, guys.

(OPERATOR INSTRUCTIONS.) And with no more questions in the queue, I'd like to turn it back over to our presenters for any additional or closing remarks.

Okay, well, I think that concludes our presentation of our Q3 results and our Q4 outlook.

We thank everybody for participating in the call and we look forward to speaking to you again in our first quarter.

Thank you.

This concludes today's conference.

We thank you for your participation and you may now disconnect.