RBC Bearings Inc (RBC) 2009 Q4 法說會逐字稿

Good morning.

And thank you for joining us today for RBC Bearings's fiscal fourth quarter and full year 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's recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions.

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.

And thank you, those of you who joined us this morning.

The current economic downturn presents a great many challenges for RBC Bearings and many companies like ours serving these markets.

In fact, many of these companies are our customers.

However, as we will discuss today, I'm confident that we're meeting these challenges effectively and with some innovation, while positioning the Company to respond better to better market demands in the future.

That said, for fiscal year 2009 we achieved net sales of $356 million, 7.7% to 7.6% higher than 2008, primarily driven by strong first half year performance in most of our primary end markets.

In our fourth quarter, market conditions deteriorated, and I was pleased with the team's preparedness, innovation and response to sustaining our profitability in most of our businesses.

I would like to recognize them here today for these achievements.

In fact, we were able to maintain strong fourth quarter gross margins and delivered quarterly adjusted operating income within our provided guide at $14.3 million and, believe me, this was no small achievement, given the environment.

Looking at the year in total, sales for industrial products were $144 million, a decline of 5% from last year.

Sales of aerospace and government products were $206 million, a gain of 19% over last year.

We have moved to where more than 58% of our sales for the year were from aerospace and government sectors.

In the fourth quarter, we demonstrated industrial sales of $29.8 million, a contraction of 28% from last year, and sales to the aircraft and government sectors of $54 million, an expansion of 6.6% over last year.

Industrial sales were 35% of the total and relative to last year, total sales declined 9%, $83.8 million versus last year's $92.1 million.

As I reflect on our performance for the year, it was certainly a tale of two economies.

In the first half of 2009, we were able to capitalize on strong demand of our industrial, aerospace and defense sectors.

The last quarters of the year we saw a significant drop in demand as our book-to-bill approached 55%, with several customers rescheduling orders beyond our 12-month window.

We were not immune to the large calendar Q1 GDP drop in the US and Europe.

However, the book-to-bill ratio does reflect a situation which is mitigated by our strong order book, it's exaggerated by some lumpiness of orders for large contracts, and it is also mitigated by lead times.

However, it does indicate an absolute weakening in demand in the quarter in all sectors served.

We are seeing better demand in our current quarterly period, but conditions have not normalized.

We continue to feel the effects from the Boeing strike of last fall as subcontractors liquidate inventories built to support the stronger production schedules.

Our Q4 bookings, booking rate was certainly impacted by some of this factor.

The strike had an equivalent effect of a 17% immediate reduction in build rates.

The ensuing financial turmoil precluded any catch-up strategy the industry expected for calendar year 2009.

We expect this Boeing-strike-related inventory adjustment to be with us a few more quarters.

It was also coupled psychologically with industry expectations of schedule cuts by Boeing, expected but not announced.

However, recent news from Boeing last week on secure financing of their order book through 2009 and into calendar 2010 is very good news for the industry.

And should be reflected by a back to business mode for the subcomponent builders.

Relative to the ongoing profitability of our operations, we are more than 95% complete in our restructuring efforts and expect to operate the Company at lower levels of revenue for the next few quarterly periods, or until the economy normalizes, but fully expect to achieve at or near recent historic levels of profitability within these revenues.

Now that will be the extent of my guidance for now.

Let's talk a minute on how we are preparing for the stronger economy that is ahead.

Our product development schedules remain very active in the areas of air frame, aero engine, defense and wind energy.

Relative to air frame and aero engine, we are very active on many projects, on product development and design refinement for the Boeing 787 Dreamliner.

We are currently targeting a content per ship of $120,000, which will be a 30% improvement from our aggregate current levels per ship.

And we are well on our way to achieving this goal.

We have without question the widest base of product approvals on this platform of any compared to other Boeing commercial aircraft.

Relative to the Airbus A350, many of the systems produced for the A350 will be made by US-based companies, most of which are our customers.

This creates a very favorable climate for our products because of client history and geographic accessibility.

We see this platform as a high potential consumer of RBC Bearing products in the future, and we are currently in the sample production phase for several meaningful applications.

Another important aircraft under development is the Joint Strike Fighter.

Our products have been introduced into several subsystems in this aircraft, and we are active on these designs now and fully expect to see a per ship content in excess of $80,000.

As you know, the development of large diameter bearings for wind energy markets have been a priority for us also.

In this regard, our production plant will be operational in July.

This investment was completely funded rom internal cash flow and is now a candidate for the 30% Green Energy Credit sponsored by the current administration.

Dan will speak more about this later.

Our current status is as follows.

We are working with multiple customers on elements of bearing design, sample production and initial low rate production of these products.

We expect to be in full production mode in calendar 2011 as the market demand for these products grows, fueled by supportive legislation and a repaired financial climate.

The timing is very favorable for us as it allows us to enter this market in a more orderly planned manner than previously anticipated.

Beyond our various growth initiatives, we also completed the integration of two acquisitions announced in the fourth quarter of 2008.

In that quarter, we announced the acquisition of PIC Design, a manufacturer and supplier of precision components to the motion control industry.

These acquisitions contributed a total of $17 million to our sales in 2009, and the companies are performing well and are on their way to becoming meaningful contributors to our business.

With that said, I would like to talk about our performance last year.

We are very pleased with our ability to expand margins in a difficult environment which underscores our team's commitment to profitability.

We took action back in December to prepare for a softening in sales in the fourth quarter by adjusting our cost structure.

Having spent many years in the world of private equity, high leverage, strict loan covenants, debt-tiered capital structures, this history required us to develop systems that allow us to quickly adjust our costs to demand and maximize cash flow.

These tools and management practices are part of our culture, and now important for us today as we navigate our way through the current economic period.

Our fourth quarter margins demonstrate the effectiveness of these practices.

Our operations continue to generate strong cash flows, and we ended the year with $30.6 million in cash and cash equivalents.

We are operating with a very low leverage, below 0.5 times, and have decreased our debt net of cash by over $10 million last year.

Our balance sheet affords flexibility to explore various avenues for growth and efficiency as we head into a more challenging 2010.

We are committed to sustaining profitability for our business during these times, and I can assure you we are poised for long-term growth when market conditions improve.

Finally, as a small but meaningful footnote, our pensions are fully funded.

In early 2007, October 2007, we changed the allocations for investment from aggressive growth to all-cash, and locked in some very substantial gains from the previous three years.

This will accrue favorably to our gross margins this year and in the future.

With that said, I would like to turn the meeting over now to Dan Bergeron, our Chief Financial Officer.

Thank you, Mike.

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

SG&A for the fourth quarter fiscal 2009 was $14.3 million compared to $13.7 million for the same period last year.

As a percentage of sales, SG&A was 17.1% for the fourth quarter of fiscal 2009, compared to 14.8% for the same period last year.

The increase of $0.6 million was mainly due to higher incentive stock compensation expense and the acquisitions of AID, BEMD and PIC Design, offset by overall cost savings.

Other net for the fourth quarter fiscal 2009 was $4.7 million, compared to $0.7 million for the same period last year.

This mainly included $3.8 million for a non-cash fixed asset impairment charge associated with the change in production capacity for Class A truck bearings, $0.4 million for amortization of intangibles, $0.3 million of bad debt expense, and $0.2 million of miscellaneous items.

Operating income was $10 million for the fourth quarter fiscal 2009, a decrease of 44.5% compared to operating income of $18 million for the same period in fiscal 2008.

Operating income excluding facility consolidation costs, impairment of fixed assets and start-up costs associated with the expansion into new bearing products, was $14.3 million, a decrease of 22.1% compared to adjusted operating income for the same period last year of $18.4 million.

Other non-operating expense for the fourth quarter fiscal 2009 was $0.2 million.

This was comprised of $0.2 million of foreign exchange losses on intercompany loans with our UK company.

Since these intercompany loans are not considered long-term in nature, the resultant translation losses or gains are included as a component of net income.

Interest expense net for the fourth quarter fiscal 2009 was $0.5 million, a decrease of $0.2 million from $0.7 million from the same period last year.

For the fourth quarter fiscal 2009, the Company reported net income of $6.5 million compared to net income of $12 million for the same period last year.

Diluted earnings per share was $0.30 for the fourth quarter fiscal 2009 compared to $0.55 per share for the same period last year.

Excluding the after tax impact of the start-up costs associated with the expansions into new bearing products, facility consolidation expense, disposal and impairment of fixed assets and the foreign exchange loss, net income was $9.6 million in the fourth quarter fiscal 2009 compared to an adjusted net income of $12.3 million for the same period last year.

Dilute earnings per share excluding the after tax impact of these items was $0.44 for the fourth quarter fiscal 2009 compared to $0.57 per share for the same period last year.

Turning to cash flow, the Company generated $44.7 million in cash from operating activities for fiscal 2009.

We used approximately $6.3 million of the cash for the acquisition of PIC Design and used approximately $27.6 million for capital expenditures.

The major capital expenditure project in fiscal 2009 was the building of our large bearing manufacturing facility in Houston, Texas.

This accounted for approximately $13.5 million of our capital expenditures.

As Mike has already mentioned, the Company will pursue qualification with the Department of Energy for a tax credit under the American Recovery and Reinvestment Act of 2009 which is Section 4-48-C tax credit under the IRS Code.

This credit could be up to an amount of 30% of investment in fiscal assets.

In fiscal 2010, we expect capital expenditures to be in the range of $8 million to $10 million.

Our total debt minus cash on hand for the period ended March 28, 2009 was $37.6 million compared to $47.9 million for the same period last year, and compared to $39.1 million for the third quarter fiscal 2009.

The Company ended the year with $30.6 million of cash on the balance sheet.

And borrowing capacity of $76.4 million under our credit facility.

Our pension plan is overfunded by approximately$ 0.9 million at the end of fiscal 2009, which will result in lower cash contributions and pension expense in fiscal 2010.

And March 28, 2009, the Company's net debt to total capital was 12.8% compared to 17.6% for the same period last yea,r and our net debt to equity was 14.7% for the year ended March 28, 2009 compared to 21.4% for the same period last year.

I'd now like to turn the call back over to the operator for the Q and A session.

Today's question-and-answer session will be conducted electronically.

(Operator Instructions).

And we will take our first question today from Walt Liptak with Barrington Research.

Hi, this is actually Jack Hain sitting in for Walt this morning.

First of all, congratulations on the quarter.

You did a nice job in a very challenging operating environment.

Secondly, I just wanted to ask with regard to the decline in the backlog, is there a certain percentage of that decline that was due to cancellations and, similarly are you seeing any deferral of orders from some of your customers?

Yes.

I guess relative to cancellations there's nothing material that I can think of that was canceled.

I would say it was more a deferral of orders or orders that were placed and then moved outside the -- the 12-month window which we -- we defined as our backlog as shippable within that 12-month period.

And you spoke to some of the opportunities in the aerospace business in the prepared remarks.

I was wondering if you could also talk about the opportunities that you see for the defense business in 2010.

Well, I think the defense business for us in 2010 will be pretty much running at a level consistent with 2009.

I don't see a big -- a substantial change there.

And we do have some new programs that are -- that were in start-up in previous years and now are going to be in full production which will accrue favorably to some of our revenues.

So I would say defense in total will be the same as last year, maybe up a little bit for us.

Okay.

And finally, I noticed that you've opted not to provide guidance for the first quarter.

Is that more of an one-time decision due to some extenuating circumstances in the quarter, or is that sort of an ongoing policy shift?

For now it is an ongoing policy shift.

The three reasons that we looked at, one, is that we've been giving quarterly guidance since we've been public in August 2005.

And in that guidance range, it has always been a very narrow range on the sales line and the operating income line.

And if you looked historically all the way back to our first period of guidance in 2005, you would see that we always were within our adjusted operating income guidance line.

Now with some of the volatility in our order book and our backlog, there is a little more fog in that.

And the ranges are opening up a little further.

So we decided that it was in the best interest now just not to give guidance.

So that was one reason.

Two, it's kind of more in line with what our peer group is doing.

I think that if you looked at most of our peer group they are not giving quarterly guidance, and most of them are not giving annual guidance.

And, three, we have five sell side analysts covering the stock, three of them have been covering us since August 2005 since we went public, and the other two since our secondary which was in 2006.

So we think that the investor community is getting some good information from that group of folks.

All right.

Thank you for taking the questions.

We will now go to Edward Marshall with Sidoti and Company.

Good morning, guys.

Good morning, Ed.

Good morning, Ed.

The follow-up on the question on deferrals in the backlog, did you quantify the amount of deferrals that fell out of the 12-month window, or could you quantify it if you didn't?

We didn't quantify it and we don't have that number available to us right now.

Was it significant?

Oh, yes, it was.

Okay.

Your backlog is typically aerospace, if I'm correct.

Is it 100% aerospace?

No, no.

If I were to guess I would say it is two-thirds aerospace defense and one-third industrial.

Okay.

The inventory balance in the quarter.

For the year we ended at $134.3 million.

Okay.

And I think you said the capacity for wind comes online in July.

Was that pushed back?

Or was that expected to hit?

I thought that was supposed to hit at the end of the first quarter?

Well, I think it depends upon when we started talking about that.

It was pushed back because of Hurricane Ike.

Right.

I remember that.

And we got that delay in Houston.

And I think other than that it has been pretty much been on schedule.

So, although the capacity is online, the revenues don't start in a meaningful way until 2011.

Okay.

And so, the description of working with multiple customers, do you have any orders yet?

Is anything registered in backlog at this point?

Yes, we do.

And can you quantify the backlog?

Well, I can't.

But the order rate or the order representation in the backlog right now is small and it is of a sample and a preproduction nature.

Okay.

And then what does depreciation look like next year with the introduction of the capacity for wind, Dan, if you know that.

Yes.

I think we're still going to be a little slightly over from where we are now.

It's still around 4%.

Okay.

Perfect.

Thank you, guys.

(Operator Instructions).

We now go to Peter Lisnic with Robert W.

Baird.

Good morning, gentlemen.

Good morning, Peter.

Good morning, Peter.

I guess first question, can you talk a little bit about the industrial businesses and maybe what you are seeing in terms of order rates there, and then filter between maybe the OEM side and the aftermarket side.

If that was said during the beginning part of the call, I'm sorry, I missed that.

We can talk a little bit about that.

For the quarter we saw the aftermarket side down about 30%.

And that's -- their orders and shipments are almost the same.

And I have shipments here.

And the industrial side was down about 25%.

Okay.

And then is there a piece of that that you can kind of attribute to inventory destocking and then maybe what have you seen so far in the current quarter relative to those comps?

Well, yes.

I would say that the 31% is inventory destocking because that sector is reporting revenues being off about 20%.

So there is a -- there was destocking during the quarter.

I would say that that destocking program from what I've seen in this sector so far this quarter, that is continuing.

Okay.

And any guess as to when it might reach a point where the destocking is sort of done?

I think as long as the GDP is in negative territory, I think these distributors are trying to get their working capital down and generate cash.

Okay.

All right.

And then second, I guess series of questions, if you will.

You mentioned maintaining margin comparable to -- I guess to this year's level which, if we're -- I just want to make sure we're using the right numbers because there has been some non-recurring charges.

So is it safe to think somewhere in the 18% range, I think that I have a 17.7% number this year excluding non-recurring, so you will be somewhere 17%, 18% for fiscal 2010?

We're not giving guidance, Peter.

Okay.

I mean, you are asking us to give you guidance for the year and --

Ballpark?

Well, let me ask it this way.

You've put through some restructuring efforts, you had some costs, I guess, in 2009 related it some of incremental capital investments, how should we think about the incremental or decremental margin for fiscal 2010?

Can you give us maybe some of the pluses or minuses on that front?

I think your other question was easier, Peter.

It was easier to answer that one.

You know, I think if you had two goal posts on EBIT and you were -- the one on the left was 15% and the one on the right was 17%, it would be in that range.

Okay.

Got it.

I will get back in queue Thanks for your help.

Yes.

And we will now go to Steve Barger with Keybanc Capital Markets.

Good morning, guys, this is actually Joe Box filling in for Steve.

I was hoping to dig into aerospace and defense a little bit.

There was a decent sequential decline in revenue growth versus where you were at in 3Q but it still remained positive.

Can you just frame up some of the specific drivers for the deceleration in growth, maybe talk about where aftermarket came in versus OE?

And also if you can make talk about the specific categories, whether you saw a decline in commercial versus biz jet, that would be helpful.

A whole lot of questions in there, Joe.

Sorry about that.

Well, I think I'll try to -- I do not know if I remember them all but I'll try to pick some of them off.

I think most of the -- certainly the biz jet market is off substantially.

And so that has a small but a measurable effect on our revenues.

The aftermarket is in a destocking mode which began probably in our third quarter and I think that that aircraft aftermarket will continue to be in a destocking mode for the next few quarters.

And that's sort of a result of a lot of the biz jet procurement and subcomponent suppliers to biz jets procured their hardware from that sector.

The big fly wheel of the sector, of the commercial aircraft sector is Boeing.

And Boeing, we talked a little bit about the strike.

I mean, that's still an issue.

We sort of can track the bearings that we produce right into the ships that they go on and we talk to our component suppliers and look at their inventories, and so that issue is still with us and probably will be with us for another quarter or two.

And finally, I think the industry was hesitant to lay in more component working capital because the expectation was that there would be a 10% to 20% cut in the 737 schedules because of financability of the order book.

That appears to be -- that problem appears to be solved and behind us, so I would expect to see sort of a recurrence of commercial demand into that -- in that sector, sort of beginning in June.

Okay.

That's good color.

My last question is in regards to your cash position.

Sequentially, you had an increase in cash and also an increase in debt.

How should we think about your uses of cash in FY 2010 and should we view the debt increases as temporary?

Well, I think in the third quarter we decided as a company to draw down a little bit on our credit facility, just to have some additional cash on the balance sheet, given the stability of the financial community at that time.

And so we'll continue to evaluate that on a quarterly basis as we move forward to decide how much cash we want to keep allocated onto the balance sheet and how much of it we want to use to go ahead and pay down the revolver with.

Thanks for your time, guys.

Thank you.

We will now go to Chip Rewey with Cramer Rosenthal.

Hi, guys.

On the large bearing plant for wind, you said that you would hit full production hopefully in 2011.

I was wondering if you could kind of give us the timeline on what you need to hit that, broken out between the time that it would take to get certification to be eligible for orders versus the actual backlog of winning the orders and working them through production?

Just meaning, is the certification going to be a long time or is it kind of a 30, 60-day type of thing?

Well, that is a great question.

For each one of these producers of the wind turbines there's a different bearing design.

Because their hardware is all different and requires bearings of different designs to support that hardware.

So it's a process of going through manufacturer by manufacturer and developing the design and analyzing the design consistent with the manufacturers' requirements.

Once that design is produced, it has to be submitted to an European agency for certification and sign-off.

And we're through that phase on -- with a few customers already, and into the phase of actually making hardware.

And so on a few customers we're in the making hardware stage.

On other customers, we're in the design stage.

And so it's sort of a tiered project approach right now.

So I think that in terms of 2011, what would be more important for our -- to fill out our production requirements, we'll have all of our -- we either have now all of our requirements stamped or are close to having all of the requirements stamped for a few customers.

It is more important for the customer of our customer to get his financing in line to be able to renew the building turbines.

And when you look at the operators of these turbine farms, there's certainly two tiers of operator.

There's the operator that can afford to build the turbines now and operate them, out of Florida Power and the Midwest America and people like that who have no problem getting financing and have plenty of debt capacity and have 3% -- get 3% money.

And then there's a bunch of -- there's another tier of wildcatters like Boone Pickens who could not get financing and had to cancel a $5 billion wind farm project.

So that other tier, once it gets financed will certainly -- the whole industry will be off to the races again.

And currently there are several of these customers that we are working on have delayed their construction of turbine plants in the United States pending an improvement in the financial environment.

Okay.

And a quick follow-up to that Section 448 credit you talked about for the -- I guess the $13.5 million CapEx.

You thought about 30% of that CapEx you could get back as a credit.

I was wondering if you could give a little more detail on that.

What would the timing be?

Would that be paid in to you as kind of a cash payment or would it be deferred against production?

Like, how should we see that?

Go ahead.

You attribute it to a true tax credit.

I'm sure we're one of many companies lining up with the Department of Energy in submitting applications and trying to get the process going to qualify for that credit.

My understanding is that the actual details from the Department of Energy on the credit will not be released until the August-September time frame.

So I think it's going to be a few months before we have some good information on where RBC stands in that lineup on participating in that credit.

Okay.

So the $8 million to $10 million CapEx you talked about for next year will actually be kind of before any sort of a credit, just a run rate?

That's correct.

All right.

Thanks a lot.

Now go again to Peter Lisnic with Robert W.

Baird.

Thanks again.

Just on the balance sheet is in pretty good shape, obviously.

And can you talk a little bit about how you might deploy that?

What the acquisition environment looks like?

And it sounds like -- we've been talking about wind for awhile here.

Any plans to add maybe incremental capacity now that you've got a few customers where you've got approval and you are making hardware on others, any sort of thought of moving forward and expanding the footprint there?

Well, those are two divergent questions there, Peter.

I like to lump them into one to make it hard for you.

Yes.

I think as far as the wind energy market is concerned, I think we're not going to double down right now on adding additional capacity.

The plant that we've built within the walls of plant can be doubled with equipment so that the output can be readily doubled.

We're not -- when we see some sort of positive signs from the administration that they truly are behind some Green Energy strategy that doesn't change daily, and everybody can understand how to get behind this thing and the market begins to heal, we'll certainly revisit that.

But I think right now our hold position is where we are on Houston.

The acquisition environment is good, it is active.

There are many things happening in the bearing business these days.

We're not unaware of it.

And we're trying -- we're participating where we can participate in discussions.

And hopefully we'll have something that is meaningful to talk about before the year gets too old.

Okay.

If I could just go back to that, the plant and the capacity comment, can you remind us of what the revenue capacity out of Houston is and then what it would be if you, say, I guess it would effectively be double without adding land, right?

That's what you're saying, just add more machinery and you could get 2X of capacity out of it.

Is that the right way to think about it?

Yes, I think it could be doubled without adding land or building.

And doubled from a $30 million number?

Is that -- do I remember right?

I think it is in the -- right now we're probably in the $15 million to $20 million range.

Okay.

So it's doubled from there.

Okay.

Great.

That is very helpful.

Thank you.

(Operator Instructions).

We now go to Walt Liptak, Barrington Research.

Hi, it is Walt Liptak with Barrington, sorry I'm getting on the call a little bit late but I'm wondering if anyone asked a question on pricing and material costs, if you were able to hang onto -- to price increases that occurred over the last couple of years as material went up?

Good question, Walt.

The only thing I can say is so far, so good.

We obviously have big, sophisticated customers who didn't miss the fact that there was adjustment in raw material prices.

And are asking everybody for a contribution to their earnings equation.

And so far we've been able to manage that -- those situations very well.

This is not -- this is a time to sort of resist the givebacks and resist the urge to deteriorate your pricing.

Because that will be with you for a long time.

Okay, got it.

Okay, thanks very much.

And with no further questions, I would now like to turn the call back over to Dr.

Michael Hartnett for any additional remarks.

Okay.

Well, my only additional remark is to thank everyone for participating in the meeting and we enjoyed speaking with you, as we always do, and we look forward to our meeting in July.

That concludes today's conference.

Thank you for your participation.