Michael Cummings – IR Michael Hartnett – Chairman, President and CEO Daniel Bergeron – VP and CFO.

Edward Marshall – Sidoti & Company Peter Lisnic – Robert W. Baird Christine Lua – Bank of America Tejas Patel – KeyBanc Capital Walt Liptak – GHS Samuel Eisner – Goldman Sachs.

Good day ladies and gentlemen and welcome to the Second Quarter Fiscal 2014 RBC Bearings Earnings Conference Call. My name is Lacey and I will be your operator for today. At this time, all participants are in a listen-only mode. At the end of the speakers’ remarks, we will have a question-and-answer session.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Michael Cummings, Investor Relations. Please proceed..

Thank you. Good morning and thank you for joining us today for RBC Bearings’ fiscal 2014 second quarter earnings conference call. On the call today will be Dr. Michael 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, Michael and good morning. Net sales for the second quarter of 2014 were $102 million versus $100.4 million last year, over the same period. Our Industrial Markets were down 12.8% on a year-over-year basis and our Aircraft and Defense products were up 15.2% over the corresponding quarter last year.

For the second quarter of fiscal 2014, sales of Industrial Products represented 42% of our total sales, while sales of aircraft products represented 58%. Gross margins for the period came in at a record 39.8% versus 37.4% in fiscal ‘13. Adjusted operating income was 22.4% of sales compared to 21.1% for the same period last year.

Our second quarter of fiscal ‘14 showed in the industrial business down 12.8%, net of the large Ground Defense program that we had last year, there was a 4.7% drop. Sequential quarters tell a different story, net of the same Ground Defense program we saw an expansion of 4%.

If we remove the contributions from new acquisitions our industrial business was flat sequentially. The components of our industrial business our distribution and OEM, on a year-over-year basis we are up 17.8% in distribution and down 13.6% in OEM net of the Ground Defense program.

Sequentially we were flat in distribution and net of the Ground Defense up in OEM by 6.2%. As reported last session, we believe we’ve seen the bottom of the industrial demand and are now seeing momentum turn slightly in our favor.

Some of our industrial business revenues are lumpy quarter-to-quarter and a shift in sales volume from one period to the other happens often and can distort the results. We experience some of this shift in the second quarter and that dampened results slightly for this sector.

Relative to our Aircraft and Defense business, we definitely saw a pickup in orders as the quarter progressed for both major aircraft producers. This is the fourth and announced increase in the build rates. We expect the demand to show up earlier in the quarter and the pickup will be reflected in revenues as early as our fourth quarter this year.

On further note I’m proud to report that the quarter, we achieved a Double Gold Status on delivering quality for Boeing. And we are chosen by Embraer as their supplier of the year, in a category where they have over 400 others competing for this title. We’re very proud of this achievement.

Our third quarter is always our weakest quarter, due to the fewer production days and the holiday season. With that said we expect our third quarter to look a little better on the top line than our second quarter, and up nicely from last year’s third quarter in both sales and gross margins.

We saw positive book-to-bill for both the industrial and aero sectors of our business in the second quarter. So we feel that there is momentum building in both businesses. I’ll now turn the call over to Dan who’ll provide more color on the financials..

Thanks Mike. I’ll jump down to SG&A. SG&A for the second quarter of fiscal 2014 increased by $1.3 million to $17.1 million compared to $15.8 million for the same period last year. As a percentage of net sales, SG&A was 16.8% for the second quarter of fiscal 2014 compared to 15.7% for the same period last year.

The increase in SG&A year-over-year was mainly due to an increase of $0.4 million associated with the addition of two new acquisitions, $0.3 million in personal related expenses, $0.2 million in stock compensation, $0.3 million in higher professional fees, and $0.1 million in miscellaneous items.

Other net for the second quarter fiscal 2014 was expense of $1.9 million compared to expense of $0.6 million for the same period last year.

For the second quarter of fiscal 2014, other net consisted of $0.9 million associated with the large bearing consolidation and restructuring, $0.4 million of amortization of intangibles, $0.4 million of costs associated with completion of acquisitions and $0.2 million in other expenses.

Operating income was $21.5 million for the second quarter fiscal 2014, compared to operating income of $21.2 million for the same period in fiscal 2013. As a percentage of net sales, operating income was 21.1% for the second quarter of fiscal 2014, compared to 21.1% for the same period last year.

Excluding the cost associated with the consolidation and restructuring of large bearing facilities, acquisition costs and disposable of fixed assets, operating income would have been $22.8 million for the second quarter of fiscal 2014, compared to $21.2 million for the same period last year.

Excluding these adjustments, operating income as a percentage of net sales would have been 22.4% compared to 21.1% for the same period last year. Income tax expense for the second quarter fiscal 2014 was $7.2 million compared to $4.4 million for the same period of last year.

Our effective income tax rate for the second quarter fiscal 2014 was 33.6% compared to 21.1% for the same period last year.

The effective income tax rates for the second quarters of fiscal 2014 and 2013 includes $0.2 million and $2.8 million of tax 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 34.4% for the second quarter of fiscal 2014 compared to 34.7% for the same period last year. For the second quarter of fiscal 2014, the company reported net income of $14.1 million compared to net income of $16.5 million for the same period last year.

Excluding the after-tax impact of the restructuring expenses, the acquisition costs, the disposable fixed assets, the CDSOA payment we received last year and the discrete tax benefits, net income would have been $14.8 million for the second quarter of fiscal 2014, an increase of 8.4% compared to $13.7 million for the same period last year.

Diluted earnings per share was $0.61 per share for the second quarter of fiscal 2014 compared to $0.73 per share for the same period last year.

Excluding the after tax impact, restructuring expenses, the acquisition cost, disposable of fixed assets, the CDSOA payment last year, and the discrete tax benefits, diluted EPS for the second quarter of fiscal 2014 would have been $0.64 per share compared to an adjusted $0.60 per share for the same period last year, an increase of 6.7%.

Turning to cash flow, the company generated $4.2 million in cash from operating activities in the second quarter, fiscal 2014, compared to $3.2 million for the same period last year. Capital expenditures were $8.8 million in the second quarter of fiscal 2014 compared to $5.5 million for the same period last year.

The company ended the second quarter fiscal 2014 with a $112.3 million of cash and short-term investments and $10.5 million of debt on the balance sheet. I’d now like to turn the call back to the operator for Q&A session..

[Operator Instructions] Our first question will come from the line of Edward Marshall with Sidoti & Company. Please proceed..

Good morning, guys..

Good morning, Ed..

Based on your comments about the acquisition in the industrial business, it sounds like CMP is roughly $25 million annually.

Is that right from a revenue perspective?.

In the last eight months we’ve completed three acquisitions WPA, CMP and then this in October TCI. So all three of them are going to contribute approximately $25 million of revenue and the purchase price is around $20 million for that $25 million of revenue..

When, is this – the military ground vehicles is this the last quarter of the comps kind of are difficult going forward, and fell off I think last third quarter of fiscal 2013?.

It’s a little bit in Q3 and Q4 but not of the magnitude that we had in Q2 of last year..

Okay..

I don’t have the exact number in front me but it’s a lot less..

And then you’ve acquired I guess some significant size business if relative to your overall segments probably a 15% over the last year or so based on what your comments were. If I think about kind of what you typically by lower margin type businesses that you fix up and take some time to do that.

the margin profile for the core business overall it doesn’t seem to have been affected at all but is there a drag in particular on the industrial business right now as you kind of get those up to say the RBC standard if you will on the margin profile and what should we expect for that margin going forward?.

Yeah for the next six to nine months there’s definitely going to be some headwinds on the gross margin and a little bit of headwind on SG&A as we consider but all three of these acquisitions and to a way we do think. But $25 million on over $400 million of revenue it’s not a big number..

Right..

There’s definitely a little drag..

You care to take a stab at what you might think for fiscal ‘15’s gross margin might look like?.

2015?.

Fiscal ‘15, next fiscal year?.

No. We and we don’t give guidance and sure we won’t be talking about fiscal 2015 so only being in the second quarter of our fiscal 2014..

Yeah. I have figured as much, but I think I’d give it a shot. On the Aerospace side from, there’s been rate increases you’ve got in telegraph that for a while so I assume you’re in pretty good shape.

But I just want to ask about capacity, I know you have some but kind of where do you setup even through the back half of the decade it seems there’s a pretty good ramp here in some of the aircraft.

Where do you guys stand on capacity?.

We are in pretty good shape. Some of these smaller aircraft businesses that we bought actually give us additional capacity to service the current mix of customers and products that sort of augment their normal business.

And also as you know, we’re – we finished building a plant in South Carolina for – and the aircraft sector and we are at the plant in Poland will be directed towards the aircraft sector. So, we’re working with the major customers now. We’re studying their supplier base, on our rate lateness, what they called rate readiness with the valuation.

And we get sort of gold stars on that, we will have no trouble keeping up. And we don’t see that we’re going to have to add a significant amount of CapEx beyond what we normally experience in order to augment with the way we produce these products..

Excellent. Thanks guys..

And our next question will come from the line of Peter Lisnic with Robert W. Baird. Please proceed..

Good morning, gentlemen..

Good morning, Peter..

The – I guess just a wrap up the acquisition related question, how much of – how much opportunity is there to take costs down in those acquired businesses, realizing its only $25 million bucks of revenue, but there’s a at least it looks as well there is a margin impact that we’re seeing what, how significant can we expect those costs to come down?.

Well, I would say over the next 12 to 16 months, we should see some nice leverage on the operating income line from these three acquisitions. Now CMP, we just did the acquisition in August, right..

Yes..

TCI which was closed in October, so we’re just in the beginning stages of that integration. But WPA which was a smaller transaction that which we did last March, the gross margin performance on that business is up any, pretty close to eight percentage points from the day we bought it.

So it takes a little bit of time, it takes eight months to 16 months to get these guys integrated to figure out where we have too much costs, where we have to take it out to get the pricing right and everything else. So I think fiscal 2015 they will definitely add some benefit to us. And I think –.

Okay..

For 2014th answer Ed’s question, at the beginning of the year we, the only guidance we gave is that we’re going to increase our gross margins at least one percentage point this fiscal year. And I think we’re still even with these acquisitions on target to be able to do that and exceed that a little..

Okay. Yeah. And I’m just trying to get a sense of whether or not these things are running on a combined basis. And I don’t know, I’ll pick a number, 25% gross margins versus a corporate number that’s closer to 38% to 40%. And thus you’ve got some material upside but if I understand them feel comfortable with your answer so that’s fine.

And then, on the industrial business thanks for the color again on OEM versus distribution and for calling out the military impact, but I was wondering if you could give us a little bit of insight as to what’s going on.

When you look at industrial outside of construction and mining or maybe talk about those two specifically since they’ve been identified by customers as being I guess weak would be the right word of describing it?.

Yeah. We have several different sectors of our industrial business. And construction and mining is one of the sectors that’s, weak. I think we’re all feeling that it’s about as weak as it’s going to get as near as we can determine the most of the product that we’ll produce today is going into the spears market to support the mining activities.

And the mining activities are so strong. I mean, so there is still operating mines and making there tonnages of copper and iron ore and other things. But the big producers have cut back their CapEx plans and so that’s affected everybody in the chain. So we expect that construction and mining business to be stable.

We expect to see some growth in the oil and natural gas business particularly with what’s going on in the offshore rigs and the floating rigs. And we have targeted our product line in that direction and expect to see some modest expansion next year as we bring some of these new products online.

These are large complicated designs to execute in the plants. They are very large bearings. And so they need a certain approve those cycle in certain test sequence to be with the customers to be assure that the product is suitable for its use.

And so we’ve completed a lot of that and we’re expecting a modestly improved year in the oil and gas sector next year.

On the distribution side of the business we’ve, we have enhanced our field sales program and added additional people to that what we consider more productive sectors of a geography selling the current mix to the industrial distributors. And so we we’re seeing good results of that.

I think if you look in our quarter-to-quarter comparisons for industrial distribution sequentially our U.S. industrial distribution is up and responding nicely to that. We were seeing some of that industrial distribution softness now in Europe not in the U.S. so that part of the program is responding well.

And we have several new product programs underway. There’s some of the major diesel engine manufacturers and components with that anti-frictionized engines, makes these engines more robust and suitable for the use.

And with the new CapEx standards driving higher and higher mileage efficiencies for these vehicles, one of the ways these companies achieve those efficiencies is through anti-frictionizing their internal engine components. And so we have some nice, we have some nice programs there that are starting to produce for us.

So on the industrial side its business as usual and a lot of good work being done to expand our offering..

Okay. That is perfect color on that. Thank you for that.

And then just last, one quick question on Aero, any sort of financial or share impact either positive or negative from Boeing’s partnership for success program that you can give us a little – any insight on?.

It’s way too early for that right now Peter. But clearly Boeing and the sub-contractors are all being aggressively directed to achieve certain savings and we are working to understand how to position our product lines relative to those objectives.

And we haven’t – we have a lot of contracts that run out through 2017 so there’s nothing immediate for us and there’s plenty of time to work the efficiency side, the method side of the business to maintain or expand your margins, should in the unlikely event we have to give up any prices..

Understood. Thank you very much for your time and for all the help. Thank you..

Our next question comes from the line of Ron Epstein with Bank of America. Please proceed..

Hi, good morning, guys. It’s actually Christine Lua calling in for Ron..

Good morning..

So when we look at your defense business, I guess excluding military vehicles, we heard from some of the helicopter OEMs that orders were down because of the U.S. government shutdown.

Can you kind of help us through maybe what you’re seeing in your order book and maybe how that could affect 3Q sales?.

Yeah, it’s really not having any effect on our order book as a matter of fact oddly enough we’re seeing some strengthening in our Q3 and Q4 sales relative to that market, and so we’re happy with what we see. I think our mission relative to the defense helicopter business is to expand our offering into that, into those platforms.

And so we have several active programs underway right now in our test labs qualifying new product that will go on these ships. Because some of these ships are scheduled, the fleets are enormous. And they are scheduled to be used into the 2040 to 2050 timeframe. And it’s a very good place for our product to be positioned.

So we are not seeing any dampening whatsoever in demand for that sector relative to previous years..

Great. And then I have a follow-up on kind of gross margin question. Your internal target has usually been about improvement of 1% per year and it looks like you are tracking well ahead of that in the first half of the year.

And just to understand if the second half, I mean if you are still on track for that, is the second half are you just being more conservative with M&A or there are other things we should consider?.

In terms of the entire year impact, I don’t see any degradation in the second half of our gross margins, any material degradation if any. It’s really hard calculus. Given the amount of mix, some of the mix shift, some of the FIFO valuations of inventory and how things are going to roll through.

I mean it’s, sometimes I think it’s a mathematical equation that’s unsolvable, but having said that we don’t expect a much if any deterioration in the gross margin in the last second half of the year and probably could even see a little bump up..

Great. Thank you..

[Operator Instructions] And our next question will come from the line of Steve Barger with KeyBanc Capital. Please proceed..

Hey, good morning guys. This is actually Tejas filling in for Steve.

How are you today?.

Hi, good..

Just a couple more on acquisition, I know it’s a lot of it’s been covered but if you were to exclude some of the acquisitions you’ve done in the quarter, would industrial sales still have been up sequentially..

I think I said yes to that right. Let me just check. There’s a lot of moving parts to this thing, with all these acquisitions, but I think in industrial sales we’re flat if I take out the impact of the Ground Defense, right – let me just get to the right spreadsheet here..

Yeah, it still would have been up..

I am just doing quick math here..

Actually that’s kind of what I was looking for, I mean just wanted to make sure it’s not just acquisition driving the sequential uptick. And then I guess on the margin side, I know you’ve already talked about, a year to 16-months or so to fully integrate some of these acquisitions.

Is there any reason why we should think that you wouldn’t be able to apply the gross margin efficiencies there as well? Yeah, the 100 basis points you talked about?.

No..

No. I mean it’s not going to happen in six-months. So but I think all three of these transactions have the potential to get to the, our internal targets on gross margin in the 16-month period..

Got it. And then just stepping away from that, everyone’s kind of talking about driving productivity. Are you seeing some of your customers push more engineering type work your way or getting you involved in the designing process. Just trying to get a sense of this by margin expansion story has been.

You know kind of benefiting from that increased service?.

Well, I mean, that’s where we live. We live in the design process. We are problem solvers for our customers and we are the specialists that they turn to design the interface that their machine needs to move whether it’s a jet engine or it’s an aircraft or its ground military vehicle or it’s a high speed train.

There’s a lot, there is a lot of highly engineered components that support the movement – one component relative to another.

And when these system designers get to those interfaces they have to turn to a specialist to solve some of the top, some of the problems of lubrication and wear and stealing and stresses and fatigue and material properties and we’re the specialists in that area..

Got it.

So if you were to kind of break that down into buckets, how much would you think is more that you bringing that the table versus efficiencies that reflected here in the margin improvement year-over-year?.

I have no idea how to answer that. Usually when you design, the way it normally works, usually when you design a component for a new system. The first few times that you make that component, you’re making in very low lot sizes because the, your customer doesn’t have the volume, he is just starting up.

You haven’t got the experience making that particular component, or you not tooled right, or capitalized right in the plant to make that particular component. Your message to manufacturer are first generation and by the time next generation.

So there’s a whole maturity learning curve associated with getting the volume up and the learning curve strengthened the margin and if you worked the learning curve, and you worked the lessons learned, each time you run that that production lot, you could substantially improve the way you execute your manufacturing process.

And that’s where the improvement in margin comes from..

Got it.

Now that makes a lot of sense and just lastly, can you just kind of talk through some other things you are seeing on the industrial distribution side, I know a lot of – or some of the public distributors have kind of been reporting passive data points and just if you can provide some specific to your business there?.

Yeah. I mean, we’re seeing modest sequential growth in our industrial distribution sector in the U.S., were down a little bit in Europe. I think we see Europe coming back, but overall year-to-year we’re up substantially..

That’s helpful. Thank you, guys..

Our next question will come from the line of Walt Liptak with GHS. Please proceed..

Hi, thanks. Good morning, guys..

Hi, Walt..

Hi.

I got on the call a little bit late, so I apologize if this question’s been asked, and when you might think about your backlog typically where you report backlog the 200 plus million is one year lookout, right and then you’ve also get a five year backlog that’s the new products and programs that you’ve been engineering and getting done over, that gives you some longer term visibility, is that right?.

Yes..

Okay.

So the question is, as you look out over the next 12 months are there any larger programs that you can talk about that you have, that you’re excited about that start coming through to fruition, that kind of increase the rate of sales, increase the visibility?.

Yeah. I can think of a few, Walt, but I don’t think I want to talk about them..

Can you give you me an idea of sector geographic region, things like that..

Yeah. Well, it’s – certainly it’s in – the programs that immediately come to mind are in the aircraft sector and the region is Asia..

Okay. That’s interesting.

I can’t remember that you guys do whole lot of workout in Asia as these new design wins, what kind of companies that you’re with?.

Well, they are with the normal subcontractors that are supporting the production for Boeing and Airbus.

And they are spread all over the world and so we have over the last, may be three or four years we have had an initiative going to higher young bright engineers out of school that have specific language skills relative to support our business in those regions of Asia that where people build aircraft.

And so now that we can support the designs and we can support the calls and we can support the customer requirements and talk to these people. Business is good..

Okay. It sounds great.

Will the production happen at your factories here in US?.

Yes..

I got it. Okay. Thanks very much..

[Operator Instructions] And our next question will come from the line of Samuel Eisner with Goldman Sachs. Please proceed..

Yeah. Thanks good morning everyone..

Hi, Sam..

So just to finish up on the industrial distribution questions, the growth that you have seen on a year-over-year basis do you think that’s purely comp based or is that aggregate demand actually starting to come through.

And then just second question on that is if the demand that you’re seeing more of a sell through or sell in as in, are distributors starting to restock..

Oh, boy, can you ask the first part of that question again?.

Yeah. I guess the 18% year-on-year increase in industrial distribution that you’re seeing is that primarily because you just have very, very weak comps that you are able to just actually just look very good on or is it pure aggregate demand in your mind..

Well, I mean we have initiatives here to strengthen that sector substantially. And those initiatives are taking hold and some of those include new products in our offering particularly to the oil and gas markets.

And it includes, it also we have sort of taken the industrial distribution market and divided it into, its market components canning and bottling and brick laying and farming and agriculture and steel making and sort of things like that. And have assigned teams to each market segment to profile the users and target the applications in the accounts.

And that’s producing good results for us..

And then the question on whether it’s selling or sell-through.

Do you have any sense whether or not this should be, is it starting to actually to rebuild inventories at this point?.

Yeah, I know, I don’t think they are rebuilding inventories. It’s selling through..

Got you. And then….

If we have any issue with the industrial distribution is that they stack so little of our products because, the big guys, we are so much smaller in that sector than the Emerson’s and SKF’s and The Timken’s and all..

Right. And so when you think about obviously, you’ve done a few acquisitions here of late cash or net cash remains basically flat on a sequential basis.

So just curious how you guys are thinking about capital deployment at this point? Have your kind of tone changed since you’ve done these acquisitions or you still active any kind of changes to that mentality at this point?.

Yeah, well, we talk about that all the time and about exactly be appropriate management of that capital. And we haven’t made any conclusions but we may have some news come out one of these days..

Alright. Thanks very much for that. And then, just on the gross margins, there’s been a lot questions on that but you guys are getting pretty close to that 40% level that I believe was a kind of long-term target for your guys.

Any kind of update on how you guys are thinking about the long-term targets for gross margins or we could kind of set in these 100 basis points for 2014 and then will look, for something else in the future?.

Well, I think we like that 40% number. I think it’s a great target. I hope we have to reset the target. We drive pretty hard every day to and I mean, people know what the goals are. And how to get there hence and it’s obviously, it’s working well right now.

And we haven’t had the acquisitions that we’ve made haven’t really been significantly dilutive to our gross margin performance. And it’s clear to me that they will approve quarter-to-quarter improvements in their gross margins because of the solutions that we’re bringing to their business problems.

And so I think, we are going to do well on that front..

And then just to, Dan on the gross margins, I think that volumes have been obviously weaker up late and there has been a drag on gross margins, so just curious if there were still a drag in this quarter and what the expectations are for the rest of the year?.

So could you repeat that again?.

Yeah.

You guys break out in your Q usually the components of gross profit expansion, and so just curious, if volumes continue to remain a headwind for you guys and you should expect better absorption coming forward, just curious how that was this quarter?.

Yeah, this quarter it was a little better than last on Aerospace side and a litter worse on the industrial side. So I think as Mike said for Q3 we’re expecting Q3 sales to be a pinch better than Q2. So I think we’ll be in the same neighborhood on an absorption standpoint.

And hopefully, we continue to get additional cost efficiencies and some additional product mix that’s impacting the margins favorably..

Great. Thanks so much..

At this time, we have no further questions in queue. I would like to turn the call back over to Mike Hartnett for any closing comments..

Okay. Well, in closing, I’d like to thank those attending this call today for their continued interest and support of RBC Bearings. And all the RBC’s people that are listening to this call for their continued excellence they demonstrated. Thank you. Good day..

Thank you for your participation in today’s conference. And this concludes your presentation. You may now disconnect. Good day everyone..