Good morning, ladies and gentlemen, and welcome to the RBC Bearings Fiscal 2021 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Michael Cummings with Alpha IR. Please go ahead..

Good morning. Thank you for joining us for RBC Bearings fiscal 2021 second quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President and Chief Executive Officer; Daniel A. Bergeron, Director, Vice President and Chief Operating Officer; and Robert Sullivan, 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'll turn the call over to Dr. Hartnett..

Thank you, Mike and good morning and welcome to the RBC conference call. Net sales for the second quarter of fiscal 2021 were $146.3 million versus $181.9 million for the same period last year, a decrease of 19.6%. For the second fiscal quarter of 2021 sales of industrial products represented 40% of our net sales, aerospace products represented 60%.

Adjusted gross margins for the quarter were 58.6% or 40% of net sales. This compares to $71.2 million or 39.1% for the same period last year. Adjusted operating income was $29.9 million, 20.4% of net sales compared to last year of $38.4 million in 21% of net sales.

Again we penetrated the 40% gross margin level on a consolidated basis and we're very happy about that. Adjusted EBITDA was $43.5 million, 29.8% of net sales compared to $51.2 million and 28.2% of net sales for the same period last year. We ended the quarter with $166.4 million in cash and $20.4 million of debt.

We entered the second quarter with better visibility on demand, but continued uncertainty due to the impact of the pandemic on our overall business. The extraordinary measures we used to protect the health and well-being of our employees and vendors remained in place and were enhanced where needed.

We continue to operate our plants with minimal impact on health and safety of our employees. Sales of industrial products were down 8.3% from last year. The prime variance from last years continues to fall in the natural resources markets of mining and oil.

Sales to the industrial aftermarket – to industrial distributors were down 4.8% in both the United States and Europe. We see continuing strength in demand from producers of equipment for wind energy, semiconductor fabrication, military vehicles, high-speed trains and space. Industrial sales were up sequentially 22.9% over the period.

Distribution in that measure was up 10.2%, good news there as the economy recovers. Aerospace commercial and defense second quarter fiscal 2021 net sales contracted 25.8%. Aerospace defense OEM and aftermarket increased 28.3%, offset by a decrease of 24.4% in commercial aircraft OEM and aftermarket.

Important drivers for aerospace defense continues to be for helicopters, engines, missiles and space. The outlook for commercial aircraft travel is still not clear. The pressure on commercial aircraft builders and supply chain remains.

We continue reworking and fine-tuning our production schedules and capacity to align our supply of products to the new demand levels. We are using the time and our resources wisely while the aircraft business remains in the doldrums. We are developing products for future portfolios and making good progress doing that.

We expect to supply more of the commercial airplane content in the future, develop our offering further for space and high-priority defense systems and work through plant consolidation projects which is our current agenda of topics. But these are projects we couldn't fully address when our priorities to expand our production capacity were paramount.

With regard to our third quarter, we are expecting sales to be between $140 million and $145 million. I'll now turn the call over to Dan for more detail on the financial performance..

Thanks, Mike. SG&A for the second quarter of fiscal 2021 was $26 million compared to $30.8 million for the same period last year. The decrease mainly was due to lower personnel cost of $4.9 million offset by $0.1 million of other items.

As a percentage of net sales, SG&A was 17.8% for the second quarter of fiscal 2021 compared to 16.9% for the same period last year. Other operating expenses for the second quarter of fiscal 2021 was expense of $4.2 million compared to expense of $3 million for the same period last year.

For the second quarter of fiscal 2021, other operating expenses were comprised mainly of $1.5 million of restructuring costs and related items, $2.6 million in amortization of intangible assets and $0.1 million of other items.

Other operating expense for the same period last year consisted mainly of $2.3 million in amortization of intangible assets and $0.9 million of acquisition related costs offset by other income of $0.2 million.

Operating income was $26.4 million for the second quarter of fiscal 2021 compared to operating income of $37.3 million for the same period in fiscal 2020.

On an adjusted basis, operating income would have been $29.9 million for the second quarter of fiscal 2021 compared to adjusted operating income of $38.4 million for the second quarter of fiscal 2020. Other non-operating expenses were $0.2 million for the second quarter of fiscal 2021 compared to $0.2 million for the same period last year.

Second quarter of fiscal 2021, the Company reported net income of $20.4 million compared to net income of $31.3 million for the same period last year. On an adjusted basis, net income would have been $23.2 million for the second quarter of fiscal 2021 compared to adjusted net income of $32.3 million for the same period last year.

Diluted earnings per share was $0.82 per share for the second quarter of fiscal 2021 compared to $1.26 per share for the same period last year. On an adjusted basis, diluted earnings per share for the second quarter of fiscal 2021 was $0.93 per share compared to an adjusted diluted EPS of $1.30 per share for the same period last year.

Turning to cash flow, the Company generated $26.1 million in cash from operating activities in the second quarter of fiscal 2021 compared to $24.5 million for the same period last year. Capital expenditures were $2.1 million in the second quarter of fiscal 2021 compared to $8.2 million for the same period last year.

Total debt as of September 26, 2020 was $20.4 million and cash on hand was $166.4 million. And I would now like to turn the call back to the operator to begin the Q&A session..

[Operator Instructions] Your first question is from the line of Steve Barger with KeyBanc Capital Markets..

Hi. Good morning, guys..

Good morning, Steve..

Good morning..

Your guidance suggests another 20% decline in revenue year-over-year plus or minus and your aerospace revenue comp in 3Q '20 is very similar to what you had in 2Q '20.

So do you expect another mid 20% decline for aero in 3Q?.

Yes.

Is that right?.

That's about right..

Okay, great.

And what do you expect your gross margin will be before restructuring or anything like that? Can you still be near 40% even with the lower revenue level and the lower mix of aerospace?.

Yes. Steve on that, our Q3 is our shortest quarter. So I think it will be a little softer in Q3 that it was in Q2, but a little stronger in Q4 than it was in Q2..

Okay. Yes, that's really great with the mix moving against you.

I guess what are the offsets? Is it the restructuring actions that you've taken recently that's allowing you to maintain that solid gross margin?.

Well, a couple of things there, Steve. First of all, just to talk about Q3 overall, it's a very short quarter for us. And many of the products we produce have long lead times because of the specialized nature of the processes and the approval gates required. Okay..

Yes..

Our question always becomes one of, well the OEM or the government inspectors who have to gate these products at our plants, will they work through December..

Right..

We will. We don't know if they will. So we're doing a little hedging here. Okay..

Yes..

So the short quarter kind of puts us at a disadvantage in that regard. It's just the nature of some of our more complex designs. It is what it is and it's normally the case. What doesn't get shipped in the third quarter gets shipped in the fourth quarter and it all gets corrected. The fourth quarter is disproportionately long this year.

So it is just I can't fight the calendar and I can't fight the government..

Right..

I'm just trying to do what I can do. In terms of our improved margins for the – there is actually a number of things going on. First of all, we've invested quite a bit of time and effort and some capital over the years with factory automation and those projects are maturing and they are contributing. So that's one element.

I can't tell you exactly which element contributes what to the margin, the accrual to margin. I know you're going to ask me that next. So – but I don't know that number. Secondly, we continue to in-source processes that we had outsourced in the past to our plants as our plants gain approvals for these new processes.

And the impact of those approvals for these props and these specialized processes that are sort of unique to a few suppliers in the industry, so it's not only saves us the cost of having third parties do the work but often we have to – the cost of transportation to the third party who is sometimes 2,000 states away..

Yes..

Is we save those costs and we save the amount of time frame it takes to service it. And I think finally there has been improvements in mix and there is just plain better factory execution..

Understood. So since you don't know that number, I'll ask something different.

Can you build out the comment on maintaining a healthy balance sheet while also addressing the urgent needs in space and defense that was in the press release? Should we think that you're preserving the balance sheet because of current conditions and you're looking for organic opportunities in space and defense or you're looking at acquisition opportunities to get in front of trends in space and defense?.

Well we're working hard to maintain the balance sheet. We've achieved certain inventory levels over the past several years that was consistent with the demand of our customer base to service that customer base. They're now going to run at a lower requirement.

So it's obvious that we need to liquidate some of our inventories and we'll be doing that over time. So that's just part of the process here. In the meantime, we are organically developing our space and sort of I'd call it advanced defense business as a priority.

And when we look at the space it's the new aerospace, all those guys that are making the headlines every day are the people that we're working with and we're making great progress. And it's just their concepts of the future are just exciting and we want to be part of that. So that's what's going on there.

And I think finally on the acquisition side, yes, I mean we're always looking. Your next question is going to ask me what we're going to do with all the cash, I'm sure. And so short-term we're going to invest the cash in liquid securities that generate something more than cash and long-term we're going to find the right acquisitions in our space.

And we like the businesses where there is strong synergies and they're out there. And there is common markets that we service today that we can service tomorrow with greater scale. And we look for companies with strong brands. And it's not a disappointing field right now. So time will tell..

Very good. Thank you..

Yes..

[Operator Instructions] Your next question is from the line of Mike Ciarmoli with Truist Securities..

Good morning. This is Pete Osterland on for Mike. A couple of questions on the aerospace end market. First, what is your view on current inventory levels in the channel at your customers? It seems like we're hearing that destocking could last through the first half of next year.

Is that consistent with your view? And how do you expect to be aligning production near-term?.

Well, that's completely consistent with our view. I mean I think Boeing now has 500, 737 MAXs. I mean they had 450 but they kept building. So there is more MAXs now. And I guess the expectation is that they will liquidate half of those MAXs next year. And of course we'd like to see them do that.

So, yes, we've adjusted our production rates in accordance with what we expect overall build rates and inventory positioning of our – of the subcontractors is today and we've done that after considerable work to study subcontractor by subcontractor, plane by plane where the content is and what's in the middle..

Thanks.

And then specifically on aftermarkets, has demand or order flow stabilized and do you have a view as to how distributors are currently stocked?.

Yes.

Well, I'd say the demand from the aftermarket is – are you talking industrial or aerospace?.

Aerospace..

Aerospace. Yes. The demand from the aftermarket is better than we expected and we think that that's going to be – that's going to lead the – that's going to lead the recovery of the aircraft business. It's just – it's planes are older, they need to be maintained.

Boeing isn't going to have the production rate in the future as we see it to satisfy everybody's demand. So those old planes are going to have to come into service. And I think as 2021 ages, people will begin to travel as they feel more secure about their health..

Thank you very much..

I am showing no further questions at this time, I would now like to turn the conference back to Mr. Hartnett..

Okay. Well that was – I think that was our shortest conference call. I hope that's a good sign. And thank you for your interest in RBC and we will be speaking to you again in late January. Good day..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, have a wonderful day. You may all disconnect..