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spk00: Good day, and thank you for standing by. Welcome to the RBC Barings Fiscal 2021 Fourth Quarter Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Please be advised that today's conference may be recorded. If you require any further assistance, please press star, then 0 to reach an operator. I'd now like to hand the conference over to your host today, Mr. Will Stack with Alpha IR. Please go ahead.
spk07: Good morning, and thank you for joining us for RBC Bearing's fiscal 2021 fourth 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 Barron'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'll turn the call over to Dr. Hartnett.
spk03: Thank you, Will. Good morning and welcome. Net sales for the fourth quarter of fiscal 2021 were $160.3 million. versus $185.8 million for the same period last year, a decrease of 13.7%. For the fourth quarter of 2021, sales of industrial products represented 47% of our net sales, with aerospace products at 53%. The gross margin for the quarter was $62.5 million, or 39% of net sales, This compares to 76.6 million or 41.2% for the same period last year. Operating income was 29.7 million, 18.6% of net sales compared to last year's 43.5 million or 23.4% respectively. Adjusted EBITDA was 45.9 million, 28.6% of net sales compared to 56.3 million and 30.3% of net sales for the same period last year. We ended the quarter with $241.3 million of cash and securities and $16.1 million of debt. Year-to-date free cash flow was a record $140.7 million. We entered the fourth quarter and saw a substantial strengthening of our industrial sector. All markets participated, industrial distribution, mining, machine tool, rail, semiconductor machinery, marine, and wind. We also saw a substantial increase in quoting and contract activity from the aerospace sector. Sales of industrial products were up 12.9% from last year, led by OEM, which was up 15.1%. Sequential quarter comparisons show industrials were up by 16.8%, led by a distribution at 21.3%. Industrial distribution gave a very strong showing during the period across all product lines and geographies. In fact, we could have sold more if we had stock in many of the mixed items. We are busy today on inventory replenishment and increasing many key stocking positions. Marine, the build out of the Virginia and Columbia submarine fleets continue. We have completed block four build out of the Virginia class and are starting the next ten boat contract this month. We are also preparing for the Columbia to begin production cycle in calendar year 22. On semiconductor, the race to expand semiconductor manufacturing is driving requirements for machinery and components at levels we haven't experienced before. As you know, this is driven by a demand for computers and automobiles, phones, games, self-driving cars, 5G technology, et cetera. Over the past 20 years, we have diligently built out very strong positions with the machine builders and achieved considerable design excellence, manufacturing scale, and reputation in these markets. We are now realizing the benefits of all these efforts. Turning to aerospace and defense, the fourth quarter fiscal 2021 net sales were down 28.6% on a quarter-over-quarter basis, but up sequentially 4.5%. Boeing is slowly increasing demand for product for the 737 MAX suppliers as they consume their excess inventory positions. We are pleased to see the turnaround in consumption here and expect each quarter to be better than the last going forward. We are planning to support a 140 to 150 plane build out this year, moving to 350 to 400 737 MAXs next year. Given the new rules for vaccinated travelers to Europe, we expect to see an improved outlook for the 777 and the 787 ships and their build rates by the end of the summer or sooner. We are currently supporting audits of our production capacities by both Boeing and Airbus personnel as they lay plans to build to increase their production rates. Airbus currently at 40 to 42 A320 series per month is targeted to their well-known goal of 60 ships per month. As reported earlier, the plan is to build 800 total ships of all designs in 2022. Space. Moving to space. As the claim spaces the new aerospace, we are active with many of the daily headline names supplying components as diverse as bearings for rocket engines, fins for directional control, structures for landing gear, actuation devices, low-friction cryogenic components. The pace is always fast in the development path, normally uncertain, but we like where this is going and doing whatever we can so that we're not the bottleneck on the process of landing a man on Mars. This can develop into a significant business scale for RBC if the plans of the significant entrepreneurs are realized over the next few years. More of this on future calls. And finally, defense. We certainly have a dream portfolio in terms of platform composition and outlook and expect continuous strength from this sector for many years. Regarding our fourth quarter, we are expecting sales to be between 154 and 158 million. It's a little bit hard to predict these numbers today, and I'm sure that we'll be talking about that more later in the call, so I'll I'll defer to that discussion and I'll now turn the call over to Dan and Rob for more detail on the financial performance.
spk04: Thank you, Key Mike. Since Mike has already covered net sales and gross margin, I'll jump down to SG&A. SG&A for the fourth quarter of fiscal 2021 was $27.4 million compared to $31.0 million for the same period last year. The decrease was mainly due to lower personnel costs of $3.4 million and $0.5 million of other items offset by $0.3 million of higher share-based compensation costs. As a percentage of net sales, SG&A was 17.1% for the fourth quarter of fiscal 2021 compared to 16.7% for the same period last year. Other operating expense for the fourth quarter of fiscal 2021 was expense of $5.3 million compared to expense of $2.1 million for the same period last year. For the fourth quarter of fiscal 2021, other operating expenses were comprised mainly of $2.5 million in amortization of intangible assets, $1.5 million of costs associated with a cyber event, $1.0 million of restructuring costs and related items, and $0.3 million of other items. Other operating expense for the same period last year consisted mainly of $2.6 million in amortization of intangible assets, $0.8 million of restructuring costs, and $0.1 million of other items, offset by a $1.4 million gain on the sale of a surplus building. Operating income was $29.7 million for the fourth quarter of fiscal 2021 compared to operating income of $43.5 million for the same period in fiscal 2020. On an adjusted basis, operating income would have been $32.5 million for the fourth quarter of fiscal 2021 compared to adjusted operating income of $43.0 million for the fourth quarter of fiscal 2020. For the fourth quarter of fiscal 2021, the company reported net income of $25.0 million compared to net income of $33.8 million for the same period last year. On an adjusted basis, net income would have been $27.4 million for the fourth quarter of fiscal 2021 compared to adjusted net income of $33.1 million for the same period last year. Diluted earnings per share were $0.99 per share for the fourth quarter of fiscal 2021 compared to $1.35 per share for the same period last year. On an adjusted basis, diluted earnings per share for the fourth quarter of fiscal 2021 was $1.08 per share compared to adjusted diluted earnings per share of $1.33 per share for the same period last year. Turning to cash flow, the company generated $41.9 million in cash from operating activities in the fourth quarter of fiscal 2021 compared to $44.4 million for the same period last year and $152.5 million in cash from operating activities for the full year of fiscal 2021 compared compared to $155.6 million for the full year last year. Capital expenditures were $3.0 million in the fourth quarter of fiscal 2021, compared to $9.7 million for the same period last year. On a 12-month basis, capital expenditures were $11.8 million, compared to $37.3 million last year. Free cash flow for the full year, which includes cash from operating activities less capital expenditures, was $140.7 million for fiscal 2021, compared to $118.3 million in fiscal 2020. Total debt as of April 3rd, 2021 was $16.1 million, and cash and marketable securities on hand was $241.3 million. I would now like to turn the call back to the operator for the question and answer session.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Again, that is star then one to ask a question. Our first question comes from Pete Skibitsky with Olympic Global Advisors.
spk01: Hey, good morning, Mike and Dan and Rob. Nice quarter. Good morning. Hey, guys, can we talk about the press release talked about a charge related to a cyber incident. You quantified it in the release. Can we talk about that, kind of what happened and if it's fully resolved now?
spk05: Yeah, so in the last week of February, the company experienced a cyber event. The event had no material impact to our business. No employee, customer, vendor, or company files were extracted from our systems, and our main ERP systems are not impacted. We hired two independent forensic specialists to review the cyber event and assist in the remediation. We incurred about $1.5 million in costs associated with the remediation. And when our 10K comes out today, you can read more about the certain risks and uncertainties as a result of any security incident as described in the 10K under the section entitled Risk Factors.
spk01: Okay. I appreciate the color there. It's a problem that's going around. Can we talk more about semiconductors? You guys seem to be, like you alluded to, kind of, you know, into a real trend here globally. Can you maybe outline for us kind of how big was it for you as a sub-niche in fiscal 21 and maybe the level of growth that you think is reasonable in fiscal 22?
spk03: Yeah, well, let us just don't have the numbers on the top of my head here, Pete, but let us research that a little bit.
spk01: Okay, okay. I'll move on to something else. Mike, maybe you can talk about M&A. You know, I think the consensus that I hear in commercial aerospace is that, you know, even though we've gone through this, or maybe because we've gone through this, you know, horrible downturn, no one is really, you know, wanting to sell for the most part because of the, you know, expectation you have to sell at such a steep discount. Is that kind of what you guys are seeing in the M&A marketplace? And maybe any other color you could add, just given the strength of your balance sheet and I know your proclivity towards M&A.
spk03: Yeah, well, I'd say on the aerospace side, we're not seeing too many attractive candidates for M&A. I mean, the guys that couldn't make it didn't make it. There's some bankruptcies there that we don't find interesting, so we don't really do much with them. And I think that whole sector is on pause a little bit until things correct. On the other hand, there is some small assets out there that are attractive, and, you know, we may have some news on that in the not-too-distant future.
spk01: Okay. Fair enough. I appreciate the color. I'll get to the end of the queue and let someone else talk. Thanks. Okay. Okay.
spk00: Our next question comes from Michael Charmoli with Truist Securities.
spk08: Hey, good morning, gentlemen. Nice results. I guess, I don't know who wants to field this one, but I guess looking at the guidance for the next quarter, you know, I know you've historically got some seasonality with maybe a 1Q being a bit weaker, but what drives that? that sequential step down? I mean, it sounds like there's, there's optimism and quoting strength, booking strength across all markets. So is there, is there anything driving that, that sequential weakness between quarters here as we move into the first quarter?
spk03: Yeah. Well, first of all, there's, you know, in our, in our lineup, Mike, there's this, there's kind of a, obviously there's a shift in leadership in terms of, you know, what's growing, what's not growing. And, What's growing is the industrial sector. There's a lot to consider here. The industrial demand, a lot of it is short-term in nature. It will be up. Our challenge is to try to determine how much it will be up. We tried to reflect some of that in the outlook. Frankly, we're not, you know, did we reflect enough? I'm not sure. I mean, it's, you know, we haven't, normally when the purchasing manager's index is north of 55, we can't make it fast enough and we can't keep it in stock, okay? When it's over 60 now, it's in a world that we've never lived in before. So it's, you know, it's sort of, It's sort of off the edge of the map. And so it's hard for us to predict exactly, you know, what the upside of our sales are going to be on the industrial side. And the problem with that is, you know, we had so much demand in the fourth quarter that a lot of our key inventories for, you know, key mix items were depleted. So, you know, we're rushing to replenish those stocks. But there's a lead time there, and so we have to add materials and labor. Right now, materials are a bit constrained. We are having trouble getting steel. We are having trouble getting some of the product that we import through the ports, and we're competing with with our own government on labor. We're working through that. We're keeping UPS and FedEx business busy because we're air shipping parts at our customer's expense from Asia that we use for some of our components. It's an interesting time. I think on the aerospace side, the primary factor here is the Boeing ramp. With the abrupt cease in 737 MAX production in March of 20, there was just a lot of componentry that was left in the system. They're working through that overhang now. I expect Quarter to quarter, it'll be better. And I expect by the end of the year, the calendar year, we'll probably be through it. And I think next year at this time, our capacity is going to be taxed with demand. And so right now, we're trying to think through how do we position ourselves mix-wise so that our capacity and the demand curve intersect in the right place at the right time. And so that's really the calculus. And so there's lots of lumps in the pudding right now on the logistics side. And it's not just for us. I think it's just for the whole U.S. as we try to walk through these issues. I expect this is just the normal exit of a pandemic. I hope to never experience it again.
spk08: I think we are all in agreement on that. So it sounds like, I mean, aerospace, though, you think, I mean, and based on what you're building towards, I mean, we'll probably see these continued gradual sequential improvements. And then, like you said, industrial is going to be the big swing factor. um what about on the pricing side i mean are you um you talked about you know some some expedited shipping are you able to pass off and pass through a lot of these price increases and how's that that impacting you know sort of your current contracts are there any any markets that might be more exposed or less exposed to pass through you know i know arrow is usually a full pass through but anything on the pricing side that's kind of raising the yellow flag that you're seeing
spk03: Well, the devil's in the details here. These expenses on expedited freight and expedited materials and all that sort of thing can just pass through the night and surprise you. We help filters up to make sure that we have early warning indications of any excursions that we need to deal with right away. and so we deal with them right away. Either we have in our contracts a pass-through on material costs, or we explain to our customers there's these extraordinary expenses to service your account, and we sometimes share those expenses, we sometimes pass them along 100%, and sometimes we don't. And it depends. It's very... It's situationally dependent, but we're confident we can manage through it. Got it.
spk08: Got it. Thanks for that call, guys. I'll jump back in the queue here.
spk00: As a reminder, that is star then one if you'd like to ask a question at this time. Our next question comes from Steve Barger with KeyBank Capital Markets.
spk02: Hey, good morning, guys. Good morning. Mike. You talked about how strong industrial is. Just thinking about Arrow, it's got a negative 15% comp from last year's 1Q. Do you expect positive year-over-year growth this quarter in Arrow?
spk03: Good question. I think it's probably going to be flat. It might be up slightly, but it's definitely not going to be a barn burner.
spk02: Right. Yeah, and last quarter you had said there was some limited visibility around arrow order trends. Is that cleared up, or just what are you seeing in terms of order rates?
spk03: It's definitely improved. Yeah. It's substantially improved.
spk02: Okay. And I guess shifting back to industrial, I know it's hard to call the year, but would you guess the industrial business has double-digit growth in FY22, just given how strongly the year's starting and the trends that you're seeing?
spk03: Yeah, absolutely. No question about it.
spk02: Yep. And I understand you don't have semiconductor mix handy, but what is the message you're getting from the equipment manufacturers in terms of demand trends, or just how are you looking at it in terms of visibility?
spk03: Well, right now the message that we're getting is, you know, you can, for our key customers, we can ship everything we can make as quickly as we can make it. These are pretty sophisticated products and there's a lot of process steps and special features. So, you know, there's a speed limit on how quickly you can get this produce these, but the situation is very good.
spk02: All right. Thanks.
spk00: Our next question comes from Pete Skibitsky with Alembic Global Advisors.
spk01: Yeah, let me just follow on to the kind of CapEx type of issues. CapEx came down quite a bit this year. I wanted to ask, how much do you expect to spend in fiscal 22 and Is there a case to make that you need to build out your semiconductor facilities, or is that too early to know, too risky? I was just interested in your thoughts on that.
spk03: I think it looks to me like the CapEx this year is going to be a little bit on the light side, simply because the year before the pandemic, it was a little on the heavy side as we were building out capacity to support, you know, various programs. Well, that capacity is built out now and so it needs to be put to work and it's mostly in the aerospace side. So as conditions improve, that capacity will get utilized. So I think overall I don't expect this year and last year to be materially different.
spk01: Okay. Okay. It'll still stay in that 10 to 15 million type of a range. Okay. And then, Mike, thinking about margins that, you know, you sustain them at a pretty nice level. They only came in two points in this crazy year of fiscal 21. How fast are you guys thinking they come back as, you know, I think you've talked about maybe a half a point adjusted operating margin improvement each year, or would the increase in volumes? Are you thinking maybe a full point or more in fiscal 22? What's the right way to think about that?
spk03: Well, it's going to be hard to, again, there's a lot of moving parts here. We should do very well. I mean, we're going to have increased volume over a reduced cost structure. That alone is going to be very helpful. And, you know, we've got to keep an eye on the inflationary pressures because those are going to be real. And we have to make adjustments in pricing or surcharges or however we want to manage those accordingly. So that's all in our wheelhouse to manage. And so we just need to be on top of that game. So overall, I expect at the gross margin level the margins to do very well. Now, at the operating income level, I think we're going to have to front load some SG&A expense to satisfy the requirements of a larger business each quarter as the year progresses. That's just the way that works and so we expect to probably lose a couple of margin points on the EBIT line as we get ahead of the requirements for engineers, salespeople, business management people, customer service people, as we bring all that back again.
spk01: Okay. So you're saying the first half of the year maybe you lose some margin points, but you expect to do better in the second half of the year, or are you talking about the full year?
spk03: Yeah, I think, you know, I think Rob probably knows those numbers better than me, but I think for the full year we may be down, what, maybe up, what, a percentage point on SG&A, that kind of thing?
spk04: Yeah, I think we're going to see some pickup in SG&A in the back half of the year as the comparisons from sales take off. We'll just see that front-loaded cost structure as we bring the folks on. So the second half of the year you should see some overall operating margin improvement.
spk01: Okay, okay. Okay, we'll watch that. And then just last two for me on the defense side. On submarines, it sounds like maybe right now on Columbia there's not a ton of activity on the Columbia right now because you mentioned I think the year after, maybe calendar 22 is when the production starts for you guys. So are you thinking maybe fiscal 22 you'll have maybe a little bit of a kind of a bathtub on submarine revenue? Or is overall activity, you know, within the subs just so strong that it's kind of continued up and to the right?
spk05: Yeah, we, Pete, this is Dan. You know, this year we finished at, you know, up in the quarter, up 40% on marine. And I think going into next year, we will be starting to ship some, or at least working on hardware for the Columbia ship. in this fiscal year. And so we're expecting another 10% growth rate for us on the marine side.
spk01: Okay.
spk05: Yeah, we ended this year around $40 million.
spk01: Okay, okay. And is there any – I know you guys have a lot of content on the F-35. And, you know, as we go out two or three years, I think that production profile starts to flatten a bit. So I just wanted to get a sense, because I know you're confident overall on the defense side – Are you seeing any aftermarket stream from the F-35 at all? I'm just wondering maybe how you could potentially offset that in the midterm when production volumes start to flatten.
spk03: Yeah, no, we're not seeing it yet.
spk01: Okay. Okay. Okay, fair enough. Okay, so just overall, Mike, your confidence on the defense side is just kind of new business wins, that sort of a thing?
spk03: Yeah, there's a lot going on on the defense side. There's platforms beyond the F-35 that we can talk about. And then, frankly, there's some that we shouldn't talk about. But we're happy with the suite of our positions. and where this whole thing is going. And, you know, we're sort of integrated, well integrated with the right lead contractors on all of these programs. And we have important positions and expanding positions on all of these programs.
spk01: Yeah, okay, that's great. Thanks very much, guys.
spk00: Our next question comes from Michael Charmoli with Truist Securities.
spk08: Hey, guys. Thanks for taking the follow-up. Maybe just on aerospace, specifically in the aftermarket and distribution, what do you guys see in there? We continue to hear... you know, optimism from suppliers that as we see more cycles, you know, we're going to start to see that airline spending kick in. But, you know, are you seeing any sort of restocking yet? Maybe any color that you could provide from product at the distributor channel? And are you seeing more pull through there? Because I would think that that's going to recover and snap back much quicker than the OE production side. But any color on that?
spk03: Yeah, well, you know, the aerospace distribution channel has been, let's say, interesting. There's been a lot of changes in management and changes in ownership. And so, you know, we've – and I think that's sort of interrupted their momentum in previous years. But, you know, that – is all coalescing again and we're seeing a year ahead that looks like it will be up substantially, double digits in aerospace distribution.
spk08: Okay. Is it anything Is it more tied to engine shop visit? Is it some of the component accessory repair that we should be looking out for? I mean, where are the bulk of your kind of products going into? Is it more on the airframe side, I guess engine side?
spk03: Well, it's all of the above. You know, I think now that the panic is over and the crisis is over, relative to air travel and all that sort of thing, those distributors had been really frozen in terms of order rates and trying to maintain their cash flows and so on and so forth. Well, there's renewed confidence in air travel, and the distributor can only be the distributor if they have items to distribute. And so they are building back their inventories as we speak. And so we're seeing that as a pickup in our business, and that'll be probably stronger each quarter this year.
spk08: Got it. Got it. Last one for me. I think you mentioned... some positive comments about wide bodies and, you know, maybe seeing, you know, I guess better demand pull and build rates by the end of the summer. It seems, you know, it seems like there's still a lot of uncertainty there, but, you know, and I think you called out the triple seven, but broadly, are you seeing any leading indicators on the wide bodies, the eight, seven, the eight, three 50, you know, your other significant platforms?
spk03: No, we're not seeing any news or any direct indication that things are better there. The fact that Europe is opening up and desperately needs Americans to travel there and spend their dollars is an important aspect of that. And the fact that Americans want to go to Europe and spend their dollars is an important aspect of that. So I think that air travel for those ships is going to be – is going to rebound more quickly than anybody expected.
spk08: Okay. Got it. All right. Thanks, guys. Yep.
spk00: Our next question comes from Joseph P. Carlegio with BFS.
spk06: Good morning, guys. How are you? Good morning. You had mentioned inflationary pressures across the business. Obviously, specifically inflationary higher steel costs, but also some labor cost pressures. I'm just curious about how far RBC is along in terms of automating its factories, in terms of robotics, et cetera, in order to offset some of those labor pressures.
spk03: Well, I mean, we're pretty advanced in terms of factory automation. A lot of our products, because of the nature of who we service, the lot sizes are small, so it requires a little bit different automation concept than not. And so it's taken us years to determine the right strategies and the improvement in manufacturing technology for robots and machine tools and the integration between robots and machine tools and how that all works has gotten so much better. And the courses in mechanical engineering at the universities that have focused on improving the credentials for engineers in control engineering has been valuable to us and so Over the past half a dozen years, we've been able to take all of that and make large improvements and gains in our plants.
spk06: Great. Thank you. And then just my second question was just on the restructuring and consolidation costs in the quarter. I think you had a gain on sale of a surplus building. Just any commentary maybe around that? further opportunities to consolidate the manufacturing base or maybe factory count at quarter end and how that's trended versus pre-pandemic? Thanks.
spk05: Yeah, the game was from last year. That's a building we sold down in Texas last year on a comparison purpose. Some of the negative restructuring we had in the fourth quarter was just finalizing the moves that we were making on the West Coast with some of our small plants that we talked about in Q2 and Q3. where we combine two plans together, and we combine one plan from a two-building scenario to a one-building scenario. So right now, there's no major consolidation planned, but we're always looking at ways to become a little more efficient with our real estate and our manufacturing facilities.
spk06: Thanks. Appreciate it.
spk00: We have a follow-up question from the line of Michael Charmoli with Truist Securities.
spk08: Hey, thanks, guys. Sorry, just one more. You know, looking at the balance sheet cap structure, you know, I know you guys have been talking about M&A for a while. We've been asking about M&A for a while. But, you know, clearly the strong balance sheet may be a little bit of a you know, lazy balance sheet in terms of generating returns. I mean, outside of M&A, and I know you said, you know, maybe something to be seen soon here, but what else are you guys thinking in terms of the cap structure, leverage, you know, is it dividends, you know, is it a special dividend, and anything else you guys are kicking around to maybe think about, you know, overall returns?
spk05: You know, Mike, we still consider ourselves a growth company. We want to be able to grow the top line to 10% compounded. And so we're out looking hard for acquisitions. We want to redeploy that money back into growth, into organic growth and to acquisition growth. So that's where our focus and target is. Got it. Got it.
spk08: All right. Perfect. Thanks, guys.
spk00: I'm showing no further questions in queue at this time. I'd like to turn the call back to Dr. Hartnett for closing remarks.
spk03: That concludes our conference call on fiscal year 21. As we move into fiscal year 22, we're very optimistic. I think the situation has changed where now it's how much can you make and how quickly can you make it and deliver it to us, which is exactly the kind of problem that we want to be dealing with. We'll be looking forward to a report on that more in July. Thanks for participating.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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