RBC Bearings Hits Turbulence, but Looks to Fly Higher

The maker of engineered components had a growth setback during the quarter, but still sees better times ahead.

Dan Caplinger
Dan Caplinger
May 27, 2015 at 1:51PM

Image: RBC Bearings.

Lately, the boom in the aerospace industry has raised awareness of a large number of companies in related fields, and RBC Bearings (NASDAQ:ROLL) is just one of the stocks that has vaulted to prominence in the wake of increased demand for its engineered bearings and components for the aerospace, industrial, and defense industries. Coming into Wednesday morning's fiscal fourth-quarter financial report, RBC Bearings shareholders were prepared for fairly stagnant results, and the company largely delivered on that front, with revenue and earnings that were flat to slightly down on an adjusted basis.

Nevertheless, the company remains optimistic about its future. Let's look more closely at RBC Bearings, and what its latest results suggest about the health of aerospace and related industries going into a new fiscal year.

RBC Bearings caps off a strong year with a whimper
Looking solely at the fiscal fourth-quarter results, RBC Bearings doesn't look like a particularly exciting stock. Revenue fell 0.3%, to $113.4 million, which was just short of the unchanged figure that most of those following the stock had expected. On the bottom line, adjusted net income of $17.1 million was identical to last year's fourth-quarter results, and the resulting $0.73 per share in adjusted earnings was also unchanged, but beat expectations by $0.01 per share.

A closer look at RBC Bearings shows fairly consistent performance across its segments. Industrial sales rose 0.1%, but a decline of 0.5% in aerospace and defense led to the overall decline. Yet the strong dollar hampered performance in both areas, and the two segments each posted small increases of between 0% and 1% when you take the currency effects out of the equation. Because RBC owns a Swiss company that had euros on deposit, the huge jump in the value of the Swiss franc had a particularly strong impact on the company's results. A drop in RBC's operating expenses helped to offset the sluggish sales figures.

From a product standpoint, different lines also saw different performance. The weakest performance came from the ball-bearings business, with a nearly 7% drop in sales. Strength in roller-bearings sales helped offset declines elsewhere, with the segment showing gains of more than 7%. The key plain-bearings division, which brings in more than half of RBC's revenue, saw sales slip about 2%.

Source: RBC Bearings.

Despite the sluggish performance in the fourth quarter, RBC Bearings was pleased with the year's performance. "We achieved record-level sales, operating income, and net income," said CEO Michael Hartnett in describing fiscal 2015, "driven by strong performance in our industrial markets and our continued focus on execution." Especially given fears about the potential impact of falling energy markets, RBC's performance has held up fairly well.

What's next for RBC Bearings?
Looking forward, the biggest game changer for RBC Bearings is its recently closed acquisition of the Sargent Aerospace & Defense business from Dover. The purchase, for which RBC paid $500 million, takes advantage of Sargent's focus on precision-engineered products for aircraft, as well as submarines and land vehicles.

The strategic move complements RBC's existing strategy quite well. Hartnett said when the deal was first announced in March that Sargent's manufacturing processes and design expertise would match up well against RBC's own.

Still, investors have high expectations for the combination, especially with the high bar that company management set. RBC Bearings estimated that adding Sargent would boost earnings by $0.25 to $0.35 per share during the first 12 months following the merger, and a combination of tax benefits and operating-cost savings would further add to the benefits to RBC in the long run. RBC will therefore have to work hard to make sure the transition is a smooth one for the company.

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RBC Bearings didn't react strongly to its earnings news, with the stock rising just a fraction of a percentage point in the first couple of hours of trading following the announcement. With such a fundamental shift from the Sargent acquisition, RBC is in the position of having to prove that it will reap the rewards of its aggressive strategy. Given the stock's big gains in recent months, anything short of full success could leave RBC shareholders vulnerable to a future setback.