Rising Costs Weigh on RBC Bearings Incorporated's Earnings

By Markets Fool.com

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RBC Bearings' (NASDAQ: ROLL) revenue grew at a brisk pace in its fiscal first quarter thanks to soaring sales in the aerospace sector. However, earnings did not join the ride because of rising costs. Still, the company was very pleased with the start of its fiscal year, and it remains optimistic about what lies ahead.

RBC Bearings Incorporated results: The raw numbers

Metric

FQ1 2017 Actuals

FQ1 2016 Actuals

Growth (YOY)

Adjusted net sales

$154.6 million

$142.3 million

8.6%

Adjusted net income

$18.1 million

$18.5 million

-2.1%

Adjusted earnings per share

$0.77

$0.78

-1.3%

Data source: RBC Bearings Incorporated. YOY = year over year.

What happened with RBC Bearings this quarter?

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Rising costs offset revenue gains:

  • Aerospace sales surged 11.3% year over year,drivenby sales to the commercial aircraft industry, which offset softer sales to the defense industry. Meanwhile, industrial sales rose 3.1% thanks to the marine sector, which offset weak sales to the energy sector.
  • Sales of engineered products were up 28.1% to $42.6 million, followed by a 7.3% increase in plain bearing sales to $70.5 million and a 7% rise in ball bearing sales to $13.7 million. This more than offset a 9% slump in roller bearings sales, which fell to $27.8 million.
  • Margins slipped a little, with the company's gross margin as a percentage of sales declining from 37.1% in last year's fiscal first quarter to 37% in fiscal 2017's first quarter. Interest expenses and taxes were also higher year over year and contributed to the decline in adjusted earnings.

What management had to say

CEO Dr. Michael Hartnett commented on the company's results:

Our results demonstrated solid execution and continued strong operating performance to begin our fiscal year. Continued strength in the aerospace sector in both commercial OEM and aftermarket activity was aided by another quarter of growth in industrial sales.

As Hartnett notes, the aerospace sector was the driver of its second-quarter results. That's not surprising given the outlook for the industry. According to a report by Deloitte Global, aerospacerevenue should grow by 3% in 2016, which is a reversal from last year's 0.5% sales slump. It is worth noting that one of the drivers of this sales growth, according to Deloitte Global, is an improvement in defense sales as a result of a rising U.S. defense budget and the increase in security threats. While that has yet to materialize in RBC Bearings' financial performance, it has seen the benefit from rising commercialsalesdriven by growing demand for next-generation aircraft.

Looking forward

While RBC Bearings did notprovide forward guidance, Hartnett did note that "we continue to be pleased with our healthy backlog and opportunities for organic growth." That backlog stood at $352.6 million as of the end of the quarter, which is up 4% year over year and represents more than two quarters' worth of revenue at its current run rate.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends RBC Bearings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.