RBC Bearings (ROLL)

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ROLL has passed rigorous product examinations given by the U.S. Military. These credentials give ROLL military market power and opportunities for lucrative replacement parts sales. Besides the U.S. Military, ROLL sells bearings to other large customers, from Boeing to General Electric. Being dependent on large customers and two end markets means ROLL rises and falls with any of its customers. For example, ROLL saw robust 2007 growth (26%) in the aerospace & defense market due to product demand for the Iraq War, but minimal growth (0.3%) in the industrial market due to decreased demand for trucks.^[1] ROLL has also been affected by rising raw materials prices, particularly steel prices. From March 2006 to March 2008, the average price of scrap metal increased from $212.50/tonne to $500/tonne, increasing the company's costs, but ROLL has stabilized margins through price increases - risky, as they could upset customers.^[2]

[edit] Business Financials

[edit] Plain Bearings (50.1% of sales)

Plain Bearings correct the expected misalignments that occur in mechanical and aeronautical engineering. For example, when aeronautical vehicles face high pressure, plain bearings keep the structure rigid. These products are used in mining and construction equipment, missile launchers, and aircraft landing controls and landing gear. From 2007 to 2008, Plain Bearings sales grew 7.4% due to increased demand for aerospace products.

[edit] Roller Bearings (31.5% of sales)

Tapered roller bearings can withstand heavy axial and radial forces, so they are ideal for trucks and aircrafts. Roller bearings are also used in aircraft hydraulics, military and commercial trucks, packaging machinery, and gear pumps. From 2007 to 2008, Roller Bearings sales grew 5.3% due to increased demand for aerospace products.

[edit] Ball Bearings(18.4% of sales)

Ball bearings are used for high-speed applications. Products are used for radar and night vision systems and semiconductor equipment. From 2007 to 2008, Ball Bearings sales grew 12.3% due to product demand for the Iraq War.

ROLL's fiscal year ends March 29th. From 2007 to 2008, sales increased 8%, gross profit increased 13.4%, and total cost increased 5.3%.^[3] In the machine tools & accessories industry, ROLL ranks 2nd in both return on equity (20.5%) and quarterly earnings growth (yoy) (78.7%).^[4] In 2008, ROLL had backlog of $217.7 million, a 23% growth from 2007 due to increased military replacement parts for the Iraq War.^[5]

[edit] Trends and Forces

[edit] ROLL competes in the machine tools industry with its niche military product line.

In the machine tools industry, RBC Bearings competes in an oligopoly against Timken Company (TKR), Stanley Works (SWK), and Kennametal (KMT). In 2007, ROLL's sales total is 5.8% as large as its biggest bearings competitor, TKR. These three companies have pricing power and more capital for investments and acquisitions, so ROLL and other smaller cap companies, such as Kaydon (KDN) with wind energy products, find niche products to gain revenue. ROLL makes niche products in the military industry. ROLL passed rigorous military product examinations and these products have received increased demand for the Iraq War.

RBC's bearing products are used in several military applications, such as fighter jets, troop transports, naval vessels, helicopters, gas turbine engines, armored vehicles, guided weaponry and satellites. ROLL's advantage in the military market is that their bearing products are custom designed to conform to U.S. military specifications. Product approval for use on military equipment is a lengthy process ranging from six months to six years.^[6] Such rigorous standards often makes ROLL the only producer of certain military products. ROLL's largest defense customers include the U.S. Department of Defense and all branches of the U.S. Military. In fiscal 2008, an estimated 21.5% of ROLL's net sales were to the U.S. Military.^[7] Since ROLL is a producer of these unique products, it also replaces and repairs these unique products. Aerospace & Defense replacement parts represented 58% of net sales for fiscal 2008.^[8] In the machine tools industry, ROLL has had the 2nd highest quarterly earnings growth (78.8%), only lower than Flow International (FLOW).^[9]

[edit] ROLL success depends on two end markets and a handful of large companies.

ROLL has seen promise in the Aerospace & Defense market and is looking to improve in the Industrial market.

• Aerospace & Defense (53% of sales) -- ROLL bearings are used in aerospace manufacturing, so changing demands for aerospace products will in turn cause increased demand for ROLL bearings. Aerospace and defense related sales jumped 26% in fiscal 2007, driven by programs to modernize and expand commercial aircraft fleets and refurbish and replace aging defense equipment.^[10] In fact, backlog is up 9.8% year-over-year to $176.6 million. ROLL built a new aerospace bearing manufacturing facility in Connecticut, which will begin operating in the fall. Almost all of ROLL's aerospace sales come from Airbus, Boeing, Lockheed Martin, Raytheon, and United Technologies.^[11] ROLL manufactures some niche products in aerospace, including aerospace hydraulics. Thus, ROLL benefits from replacement parts sales because they are one of few product manufacturers. Aerospace replacement parts represented 58% of net sales for fiscal 2008.^[12]

• Industrial (47% of sales) -- ROLL's industrial end market includes construction and mining, oil and natural resource extraction, heavy truck, packaging and semiconductor machinery. If there is less demand for industrial products, then manufacturers will demand less ROLL products. In this market, ROLL sells to GE, Applied Materials (AMAT), Caterpillar (CAT), and Parker-Hannifin (PH). Total sales to industrial customers grew just 0.3% due largely to a sharp volume decline in the trucks market. On June 09, 2008, ROLL acquired PIC Design for $6.6 million. PIC Design manufactures and supplies plain, roller, and ball bearings for use in the motion control industry. In 2007, PIC Design generated revenues of approximately $10.0 million. ^[13]

[edit] Rising steel prices cause ROLL to pass costs to consumers.

Steel is ROLL's primary material used in manufacturing, especially its aerospace bearings line.^[14] 22% of the company's costs in 2008 were for steel purchases. It takes ROLL up to three months to pass on costs to consumers through pricing and surcharges^[15] From March 2006 to March 2008, the average price of scrap metal has increased from $212.50/tonne to $500/tonne.^[16] In that time period, ROLL operating margins have increased 4.9% due to pricing strategies and implementing commodity surcharges. ^[17] TKR, who also heavily relies on steel, saw operating margins decrease 0.78% in that time period.

[edit] Competition

[edit] Machine Tools & Accessories

• Stanley Works (SWK)- SWK is a top brand of consumer and industrial tools.^[18]
• Timken Company (TKR)- TKR is the world's largest manufacturer of tapered roller bearings and a U.S. producer of steel alloy.^[19]
• Kennametal (KMT)- Leading global producer of tools, machine accessories, and advanced materials and second largest metal cutting tools manufacturer in the world.^[20]
• Kaydon (KDN)- KDN manufactures specialty bearings, especially bearings used for wind energy.
• CompX International (CIX)- CIX manufactures security products and precision ball bearing slides.^[21]
• Hardinge (HDNG)- HDNG produces machine tools in Western Europe.
• Thermadyne Holding (THMD)- THMD producers of gas and electric arc cutting and welding products for the Americas.
• Flow International (FLOW)- Flow produces high-pressure waterjet cutting tools and had the highest revenue growth of machine tools companies in the past quarter.^[22]

[edit] References

1. ↑ ROLL 2008 10-k, Item 1: Business, page 5
2. ↑ Steel on the Net, "Steel Prices," 2008
3. ↑ ROLL 2008 10-k, Item 6: Selected Financial Data, page 18
4. ↑ Yahoo! Finance: Machine Tools & Accessories Leaders and Laggards
5. ↑ ROLL 2008 10-k, Item 1: Business, page 5
6. ↑ RBC Bearings company website, "Investors"
7. ↑ ROLL 2008 10-k, Item 1: Business, page 8
8. ↑ RBC Bearings company website, "Investors"
9. ↑ Yahoo! Finance, Machine Tools & Accessories Leaders and Laggards
10. ↑ Forbes, "It's (Almost) All Ball Bearings," 08/02/07
11. ↑ Forbes, "It's (Almost) All Ball Bearings," 08/02/07
12. ↑ RBC Bearings company website, "Investors"
13. ↑ Wall Street Journal, "RBC Bearings Incorporated Completes the Acquisition of Precision Industrial Components LLC," 06/09/08
14. ↑ ROLL 2008 10-k, Item 1: Business, page 5]
15. ↑ ROLL 2008 10-k, Item 1: Business, page 5
16. ↑ Steel on the Net, "Steel Prices," 2008
17. ↑ ROLL 2008 10-k, Item 6: Selected Financial Data, page 18
18. ↑ Stanley Works website, "Businesses"
19. ↑ Timken Company website, "Corporate Overview"]
20. ↑ KMT 2007 10-k, Item 6- Selected Financial Data, page 11
21. ↑ Yahoo! Finance: CIX
22. ↑ Yahoo! Finance: Machine Tools and Accessories Leaders and Laggards
23. ↑ SWK 2007 10-k, Item 6: Selected Financial Data, page 14
24. ↑ THMD 2007 10-k, Item 6: Selected Financial Data, page 18
25. ↑ CIX 2007 10-k, Item 6: Selected Financial Data, page 15
26. ↑ HDNG 2007 10-k, Item 6: Selected Financial Data, page 21
27. ↑ ROLL 2007 10-k, Item 6: Selected Financial Data, page 18
28. ↑ NNBR 2007 10-k, Item 6: Selected Financial Data, page 17
29. ↑ TKR 2007 10-k, Item 6: Selected Financial Data, page 18
30. ↑ KMT 2007 10-k, Item 6- Selected Financial Data, page 11
31. ↑ KDN 2007 10-k, Item 6: Selected Financial Data, page 9