UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2015

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to          .

 

Commission File Number: 333-124824

 

RBC Bearings Incorporated
(Exact name of registrant as specified in its charter)

 

Delaware
 (State or other jurisdiction of incorporation or organization)
95-4372080
(I.R.S. Employer Identification No.)
   
One Tribology Center
Oxford, CT
(Address of principal executive offices)

06478
(Zip Code)

 

(203) 267-7001
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer þ            Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of October 22, 2015, RBC Bearings Incorporated had 23,421,370 shares of Common Stock outstanding.

 

 

 

  

TABLE OF CONTENTS

 

Part I - FINANCIAL INFORMATION 3
     
ITEM 1. Financial Statements 3
ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 33
ITEM 4. Controls and Procedures 33
Changes in Internal Control over Financial Reporting 33
     
Part II - OTHER INFORMATION 34
     
ITEM 1. Legal Proceedings 34
ITEM 1A. Risk Factors 34
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Mine Safety Disclosures 35
ITEM 5. Other Information 35
ITEM 6. Exhibits 36

 

 2 

 

  

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

RBC Bearings Incorporated

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)

 

   September 26,
2015
   March 28,
2015
 
   (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $44,077   $125,455 
Accounts receivable, net of allowance for doubtful accounts of $1,643 at September 26, 2015 and $860 at March 28, 2015   97,132    76,651 
Inventory   262,883    206,158 
Deferred income taxes   11,336    12,492 
Prepaid expenses and other current assets   9,306    4,628 
Total current assets   424,734    425,384 
Property, plant and equipment, net   184,102    141,649 
Goodwill   269,901    43,439 
Intangible assets, net of accumulated amortization of $17,355 at September 26, 2015 and $13,185 at March 28, 2015   208,553    12,028 
Other assets   9,169    9,573 
Total assets  $1,096,459   $632,073 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $37,092   $23,459 
Accrued expenses and other current liabilities   30,311    17,326 
Current portion of long-term debt   8,725    1,233 
Total current liabilities   76,128    42,018 
Deferred income taxes   22,355    10,126 
Long-term debt, less current portion   393,573    7,965 
Other non-current liabilities   28,728    22,531 
Total liabilities   520,784    82,640 
           
Stockholders' equity:          
Preferred stock, $.01 par value; authorized shares: 10,000,000 at September 26, 2015 and March 28, 2015; none issued and outstanding        
Common stock, $.01 par value; authorized shares: 60,000,000 at September 26, 2015 and March 28, 2015; issued and outstanding shares: 23,989,656 at September 26, 2015 and 23,833,185 at March 28, 2015   240    238 
Additional paid-in capital   270,236    262,091 
Accumulated other comprehensive loss   (9,900)   (7,770)
Retained earnings   342,099    314,176 
Treasury stock, at cost, 559,856 shares at September 26, 2015 and 439,864 shares at March 28, 2015   (27,000)   (19,302)
Total stockholders' equity   575,675    549,433 
Total liabilities and stockholders' equity  $1,096,459   $632,073 

 

See accompanying notes.

 

 3 

 

  

RBC Bearings Incorporated

Consolidated Statements of Operations

(dollars in thousands, except share and per share data)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   September 26,
2015
   September 27,
2014
   September 26,
2015
   September 27,
2014
 
Net sales  $148,696   $112,555   $291,004   $225,539 
Cost of sales   96,578    72,804    186,122    141,967 
Gross margin   52,118    39,751    104,882    83,572 
Operating expenses:                    
Selling, general and administrative   24,944    18,517    48,669    37,513 
Other, net   3,575    2,937    10,253    3,551 
Total operating expenses   28,519    21,454    58,922    41,064 
Operating income   23,599    18,297    45,960    42,508 
Interest expense, net   2,273    308    3,984    532 
Other non-operating (income) expense   (596)   (235)   10    (502)
Income before income taxes   21,922    18,224    41,966    42,478 
Provision for income taxes   7,403    4,976    14,043    13,210 
Net income  $14,519   $13,248   $27,923   $29,268 
Net income per common share:                    
Basic  $0.63   $0.57   $1.20   $1.27 
Diluted  $0.62   $0.57   $1.19   $1.25 
Weighted average common shares:                    
Basic   23,210,640    23,134,902    23,186,600    23,070,170 
Diluted   23,495,285    23,424,421    23,516,537    23,394,439 
Dividends per share  $   $   $   $2.00 

 

See accompanying notes.

 

 4 

 

  

RBC Bearings Incorporated

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   September 26,
2015
   September 27,
2014
   September 26,
2015
   September 27,
2014
 
Net income  $14,519   $13,248   $27,923   $29,268 
Pension and postretirement liability adjustments, net of taxes   (228)   199    (455)   398 
Unrealized gain on investments, net of taxes       (345)       (273)
Foreign currency translation adjustments   (3,380)   (5,152)   (1,675)   (5,971)
Total comprehensive income  $10,911   $7,950   $25,793   $23,422 

 

See accompanying notes.

 

 5 

 

  

RBC Bearings Incorporated

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

   Six Months Ended 
  

September 26,

2015

  

September 27,

2014

 
Cash flows from operating activities:          
Net income  $27,923   $29,268 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   8,302    7,103 
Excess tax benefits from stock-based compensation   (1,682)   (2,778)
Deferred income taxes   791    218 
Amortization of intangible assets   4,170    964 
Amortization of deferred financing costs   621    163 
Consolidation and restructuring charges       5,026 
Stock-based compensation   4,628    4,035 
Other non-cash charges   232    500 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   4,068    2,848 
Inventory   (9,481)   (6,291)
Prepaid expenses and other current assets   (3,946)   (2,669)
Other non-current assets   (20)   (670)
Accounts payable   (1,206)   (560)
Accrued expenses and other current liabilities   769    7,451 
Other non-current liabilities   5,091    120 
Net cash provided by operating activities   40,260    44,728 
           
Cash flows from investing activities:          
Purchase of property, plant and equipment   (9,799)   (11,458)
Proceeds from sale of short-term investments       2,380 
Proceeds from sale of assets   40    593 
Business acquisition   (500,000)    
Net cash used in investing activities   (509,759)   (8,485)
           
Cash flows from financing activities:          
Proceeds from revolving credit facility   225,000     
Repayments of revolving credit facility   (20,000)    
Proceeds from term loans   200,000     
Repayments of term loans   (5,245)   (259)
Finance fees paid in connection with credit facility   (7,122)    
Exercise of stock options   1,837    2,992 
Excess tax benefits from stock-based compensation   1,682    2,778 
Repurchase of common stock   (7,698)   (4,721)
Dividends paid to shareholders       (46,014)
Other, net       (101)
Net cash provided by (used in) financing activities   388,454    (45,325)
           
Effect of exchange rate changes on cash   (333)   (2,678)
           
Cash and cash equivalents:          
Decrease during the period   (81,378)   (11,760)
Cash, at beginning of period   125,455    121,207 
Cash, at end of period  $44,077   $109,447 

 

See accompanying notes.

 

 6 

 

  

RBC Bearings Incorporated

Notes to Unaudited Interim Consolidated Financial Statements

(dollars in thousands, except share and per share data)

 

The consolidated financial statements included herein have been prepared by RBC Bearings Incorporated, a Delaware corporation (collectively with its subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The March 28, 2015 fiscal year end balance sheet data have been derived from the Company’s audited financial statements, but do not include all disclosures required by generally accepted accounting principles in the United States. The interim financial statements included with this report have been prepared on a consistent basis with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2015.

 

These statements reflect all adjustments, accruals and estimates consisting only of items of a normal recurring nature, which are, in the opinion of management, necessary for the fair presentation of the consolidated financial condition and consolidated results of operations for the interim periods presented. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Annual Report on Form 10-K.

 

The results of operations for the six month period ended September 26, 2015 are not necessarily indicative of the operating results for the entire fiscal year ending April 2, 2016. The three month periods ended September 26, 2015 and September 27, 2014 each include 13 weeks. The amounts shown are in thousands, unless otherwise indicated.

 

Adoption of Recent Accounting Pronouncements

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.” This ASU allows an acquirer in a business combination to account for measurement-period adjustments during the period in which it determines the amount of the adjustment. An acquirer would also need to capture in the current period any effect on earnings it would have recorded in previous periods if the accounting had been completed at the acquisition date. This pronouncement is effective for fiscal and interim periods beginning after December 15, 2015. Early adoption is permitted. The Company has adopted this update effective with their interim period beginning March 29, 2015.

 

In April 2015, the FASB issued ASU No. 2015-04, “Compensation - Retirement Benefits: Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” This ASU permits an entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month end that is closest to the entity’s fiscal year-end and apply that consistently from year to year. The practical expedient requires if a contribution or significant event occurs between the month-end date used to measure the defined benefit plan assets and an entity’s fiscal year end, the entity should adjust the measurement of the defined benefit plan assets and obligations to reflect the effects of those contributions and other significant events. This pronouncement is effective for fiscal and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This pronouncement is effective for fiscal and interim periods beginning after December 15, 2015. Early adoption is allowed. Given the requirement for retrospective treatment, the Company adopted this pronouncement in the first quarter of fiscal 2016. Other than a different presentation within the balance sheet, the adoption of this ASU did not have a material impact on the Company’s financial statements.

 

 7 

 

  

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement-Extraordinary and Unusual Items.” This update eliminates the concept of extraordinary items and removes the requirements to separately present extraordinary events. This ASU also requires additional disclosures for items that are both unusual in nature and infrequent in occurrence. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern.” This update requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, and requires related footnote disclosures. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify existing guidance on revenue recognition. This guidance includes the required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2016 with no early adoption permitted. The Company has not determined the effect that the adoption of the pronouncement may have on its financial position and/or results of operations.

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update requires additional disclosures about discontinued operations and amends the requirements for reporting discontinued operations. Under this ASU only disposals constituting a major financial or operational impact or that represent a strategic shift should be reported as discontinued operations. This update also requires new disclosures for individually material disposals that do not qualify as discontinued operations. This guidance was adopted by the Company at the beginning of the second quarter of fiscal 2015. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

1. Accumulated Other Comprehensive Income (Loss)

 

The components of comprehensive income (loss) that relate to the Company are net income, foreign currency translation adjustments and pension plan and postretirement benefits, all of which are presented in the consolidated statements of stockholders' equity and comprehensive income (loss).

 

The following summarizes the activity within each component of accumulated other comprehensive income (loss):

 

   Currency
Translation
  

Pension and

Postretirement
Liability

   Total 
Balance at March 28, 2015  $(93)  $(7,677)  $(7,770)
Other comprehensive income (loss) before reclassifications (net of taxes)   (1,675)   (373)   (2,048)
Amounts reclassified from accumulated other comprehensive income (loss)       (82)   (82)
Net current period other comprehensive income (loss)   (1,675)   (455)   (2,130)
Balance at September 26, 2015  $(1,768)  $(8,132)  $(9,900)

 

 8 

 

  

2. Net Income Per Common Share

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding.

 

Diluted net income per common share is computed by dividing net income by the sum of the weighted-average number of common shares and dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options.

 

The table below reflects the calculation of weighted-average shares outstanding for each period presented as well as the computation of basic and diluted net income per common share:

 

   Three Months Ended   Six Months Ended 
  

September 26,

2015

  

September 27,

2014

  

September 26,

2015

  

September 27,

2014

 
                 
Net income  $14,519   $13,248   $27,923   $29,268 
                     
Denominator for basic net income per common share—weighted-average shares outstanding    23,210,640    23,134,902    23,186,600    23,070,170 
Effect of dilution due to employee stock awards    284,645    289,519    329,937    324,269 
Denominator for diluted net income per common share — weighted-average shares outstanding    23,495,285    23,424,421    23,516,537    23,394,439 
                     
Basic net income per common share   $0.63   $0.57   $1.20   $1.27 
                     
Diluted net income per common share   $0.62   $0.57   $1.19   $1.25 

 

At September 26, 2015, 408,000 employee stock options and 73,850 restricted shares have been excluded from the calculation of diluted earnings per share. At September 27, 2014, 419,650 employee stock options and 800 restricted shares have been excluded from the calculation of diluted earnings per share. The inclusion of these employee stock options would be anti-dilutive.

 

3. Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Short-term investments, if any, are comprised of equity securities and are measured at fair value by using quoted prices in active markets and are classified as Level 1 of the valuation hierarchy.

 

4. Inventory

 

Inventories are stated at the lower of cost or market, using the first-in, first-out method, and are summarized below:

 

   September 26,
2015
   March 28,
2015
 
Raw materials  $29,361   $18,424 
Work in process   76,514    50,243 
Finished goods   157,008    137,491 
   $262,883   $206,158 

 

 9 

 

  

5. Goodwill and Intangible Assets

 

Goodwill

 

   Roller   Plain   Ball   Engineered
Products
   Total 
                     
March 28, 2015  $16,007   $20,641   $5,623   $1,168   $43,439 
Acquisitions       57,479        169,002    226,481 
Other               (19)   (19)
September 26, 2015  $16,007   $78,120   $5,623   $170,151   $269,901 

 

Intangible Assets

 

      September 26, 2015   March 28, 2015 
   Weighted
Average
Useful
Lives
  Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization
 
Product approvals  24  $54,285   $3,349   $4,068   $2,372 
Customer relationships and lists  24   110,696    6,348    9,017    4,349 
Trade names  10   19,990    2,219    2,102    1,372 
Distributor agreements  5   722    722    722    722 
Patents and trademarks  15   7,881    3,345    7,670    3,039 
Domain names  10   437    320    437    299 
Other  5   1,197    1,052    1,197    1,032 
       195,208    17,355    25,213    13,185 
Non-amortizable repair station certifications  n/a   30,700             
Total     $225,908   $17,355   $25,213   $13,185 

 

Amortization expense for definite-lived intangible assets for the three and six month periods ended September 26, 2015 was $2,402 and $4,170, respectively. Amortization expense for definite-lived intangible assets for the three and six month periods ended September 27, 2014 was $467 and $964, respectively. Estimated amortization expense for the remaining six months of fiscal 2016, the five succeeding fiscal years and thereafter is as follows:

 

2016  $4,814 
2017   9,562 
2018   9,439 
2019   9,216 
2020   9,108 
2021   9,058 
2022 and thereafter   126,656 

 

 10 

 

  

6. Debt

 

The balances payable under all borrowing facilities are as follows:

 

  

September 26,

2015

  

March 28,

2015

 
Revolver and term loan facilities  $400,000   $ 
Debt issuance costs   (6,529)    
Other   8,827    9,198 
Total debt   402,298    9,198 
Less: current portion   8,725    1,233 
Long-term debt  $393,573   $7,965 

 

New Credit Facility

 

In connection with the Sargent Aerospace & Defense (“Sargent”) acquisition on April 24, 2015, the Company entered into a new credit agreement (the “New Credit Agreement”) and related Guarantee, Pledge Agreement and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer and the other lenders party thereto and terminated the JP Morgan Credit Agreement. The New Credit Agreement provides RBCA, as Borrower, with (a) a $200,000 term loan facility (the “Term Loan”) and (b) a $350,000 revolving credit facility (the “Revolver” and together with the Term Loan, the “Facilities”).

 

Amounts outstanding under the Facilities generally bear interest at (a) a base rate determined by reference to the higher of (1) Wells Fargo’s prime lending rate, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one-month LIBOR rate plus 1% or (b) LIBOR rate plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA from time to time. Currently, the Company's margin is 0.5% for base rate loans and 1.5% for LIBOR rate loans. As of September 26, 2015, there was $205,000 outstanding under the Revolver and $195,000 outstanding under the Term Loan, offset by $6,529 in debt issuance costs (original amount was $7,122).

 

The New Credit Agreement requires the Company to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.50 to 1; and (2) a consolidated interest coverage ratio not to exceed 2.75 to 1. The New Credit Agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the agreement. As of September 26, 2015, the Company was in compliance with all such covenants.

 

The Company’s obligations under the New Credit Agreement are secured as well as providing for a pledge of substantially all of the Company’s and RBCA’s assets. The Company and certain of its subsidiaries have also entered into a Guarantee to guarantee RBCA’s obligations under the New Credit Agreement.

 

Approximately $3,290 of the Revolver is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain insurance programs, and $225,000 was utilized to finance the acquisition of Sargent. As of September 26, 2015, RBCA paid down $20,000 of the Revolver and has the ability to borrow up to an additional $141,710 under the Revolver.

 

Prior Credit Facility

 

On November 30, 2010, the Company entered into a credit agreement (the “JP Morgan Credit Agreement”) and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides Roller Bearing Company of America, Inc. (“RBCA”), as borrower, with a $150,000 five-year senior secured revolving credit facility which can be increased by up to $100,000, in increments of $25,000, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).

 

 11 

 

  

Amounts outstanding under the JP Morgan Credit Agreement generally bear interest at the prime rate or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based upon the Company’s consolidated ratio of net debt to adjusted EBITDA, measured at the end of each quarter. As of September 27, 2014, the Company’s margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans.

 

The JP Morgan Credit Agreement requires the Company to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.25 to 1; and (2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. The credit agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the agreement. The JP Morgan Credit Agreement was terminated and replaced by the New Credit Agreement discussed above. $190 of debt issuance costs were written off on termination.

 

Other Notes Payable

 

On October 1, 2012, Schaublin purchased the land and building, which it occupied and had been leasing, for 14,067 CHF (approximately $14,910). Schaublin obtained a 20 year fixed rate mortgage of 9,300 CHF (approximately $9,857) at an interest rate of 2.9%. The balance of the purchase price of 4,767 CHF (approximately $5,053) was paid from cash on hand. The balance on this mortgage as of September 26, 2015 was 7,905 CHF, or $8,077.

 

7. Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to state or foreign income tax examinations by tax authorities for years ending before March 31, 2007. The Company is no longer subject to U.S. federal corporate income tax examination by the Internal Revenue Service for fiscal years ending before March 29, 2014. A U.S. federal corporate income tax examination by the Internal Revenue Service for the fiscal year ended March 30, 2013 was deemed effectively settled in the Company’s first quarter of fiscal 2016.

 

The effective income tax rates for the three month periods ended September 26, 2015 and September 27, 2014, were 33.8% and 27.3%. In addition to discrete items, the effective income tax rates for these periods are different from the U.S. statutory rates due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and state income taxes which increases the rate.

 

The effective income tax rate for the three month period ended September 26, 2015 of 33.8% includes immaterial discrete items of $51. The effective income tax rate without discrete items for the three month period ended September 26, 2015 would have been 33.5%. The effective income tax rate for the three month period ended September 27, 2014 of 27.3% includes discrete items of $3,131 which are comprised substantially of items associated with the consolidation and restructuring of the Company’s U.K. manufacturing facility. The effective income tax rate without discrete items and without other associated consolidated and restructuring expenses pertaining to the Company’s UK manufacturing facility for the three month period ended September 27, 2014 would have been 32.9%. The Company believes it is reasonably possible that some of its unrecognized tax positions may be effectively settled within the next twelve months due to the closing of audits and the statute of limitations expiring in varying jurisdictions. The decrease, pertaining primarily to credits and state tax, is estimated to be approximately $449.

 

 12 

 

  

8. Reportable Segments

 

The Company operates through operating segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Those operating segments with similar economic characteristics and that meet all other required criteria, including nature of the products and production processes, distribution patterns and classes of customers, are aggregated as reportable segments. With the acquisition and integration of Sargent into the Company’s operating and reportable segment structure, the Company has transitioned the Other segment to a new reportable segment titled Engineered Products. The Company has four reportable business segments; Plain Bearings, Roller Bearings, Ball Bearings and Engineered Products, which are described below.

 

Plain Bearings. Plain bearings are produced with either self-lubricating or metal-to-metal designs and consists of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components. The bearings and rings businesses of Sargent are included here.

 

Roller Bearings. Roller bearings are anti-friction bearings that use rollers instead of balls. The Company manufactures four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.

 

Ball Bearings. The Company manufactures four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings which are used in high-speed rotational applications.

 

Engineered Products. Engineered Products consists of highly engineered hydraulics, fasteners, collets and precision components used in aerospace, marine and industrial applications. The hydraulics, fasteners and precision components businesses of Sargent are included here.

 

 13 

 

  

Segment performance is evaluated based on segment net sales and operating income. Items not allocated to segment operating income include corporate administrative expenses and certain other amounts.

 

   Three Months Ended   Six Months Ended 
   September 26,
2015
   September 27,
2014
   September 26,
2015
   September 27,
2014
 
Net External Sales                    
Plain  $67,607   $57,458   $133,284   $117,331 
Roller   27,151    33,504    57,731    65,269 
Ball   13,122    14,093    25,941    27,638 
Engineered Products   40,816    7,500    74,048    15,301 
   $148,696   $112,555   $291,004   $225,539 
Gross Margin                    
Plain  $26,763   $20,817   $52,711   $43,284 
Roller   11,355    10,799    24,250    23,590 
Ball   5,292    5,360    10,475    10,787 
Engineered Products   8,708    2,775    17,446    5,911 
   $52,118   $39,751   $104,882   $83,572 
Selling, General & Administrative Expenses                    
Plain  $5,906   $4,588   $11,389   $9,350 
Roller   1,483    1,566    2,973    3,251 
Ball   1,370    1,279    2,738    2,607 
Engineered Products   4,176    881    8,122    1,861 
Corporate   12,009    10,203    23,447    20,444 
   $24,944   $18,517   $48,669   $37,513 
Operating Income                    
Plain  $20,784   $15,950   $41,089   $33,503 
Roller   9,724    6,497    21,064    17,449 
Ball   3,775    3,914    7,447    7,867 
Engineered Products   2,303    1,909    4,863    4,034 
Corporate   (12,987)   (9,973)   (28,503)   (20,345)
   $23,599   $18,297   $45,960   $42,508 
Geographic External Sales                    
Domestic  $130,521   $93,387   $253,501   $188,433 
Foreign   18,175    19,168    37,503    37,106 
   $148,696   $112,555   $291,004   $225,539 
Intersegment Sales                    
Plain  $977   $1,041   $2,116   $2,020 
Roller   5,182    5,056    10,695    10,039 
Ball   486    706    1,047    1,258 
Engineered Products   7,023    7,840    15,134    15,028 
   $13,668   $14,643   $28,992   $28,345 

 

All intersegment sales are eliminated in consolidation.

 

 14 

 

  

9. Restructuring of Operations

 

In the second quarter of fiscal 2015, the Company consolidated the manufacturing capacity of its United Kingdom (U.K.) facility into its other manufacturing facilities in order to better align manufacturing abilities and product development. As a result the Company recorded a charge of $6,382 in the second quarter and $88 in the third quarter of fiscal 2015 associated with the consolidation of operations attributable to the Roller Bearings segment. The $6,382 charge includes $3,707 of inventory rationalization costs that were recorded in cost of sales in the income statement. All other costs were recorded under operating expenses in the other, net category of the income statement. The pre-tax charge of $6,382 was offset with an associated tax benefit of $3,131.

 

10. Acquisitions

 

On April 24, 2015, the Company acquired Sargent from Dover Corporation for $500,000 financed through a combination of cash on hand and senior debt. With headquarters in Tucson, Arizona, Sargent is a leader in precision-engineered products, solutions and repairs for aircraft airframes and engines, rotorcraft, submarines and land vehicles. Sargent manufactures, sells and services hydraulic valves and actuators, specialty bearings, specialty fasteners, seal rings & alignment joints and engineered components under leading brands including Kahr Bearing, Airtomic, Sonic Industries, Sargent Controls and Sargent Aerospace & Defense. The Company acquired Sargent because management believes it provides complementary products and channels, and expands and enhances the Company’s product portfolio and engineering technologies. The bearings and rings businesses are included in the Plain Bearings segment. The hydraulics, fasteners and precision components businesses are included in the Engineered Products segment.

 

The acquisition of Sargent was accounted for as a purchase in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The fair values of identifiable intangible assets, which were primarily customer relationships, product approvals, trade names, and patents and trademarks, were based on valuations using the income approach. The excess of the purchase price over the estimated fair values of tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill is attributable to expected synergies and expected growth opportunities. The preliminary price allocation resulted in goodwill of $226,481. The Company estimates a majority of goodwill will be deductible for United States income tax purposes. The allocation of purchase price is preliminary as the Company has not completed its analysis estimating the fair value of inventory, property, plant, and equipment, intangible assets, income tax liabilities and certain contingent liabilities. The purchase price allocation was updated to reflect current estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.

 

The preliminary purchase price allocation for Sargent was as follows:

 

  

As of

April 24, 2015

 
Current assets  $3,086 
Trade receivables   23,892 
Inventories   47,709 
Property, plant and equipment   41,538 
Intangible assets   201,000 
Goodwill   226,481 
Total assets acquired   543,706 
Accounts payable   14,900 
Liabilities assumed   28,806 
Net assets acquired  $500,000 

 

The valuation of the net assets acquired of $500,000 was classified as Level 3 in the valuation hierarchy. Level 3 inputs represent unobservable inputs for the asset or liability.

 

 15 

 

  

The components of intangible assets included as part of the Sargent acquisition was as follows:

 

  

Weighted Average

Amortization Period

(Years)

  Gross Value 
Amortizable intangible assets        
Customer relationships  25  $101,800 
         
Product approvals  25   50,500 
Trademarks and tradenames  10   18,000 
       170,300 
Non-amortizable intangible assets        
Repair station certifications  -   30,700 
Intangible assets     $201,000 

 

Included in the Company’s results of operations for the three and six months ended September 26, 2015 are revenues related to the Sargent acquisition of $45,507 and $79,509, respectively. Also, included for the three and six months ended September 26, 2015 is net income of $1,407 and $5,232, respectively. Acquisition-related expenses were recorded in Other, net in the Consolidated Statements of Operations for both the three and six months ended September 26, 2015 of $1,283 and $6,071, respectively.

 

The following supplemental pro forma financial information presents the financial results for the three and six months ended September 26, 2015 and September 27, 2014, as if the acquisition of Sargent had occurred at the beginning of fiscal year 2015. The pro forma financial information includes, where applicable, adjustments for: (i) the estimated amortization of acquired intangible assets, (ii) estimated additional interest expense on acquisition related borrowings, (iii) the income tax effect on the pro forma adjustments using an estimated effective tax rate. The pro forma financial information excludes, where applicable, adjustments for: (i) the estimated impact of inventory purchase accounting adjustments and (ii) the estimated closing costs on the acquisition. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated or the results that may be obtained in the future:

 

   Three Months Ended   Six Months Ended 
   September
26,
2015
   September
27,
2014
   September
26,
2015
   September
27,
2014
 
Pro forma net sales  $148,696   $162,145   $299,378   $325,355 
Pro forma net income   18,058    14,170    34,723    30,856 
                     
Basic earnings per share as reported  $0.63   $0.57   $1.20   $1.27 
Pro forma basic earnings per share   0.78    0.61    1.50    1.34 
                     
Diluted earnings per share as reported  $0.62   $0.57   $1.19   $1.25 
Pro forma diluted earnings per share   0.77    0.60    1.48    1.32 

 

On October 7, 2013, the Company acquired the net assets of Turbine Components Inc. (“TCI”) for approximately $3,925. Located in San Diego, California, TCI is an FAA certified aircraft gas turbine repair station and manufacturer of precision components for aerospace markets. TCI’s net sales for the prior calendar year were approximately $4,000. The purchase price allocation is as follows: accounts receivable ($585), inventory ($125), fixed assets ($1,231), goodwill ($2,821), intangible assets ($441), other non-current assets ($127), other current liabilities ($641) and noncurrent liabilities ($766). The purchase price allocation, which resulted in goodwill of $2,821, is deductible for tax purposes. TCI is included in the Plain Bearings segment. In connection with the acquisition the Company agreed to a contract for additional contingent consideration that is dependent on the outcome of future events. The contingent consideration is based on a market valuation formula and will be payable five years from the acquisition date. The current fair value of the contingent consideration is determined to be $469. Pro forma net sales and net income inclusive of TCI are not materially different from the amounts reported in the accompanying consolidated statements of operations.

 

 16 

 

  

On August 16, 2013, the Company acquired Climax Metal Products Company (“CMP”) located in Mentor, Ohio for $13,646. The purchase price included $10,672 in cash and $2,974 of debt. CMP is a manufacturer of precision shaft collars, rigid couplings, keyless locking devices and bearings for the industrial markets. CMP’s net sales for the prior calendar year were approximately $14,100. The purchase price allocation is as follows: accounts receivable ($1,206), inventory ($4,509), other current assets ($73), fixed assets ($2,466), goodwill ($5,623), intangible assets ($3,904), other non-current assets ($10), other current liabilities ($2,171) and noncurrent liabilities ($1,974). The purchase price allocation, which resulted in goodwill of $5,623, is not deductible for tax purposes. CMP is included in the Ball Bearings segment. Pro forma net sales and net income inclusive of CMP are not materially different from the amounts reported in the accompanying consolidated statements of operations.

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement As To Forward-Looking Information

 

The information in this discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the “safe harbor” created by those sections. All statements other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are “forward-looking statements” as the term is defined in the Private Securities Litigation Reform Act of 1995.

 

The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing industry is highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer could result in a material reduction in our revenues and profitability; (c) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers’ businesses generally, could materially reduce our revenues and profitability; (d) future reductions or changes in U.S. government spending could negatively affect our business; (e) fluctuating or interruption to supply, and availability of raw materials, components and energy resources could materially increase our costs or reduce our revenues, cash flow from operations and profitability; (f) our products are subject to certain approvals, and the loss of such approvals could materially reduce our revenues and profitability; (g) restrictions in our indebtedness agreements could limit our growth and our ability to respond to changing conditions; (h) work stoppages and other labor problems could materially reduce our ability to operate our business; (i) our business is capital intensive and may consume cash in excess of cash flow from our operations; (j) unexpected equipment failures, catastrophic events or capacity constraints may increase our costs and reduce our sales due to production curtailments or shutdowns; (k) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (l) the costs and difficulties of integrating acquired businesses could impede our future growth; (m) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (n) our international operations are subject to risks inherent in such activities; (o) currency translation risks may have a material impact on our results of operations; (p) we may be required to make significant future contributions to our pension plan; (q) we may incur material losses for product liability and recall related claims; (r) environmental regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (s) our intellectual property and other proprietary rights are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (t) cancellation of orders in our backlog of orders could negatively impact our revenues; (u) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (v) provisions in our charter documents may prevent or hinder efforts to acquire a controlling interest in us; (w) health care reform could adversely affect our operating results; and (x) we may not pay cash dividends in the foreseeable future. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC, including, without limitation, the risks identified under the heading “Risk Factors” set forth in the Annual Report on Form 10-K for the year ended March 28, 2015. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.

 

 17 

 

 

Overview

 

We are a well known international manufacturer and maker of highly engineered precision bearings and components. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major categories, we focus primarily on the higher end of the bearing and engineered component markets where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. With 37 facilities, of which 33 are manufacturing facilities in five countries, we have been able to significantly broaden our end markets, products, customer base and geographic reach. We currently operate under four reportable business segments: Plain Bearings; Roller Bearings; Ball Bearings; and Engineered Products. The following further describes these reportable segments:

 

Plain Bearings. Plain bearings are produced with either self-lubricating or metal-to-metal designs and consists of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components.

 

Roller Bearings. Roller bearings are anti-friction bearings that use rollers instead of balls. We manufacture four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.

 

Ball Bearings. We manufacture four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings which are used in high-speed rotational applications.

 

Engineered Products. Engineered Products consists of highly engineered hydraulics, fasteners, collets and precision components used in aerospace, marine and industrial applications.

 

Purchasers of bearings and engineered products include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction, energy, mining, marine and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.

 

Currently, our strategy is built around maintaining our role as a leading manufacturer of highly engineered bearings and components through the following efforts:

 

 18 

 

  

·Developing innovative solutions. By leveraging our design and manufacturing expertise and our extensive customer relationships, we continue to develop new products for markets in which there are substantial growth opportunities.

 

·Expanding customer base and penetrating end markets. We continually seek opportunities to access new customers, geographic locations and platforms with existing products or profitable new product opportunities.

 

·Increasing aftermarket sales. We believe that increasing our aftermarket sales of replacement parts will further enhance the continuity and predictability of our revenues and enhance our profitability. Such sales included sales to third party distributors and sales to OEMs for replacement bearings and components. We will increase the percentage of our revenues derived from the replacement market by continuing to implement several initiatives.

 

·Pursuing selective acquisitions. The acquisition of businesses that complement or expand our operations has been and continues to be an important element of our business strategy. We believe that there will continue to be consolidation within the industry that may present us with acquisition opportunities.

 

The following items highlight the most recent significant events:

 

·In the first quarter of fiscal 2016, subsequent to the close of the fiscal 2015 year, we acquired Sargent for $500 million financed through a combination of cash on hand and senior debt. Headquartered in Tucson, Arizona, Sargent is a leader in precision-engineered products, solutions and repairs for aircraft airframes and engines, rotorcraft, submarines and land vehicles. Sargent manufactures, sells and services hydraulic valves and actuators, specialty bearings, specialty fasteners, seal rings & alignment joints and precision components under leading brands including Kahr Bearing, Airtomic, Sonic Industries, Sargent Controls and Sargent Aerospace & Defense. Annual sales are approximately $195 million and the company has over 750 employees in six facilities in three countries.

 

·In connection with the Sargent acquisition on April 24, 2015, we entered into the New Credit Agreement and related Guarantee, Pledge Agreement and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer and the other lenders party thereto. The New Credit Agreement provides RBCA, as Borrower, with (a) a $200 million Term Loan and (b) a $350 million Revolver and together with the Term Loan (the “Facilities”).

 

·In the second quarter of fiscal 2015, we reached a decision to consolidate the manufacturing capacity of the United Kingdom (U.K.) facility into our other manufacturing facilities. This decision was based on our intent to better align manufacturing abilities and product development.

 

·In the third quarter of fiscal 2014, we acquired the net assets of Turbine Components Inc. (“TCI”) for approximately $3,925. Located in San Diego, California, TCI is an FAA certified aircraft gas turbine repair station and manufacturer of precision components for aerospace markets.

 

Outlook

 

Our net sales for the three month period ended September 26, 2015 increased 32.1% compared to the same period last fiscal year. Our aerospace markets increased 59.6% and the diversified industrial market decreased 2.4%. Our backlog, as of September 26, 2015, was $347.8 million compared to $218.0 million as of September 27, 2014.

 

Management believes that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. As of September 26, 2015, we had cash and cash equivalents of $44.1 million of which approximately $29.4 million was cash held by our foreign operations. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign entities.

 

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Results of Operations

 

   Three Months Ended 
   September 26,
2015
   September 27,
2014
   $ Change   % Change 
Organic net sales  $103.2   $112.6   $(9.4)   (8.3)%
Sales by recent acquisitions   45.5        45.5      
Total net sales  $148.7   $112.6   $36.1    32.1%
                     
Net income  $14.5   $13.2   $1.3    9.6%
                     
Net income per common share: diluted  $0.62   $0.57           
Weighted average common shares: diluted   23,495,285    23,424,421           

 

Net sales increased $36.1 million or 32.1% for the second quarter of fiscal 2016 over the same period last year. The increase in net sales was mainly the result of a 59.6% increase in aerospace and defense sales offset by a 2.4% decrease in industrial sales. The increase in aerospace and defense sales was mostly attributable to an increase in aerospace aftermarket of 28.0% and aerospace OEM of 66.8%. The decrease in industrial sales was mostly attributable to a decrease in industrial aftermarket of 13.4% offset by an increase in industrial OEM of 3.6%. Overall net sales for the quarter were negatively impacted by $0.9 million due to foreign exchange compared to the same period last year. Excluding the $45.5 million in sales associated with the Sargent acquisition and the foreign exchange impact, industrial sales decreased 12.7% and aerospace and defense sales decreased by 3.5%.

 

Net income for the second quarter of fiscal 2016 was $14.5 million compared to $13.2 million for the same period last year. Excluding the after tax impact of $0.7 million in costs associated with the acquisition, $2.8 million in inventory purchase accounting associated with the Sargent acquisition, $0.1 million of costs associated with integration and restructuring, $0.1 million of discrete tax expense offset by $0.4 million of favorable foreign exchange translation, net income would have been $17.8 million. Excluding the after tax impact of $3.3 million of costs associated with the consolidation and restructuring of facilities, net income for the second quarter of fiscal 2015 would have been $16.5 million.

 

   Six Months Ended 
   September 26,
2015
   September 27,
2014
   $ Change   % Change 
Organic net sales  $211.5   $225.5   $(14.0)   (6.2)%
Sales by recent acquisitions   79.5        79.5      
Total net sales  $291.0   $225.5   $65.5    29.0%
                     
Net income  $27.9   $29.3   $(1.4)   (4.6)%
                     
Net income per common share: diluted  $1.19   $1.25           
Weighted average common shares: diluted   23,516,537    23,394,439           

 

Net sales increased $65.5 million or 29.0% for the six month period ended September 26, 2015 over the same period last year. The increase in net sales was mainly the result of a 51.0% increase in aerospace and defense sales and a 1.3% increase in industrial. The increase in aerospace and defense sales was mostly attributable to an increase in aerospace aftermarket of 25.1% and aerospace OEM of 57.0%. The increase in industrial sales was mostly attributable to an increase in industrial OEM of 8.1% offset by a decrease in industrial aftermarket of 10.7%. Overall net sales for the six months were negatively impacted by $1.8 million due to foreign exchange compared to the same period last year. Excluding the $79.5 million in sales associated with the Sargent acquisition and the foreign exchange impact, industrial sales decreased 7.5% and aerospace and defense sales decreased by 3.8%.

 

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Net income for the six months ended September 26, 2015 was $27.9 million compared to $29.3 million for the same period last year. Excluding the after tax impact of $3.5 million in costs associated with the acquisition, $4.4 million in inventory purchase accounting associated with the Sargent acquisition, $0.7 million of costs associated with integration and restructuring, and offset by $0.2 million of favorable foreign exchange translation, net income would have been $36.3 million. Excluding the after tax impact of $3.2 million of costs associated with the consolidation and restructuring of facilities, net income would have been $32.5 million for the six month period ended September 27, 2014.

 

Gross Margin

 

   Three Months Ended 
   September 26,
2015
   September 27,
2014
   $
Change
  

%

Change

 
                 
Gross Margin  $52.1   $39.8   $12.3    31.1%
Gross Margin %   35.1%   35.3%          

 

Gross margin increased $12.3 million or 31.1% in the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015. Excluding the unfavorable impact of $4.3 million of inventory purchase accounting associated with the Sargent acquisition, gross margin would have been $56.4 million for the second quarter of fiscal 2016. Excluding the impact of the inventory rationalization associated with the consolidation and restructuring of the U.K. facility of $3.7 million, gross margin would have been $43.5 million for the second quarter of fiscal 2015.

 

   Six Months Ended 
   September 26,
2015
   September 27,
2014
   $
Change
  

%

Change

 
                 
Gross Margin  $104.9   $83.6   $21.3    25.5%
Gross Margin %   36.0%   37.1%          

 

Gross margin increased $21.3 million or 25.5% for the first six months of fiscal 2016 compared to the same period last year. Excluding the unfavorable impact of $6.6 million of inventory purchase accounting associated with the Sargent acquisition, gross margin would have been $111.5 million. Excluding the impact of the consolidation and restructuring of the U.K. facility of $3.7 million, gross margin would have been $87.3 million for the first six months of fiscal 2015.

 

Selling, General and Administrative

 

   Three Months Ended 
   September 26,
2015
   September 27,
2014
   $
Change
  

%

Change

 
                 
SG&A  $24.9   $18.5   $6.4    34.7%
% of net sales   16.8%   16.5%          

 

SG&A increased as a percentage of net sales to 16.8% in the second quarter of fiscal 2016 from 16.5% in the second quarter of fiscal 2015. SG&A expenses increased by $6.4 million to $24.9 million for the second quarter of fiscal 2016 compared to the same period last year. Excluding the impact of the Sargent acquisition of $4.6 million, the increase was primarily due to higher personnel expenses of $1.1 million, professional expenses of $0.3 million, increase in incentive stock compensation of $0.2 million and $0.2 million of other expenses.

 

 21 

 

 

 

 

   Six Months Ended 
   September 26,
2015
   September 27,
2014
   $
Change
   %
Change
 
                 
SG&A  $48.6   $37.5   $11.1    29.7%
% of net sales   16.7%   16.6%          

 

SG&A increased as a percentage of net sales to 16.7% for the first six months of fiscal 2016 from 16.6% for the same period last year. SG&A expenses increased by $11.1 million to $48.6 million for the first six months of fiscal 2016 compared to the same period last year. Excluding the impact of the Sargent acquisition of $8.3 million, the increase was primarily due to higher personnel expenses of $1.5 million, increase in incentive stock compensation of $0.6 million, professional expenses of $0.4 million and $0.3 million of other expenses.

 

Other, Net

 

   Three Months Ended 
   September 26,
2015
   September 27,
2014
   $
Change
   %
Change
 
                 
Other, net  $3.6   $2.9   $0.7    21.7%
% of net sales   2.4%   2.6%          

 

Other operating expenses for the second quarter of fiscal 2016 totaled $3.6 million compared to $2.9 million for the same period last year. For the second quarter of fiscal 2016 other operating expenses were comprised mainly of $2.4 million in amortization of intangibles, $1.1 million of acquisition related costs, $0.2 million in integration and restructuring costs offset by $0.1 million of other income.

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
   $
 Change
   %
 Change
 
                 
Other, net  $10.3   $3.6   $6.7    188.7%
% of net sales   3.5%   1.6%          

 

Other operating expenses for the first six months of fiscal 2016 totaled $10.3 million compared to $3.6 million for the same period last year. For the first six months of fiscal 2016 other operating expenses were comprised mainly of $4.2 million in amortization of intangibles, $5.1 million of acquisition related costs, $1.0 million in integration and restructuring costs.

 

Interest Expense, Net

 

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
   $
 Change
   %
 Change
 
                 
Interest expense, net  $2.3   $0.3   $2.0    638.0%
% of net sales   1.5%   0.3%          

 

 22 

 

 

Interest expense, net, generally consists of interest charged on our credit facilities and amortization of deferred financing fees, offset by interest income (see “Liquidity and Capital Resources – Liquidity”, below). Interest expense, net was $2.3 million for the second quarter of fiscal 2016 compared to $0.3 million for the same period last year. For the second quarter of fiscal 2016 interest expense, net consisted of interest expense of $1.9 million and deferred debt fees of $0.4 million.

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
   $
 Change
   %
 Change
 
                 
Interest expense, net  $4.0   $0.5   $3.5    648.9%
% of net sales   1.4%   0.2%          

 

Interest expense, net, generally consists of interest charged on our credit facilities and amortization of deferred financing fees, offset by interest income (see “Liquidity and Capital Resources – Liquidity”, below). Interest expense, net was $4.0 million for the first six months of fiscal 2016 compared to $0.5 million for the same period last year. For the first six months of fiscal 2016 interest expense, net consisted of interest expense of $3.4 million and deferred debt fees of $0.6 million.

 

Income Taxes

 

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
 
         
Income tax expense (benefit)  $7.4   $5.0 
Effective tax rate with discrete items   33.8%   27.3%
Effective tax rate without discrete items   33.5%   32.9%

 

Income tax expense for the three month period ended September 26, 2015 was $7.4 million compared to $5.0 million for the three month period ended September 27, 2014. Our effective income tax rate for the three month period ended September 26, 2015 was 33.8% compared to 27.3% for the three month period ended September 27, 2014. The effective income tax rate for the three month period ended September 26, 2015 of 33.8% includes immaterial discrete expense of $0.1 million. The effective income tax rate without discrete items for the three month period ended September 26, 2015 would have been 33.5%. The effective income tax rate for the three month period ended September 27, 2014 of 27.3% includes discrete benefits of $3.1 million which are comprised substantially of items associated with the consolidation and restructuring of the Company’s U.K. manufacturing facility. The effective income tax rate without discrete items and without other associated consolidated and restructuring expenses pertaining to the Company’s U.K. manufacturing facility for the three month period ended September 27, 2014 would have been 32.9%.

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
 
         
Income tax expense (benefit)  $14.0   $13.2 
Effective tax rate with discrete items   33.5%   31.1%
Effective tax rate without discrete items   33.6%   33.4%

 

 23 

 

 

Income tax expense for the six month period ended September 26, 2015 was $14.0 million compared to $13.2 million for the six month period ended September 27, 2014. Our effective income tax rate for the six month period ended September 26, 2015 was 33.5% compared to 31.1% for the six month period ended September 27, 2014. The effective income tax rate for the six month period ended September 26, 2015 of 33.5% includes immaterial discrete benefit of $0.1 million. The effective income tax rate without discrete items for the six month period ended September 26, 2015 would have been 33.6%. The effective income tax rate for the six month period ended September 27, 2014 of 31.1% includes discrete benefits in the amount of $3.1 million which are substantially comprised of items associated with the consolidation and restructuring of the Company’s U.K. manufacturing facility. The effective income tax rate without these discrete items and without other associated consolidated and restructuring expenses pertaining to the Company’s U.K. manufacturing facility would have been 33.4%.

 

Segment Information

 

We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Engineered Products. In fiscal 2016 we integrated the Sargent businesses into our Plain Bearings and Engineered Products segments (see Notes 8 and 10 of Notes to Unaudited Interim Consolidated Financial Statements). We use gross margin as the primary measurement to assess the financial performance of each reportable segment. The presentation of segment net sales includes a reconciliation to adjust for the effects of any acquisitions made in fiscal 2016 and fiscal 2015.

 

Plain Bearing Segment:

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $55.3   $57.5   $(2.2)   (3.8)%
Sales by recent acquisitions   12.3        12.3      
Total net sales  $67.6   $57.5   $10.1    17.7%
                     
Gross margin  $26.8   $20.8   $6.0    28.6%
Gross margin %   39.6%   36.2%          
                     
SG&A  $5.9   $4.6   $1.3    28.7%
% of segment net sales   8.7%   8.0%          

 

Net sales increased $10.1 million or 17.7% for the three months ended September 26, 2015 compared to the same period last year. The 17.7% increase was primarily driven by a 29.6% increase in aerospace and defense sales and a 8.8% decrease in industrial sales. The 29.6% increase in aerospace and defense sales was primarily due to a 286.8% increase in defense and a 16.5% increase in commercial aerospace. Excluding the $12.3 million impact of acquisition volume from Sargent, the net sales decrease of $2.2 million for this segment was mostly attributable to the unfavorable impacts of decreased volume of $1.7 million and foreign exchange of $0.5 million.

 

Gross margin increased $6.0 million for the three months ended September 26, 2015 compared to the same period last year. Excluding the $5.8 million impact from the Sargent acquisition, the gross margin increase of $0.2 million was mostly attributable to the favorable impact of cost efficiencies of $1.0 million and offset by unfavorable product mix of $0.7 million and foreign exchange loss of $0.1 million.

 

 24 

 

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $112.7   $117.3   $(4.6)   (3.9)%
Sales by recent acquisitions   20.6        20.6      
Total net sales  $133.3   $117.3   $16.0    13.6%
                     
Gross margin  $52.7   $43.3   $9.4    21.8%
Gross margin %   39.5%   36.9%          
                     
SG&A  $11.4   $9.3   $2.1    21.8%
% of segment net sales   8.5%   8.0%          

 

Net sales increased $16.0 million or 13.6% for the six months ended September 26, 2015 compared to the same period last year. The 13.6% increase was primarily driven by a 21.0% increase in aerospace and defense sales and a 3.0% decrease in industrial sales. The 21.0% increase in aerospace and defense sales was primarily due to a 169.0% increase in defense and a 12.2% increase in commercial aerospace. Excluding the $20.6 million impact of acquisition volume from Sargent, the net sales decrease of $4.6 million for this segment was mostly attributable to the unfavorable impacts of volume of $3.5 million and foreign exchange of $1.1 million.

 

Gross margin increased $9.4 million for the six months ended September 26, 2015 compared to the same period last year. Excluding the $9.6 million impact from the Sargent acquisition, the gross margin decrease of $0.2 million was mostly attributable to the unfavorable impacts of product mix of $1.9 million, foreign exchange of $0.1 million, offset by the favorable impact of increased volume of $1.4 million and cost efficiencies of $0.4 million.

 

Roller Bearing Segment:

 

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
   $ Change   %
 Change
 
                 
Organic net sales  $27.2   $33.5   $(6.3)   (19.0)%
Sales by recent acquisitions                 
Total net sales  $27.2   $33.5   $(6.3)   (19.0)%
                     
Gross margin  $11.3   $10.8   $0.5    5.1%
Gross margin %   41.8%   32.2%          
                     
SG&A  $1.5   $1.5         
% of segment net sales   5.5%   4.7%          

 

Net sales decreased $6.3 million or 19.0% over the second quarter of fiscal 2016. The decrease of 19.0% was primarily due to a 20.0% decrease in industrial sales and a 17.9% decrease in aerospace, mainly defense sales.

 

The Roller Bearings segment achieved a gross margin of $11.3 million in the three month period ended September 26, 2015 compared to $10.8 million in the comparable period in fiscal 2015. This increase was primarily due to the impact of cost efficiencies of $1.7 million offset by a volume decrease of $1.2 million.

 

 25 

 

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $57.7   $65.3   $(7.6)   (11.5)%
Sales by recent acquisitions                 
Total net sales  $57.7   $65.3   $(7.6)   (11.5)%
                     
Gross margin  $24.3   $23.6   $0.7    2.8%
Gross margin %   42.0%   36.1%          
                     
SG&A  $3.0   $3.3   $(0.3)   (8.6)%
% of segment net sales   5.1%   5.0%          

 

Net sales decreased $7.6 million or 11.5% over the first six months of fiscal 2016. The decrease of 11.5% was primarily due to an 11.7% decrease in industrial sales and a 11.4% decrease in aerospace and defense sales. The 11.4% decrease in aerospace and defense sales was due to a 8.6% decline in commercial aerospace and a 42.3% decrease in defense. This decrease was attributable to a volume decrease of $7.6 million.

 

The Roller Bearings segment achieved a gross margin of $24.3 million for the first six months of fiscal 2016 compared to $23.6 million for the comparable period in fiscal 2015. This increase of $0.7 million was primarily due to the unfavorable impacts of product mix of $1.0 million and decreased volume of $2.2 million offset by cost efficiencies of $3.9.

 

Ball Bearing Segment:

 

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $13.1   $14.1   $(1.0)   (6.9)%
Sales by recent acquisitions                 
Total net sales  $13.1   $14.1   $(1.0)   (6.9)%
                     
Gross margin  $5.3   $5.4   $(0.1)   (1.3)%
Gross margin %   40.3%   38.0%          
                     
SG&A  $1.3   $1.3         
% of segment net sales   10.4%   9.1%          

 

Net sales decreased $1.0 million or 6.9% for the second quarter of fiscal 2016 compared to the same period last year. The 6.9% decrease was primarily driven by a 4.8% decrease in industrial sales and a 10.5% decrease in aerospace and defense sales. The decrease in industrial sales was primarily due to a decline in oil and gas, and mining activity and the decrease in aerospace was mainly driven by defense.

 

Gross margin decreased $0.1 million or 1.3% for the second quarter of fiscal 2016 compared to the same period last year. The decrease was primarily due to the unfavorable impact of decreased volume of $0.7 million, offset by the favorable impact of product mix of $0.4 million and cost efficiencies of $0.2 million.

 

 26 

 

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $25.9   $27.6   $(1.7)   (6.1)%
Sales by recent acquisitions                 
Total net sales  $25.9   $27.6   $(1.7)   (6.1)%
                     
Gross margin  $10.5   $10.8   $(0.3)   (2.9)%
Gross margin %   40.4%   39.0%          
                     
SG&A  $2.7   $2.6   $0.1    5.0%
% of segment net sales   10.6%   9.4%          

 

Net sales decreased $1.7 million or 6.1% for the first six months of fiscal 2016 compared to the same period last year. The 6.1% decrease was primarily driven by a 6.0% decrease in industrial sales and a 6.4% decrease in aerospace and defense sales. The decrease in industrial sales was primarily due to a decline in oil and gas, and mining activity. The decrease in aerospace and defense of 6.4% was primarily impacted by a 7.4% decline in commercial aerospace and offset by a 28.1% increase in defense. These decreases were attributable to decreased volume of $1.7 million.

 

Gross margin decreased $0.3 million or 2.9% for the first six months of fiscal 2016 compared to the same period last year. The decrease was primarily due to the unfavorable impact of decreased volume of $1.1 million, offset by the favorable impact of product mix of $0.8 million.

 

Engineered Products Segment:

 

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $7.6   $7.5   $0.1    1.3%
Sales by recent acquisitions   33.2        33.2      
Total net sales  $40.8   $7.5   $33.3    444.2%
                     
Gross margin  $8.7   $2.8   $5.9    213.8%
Gross margin %   21.3%   37.0%          
                     
SG&A  $4.2   $0.9   $3.3    374.0%
% of segment net sales   10.2%   11.7%          

 

Net sales increased $33.3 million or 444.2% for the second quarter of fiscal 2016 compared to the same period last year. The 444.2% increase was primarily driven by a 69.6% increase in industrial sales and a 1,985.8% increase in aerospace and defense sales. Excluding the impact of the Sargent Acquisition commercial aerospace increased 61.0% offset by a 1.1% decline in defense. Excluding the $33.2 million impact of acquisition volume from Sargent, net sales increased $0.1 million. This increase was primarily attributable to the unfavorable impacts of foreign exchange of $0.2 million offset by the favorable impact of volume of $0.3 million.

 

Gross margin increased $5.9 million or 213.8% for the second quarter of fiscal 2016 compared to the same period last year. Excluding the $6.6 million impact from the Sargent acquisition, the gross margin decrease of $0.7 million was mostly attributable to the unfavorable impacts of product mix of $0.3 million and foreign exchange of $0.1 million and other costs of $0.3 million.

 

 27 

 

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
Organic net sales  $15.2   $15.3   $(0.1)   (1.3)%
Sales by recent acquisitions   58.9        58.9      
Total net sales  $74.1   $15.3   $58.8    383.9%
                     
Gross margin  $17.4   $5.9   $11.5    195.1%
Gross margin %   23.6%   38.6%          
                     
SG&A  $8.1   $1.9   $6.2    336.4%
% of segment net sales   11.0%   12.2%          

 

Net sales increased $58.8 million or 383.9% for the first six months of fiscal 2016 compared to the same period last year. The 383.9% increase was primarily driven by a 60.0% increase in industrial sales and a 1,678.2% increase in aerospace and defense sales. Excluding the impact of the Sargent acquisition commercial aerospace increased 27.3% and defense increased 2.9%. Excluding the $58.9 million impact of acquisition volume from Sargent, net sales decreased $0.1 million. This decrease was primarily attributable to the unfavorable impacts of foreign exchange of $0.2 million, offset by the favorable impact of volume of $0.1 million.

 

Gross margin increased $11.5 million or 195.1% for the first six months of fiscal 2016 compared to the same period last year. Excluding the $12.3 million impact from the Sargent acquisition, the gross margin decrease of $0.8 million was mostly attributable to the unfavorable impacts of product mix of $0.4 million and foreign exchange of $0.2 million and other costs of $0.3 million, offset by the favorable impact of volume of $0.1 million.

 

Corporate:

   Three Months Ended 
   September 26, 
2015
   September 27, 
2014
  
Change
   %
 Change
 
                 
SG&A  $12.0   $10.2   $1.8    17.7%
% of total net sales   8.1%   9.1%          

 

   Six Months Ended 
   September 26, 
2015
   September 27, 
2014
   $
 Change
   %
 Change
 
                 
SG&A  $23.4   $20.4   $3.0    14.7%
% of total net sales   8.1%   9.1%          

 

Corporate SG&A increased for both the second quarter and first six months of fiscal 2016 compared to the same periods last year. This was primarily due to unfavorable impacts in stock compensation and headcount – related expenses.

 

 28 

 

 

Liquidity and Capital Resources

 

Our business is capital intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth in part through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.

 

Liquidity

 

New Credit Facility

 

In connection with the Sargent acquisition on April 24, 2015, the Company entered into the New Credit Agreement and related Guarantee, Pledge Agreement and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer and the other lenders party thereto and terminated the JP Morgan Credit Agreement. The Credit Agreement provides RBCA, as Borrower, with (a) a $200 million Term Loan and (b) a $350 million Revolver and together with the Term Loan (the “Facilities”).

 

Amounts outstanding under the Facilities generally bear interest at (a) a base rate determined by reference to the higher of (1) Wells Fargo’s prime lending rate, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one-month LIBOR rate plus 1% or (b) LIBOR rate plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA from time to time. Currently, our margin is 0.5% for base rate loans and 1.5% for LIBOR rate loans. As of September 26, 2015, there was $205.0 million outstanding under the Revolver and $195.0 million outstanding under the Term Loan, offset by $6.5 million in debt issuance costs (original amount was $7.1 million).

 

The New Credit Agreement requires us to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.50 to 1; and (2) a consolidated interest coverage ratio not to exceed 2.75 to 1. The New Credit Agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain requirements and limitations of the agreement. As of September 26, 2015, we were in compliance with all such covenants.

 

Our obligations under the New Credit Agreement are secured as well as providing for a pledge of substantially all of our assets. We and certain of our subsidiaries have also entered into a Guarantee to guarantee our obligations under the New Credit Agreement.

 

Approximately $3.3 million of the Revolver is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain insurance programs, and $225.0 million was utilized to finance the acquisition of Sargent. As of September 26, 2015, RBCA paid down $20.0 million of the Revolver and has the ability to borrow up to an additional $141.7 million under the Revolver.

 

Prior Credit Facility

 

On November 30, 2010, we entered into a credit agreement (the “JP Morgan Credit Agreement”) and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides Roller Bearing Company of America, Inc. (“RBCA”), as borrower, with a $150 million five-year senior secured revolving credit facility which can be increased by up to $100 million, in increments of $25 million, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).

 

 29 

 

 

Amounts outstanding under the JP Morgan Credit Agreement generally bear interest at the prime rate or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based upon our consolidated ratio of net debt to adjusted EBITDA, measured at the end of each quarter. As of September 27, 2014, our margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans.

 

The JP Morgan Credit Agreement requires us to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.25 to 1; and (2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. The credit agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain requirements and limitations of the agreement. The JP Morgan Credit Agreement was terminated and replaced by the New Credit Agreement discussed above.

 

Other Notes Payable

 

On October 1, 2012, Schaublin purchased the land and building, which it occupied and had been leasing, for 14.1 million CHF (approximately $14.9 million). Schaublin obtained a 20 year fixed rate mortgage of 9.3 million CHF (approximately $9.9 million) at an interest rate of 2.9%. The balance of the purchase price of 4.8 million CHF (approximately $5.1 million) was paid from cash on hand. The balance on this mortgage as of September 26, 2015 was 7.9 million CHF, or $8.1 million.

 

Our ability to meet future working capital, capital expenditures and debt service requirements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, particularly interest rates, cyclical changes in our end markets and prices for steel and our ability to pass through price increases on a timely basis, many of which are outside of our control. In addition, future acquisitions could have a significant impact on our liquidity position and our need for additional funds.

 

From time to time we evaluate our existing facilities and operations and their strategic importance to us. If we determine that a given facility or operation does not have future strategic importance, we may sell, partially or completely, relocate production lines, consolidate or otherwise dispose of those operations. Although we believe our operations would not be materially impaired by such dispositions, relocations or consolidations, we could incur significant cash or non-cash charges in connection with them.

 

On May 16, 2014, our Board declared a special dividend to shareholders of $2.00 per common share or a total of approximately $46.0 million. The special dividend was paid on June 13, 2014, to shareholders of record on May 30, 2014. The ex-dividend date was May 28, 2014. The Board opted for a special dividend payment, rather than a regular recurring dividend to allow greater flexibility given our pipeline of attractive growth opportunities. The Board, will however, consider the use of additional special cash dividends in the future as circumstance warrant.

 

As of September 26, 2015, we had cash and cash equivalents of $44.1 million of which approximately $29.4 million was cash held by our foreign operations. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign entities.

 

 30 

 

 

Cash Flows

 

Six Month Period Ended September 26, 2015 Compared to the Six Month Period Ended September 27, 2014

 

The following table summarizes our cash flow activities:

 

   FY16   FY15   $ Change

 
Net cash provided by (used in):               
Operating activities  $40.3   $44.7   $(4.4)
Investing activities   (509.8)   (8.5)   (501.3)
Financing activities   388.4    (45.3)   433.7 
Effect of exchange rate changes on cash   (0.3)   (2.7)   2.4 
Decrease in cash and cash equivalents  $(81.4)  $(11.8)  $(69.6)

 

During fiscal 2016 we generated cash of $40.3 million from operating activities compared to generating cash of $44.7 million for fiscal 2015. The decrease of $4.4 million for fiscal 2016 was mainly a result of the addition of non-cash charges of $1.8 million offset by the unfavorable impacts of a net change in operating assets and liabilities of $4.9 million and a decrease in net income of $1.3 million. The favorable impact of the non-cash charges of $1.8 was primarily due increased amortization of intangibles of $3.2 million and impairment charges of $5.0 million in the second quarter of fiscal 2015 related to the consolidation of the U.K. facility. The unfavorable change in operating assets and liabilities was primarily the result of a increase in the amount of cash being used for working capital items.

 

The following chart summarizes the favorable (unfavorable) change in operating assets and liabilities of ($4.9) million for fiscal 2016 versus fiscal 2015 and $18.4 million for fiscal 2015 versus fiscal 2014.

 

   FY16   FY15 
Cash provided by (used in):          
Accounts receivable  $1.2   $5.0 
Inventory   (3.2)   6.6 
Prepaid expenses and other current assets   (1.3)   (1.2)
Other non-current assets   0.7    0.7 
Accounts payable   (0.6)   0.5 
Accrued expenses and other current liabilities   (6.7)   7.1 
Other non-current liabilities   5.0    (0.3)
Total change in operating assets and liabilities:  $(4.9)  $18.4 

 

During fiscal 2016, we used $509.8 million for investing activities as compared to $8.5 for fiscal 2015. The increase of cash used in investing activities of $501.3 million is primarily attributable to the $500.0 million used to finance the acquisition of Sargent.

 

During fiscal 2016, we generated $388.4 million from financing activities compared to using $45.3 million for fiscal 2015. This increase in cash generated was primarily attributable to the $225.0 million revolving credit facility and $200.0 million proceeds from the term loan associated with the acquisition of Sargent in the first quarter of fiscal 2016.

 

Capital Expenditures

 

Our capital expenditures were $9.8 million for the six month period ended September 26, 2015. In addition, we expect to make additional capital expenditures of $10.0 to $12.0 million during fiscal 2016 in connection with our existing business. We expect to fund fiscal 2016 capital expenditures principally through existing cash, internally generated funds and debt. We may also make substantial additional capital expenditures in connection with acquisitions.

 

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Obligations and Commitments

 

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Because these estimates are necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments and leases as of September 26, 2015:

 

   Payments Due By Period 
Contractual Obligations(1)  Total   Less than
1 Year
   1 to
3 Years
   3 to
5 Years
   More than
5 Years
 
   (in thousands) 
Total debt  $402,298   $7,301   $25,601   $363,695   $5,701 
Operating leases   13,571    5,482    5,420    1,976    693 
Interest on fixed rate debt   2,134    235    429    375    1,095 
Interest on variable rate debt(2)   29,715    6,686    12,809    10,220     
Pension and postretirement benefits   19,467    1,819    3,846    3,983    9,819 
Total contractual cash obligations  $467,185   $21,523   $48,105   $380,249   $17,308 

 

(1)We cannot make a reasonably reliable estimate of when (or if) the unrecognized tax liability of $5.7 million, which includes interest and penalties, will be paid to the respective taxing authorities. These obligations are therefore excluded from the above table.

 

(2)These amounts represent expected cash payments of interest on our variable rate long-term debt under our Facilities at the prevailing interest rates at September 26, 2015.

 

Other Matters

 

Critical Accounting Estimates

 

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements in our fiscal 2015 Annual Report, incorporated by reference in our fiscal 2015 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2016.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates.

 

Interest Rates. We currently have variable rate debt outstanding under the credit agreement. We regularly evaluate the impact of interest rate changes on our net income and cash flow and take action to limit our exposure when appropriate.

 

Foreign Currency Exchange Rates. As a result of our operations in Europe, we are exposed to risk associated with fluctuating currency exchange rates between the U.S. dollar, the Euro, the Swiss Franc, the Polish Zloty and the Canadian Dollar. Our Swiss operations utilize the Swiss Franc as the functional currency, our French operations utilize the Euro as the functional currency, our Polish operations utilize the Polish Zloty as the functional currency and our Canadian operations utilize the Canadian Dollar as the functional currency. Foreign currency transaction gains and losses are included in earnings. Approximately 11% and 14% of our net sales were impacted by foreign currency fluctuations in the first six months of fiscal 2016 and fiscal 2015, respectively. We expect that this proportion is likely to increase as we seek to increase our penetration of foreign markets, particularly within the aerospace and defense markets. Foreign currency transaction exposure arises primarily from the transfer of foreign currency from one subsidiary to another within the group, and to foreign currency denominated trade receivables. Unrealized currency translation gains and losses are recognized upon translation of the foreign subsidiaries’ balance sheets to U.S. dollars. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our earnings. We periodically enter into derivative financial instruments in the form of forward exchange contracts to reduce the effect of fluctuations in exchange rates on certain third-party sales transactions denominated in non-functional currencies. Based on the accounting guidance related to derivatives and hedging activities, we record derivative financial instruments at fair value. For derivative financial instruments designated and qualifying as cash flow hedges, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (“AOCI”), and is reclassified into earnings when the hedged transaction affects earnings. As of September 26, 2015, we had no derivatives.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 4. Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 26, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 26, 2015, our disclosure controls and procedures were (1) designed to ensure that information relating to our Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported to our Chief Executive Officer and Chief Financial Officer within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, and (2) effective, in that they provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting occurred during the six month period ended September 26, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

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PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

From time to time, we are involved in litigation and administrative proceedings which arise in the ordinary course of our business. We do not believe that any litigation or proceeding in which we are currently involved, either individually or in the aggregate, is likely to have a material adverse effect on our business, financial condition, operating results, cash flow or prospects.

 

Our wholly owned subsidiary, RBC Aircraft Products, Inc. is a plaintiff in a lawsuit against Precise Machining & Manufacturing LLC currently pending in the United States District Court, District of Connecticut’s Case Number 3:10 CV 878 (SRU). A jury award against Precise Machining & Manufacturing LLC and in favor of RBC Aircraft Products, Inc. in the amount of $2,986,089 was entered on April 9, 2013. Precise Machining & Manufacturing LLC subsequently filed a motion for judgment in its favor as a matter of law and a motion for a new trial. On May 5, 2014 the presiding judge surprisingly overturned the jury verdict and granted a motion for a new trial. RBC Aircraft Products, Inc. subsequently filed a motion for Certification of Judgment, which was unopposed by Precise Machining & Manufacturing LLC, which was granted on July 28, 2014 and allows RBC Aircraft Products, Inc. to immediately appeal the judges’ decision to overturn the jury verdict to the Second Circuit Court of Appeals. The overturning of a jury verdict is highly unusual and RBC Aircraft Products, Inc. believes there is no credible support for doing so in this matter and expects to be successful with its appeal.

 

We expect to prevail in this appeal above; however, as litigation is inherently unpredictable, there can be no assurance in this regard. Any monetary recovery from this lawsuit will be recognized only if and when it is received by the Company.

 

ITEM 1A. Risk Factors

 

There have been no material changes to our risk factors and uncertainties during the six month period ended September 26, 2015. For a discussion of the Risk Factors, refer to Part I, Item 2, “Cautionary Statement As To Forward-Looking Information,” contained in this report and Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the period ended March 28, 2015.

 

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Equity Securities

 

None.

 

Use of Proceeds

 

Not applicable.

 

Issuer Purchases of Equity Securities

 

On February 7, 2013, our board of directors authorized us to repurchase up to $50.0 million of our common stock, from time to time on the open market, in block trade transactions and through privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18 depending on market conditions, alternative uses of capital and other relevant factors. Purchases may be commenced, suspended, or discontinued at any time without prior notice.

 

Total share repurchases for the three months ended September 26, 2015 are as follows:

 

Period  Total 
number
of shares
Purchased
   Average
price paid
per share
   Number of
shares
purchased 
as part of the
publicly
announced
program
   Approximate
dollar value
of shares still
available to be
purchased
under the
program
(000’s)
 
06/28/2015 – 07/25/2015   9,591   $71.73    9,591   $38,211 
07/26/2015 – 08/22/2015               38,211 
08/23/2015 – 09/26/2015   80,324    60.11    80,324   $33,382 
Total   89,915   $61.35    89,915      

  

ITEM 3.Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.Other Information

 

Not applicable.

 

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ITEM 6.Exhibits

 

Exhibit
Number
  Exhibit Description  
31.01   Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).  
31.02   Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).  
32.01   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*  
32.02   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*  
101.INS   X BRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.  
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.  
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.  
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.  
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.  

 

 

*           This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  RBC Bearings Incorporated  
    (Registrant)  
       
  By:

/s/ Michael J. Hartnett

 
    Name: Michael J. Hartnett  
    Title: Chief Executive Officer  
    Date: November 5, 2015  
         
  By:

/s/ Daniel A. Bergeron

 
    Name: Daniel A. Bergeron  
    Title: Chief Financial Officer  
    Date: November 5, 2015  

 

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EXHIBIT INDEX

 

Exhibit
Number
  Exhibit Description
31.01   Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
31.02   Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
32.01   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*
32.02   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

*           This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

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