RBC 10-Q
RBC Bearings INC (RBC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
OR
For the transition period from to .
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
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.
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 (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||
| Non-accelerated filer | ☐ | Smaller reporting company | ||
| Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of February 4, 2022, RBC Bearings Incorporated had
TABLE OF CONTENTS
| Part I - | FINANCIAL INFORMATION | 1 | |
| Item 1. | Consolidated Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 | |
| Item 4. | Controls and Procedures | 34 | |
| Changes in Internal Control over Financial Reporting | 34 | ||
| Part II - | OTHER INFORMATION | 35 | |
| Item 1. | Legal Proceedings | 35 | |
| Item 1A. | Risk Factors | 35 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 | |
| Item 3. | Defaults Upon Senior Securities | 37 | |
| Item 4. | Mine Safety Disclosures | 37 | |
| Item 5. | Other Information | 37 | |
| Item 6. | Exhibits | 38 |
i
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
RBC Bearings Incorporated
Consolidated Balance Sheets
(dollars in thousands, except per share data)
| January 1, 2022 | April 3, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Current operating lease liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less current portion | ||||||||
| Long-term operating lease liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes.
1
RBC Bearings Incorporated
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Other, net | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Other non-operating (income)/expense | ( | ) | ||||||||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income/(loss) | ( | ) | ||||||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income/(loss) available to common stockholders | $ | ( | ) | $ | $ | $ | ||||||||||
| Net income/(loss) per share available to common stockholders: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | $ | ||||||||||
| Diluted | $ | ( | ) | $ | $ | $ | ||||||||||
| Weighted average common shares: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes.
2
RBC Bearings Incorporated
Consolidated Statements of Comprehensive Income/(Loss)
(dollars in thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Net income/(loss) | $ | ( | ) | $ | $ | $ | ||||||||||
| Pension and postretirement liability adjustments, net of taxes (1) | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income/(loss) | $ | ( | ) | $ | $ | $ | ||||||||||
| (1) |
See accompanying notes.
3
RBC Bearings Incorporated
Consolidated Statements of Stockholders’ Equity
(dollars in thousands)
(Unaudited)
| Common Stock | Preferred Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained |
Treasury Stock | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income/(Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
| Balance at April 3, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Exercise of equity awards | — | — | ||||||||||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of tax expense of $ | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | — | ||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Preferred stock issuance, net of issuance costs | — | — | ||||||||||||||||||||||||||||||||||||||
| Common stock issuance, net of issuance costs | — | |||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Exercise of equity awards | — | — | ||||||||||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of taxes of $ | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at October 2, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net income/(loss) | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Exercise of equity awards | — | — | ||||||||||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of taxes of $ | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | — | ||||||||||||||||||||||||||||||||||||||
| Preferred stock issuance, net of issuance costs | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Common stock issuance, net of issuance costs | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
See accompanying notes.
4
RBC Bearings Incorporated
Consolidated Statements of Stockholders’ Equity (continued)
(dollars in thousands)
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained |
Treasury Stock | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Income/(Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||
| Balance at March 28, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of equity awards | — | |||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of taxes of $ | — | — | — | |||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | |||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of equity awards | — | |||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of taxes of $ | — | — | — | |||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( | ) | — | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||
| Balance at September 26, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Exercise of equity awards | — | — | ||||||||||||||||||||||||||||||
| Change in net prior service cost and actuarial losses, net of taxes of $ | — | — | ||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | |||||||||||||||||||||||||||||||
| Currency translation adjustments | — | |||||||||||||||||||||||||||||||
| Balance at December 26, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
See accompanying notes.
5
RBC Bearings Incorporated
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
| Nine Months Ended | ||||||||
January 1, 2022 | December 26, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ||||||||
| Amortization of deferred financing costs | ||||||||
| Share-based compensation | ||||||||
| Loss/(gain) on disposition of assets | ||||||||
| Loss on extinguishment of debt | ||||||||
| Consolidation, restructuring, and other noncash charges | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other noncurrent assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Other noncurrent liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of assets | ||||||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Proceeds from sale of marketable securities | ||||||||
| Acquisition of business, net of cash acquired | ( | ) | ||||||
| Net cash provided by/(used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds received from issuance of common stock | ||||||||
| Proceeds received from issuance of preferred stock | ||||||||
| Proceeds received from term loans, net of financing costs | ||||||||
| Proceeds received from senior notes, net of financing costs | ||||||||
| Finance fees paid in connection with credit facilities and senior notes | ( | ) | ||||||
| Repayments of term loans | ( | ) | ( | ) | ||||
| Repayments of revolving credit facilities | - | ( | ) | |||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Principal payments on finance lease obligations | ( | ) | - | |||||
| Exercise of stock options | ||||||||
| Repurchase of common stock | ( | ) | ( | ) | ||||
| Net cash provided by/(used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ||||||||
| Cash and cash equivalents: | ||||||||
| Increase during the period | ||||||||
| Cash and cash equivalents, at beginning of period | ||||||||
| Cash and cash equivalents, at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest | ||||||||
See accompanying notes.
6
RBC Bearings Incorporated
Notes to Unaudited Interim Consolidated Financial Statements
(dollars in thousands, except per share data)
1. Basis of Presentation
The interim 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 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 April 3, 2021. We condensed or omitted certain information and footnote disclosures normally included in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP). As used in this report, the terms “we,” “us,” “our,” “RBC” and the “Company” mean RBC Bearings Incorporated and its subsidiaries, unless the context indicates another meaning.
These statements reflect all adjustments, accruals, and estimates, consisting only of items of a normal recurring nature, that 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 three- and nine-month periods ended January 1, 2022 are not necessarily indicative of the operating results for the entire fiscal year ending April 2, 2022. The three- and nine-month periods ended January 1, 2022 and December 26, 2020 included 13 weeks, 39 weeks, 13 weeks and 39 weeks, respectively. The amounts shown are in thousands, unless otherwise indicated.
2. Significant Accounting Policies
The Company’s significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended April 3, 2021.
Significant changes to our accounting policies as a result of adopting new accounting standards are discussed below.
7
Recent Accounting Standards Adopted
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The objective of this standard update is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU also attempts to improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This standard update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this ASU effective April 4, 2021 and the impact of adoption was not material to the Company’s financial position, results of operations or liquidity.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. This ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company early adopted this ASU in fiscal 2022.
The
adoption of this ASU did not have a material impact on our financial position, results of operations or liquidity. Adoption of this ASU
did simplify the accounting of the
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 840): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements in accordance with U.S. GAAP. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company early adopted this ASU in fiscal 2022 and the impact of adoption was not material to the Company’s financial position, results of operations or liquidity.
Recent Accounting Standards Yet to Be Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The objective of the standard is to address operational challenges likely to arise in accounting for contract modifications and hedge accounting due to reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The standard update is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected for a topic or industry subtopic, the amendments in this standard update must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. An entity may elect to apply the amendments for eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of that interim period. If an entity elects to apply any of the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020 and March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship. The Company has not yet assessed the impact of adoption will have on the Company’s consolidated financial statements.
Other new pronouncements issued but not effective until after April 2, 2022 are not expected to have a material impact on our financial position, results of operations or liquidity.
8
3. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table disaggregates total revenue by end market which is how we view our reportable segments (see Note 12):
Three Months Ended | Nine Months Ended | |||||||||||||||
January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Aerospace/Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table disaggregates total revenue by geographic origin:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table illustrates the approximate percentage of revenue recognized for performance obligations satisfied over time versus the amount of revenue recognized for performance obligations satisfied at a point in time:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 1, 2022 | December 26,
2020 | January 1, 2022 | December 26,
2020 | |||||||||||||
| Point-in-time | % | % | % | % | ||||||||||||
| Over time | % | % | % | % | ||||||||||||
| % | % | % | % | |||||||||||||
Remaining Performance Obligations
Remaining
performance obligations represent the transaction price of orders meeting the definition of a contract for which work has not been performed
or has been partially performed and excludes unexercised contract options. The duration of the majority of our contracts, as defined
by ASC Topic 606, is less than one year. The Company has elected to apply the practical expedient, which allows companies to exclude
remaining performance obligations with an original expected duration of one year or less. The aggregate amount of the transaction price
allocated to remaining performance obligations for such contracts with a duration of more than one year was approximately $
Contract Balances - The timing of revenue recognition, invoicing and cash collections affect accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the consolidated balance sheets. These assets and liabilities are reported on the consolidated balance sheets on an individual contract basis at the end of each reporting period.
9
Contract
Assets (Unbilled Receivables) - Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer
being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when (1) the cost-to-cost method is applied
and (2) such revenue exceeds the amount invoiced to the customer. As of January 1, 2022 and April 3, 2021, current contract assets were
$
Contract
Liabilities (Deferred Revenue) - The Company may receive a customer advance or deposit, or have an unconditional right to receive
a customer advance, prior to revenue being recognized. Since the performance obligations related to such advances may not have been satisfied,
a contract liability is established. Advance payments are not considered a significant financing component as the timing of the transfer
of the related goods or services is at the discretion of the customer. As of January 1, 2022 and April 3, 2021, current contract liabilities
were $
Accounts
Receivable - As of January 1, 2022 and April 3, 2021, accounts receivable with customers, net, were $
Variable Consideration
The
amount of consideration to which the Company expects to be entitled in exchange for the goods and services is not generally subject to
significant variations. However, the Company does offer certain customers rebates, prompt payment discounts, end-user discounts, the
right to return eligible products, and/or other forms of variable consideration. The Company estimates this variable consideration using
the expected value amount, which is based on historical experience. The Company includes estimated amounts in the transaction price to
the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved. The Company adjusts the estimate of revenue at the earlier of when the amount of consideration
the Company expects to receive changes or when the consideration becomes fixed. Accrued customer rebates were $
4. 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.
The following summarizes the activity within each component of accumulated other comprehensive income (loss), net of taxes:
Currency | Pension
and | Total | ||||||||||
| Balance at April 3, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
| Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ||||||||
| Amounts recorded in/reclassified from accumulated other comprehensive income (loss) | ||||||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Balance at January 1, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
10
5. Stockholders’ Equity
Preferred Stock
We
are authorized to issue
On
September 24, 2021, we completed an offering of
Holders
of MCPS are entitled to receive, when, as and if declared by our Board of Directors, or an authorized committee thereof, out of funds
legally available for payment, cumulative dividends at the annual rate of
The
MCPS has a liquidation preference of $
Subject
to certain exceptions, no dividend or distribution will be declared or paid on shares of our common stock, and no common stock will be
purchased, redeemed or otherwise acquired for consideration by us or any of our subsidiaries unless, in each case, all accumulated and
unpaid dividends for all preceding dividend periods have been declared and paid, or a sufficient amount of cash or number of shares of
common stock has been set apart for the payment of such dividends, on all outstanding shares of MCPS. In the event of our voluntary or
involuntary liquidation, winding-up or dissolution, no distribution of our assets may be made to holders of our common stock until we
have paid holders of MCPS, each of which will be entitled to receive a liquidation preference in the amount of $
Unless
earlier converted or redeemed, each share of MCPS will automatically convert, for settlement on or about October 15, 2024, into between
11
Common Stock
We
are authorized to issue
On
September 24, 2021, we completed an offering of
6. Net Income Per Share Available to Common Stockholders
Basic net income per share available to common stockholders is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding.
Diluted net income per share available to common stockholders is computed by dividing net income available to common stockholders 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 and the conversion of MCPS to common shares.
We exclude outstanding stock options, stock awards and the MCPS from the calculations if the effect would be anti-dilutive. The dilutive effect of the MCPS is calculated using the if-converted method. The if-converted method assumes that these securities were converted to shares of common stock at the later of the September 24, 2021 issuance date or the beginning of the reporting period to the extent that the effect is dilutive. If the effect is anti-dilutive, we calculate net income per share available to common stockholders by adjusting net income in the numerator for the effect of the cumulative MCPS dividends for the respective period.
For
the three- and nine-month periods ended January 1, 2022, the effect of assuming the conversion of the
For
the three months ended January 1, 2022, all employee stock options and restricted shares were excluded from the calculation of diluted
earnings per share available to common stockholders as the Company generated a loss for the period. For the nine months ended January
1, 2022,
12
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 share available to common stockholders. Since we were in a loss position for the three months ended January 1, 2022, basic net loss per share was the same as diluted net loss per share.
| Three Months Ended | Nine months Ended | |||||||||||||||
January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Net income/(loss) | $ | ( | ) | $ | $ | $ | ||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income/(loss) available to common stockholders | $ | ( | ) | $ | $ | $ | ||||||||||
| Denominator for basic net income/(loss) per share available to common stockholders — weighted-average shares outstanding | ||||||||||||||||
| Effect of dilution due to employee stock awards | ||||||||||||||||
| Effect of dilution due to MCPS | ||||||||||||||||
| Denominator for diluted net income/(loss) per share available to common stockholders — weighted-average shares outstanding | ||||||||||||||||
| Basic net income/(loss) per share available to common stockholders | $ | ( | ) | $ | $ | $ | ||||||||||
| Diluted net income/(loss) per share available to common stockholders | $ | ( | ) | $ | $ | $ | ||||||||||
7. 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. The Company maintains its cash accounts primarily with Bank of America, N.A., JPMorgan Chase & Co., HSBC Holdings plc, Credit Suisse Group AG, and Wells Fargo & Company. The Company has not experienced any losses in such accounts.
8. Inventory
Inventories are stated at the lower of cost or net realizable value, using the first-in, first-out method, and are summarized below:
January
1, | April 3, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
13
9. Goodwill and Intangible Assets
Goodwill
Goodwill balances, by segment, consist of the following:
| Plain | Roller | Ball | Engineered Products | Aerospace/Defense | Industrial | Total | ||||||||||||||||||||||
| April 3, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Allocation in the third quarter of fiscal 2022 (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Acquisition (2) | ||||||||||||||||||||||||||||
| Translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||
| January 1, 2022 | $ | $ | $ | |||||||||||||||||||||||||
| (1) |
| (2) |
We evaluate our reportable operating segments periodically, as well as when changes in our operating segments occur. For changes in reportable segments, we reassign goodwill using a relative fair value allocation approach as mentioned in tickmark 1 above. As a result of this change in segments during the quarter, the Company performed an interim goodwill impairment analysis and determined that the estimated fair values of the segments exceeded their carrying values (including goodwill). As such, there was no impairment as a result of this change.
Intangible Assets
January 1, 2022 | April 3, 2021 | |||||||||||||||||
Weighted
| Gross
|
Accumulated
| Gross
|
Accumulated
| ||||||||||||||
| Product approvals | $ | $ | $ | $ | ||||||||||||||
| Customer relationships and lists (1) | ||||||||||||||||||
| Trade names (1) | ||||||||||||||||||
| Distributor agreements | ||||||||||||||||||
| Patents and trademarks | ||||||||||||||||||
| Domain names | ||||||||||||||||||
| Other(1) | ||||||||||||||||||
| Non-amortizable repair station certifications | — | — | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||
| (1) |
Amortization
expense for definite-lived intangible assets during the three-month periods ended January 1, 2022 and December 26, 2020 were $
| Remainder of Fiscal 2022 | $ | |||
| Fiscal 2023 | ||||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Fiscal 2026 | ||||
| Fiscal 2027 | ||||
| Fiscal 2028 and thereafter |
14
10. Debt
The balances payable under all borrowing facilities are as follows:
January 1, 2022 | April 3, 2021 | |||||||
| Revolver and term loan facilities | $ | $ | ||||||
| Senior notes | ||||||||
| Debt issuance costs | ( | ) | ( | ) | ||||
| Other | ||||||||
| Total debt | ||||||||
| Less: current portion | ||||||||
| Long-term debt | $ | $ | ||||||
The current portion of long-term debt as of January 1, 2022 included the current portion of the Term Loan Facility, a mortgage held at one of our foreign entities and a note payable for purchased equipment. The current portion of long-term debt as of April 3, 2021 included the current portion of the Foreign Term Loan and a mortgage held at one of our foreign entities.
Domestic Credit Facility
On
November 1, 2021 RBC Bearings Incorporated, our top holding company, and our Roller Bearing Company of America, Inc. subsidiary (“RBCA”)
entered into a Credit Agreement (the “New Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”),
as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer and the other lenders party thereto, and terminated
the Company’s prior Credit Agreement, which was entered into with Wells Fargo in 2015 (the “2015 Credit Agreement”).
The New Credit Agreement provides the Company with (a) a $1,300,000 term loan facility (the “Term Loan Facility”), which
was used to fund a portion of the cash purchase price for the acquisition of Dodge and to pay related fees and expenses, and (b) a $
15
The
Term Loan Facility and the Revolving Credit Facility will mature on November 2, 2026 (the “Maturity Date”). The Company can
elect to prepay some or all of the outstanding balance from time to time without penalty. Commencing one full fiscal quarter after the
execution of the New Credit Agreement, the Term Loan Facility will amortize in quarterly installments with the balance payable on the
Maturity Date unless otherwise extended in accordance with the terms of the Term Loan Facility. The required future principal payments
are approximately $
The New Credit Agreement requires the Company to comply with various covenants, including the following financial covenants beginning with the test period ending December 31, 2021: (a) a maximum Total Net Leverage Ratio of 5.50:1.00, which maximum Total Net Leverage Ratio shall decrease during certain subsequent test periods as set forth in the New Credit Agreement (provided that, no more than once during the term of the Facilities, such maximum ratio applicable at such time may be increased by the Borrower by 0.50:1.00 for a period of 12 months after the consummation of a material acquisition), and (b) a minimum Interest Coverage Ratio of 2.00:1.00.
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 New Credit Agreement.
The Company’s domestic subsidiaries have guaranteed the Company’s obligations under the New Credit Agreement, and the Company’s obligations and the domestic subsidiaries’ guaranty are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries.
As
of January 1, 2022, $
Senior Notes
On
October 7, 2021, RBCA issued $
16
The Senior Notes were issued pursuant to an indenture, dated as of October 7, 2021 (the “Indenture”), between RBCA and Wilmington Trust, National Association, as trustee. The Indenture contains covenants limiting the ability of the Company to (i) incur additional indebtedness or guarantee indebtedness, (ii) declare or pay dividends, redeem stock or make other distributions to stockholders, (iii) make investments, (iv) create liens or use assets as security in other transactions, (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets, (vi) enter into transactions with affiliates, and (vii) sell or transfer certain assets. These covenants contain various exceptions, limitations and qualifications. At any time that the Senior Notes are rated investment grade, certain covenants will be suspended.
The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by RBC Bearings and certain of RBCA’s existing and future wholly-owned domestic subsidiaries that also guarantee the New Credit Agreement.
Interest
on the Senior Notes accrues from October 7, 2021 at a rate of
The Senior Notes will mature on October 15, 2029. The Company may redeem some or all of the Senior Notes at any time on or after October 15, 2024 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The Company may also redeem up to 40% of the Senior Notes using the proceeds of certain equity offerings completed before October 15, 2024, at a redemption price equal to 104.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to October 15, 2024, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount, plus a “make–whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company sells certain of its assets or experiences specific kinds of changes in control, the Company must offer to purchase the Senior Notes.
The
Senior Notes are reported at carrying value on the consolidated balance sheets. The fair value of the Senior Notes as of January 1, 2022
was $
Foreign Term Loan and Revolving Credit Facility
On
August 15, 2019, one of our foreign subsidiaries, Schaublin SA (“Schaublin”), entered into two separate credit agreements
(the “Foreign Credit Agreements”) with Credit Suisse (Switzerland) Ltd. to (i) finance the acquisition of Swiss Tool, and
(ii) provide future working capital. The Foreign Credit Agreements provided Schaublin with a CHF
Amounts
outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable
margin is based on Schaublin’s ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin’s
margin is
Schaublin’s parent company, Schaublin Holding, has guaranteed Schaublin’s obligations under the Foreign Credit Agreements. Schaublin Holding’s guaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the two operating companies in the Swiss Tool System group of companies.
As
of January 1, 2022, there was approximately $
17
11. Income Taxes
The Company files income tax returns in numerous U.S. and foreign jurisdictions, with returns subject to examination for varying periods, but generally back to and including the year ending April 2, 2005. The Company is no longer subject to U.S. federal tax examination by the Internal Revenue Service for years ending before March 31, 2018.
The
effective income tax rates for the three-month periods ended January 1, 2022 and December 26, 2020 were
The
effective income tax rate for the three-month period ended January 1, 2022 of
The
effective income tax rate for the nine-month period ended January 1, 2022 was
12. Reportable Segments
The
Company previously reported its financial results under
Aerospace/Defense. This segment represents the end markets for the Company’s highly engineered bearings and precision components used in commercial aerospace, defense aerospace, and sea and ground defense applications.
Industrial. This segment represents the end markets for the Company’s highly engineered bearings and precision components used in various industrial applications including: power transmission; construction, mining, energy and specialized equipment manufacturing; semiconductor production equipment manufacturing; agricultural machinery, commercial truck and automotive manufacturing; and tool holding.
Financial information for fiscal 2021 has been recast to conform to the new segment presentation.
18
Segment performance is evaluated based on segment net sales and gross margin. Items not allocated to segment operating income include corporate administrative expenses and certain other amounts.
Three Months Ended | Nine Months Ended | |||||||||||||||
January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Net External Sales | ||||||||||||||||
| Aerospace/Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Gross Margin | ||||||||||||||||
| Aerospace/Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Selling, General & Administrative Expenses | ||||||||||||||||
| Aerospace/Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| Corporate | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Operating Income | ||||||||||||||||
| Aerospace/Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| Corporate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | $ | |||||||||||||
January 1, | April
3, | |||||||
| Total Assets | ||||||||
| Aerospace/Defense | $ | $ | ||||||
| Industrial | ||||||||
| Corporate | ||||||||
| $ | $ | |||||||
13. Dodge Acquisition
On November 1, 2021, the Company
completed the acquisition of Dodge for approximately $
With headquarters in Greenville, South Carolina, Dodge is a leading manufacturer of mounted bearings and mechanical products with market-leading brand recognition. Dodge manufactures a complete line of mounted bearings, enclosed gearing and power transmission components across a diverse set of industrial end markets. Dodge primarily operates across the construction and mining aftermarket, and the food & beverage, warehousing and general machinery verticals, with sales predominately in the Americas.
When
the Company entered into the Dodge acquisition agreement in July 2021, its obligation to pay the purchase price was supported by a $
Acquisition costs incurred in the three- and nine- month periods ended
January 1, 2022 totaled $
19
This acquisition was accounted for as a purchase transaction. The preliminary purchase price allocation is subject to change pending a final valuation of the assets and liabilities acquired. The assets acquired and liabilities assumed were recorded based on their fair values at the date of acquisition as follows:
| November 1,
2021 |
||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaid expenses and other current assets | ||||
| Property, plant and equipment | ||||
| Operating lease assets | ||||
| Goodwill | ||||
| Other intangible assets | ||||
| Other noncurrent assets | ||||
| Accounts payable | ||||
| Accrued rebates | ||||
| Accrued expenses and other current liabilities | ||||
| Deferred tax liabilities | ||||
| Other noncurrent liabilities | ||||
| Net assets acquired | ||||
| Less cash received | ||||
| Net consideration | $ | |||
The goodwill associated with this acquisition is the result of expected synergies from combining the operations of the acquired business with the Company’s operations and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The majority of goodwill is not deductible for tax purposes.
The fair value of the identifiable intangible assets of $
The results of operations
for Dodge have been included in the Company’s financial statements for the period subsequent to the completion of the acquisition on November
1, 2021. Dodge contributed $
Three Months Ended | Nine Months Ended | |||||||||||||||
January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic net income per share available to common stockholders | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share available to common stockholders | $ | $ | $ | |||||||||||||
Upon closing, the Company entered into a transition services agreement
("TSA") with ABB, pursuant to which ABB agreed to support the information technology, human resources and benefits, finance,
tax and treasury functions of the Dodge business for six to twelve months. The Company has the option to extend the support period for
up to a maximum of an additional year for certain IT services. RBC has the right to terminate individual services at any point over the
renewal term. All services are expected to be terminated by the end of the second quarter of fiscal 2023. Since the purchase of the Dodge
business, costs associated with the TSA were $
The acquisition of Dodge resulted in additional lease obligations.
The Company’s total lease obligations, including leases acquired, are $
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement as to Forward-Looking Information
The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources.
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 and engineered products industries are highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer, or a material adverse change in a major customer’s business, could result in a material reduction in our revenues, cash flows and profitability; (c) our results have been and are likely to continue to be impacted by the COVID-19 pandemic; (d) 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, cash flows and profitability; (e) future reductions or changes in U.S. government spending could negatively affect our business; (f) fluctuating supply and costs of subcomponents, raw materials and energy resources, or the imposition of import tariffs, could materially reduce our revenues, cash flows and profitability; (g) our results could be impacted by governmental trade policies and tariffs relating to our supplies imported from foreign vendors or our finished goods exported to other countries; (h) our products are subject to certain approvals and government regulations and the loss of such approvals, or our failure to comply with such regulations, could materially reduce our revenues, cash flows and profitability; (i) the retirement of commercial aircraft could reduce our revenues, cash flows and profitability; (j) work stoppages and other labor problems could materially reduce our ability to operate our business; (k) unexpected equipment failures, catastrophic events or capacity constraints could increase our costs and reduce our sales due to production curtailments or shutdowns; (l) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (m) businesses that we have acquired (such as Dodge) or that we may acquire in the future may have liabilities that are not known to us; (n) goodwill and indefinite-lived intangibles comprise a significant portion of our total assets, and if we determine that goodwill and indefinite-lived intangibles have become impaired in the future, our results of operations and financial condition in such years may be materially and adversely affected; (o) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (p) our international operations are subject to risks inherent in such activities; (q) currency translation risks may have a material impact on our results of operations; (r) we are subject to changes in legislative, regulatory and legal developments involving income and other taxes; (s) we may be required to make significant future contributions to our pension plan; (t) we may incur material losses for product liability and recall-related claims; (u) environmental and health and safety laws and regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (v) our intellectual property and proprietary information 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; (w) cancellation of orders in our backlog could negatively impact our revenues, cash flows and profitability; (x) 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; (y) litigation could adversely affect our financial condition; (z) changes in accounting standards or changes in the interpretations of existing standards could affect our financial results; (aa) risks associated with utilizing information technology systems could adversely affect our operations; (bb) our quarterly performance can be affected by the timing of government product inspections and approvals; (cc) we may not be able to efficiently integrate Dodge into our operations; (dd) we may fail to realize some or all of the anticipated benefits of the Dodge acquisition or those benefits may take longer to realize than expected; (ee) we incurred substantial debt in order to complete the Dodge acquisition, which could constrain our business and exposes us to the risk of defaults under our debt instruments; and (ff) increases in interest rates would increase the cost of servicing the Term Loan Facility and could reduce our profitability. 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 April 3, 2021. 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.
21
Overview
We are a well-known international manufacturer and maker of highly-engineered bearings and precision 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 bearings 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 expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. With 53 facilities in 10 countries, of which 38 are manufacturing facilities, we have been able to significantly broaden our end markets, products, customer base and geographic reach.
Previously we operated under four reportable business segments – Plain Bearings, Roller Bearings, Ball Bearings, and Engineered Products – but the Dodge acquisition has resulted in a change in the internal organization of the Company and how our chief operating decision maker makes operating decisions, assesses the performance of the business, and allocates resources so that we now operate under two reportable business segments – Aerospace/Defense and Industrial:
| ● | Aerospace/Defense. This segment represents the end markets for the Company’s highly engineered bearings and precision components used in commercial aerospace, defense aerospace, and sea and ground defense applications. |
| ● | Industrial. This segment represents the end markets for the Company’s highly engineered bearings and precision components used in various industrial applications including: power transmission; construction, mining, energy and specialized equipment manufacturing; semiconductor production equipment manufacturing; agricultural machinery, commercial truck and automotive manufacturing; and tool holding. |
Financial information for fiscal 2021 has been recast to conform to the new segment presentation.
The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into single and sole-source relationships and long-term purchase agreements, through diversification across multiple market segments within the Aerospace/Defense and 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 precision components through the following efforts:
| ● | 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 bearing 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 include sales to third party distributors and sales to OEMs for replacement products and aftermarket services. The acquisition of Dodge has had a profound impact on our sales volumes to distributors and other aftermarket customers. We will further 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. |
Outlook
Our net sales for the three-month period ended January 1, 2022 increased 83.0% compared to the same period last fiscal year; excluding Dodge sales in the third quarter of fiscal 2022, net sales were up 7.6% period over period. The increase in net sales was a result of a 230.4% increase in our Industrial segment while sales in our Aerospace/Defense segment were flat. Our backlog, as of January 1, 2022, was $552.7 million compared to $394.8 million as of April 3, 2021.
Although we experienced a comparative increase in our commercial aerospace business versus the same period last year, the overall recovery of this space has been marginally slower than anticipated. The orders have started to fill in however, as noted in our backlog increase over recent periods. Defense sales, which represented approximately 38.0% of segment sales this period, were down more than 10.0% year over year. This is in part due to the timing of delivery on parts that require government approval and/or completion of certain milestone achievements prior to invoicing.
22
Excluding Dodge sales, sales to our industrial segment increased 21.3% year over year. This reflects a pattern of sustained growth in our industrial sales, with strong results in several areas. Mining increased by more than 50.0% year over year, driven by strong order activity from large OEM customers. Our oil and gas business this quarter showed the start of a strong recovery which is expected to continue into future periods. Other notable strengths in industrial were in semiconductor and general industrial markets.
On November 1, 2021, RBC completed the acquisition of Dodge, which operates in our Industrial segment, with a significant amount of their sales derived from customers in industrial distribution. Including the positive impact of this acquisition, the Company expects net sales to be approximately $340.0 million to $350.0 million in the fourth quarter of fiscal 2022.
We experienced strong cash flow generation during the third quarter of fiscal 2022 (as discussed in the section “Liquidity and Capital Resources” below). With the addition of Dodge, we expect this trend to continue throughout the fiscal year as customer demand continues to be significant. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future, including at least the next 12 months. For further discussion regarding the funding of the Dodge acquisition, refer to Part I, Item 1 – Notes 5, 10 and 13. As of January 1, 2022, we had cash and cash equivalents of $255.5 million of which approximately $29.4 million was cash held by our foreign operations.
Results of Operations
(dollars in millions)
| Three Months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Total net sales | $ | 267.0 | $ | 145.9 | $ | 121.1 | 83.0 | % | ||||||||
| Net income/(loss) available to common stockholders | $ | (5.8 | ) | $ | 21.6 | $ | (27.4 | ) | (127.0 | )% | ||||||
| Net income/(loss) per share available to common stockholders: diluted | $ | (0.20 | ) | $ | 0.86 | |||||||||||
| Weighted average common shares: diluted | 28,618,495 | 25,060,812 | ||||||||||||||
Our net sales for the three-month period ended January 1, 2022 increased 83.0% compared to the same period last fiscal year; excluding Dodge sales in the third quarter of fiscal 2022, net sales were up 7.6% period over period. The increase in net sales was a result of a 230.4% increase in our Industrial segment. Sales to our Aerospace/Defense segment were led by aircraft OEM, which was up 10.5% compared to the same period in the prior year. Sales to the defense sector were down, principally as a result of production delays, rendering the Aerospace/Defense segment to be even with the prior year. Excluding Dodge sales, sales to our industrial segment increased 21.3% year over year. This reflects a pattern of sustained growth in our industrial sales, with strong results in areas including the semiconductor, mining, energy, and general industrial markets. Within aerospace, we experienced an increase in our commercial aerospace business while the defense end markets were down as compared to the same period last year.
Net income available to common stockholders for the third quarter of fiscal 2022 was a loss of $5.8 million compared to income of $21.6 million for the same period last year. Net income for the third quarter of fiscal 2022 was affected by approximately $7.0 million of pre-tax inventory purchase accounting adjustments associated with the Dodge acquisition, $23.5 million of other costs associated with the acquisition of Dodge, interest expense of $11.9 million, and tax expense of $1.2 million. Net income for the third quarter of fiscal 2021 was affected by $1.1 million of after-tax restructuring costs and related items primarily associated with the consolidation of certain manufacturing facilities, as well as $0.2 million of losses on foreign exchange, partially offset by $1.0 million of tax benefits associated with share-based compensation.
23
| Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Total net sales | $ | 584.1 | $ | 448.7 | $ | 135.4 | 30.2 | % | ||||||||
| Net income available to common stockholders | $ | 26.6 | $ | 64.7 | $ | (38.1 | ) | (58.9 | )% | |||||||
| Net income per share available to common stockholders: diluted | $ | 1.00 | $ | 2.59 | ||||||||||||
| Weighted average common shares: diluted | 26,663,990 | 24,985,848 | ||||||||||||||
Net sales increased $135.4 million, or 30.2% for the nine-month period ended January 1, 2022 over the same period last year. The increase in net sales was mainly the result of a 106.6% increase in Industrial sales partially offset by a 7.8% decrease in Aerospace/Defense sales. The increase in Industrial sales was felt across many end markets, notably in mining, energy, and general industrial markets. The decrease in Aerospace/Defense sales was realized in both our commercial and defense markets. While the first half of the year reflected difficult results in aerospace and defense, we have seen an improvement in our commercial aerospace end market, which has slowed the decline in this segment. This trend is expected to continue to improve in future periods.
Net income for the nine months ended January 1, 2022 was $26.6 million compared to $64.7 million for the same period last year. Net income for the nine-month period in fiscal 2022 was affected by approximately $7.0 million of pre-tax inventory purchase accounting adjustments associated with the Dodge acquisition, $24.9 million of other costs associated with the acquisition of Dodge, interest expense of $27.9 million and tax expense of $10.8 million. Net income for the nine-month period in fiscal 2021 was affected by $0.8 million of capacity inefficiencies driven by the decrease in volume, $5.9 million costs associated with the consolidation of certain manufacturing facilities, and $15.7 million of tax expense.
Gross Margin
Three Months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ | % | |||||||||||||
| Gross Margin | $ | 93.3 | $ | 55.6 | $ | 37.7 | 67.9 | % | ||||||||
| % of net sales | 35.0 | % | 38.1 | % | ||||||||||||
Gross margin was 35.0% of net sales for the third quarter of fiscal 2022 compared to 38.1% for the third quarter of fiscal 2021. Gross margin for the third quarter of fiscal 2022 included the unfavorable impact of $7.0 million of inventory purchase accounting adjustments associated with the Dodge acquisition.
| Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Gross Margin | $ | 219.6 | $ | 171.6 | $ | 48.0 | 27.9 | % | ||||||||
| % of net sales | 37.6 | % | 38.3 | % | ||||||||||||
Gross margin was 37.6% of net sales for the first nine months of fiscal 2022 compared to 38.3% for the same period last year. Gross margin for the nine-month period of fiscal 2022 included the unfavorable impact of $7.0 million of inventory purchase accounting adjustments associated with the Dodge acquisition and $0.9 million of other inventory rationalization costs associated with consolidation efforts at one of our facilities. Gross margin for the nine-month period of fiscal 2021 was impacted by $0.8 million of capacity inefficiencies driven by the decrease in volume and $2.8 million in inventory rationalization costs associated with the consolidation of certain manufacturing facilities.
24
Selling, General and Administrative
| Three Months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $
| % | |||||||||||||
| SG&A | $ | 43.2 | $ | 25.7 | $ | 17.5 | 68.1 | % | ||||||||
| % of net sales | 16.2 | % | 17.6 | % | ||||||||||||
SG&A for the third quarter of fiscal 2022 was $43.2 million, or 16.2% of net sales, as compared to $25.7 million, or 17.6% of net sales, for the same period of fiscal 2021. SG&A for the third quarter of fiscal 2022 includes approximately $12.0 million of costs from the Dodge business. The remainder of the increase is primarily associated with an increase in personnel costs year over year.
Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ | % Change | |||||||||||||
| SG&A | $ | 102.7 | $ | 78.6 | $ | 24.1 | 30.1 | % | ||||||||
| % of net sales | 17.6 | % | 17.5 | % | ||||||||||||
SG&A expenses increased by $24.1 million to $102.7 million for the first nine months of fiscal 2022 compared to $78.6 million for the same period last year. SG&A for the first nine months of fiscal 2022 includes approximately $12.0 million of costs from the Dodge business. The remainder of the increase is primarily associated with an increase in personnel costs year over year.
Other, Net
Three Months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Other, net | $ | 35.8 | $ | 3.3 | $ | 32.5 | 984.8 | % | ||||||||
| % of net sales | 13.4 | % | 2.3 | % | ||||||||||||
Other operating expenses for the third quarter of fiscal 2022 totaled $35.8 million compared to $3.3 million for the same period last year. For the third quarter of fiscal 2022, other operating expenses included $23.5 million of costs associated with the Dodge acquisition, $12.1 million of amortization of intangible assets, and $0.2 million of other items. For the third quarter of fiscal 2021, other operating expenses included $2.6 million of amortization of intangible assets, $0.5 million of restructuring costs and related items, and $0.2 million of other costs.
Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ | % Change | |||||||||||||
| Other, net | $ | 44.7 | $ | 11.3 | $ | 33.4 | 295.6 | % | ||||||||
| % of net sales | 7.7 | % | 2.5 | % | ||||||||||||
Other operating expenses for the first nine months of fiscal 2022 totaled $44.7 million compared to $11.3 million for the same period last year. For the first nine months of fiscal 2022, other operating expenses were comprised mainly of $24.9 million of costs associated with the Dodge acquisition, $17.5 million of amortization of intangible assets, $1.7 million of restructuring and related items, and $0.6 million of other items. For the first nine months of fiscal 2021, other operating expenses were comprised mainly of $7.7 million in amortization of intangibles, $3.1 million of restructuring and related items, $0.4 million of additions to the allowance for doubtful accounts, and $0.1 million of other items.
25
Interest Expense, Net
| Three Months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| Interest expense, net | $ | 11.9 | $ | 0.3 | $ | 11.6 | 3,866.7 | % | ||||||||
| % of net sales | 4.4 | % | 0.2 | % | ||||||||||||
Interest expense, net, generally consists of interest charged on the Company’s debt agreements and amortization of deferred financing fees, offset by interest income (see “Liquidity and Capital Resources” below). Interest expense, net, was $11.9 million for the third quarter of fiscal 2022 compared to $0.3 million for the same period last year. During the third quarter, the Company incurred approximately $1.1 million in costs associated with the amortization of fees for the Bridge Commitment established in association with the Dodge acquisition (see Note 13 of Part 1, Item 1 above), which was replaced during the quarter with the permanent financings discussed in Notes 5 and 9 of Part 1, Item 1 above. The increase in interest cost during the period is a result of the quarterly impact of the permanent financing in place.
| Nine months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| Interest expense, net | $ | 27.9 | $ | 1.1 | $ | 26.8 | 2,436.4 | % | ||||||||
| % of net sales | 4.7 | % | 0.2 | % | ||||||||||||
Interest expense, net was $27.9 million for the first nine months of fiscal 2022 compared to $1.1 million for the first nine months of fiscal 2021. During the nine months ended January 1, 2022 the Company incurred approximately $16.6 million in costs associated with the amortization of fees for the Bridge Commitment and $11.3 million of interest expense on outstanding financing.
Other Non-operating Expense
| Three Months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| Other non-operating expense | $ | 1.4 | $ | (0.1 | ) | $ | 1.5 | 1,500.0 | % | |||||||
| % of net sales | 0.5 | % | 0.0 | % | ||||||||||||
Other non-operating expenses were $1.4 million for the third quarter of fiscal 2022 compared to $0.1 million for the same period in the prior year. For the third quarter of fiscal 2022, other non-operating expenses were comprised of $0.9 million of charges associated with the elimination of a domestic debt facility, $0.4 million of post retirement benefit costs, and $0.1 million of other items. For the third quarter of fiscal 2021, other non-operating income was comprised of $0.5 million of gains on marketable securities, partially offset by $0.2 million of foreign exchange loss and $0.2 million of other items.
| Nine months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| Other non-operating expense | $ | 0.6 | $ | 0.2 | $ | 0.4 | 200.0 | % | ||||||||
| % of net sales | 0.1 | % | 0.0 | % | ||||||||||||
26
Other non-operating expenses were $0.6 million for the first nine months of fiscal 2022 compared to $0.2 million for the same period in the prior year. For the first nine months of fiscal 2022, other non-operating expenses were comprised of $0.9 million of charges associated with the elimination of a debt facility, $0.6 million of post retirement benefit costs, $0.1 million of foreign exchange loss, and $0.2 million of other items partially offset by $1.2 million of income associated with short-term marketable securities. For the first nine months of fiscal 2021, other non-operating expenses were comprised of $0.4 million of foreign exchange loss and $0.3 million of other items, partially offset by $0.5 million of gains on marketable securities.
Income Taxes
| Three Months Ended | ||||||||
| January 1, 2022 |
December 26, 2020 |
|||||||
| Income tax expense | $ | 1.2 | $ | 4.7 | ||||
| Effective tax rate | 105.6 | % | 17.9 | % | ||||
Income tax expense for the three-month period ended January 1, 2022 was $1.2 million compared to $4.7 million for the three-month period ended December 26, 2020. Our effective income tax rate for the three-month period ended January 1, 2022 was 105.6% compared to 17.9% for the three-month period ended December 26, 2020. The effective income tax rate for the three-month period ended January 1, 2022 of 105.6% included $0.5 million of tax benefits associated with share-based compensation partially offset by $0.1 million of discrete tax expense; the effective income tax rate without these items would have been 134.6%. The tax rate for the third quarter was negatively impacted by the inclusion of certain pre-tax acquisition related charges that are not deductible for tax purposes. The effective income tax rate for the three-month period ended December 26, 2020 of 17.9% includes $1.0 million of tax benefit associated with share-based compensation. The effective income tax rate without these benefits and other items for the three-month period ended December 26, 2020 would have been 21.4%.
| Nine months Ended | ||||||||
| January 1, 2022 |
December 26, 2020 |
|||||||
| Income tax expense | $ | 10.8 | $ | 15.7 | ||||
| Effective tax rate | 24.7 | % | 19.6 | % | ||||
Income tax expense for the nine-month period ended January 1, 2022 was $10.8 million compared to $15.7 million for the nine-month period ended December 26, 2020. Our effective income tax rate for the nine-month period ended January 1, 2022 was 24.7% compared to 19.6% for the nine-month period ended December 26, 2020. The effective income tax rate for the nine-month period ended January 1, 2022 of 24.7% included $2.7 million of tax benefits associated with share-based compensation partially offset by $1.9 million of discrete tax expense primarily associated with establishing a valuation allowance on a loss carryforward; the effective income tax rate without these benefits would have been 26.4%. The tax rate for the nine months ended January 1, 2022 was negatively impacted by the inclusion of certain pre-tax acquisition related charges that are not deductible for tax purposes. The effective income tax rate for the nine-month period ended December 26, 2020 of 19.6% includes $1.7 million of tax benefit associated with share-based compensation. The effective income tax rate without these benefits and other items for the nine-month period ended December 26, 2020 would have been 21.5%.
Segment Information
We previously reported our financial results under four operating segments (Plain Bearings; Roller Bearings; Ball Bearings; and Engineered Products), but the Dodge acquisition has resulted in a change in the internal organization of the Company and how our chief operating decision maker makes operating decisions, assesses the performance of the business, and allocates resources. Accordingly, we will now report our financial results under two operating segments: Aerospace/Defense; and Industrial. Financial information for fiscal 2021 has been recast to conform to the new segment presentation. We use gross margin as the primary measurement to assess the financial performance of each reportable segment.
27
Aerospace/Defense Segment
| Three Months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Total net sales | $ | 93.2 | $ | 93.3 | $ | (0.1 | ) | (0.1 | )% | |||||||
| Gross margin | $ | 37.5 | $ | 38.1 | $ | (0.6 | ) | (1.5 | )% | |||||||
| % of segment net sales | 40.2 | % | 41.6 | % | ||||||||||||
| SG&A | $ | 7.1 | $ | 7.1 | $ | (0.0 | ) | (0.0 | )% | |||||||
| % of segment net sales | 7.6 | % | 7.6 | % | ||||||||||||
Net sales decreased $0.1 million, or 0.1%, for the three months ended January 1, 2022 compared to the same period last year. Commercial aerospace increased during the period 7.5% year over year. The aerospace OEM component was up 10.5%, demonstrating early signs of a recovery in the OEM markets. This was further evidenced by continuing expansion of our backlog during the period. Our defense markets, which represent about 38.0% of sales, decreased by approximately 10.3% during the period. These markets were impacted by the timing of deliveries to certain government customers which require sign off or achievement of certain milestones prior to shipment. Overall distribution and aftermarket sales, which represent a little less than 20.0% of segment sales, were down 14.8% year over year.
Gross margin as a percentage of segment net sales was 40.2% for the third quarter of fiscal 2022 compared to 41.6% for the same period last year. The decrease in gross margin as a percentage of net sales was driven by product mix during the period.
| Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Total net sales | $ | 276.5 | $ | 299.8 | $ | (23.3 | ) | (7.8 | )% | |||||||
| Gross margin | $ | 112.7 | $ | 122.0 | $ | (9.3 | ) | (7.6 | )% | |||||||
| % of segment net sales | 40.8 | % | 40.1 | % | ||||||||||||
| SG&A | $ | 21.7 | $ | 21.5 | $ | 0.2 | 0.8 | % | ||||||||
| % of segment net sales | 7.8 | % | 7.2 | % | ||||||||||||
Net sales decreased $23.4 million, or 7.8%, for the nine months ended January 1, 2022 compared to the same period last year. The 7.8% decrease was primarily driven by a 7.5% decrease in our commercial aerospace market, both OEM and aftermarket, while our defense market is down 7.7% year over year for reasons outlined above. During the year, as evidenced in the quarter discussion above, we have noted improvement in the sales and orders to our commercial aerospace customers. Although the recovery has taken longer than previously anticipated, our backlog and recent results reflect the early stages of this process which we expect to continue to see in the future. Overall distribution and aftermarket sales were down 16.9% year over year as excess channel inventory is consumed.
Gross margin as a percentage of net sales increased to 40.8% for the first nine months of fiscal 2022 compared to 40.1% for the same period last year. Gross margin for the nine-month period ended January 1, 2022 was impacted by approximately $0.9 million of inventory rationalization costs associated with a consolidation efforts at one of our facilities.
28
Industrial Segment
| Three Months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| Total net sales | $ | 173.8 | $ | 52.6 | $ | 121.2 | 230.4 | % | ||||||||
| Gross margin | $ | 55.9 | $ | 17.5 | $ | 38.4 | 218.6 | % | ||||||||
| % of segment net sales | 32.2 | % | 33.3 | % | ||||||||||||
| SG&A | $ | 18.2 | $ | 4.4 | $ | 13.8 | 313.3 | % | ||||||||
| % of segment net sales | 10.5 | % | 8.4 | % | ||||||||||||
Net sales increased $121.2 million, or 230.4%, for the three months ended January 1, 2022 compared to the same period last year. The increase was primarily due to two months of Dodge sales in fiscal 2022 and continued strong performance across the majority of our industrial markets. Excluding Dodge sales of $110.0 million, net sales increased $11.2 million, or 21.3%, period over period. This increase was driven by performance in semiconductor, energy, mining, and the general industrial markets. Sales to distribution and the aftermarket reflected more than 60.0% of our quarterly industrial sales. These distribution and aftermarket sales increased 445.1% compared to the same quarter in the prior year, and 15.5% on an organic basis.
Gross margin for the three months ended January 1, 2022 was 32.2% of net sales, compared to 33.3% in the comparable period in fiscal 2021. The gross margin for the third quarter of fiscal 2022 included the unfavorable impact of $7.0 million of inventory purchase accounting adjustments associated with the Dodge acquisition. Gross margin for the third quarter of fiscal 2021 was impacted by approximately $0.8 million of inventory rationalization costs associated with the consolidation of certain manufacturing facilities.
| Nine months Ended | ||||||||||||||||
January 1, 2022 | December 26, 2020 | $ Change | % Change | |||||||||||||
| Total net sales | $ | 307.6 | $ | 148.9 | $ | 158.7 | 106.6 | % | ||||||||
| Gross margin | $ | 106.9 | $ | 49.7 | $ | 57.2 | 115.2 | % | ||||||||
| % of segment net sales | 34.8 | % | 33.4 | % | ||||||||||||
| SG&A | $ | 29.8 | $ | 13.0 | $ | 16.8 | 129.2 | % | ||||||||
| % of segment net sales | 9.7 | % | 8.7 | % | ||||||||||||
Net sales increased $158.7 million, or 106.6%, for the nine months ended January 1, 2022 compared to the same period last year. The increase was primarily due to two months of Dodge sales in fiscal 2022 and strong performance across our industrial markets. Excluding Dodge sales, net sales increased $48.7 million, or 32.7%, period over period. Sales to distribution and the aftermarket increased 182.6% over last year, and 28.3% on an organic basis. The overall segment increase, excluding the addition of Dodge, was driven by performance in semiconductor, energy, mining, and the general industrial markets.
Gross margin for the nine months ended January 1, 2022 was 34.8% of net sales, compared to 33.4% in the comparable period in fiscal 2021. The gross margin for the first nine months of fiscal 2022 included the unfavorable impact of $7.0 million of inventory purchase accounting adjustments associated with the Dodge acquisition. Gross margin for the first nine months of fiscal 2021 was impacted by approximately $2.8 million in inventory rationalization costs associated with the consolidation of certain manufacturing facilities..
29
Corporate
| Three Months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| SG&A | $ | 17.9 | $ | 14.2 | $ | 3.7 | 25.9 | % | ||||||||
| % of total net sales | 6.7 | % | 9.8 | % | ||||||||||||
Corporate SG&A was $17.9 million, or 6.7% of sales for the third quarter of fiscal 2022 compared to $14.2 million, or 9.8% of sales for the same period last year. The year over year increase was primarily due to an increase in personnel costs and professional fees during the period.
| Nine months Ended | ||||||||||||||||
| January 1, 2022 |
December 26, 2020 |
$ Change |
% Change |
|||||||||||||
| SG&A | $ | 51.2 | $ | 44.1 | $ | 7.1 | 16.1 | % | ||||||||
| % of total net sales | 8.8 | % | 9.8 | % | ||||||||||||
Corporate SG&A increased $7.1 million for the nine months ended January 1, 2022 compared to the same period last year due to an increase in personnel costs, professional fees, and travel related costs.
Liquidity and Capital Resources
(dollars in millions in tables)
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, including the Dodge acquisition completed on November 1, 2021. 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 Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future. For further discussion regarding the funding of the Dodge acquisition, refer to Part I, Item 1 – Notes 5, 10 and 13.
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, relocate, 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.
Liquidity
As of January 1, 2022, we had cash and cash equivalents of $255.5 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 subsidiaries.
30
Domestic Credit Facility
The Company entered into the New Credit Agreement with Wells Fargo and the other lenders party thereto on November 1, 2021 and terminated the 2015 Credit Agreement. The New Credit Agreement provides the Company with (a) the $1,300.0 million Term Loan Facility, which was used to fund a portion of the cash purchase price for the acquisition of Dodge and to pay related fees and expenses, and (b) the $500.0 million Revolving Credit Facility. Debt issuance costs associated with the New Credit Agreement totaled $14.9 million and will be amortized over the life of the New Credit Agreement. When the 2015 Credit Agreement was terminated the Company wrote off $890 of previously unamortized debt issuance costs relating to the 2015 Credit Agreement.
Amounts outstanding under the Facilities generally bear interest at either, at the Company’s option, (a) a base rate determined by reference to the higher of (i) Wells Fargo’s prime lending rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the one-month LIBOR rate plus 1.00% or (b) the 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 0.75% for base rate loans and 1.75% for LIBOR rate loans. The Facilities are subject to a “LIBOR” floor of 0.00% and contain “hard-wired” LIBOR replacement provisions as set forth in the New Credit Agreement. As of January 1, 2022, the Company’s commitment fee rate is 0.25% and the letter of credit fee rate is 1.75%.
The Term Loan Facility and the Revolving Credit Facility will mature on November 2, 2026. The Company can elect to prepay some or all of the outstanding balance from time to time without penalty. Commencing one full fiscal quarter after the execution of the New Credit Agreement, the Term Loan Facility will amortize in quarterly installments as set forth in Part I, Item 1 – Note 10, with the balance payable on the Maturity Date unless otherwise extended in accordance with the terms of the Term Loan Facility.
The New Credit Agreement requires the Company to comply with various covenants, including the following financial covenants beginning with the test period ending December 31, 2021: (a) a maximum Total Net Leverage Ratio of 5.50:1.00, which maximum Total Net Leverage Ratio shall decrease during certain subsequent test periods as set forth in the New Credit Agreement (provided that, no more than once during the term of the Facilities, such maximum ratio applicable at such time may be increased by the Borrower by 0.50:1.00 for a period of twelve (12) months after the consummation of a material acquisition), and (b) a minimum Interest Coverage Ratio of 2.00:1.00.
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 New Credit Agreement.
The Company’s domestic subsidiaries have guaranteed the Company’s obligations under the New Credit Agreement, and the Company’s obligations and the domestic subsidiaries’ guaranty are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries.
As of January 1, 2022, $1,300.0 million was outstanding under the Term Loan Facility and none of the Revolving Credit Facility was being utilized to provide letters of credit to secure the Company’s obligations relating to certain insurance programs, and the Company had the ability to borrow up to an additional $496.5 million under the Revolving Credit Facility.
Senior Notes
On October 7, 2021, RBCA issued $500.0 million aggregate principal amount of the Senior Notes and used the approximately $492.0 million of net proceeds from the issuance (after deducting initial purchasers’ discounts and commissions and offering expenses) to fund a portion of the cash purchase price for the acquisition of Dodge.
The Senior Notes were issued pursuant to the Indenture with Wilmington Trust, National Association, as trustee. The Indenture contains covenants limiting the ability of the Company to (i) incur additional indebtedness or guarantee indebtedness, (ii) declare or pay dividends, redeem stock or make other distributions to stockholders, (iii) make investments, (iv) create liens or use assets as security in other transactions, (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets, (vi) enter into transactions with affiliates, and (vii) sell or transfer certain assets. These covenants contain various exceptions, limitations and qualifications. At any time that the Senior Notes are rated investment grade, certain covenants will be suspended.
The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by RBC Bearings and certain of RBCA’s existing and future wholly-owned domestic subsidiaries that also guarantee the New Credit Agreement.
Interest on the Senior Notes accrues from October 7, 2021 at a rate of 4.375% and will be payable semi–annually in cash in arrears on April 15 and October 15 of each year, commencing April 15, 2022.
31
The Senior Notes will mature on October 15, 2029. The Company may redeem some or all of the Senior Notes at any time on or after October 15, 2024 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The Company may also redeem up to 40% of the Senior Notes using the proceeds of certain equity offerings completed before October 15, 2024, at a redemption price equal to 104.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to October 15, 2024, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount, plus a “make–whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company sells certain of its assets or experiences specific kinds of changes in control, the Company must offer to purchase the Senior Notes.
Foreign Term Loan and Revolving Credit Facility
Our Foreign Credit Agreements with Credit Suisse (Switzerland) Ltd. provided us with financing to acquire Swiss Tool in 2019 and provide future working capital for Schaublin, our foreign subsidiary. The Foreign Credit Agreements provide (a) the Foreign Term Loan, a CHF 15.0 million (approximately $15.4 million) term loan, which expires on July 31, 2024, and (b) the Foreign Revolver, a CHF 15.0 million (approximately $15.4 million) revolving credit facility, which continues in effect until terminated by either Schaublin or Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements totaled CHF 0.3 million (approximately $0.3 million) and are being amortized throughout the life of the Foreign Credit Agreements. As of January 1, 2022, approximately $0.1 million in unamortized debt issuance costs remain.
Amounts outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable margin is based on Schaublin’s ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin’s margin is 1.00%.
The Foreign Credit Agreements require Schaublin to comply with various covenants, which are tested annually on March 31. These covenants include, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 2.50 to 1 as of March 31, 2021 and thereafter. Schaublin is also required to maintain an economic equity of CHF 20.0 million at all times. The Foreign Credit Agreements allow Schaublin to, among other things, incur other debt or liens and acquire or dispose of assets provided that Schaublin complies with certain requirements and limitations of the Foreign Credit Agreements. As of January 1, 2022, Schaublin was in compliance with all such covenants.
Schaublin’s parent company, Schaublin Holding, has guaranteed Schaublin’s obligations under the Foreign Credit Agreements. Schaublin Holding’s guaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the three operating companies in the Swiss Tool System group of companies.
As of January 1, 2022, there was approximately $2.1 million outstanding under the Foreign Term Loan and no amounts outstanding under the Foreign Revolver. Schaublin has the ability to borrow up to an additional $16.1 million under the Foreign Revolver as of January 1, 2022. Schaublin’s required future principal payments are approximately $0 for the remainder of fiscal 2022, $0 for fiscal 2023 and fiscal 2024 and $2.1 million for fiscal 2025.
Cash Flows
Nine-month Period Ended January 1, 2022 Compared to the Nine-month Period Ended December 26, 2020
The following table summarizes our cash flow activities:
| FY22 | FY21 |
$ Change | ||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 133.4 | $ | 110.6 | $ | 22.8 | ||||||
| Investing activities | (2,839.5 | ) | (83.6 | ) | (2,755.9 | ) | ||||||
| Financing activities | 2,810.3 | (4.6 | ) | 2,814.9 | ||||||||
| Effect of exchange rate changes on cash | 0.2 | 0.5 | (0.3 | ) | ||||||||
| Increase in cash and cash equivalents | $ | 104.4 | $ | 22.9 | $ | 81.5 | ||||||
During the first nine months of fiscal 2022, we generated cash of $133.4 million from operating activities compared to $110.6 million of cash generated during the same period of fiscal 2021. The increase of $22.8 million for fiscal 2022 was mainly a result of the favorable impact of a net change in operating assets and liabilities of $24.4 million and a favorable change in non-cash charges of $30.2 million, offset by a decrease in net income of $31.8 million. It is important to note that our net income was affected by approximately $21.6 million of non-recurring costs related to the Dodge acquisition. Further, cash flows from operating activities only include two months of cash flow activity from Dodge. The favorable change in operating assets and liabilities is detailed in the table below, while the increase in non-cash charges resulted from $17.2 million of amortization of deferred financing costs, $2.2 million of share-based compensation charges, $12.6 million of depreciation and amortization and $0.9 million of costs related to the extinguishment of debt partially offset by unfavorable changes of $1.8 million in deferred taxes and $0.9 million of loss on disposition of assets.
32
The following chart summarizes the favorable change in operating assets and liabilities of $24.4 million for fiscal 2022 versus fiscal 2021 and the favorable change of $19.1 million for fiscal 2021 versus fiscal 2020.
| FY22 | FY21 | |||||||
| Cash provided by (used in): | ||||||||
| Accounts receivable | $ | (29.2 | ) | $ | 13.0 | |||
| Inventory | (3.8 | ) | 16.0 | |||||
| Prepaid expenses and other current assets | (10.1 | ) | 1.8 | |||||
| Other noncurrent assets | 11.5 | (5.3 | ) | |||||
| Accounts payable | 45.6 | (11.4 | ) | |||||
| Accrued expenses and other current liabilities | 10.6 | (0.5 | ) | |||||
| Other noncurrent liabilities | (0.2 | ) | 5.5 | |||||
| Total change in operating assets and liabilities: | $ | 24.4 | $ | 19.1 | ||||
During the first nine months of fiscal 2022, we used $2,839.5 million for investing activities as compared to $83.6 million used during the first nine months of fiscal 2021. This increase in cash used was attributable to the acquisition of Dodge for $2,908.2 million and an increase in capital expenditures of $13.0 million partially offset by proceeds from the sale of $120.5 million of highly liquid marketable securities during the current period and $45.1 million less in purchase of marketable securities compared to the same period in the prior year. The prior year also included $0.3 million of purchase accounting adjustments related to the acquisition of Swiss Tool.
During the first nine months of fiscal 2022, we generated $2,810.3 million from financing activities compared to $4.6 million used during the first nine months of fiscal 2021. This increase in cash generated was primarily attributable to $1,286.2 million of net proceeds received from the Term Loan Facility, $494.2 million of net proceeds received from the Senior Notes, $605.5 million of net proceeds received from the issuance of common stock during the current period, $445.3 million of net proceeds received from the issuance of preferred stock during the current period, and $11.6 million more exercises of share-based awards partially offset by $20.0 million of finance fees paid in connection with credit facilities and senior notes in the current period, $5.8 million more payments made on outstanding debt, $1.4 million more treasury stock purchases and $0.7 million in principal payments made on finance lease obligations during the current fiscal year.
Capital Expenditures
Our capital expenditures were $14.9 million and $21.8 million for the three- and nine-month periods ended January 1, 2022, respectively. We expect to make additional capital expenditures of $7.0 million to $12.0 million during the remainder of fiscal 2022 in connection with our existing business. We expect to fund these capital expenditures principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions.
Obligations and Commitments
The Company’s fixed contractual obligations and commitments are materially consistent with what we disclosed in our Form 10-K for the fiscal year ended April 3, 2021 with the exception of what we’ve disclosed within Note 10 included in Part I, Item 1 of this report and additional lease obligations resulting from the acquisition of Dodge. The Company’s total lease obligations are $3.0 million for the remainder of fiscal 2022, $11.9 million for fiscal 2023, $10.1 million for fiscal 2024, $8.6 million for fiscal 2025, $8.0 million for fiscal 2026, $8.2 million for fiscal 2027 and $71.1 million thereafter.
Other Matters
Critical Accounting Policies and 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 2021 Annual Report on 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 nine months of fiscal 2022 other than the following:
Valuation of Business Combinations
We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition, including identifiable intangible assets, which either arise from a contractual or legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocate to goodwill any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred through other, net on the consolidated statements of operations.
33
Off-Balance Sheet Arrangements
As of January 1, 2022, we had no significant off-balance sheet arrangements other than $3.6 million of outstanding standby letters of credit, all of which were under the Revolving Credit Facility.
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 our credit agreements. 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. Our operations in the following countries utilize the following currencies as their functional currency:
| ● Australia – Australian dollar | ● India – rupee | ||
| ● Canada – Canadian dollar | ● Mexico – peso | ||
| ● China – Chinese yuan | ● Poland – zloty | ||
| ● France – euro | ● Switzerland – Swiss franc | ||
| ● Germany – euro |
As a result, we are exposed to risk associated with fluctuating currency exchange rates between the U.S. dollar and these currencies. Foreign currency transaction gains and losses are included in earnings. Approximately 12% and 11% of our net sales were impacted by foreign currency fluctuations for the three- and nine-month periods ended January 1, 2022, respectively, compared to 11% and 10% for the three- and nine-month periods ended December 26, 2020, respectively. 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 operations’ 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, and is reclassified into earnings when the hedged transaction affects earnings. As of January 1, 2022, we had no derivatives.
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 January 1, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of January 1, 2022, 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 three-month period ended January 1, 2022 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).
As discussed within Note 13 included within Part I, Item 1 of this report, we acquired Dodge on November 1, 2021. We are currently in the process of integrating the internal controls and procedures of Dodge into our internal controls over financial reporting. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, we will include the internal controls and procedures of Dodge in our annual assessment of the effectiveness of our internal control over financial reporting for our 2023 fiscal year.
34
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.
Item 1A. Risk Factors
There have been no material changes to our risk factors and uncertainties since the most recent filing of our Form 10-K, besides those noted below. For a discussion of the risk factors, refer to Part I, Item 2, “Cautionary Statement as to Forward-Looking Information” contained in this quarterly report and Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended April 3, 2021.
Quarterly performance can be affected by the timing of government product inspections and approvals.
A portion of our quarterly revenue is associated with contracts with the U.S. government that require onsite inspection and approval of the products by government personnel before we may ship the products, and we have no control over the timing of those inspections and approvals. If products scheduled for delivery in one quarter are not inspected or approved until the following quarter, the delay would adversely affect our sales and profitability for the quarter in which the shipments were scheduled.
We may fail to realize some or all of the anticipated benefits of the Dodge acquisition or those benefits may take longer to realize than expected.
We believe that there are significant benefits and synergies to be realized through leveraging the products, scale and combined enterprise customer bases of RBC and Dodge. However, the efforts to realize these benefits and synergies will be a complex process and may disrupt both companies’ existing operations if not implemented in a timely and efficient manner. The full benefits of the Dodge acquisition, including any anticipated sales or growth opportunities, may not be realized as expected or may not be achieved within the time frames we anticipate, or at all. Any data on the expected synergies from the Dodge acquisition included in the unaudited pro forma condensed combined financial information that was included in our Current Report on Form 8-K filed with the SEC on September 20, 2021 is based on various adjustments, assumptions and preliminary estimates. Such data have not been prepared, reviewed or analyzed by a third-party and may not be an accurate indication of the actual synergies we will realize, if any, from the Dodge acquisition and the integration of Dodge into our business. Failure to achieve the anticipated benefits of the acquisition could adversely affect our results of operations or cash flows.
We may not be able to efficiently integrate Dodge into our operations.
The future success of the Dodge acquisition, including its anticipated benefits and cost savings, depends, in part, on our ability to optimize our operations and integrate Dodge, its systems, operations and personnel into our existing business. These activities will require time and involve dedication of various resources of the Company that would otherwise be dedicated to our existing operations. These integration efforts may accordingly adversely affect our other operations to the extent such efforts take resources or attention away from our other operations. If we experience difficulties in the integration process, the anticipated benefits of the Dodge acquisition may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on us for an undetermined period. There can be no assurance that we will realize the operational or financial gains from the Dodge acquisition that we anticipated when originally determining to acquire Dodge.
Additional challenges, risks and uncertainties we may encounter as part of the integration process include the following:
| ● | we may face significant costs of integration and compliance with any laws or regulations applicable to Dodge or our combined company; |
| ● | we may experience delays in the integration of management teams, strategies, operations, products and services; |
| ● | there may be differences in business backgrounds, corporate cultures and management philosophies that may delay the successful integration of Dodge’s management personnel into our operations; |
| ● | we may be unable to retain key Dodge employees; |
| ● | we may not be able to create and enforce uniform standards, controls, procedures, policies and information systems across our combined company; |
35
| ● | we may face challenges in integrating complex systems, technology, networks and other assets of Dodge into our operations in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; |
| ● | there may be potential unknown liabilities and unforeseen increased expenses associated with the Dodge acquisition, including costs to integrate Dodge beyond current estimates; and |
| ● | we may experience disruptions of, or the loss of momentum in, our or Dodge’s ongoing businesses or inconsistencies in standards, controls, procedures and policies. |
Any of these factors could adversely affect our or Dodge’s ability to maintain relationships with customers, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the Dodge acquisition, which could reduce earnings or otherwise adversely affect our business and financial results.
We incurred substantial debt in order to complete the Dodge acquisition, which could constrain our business and exposes us to the risk of defaults under our debt instruments.
As of January 1, 2022, we had approximately $1,790.3 million of total debt, net of deferred issuance costs, as a result of the completion of the Dodge acquisition. This debt could or will have important consequences, including, but not limited to:
| ● | this debt requires us to make significant interest and principal payments in the future; |
| ● | a substantial portion of our cash flow from operations will be used to repay the principal and interest on our debt, thereby reducing the funds available to us for other purposes including for strategic acquisitions, working capital, capital expenditures, and general corporate purposes; |
| ● | our flexibility in planning for and reacting to changes in our business, the competitive landscape and the markets in which we operate may be limited; and |
| ● | we may be placed at a competitive disadvantage relative to other companies in our industry with less debt or comparable debt on more favorable terms. |
Our ability to make scheduled payments on and to refinance our indebtedness depends on and is subject to our financial and operating performance and no assurance can be given that our business will generate sufficient cash flow to service our debt.
Additionally, our ability to comply with the financial and other covenants contained in our debt instruments could be affected by, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy, or changes in industry-specific or general economic conditions which are beyond our control. The breach of any of these covenants could result in a default or event of default under the New Credit Agreement and the indenture that governs the Notes, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our prospects, business, financial condition, results of operations and cash flows could be materially and adversely affected and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.
36
Increases in interest rates would increase the cost of servicing Term Loan Facility and could reduce our profitability.
The $1,300.0 million outstanding under the Term Loan Facility bears interest at a variable rate. As a result, increases in interest rates would increase the cost of servicing the Term Loan Facility, and could materially reduce our profitability and cash flows. We have not entered into interest rate cap agreements on the Term Loan Facility. In addition, a transition away from the London Interbank Offered Rate (LIBOR) as a benchmark for establishing the applicable interest rate may affect the cost of servicing the Term Loan Facility. The Financial Conduct Authority of the United Kingdom has announced that it plans to no longer persuade or compel banks to submit rates for the calculation of LIBOR at some point in the future. Although the Term Loan Facility provides for alternative base rates, such alternative base rates may or may not be related to LIBOR, and the consequences of the phase–out of LIBOR cannot be entirely predicted at this time. The Credit Agreement for the Term Loan Facility includes language which would allow us to modify the rate used if and when the LIBOR phase-out occurs. The Company is currently evaluating whether or not to enter into an interest rate swap agreement to hedge our risk.
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
In 2019, our Board of Directors authorized us to repurchase up to $100.0 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 SEC 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 under the 2019 plan for the three months ended January 1, 2022 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) |
||||||||||||
| 10/03/2021 – 10/30/2021 | 171 | $ | 226.32 | 171 | $ | 81,184 | ||||||||||
| 10/31/2021 – 11/27/2021 | — | — | — | 81,184 | ||||||||||||
| 11/28/2021 – 01/01/2022 | 6,490 | 194.34 | 6,490 | $ | 79,923 | |||||||||||
| Total | 6,661 | $ | 195.16 | 6,661 | ||||||||||||
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
37
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 | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | 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. |
38
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: | February 10, 2022 | ||
| By: | /s/ Robert M. Sullivan | ||
| Name: | Robert M. Sullivan | ||
| Title: | Chief Financial Officer | ||
| Date: | February 10, 2022 | ||
39
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 | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | 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. |
40