RBC Bearings INC - Quarter Report: 2008 December (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended December 27, 2008
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to .
Commission
File Number: 333-124824
RBC
Bearings Incorporated
(Exact
name of registrant as specified in its charter)
|
Delaware
|
95-4372080
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
One
Tribology Center
|
|
|
06478
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(203)
267-7001
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
Accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
As of
February 2, 2009, RBC Bearings Incorporated had 21,709,236 shares of Common
Stock outstanding.
TABLE
OF CONTENTS
|
Part
I - FINANCIAL INFORMATION
|
3
|
|
|
ITEM
1.
|
Unaudited
Consolidated Financial Statements
|
3
|
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
12
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
|
ITEM
4.
|
Controls
and Procedures
|
21
|
|
|
Changes
in Internal Control over Financial Reporting
|
21
|
|
22
|
||
|
ITEM
1.
|
Legal
Proceedings
|
22
|
| ITEM 1A. |
Risk
Factors
|
22
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
23
|
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
Other
Information
|
23
|
|
|
ITEM
6.
|
Exhibits
|
23
|
2
PART
I. FINANCIAL INFORMATION
ITEM 1. Financial
Statements
RBC
Bearings Incorporated
Consolidated
Balance Sheets
(dollars
in thousands, except share and per share data)
|
December 27,
2008
|
March 29,
2008
|
|||||||
|
ASSETS
|
(Unaudited)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 15,098 | $ | 9,859 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $1,191
at December 27, 2008 and $1,018 at March 29,
2008
|
62,954 | 66,137 | ||||||
|
Inventory
|
135,105 | 123,820 | ||||||
|
Deferred
income taxes
|
4,787 | 5,567 | ||||||
|
Prepaid
expenses and other current assets
|
11,789 | 9,976 | ||||||
|
Total
current assets
|
229,733 | 215,359 | ||||||
|
Property,
plant and equipment, net
|
83,562 | 73,243 | ||||||
|
Goodwill
|
32,829 | 31,821 | ||||||
|
Intangible
assets, net of accumulated amortization of $4,742 at December
27, 2008 and $3,583 at March 29, 2008
|
12,863 | 11,404 | ||||||
|
Other
assets
|
4,827 | 5,285 | ||||||
|
Total
assets
|
$ | 363,814 | $ | 337,112 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 22,201 | $ | 24,851 | ||||
|
Accrued
expenses and other current liabilities
|
16,934 | 13,489 | ||||||
|
Current
portion of long-term debt
|
1,190 | 750 | ||||||
|
Total
current liabilities
|
40,325 | 39,090 | ||||||
|
Long-term
debt, less current portion
|
53,000 | 57,000 | ||||||
|
Deferred
income taxes
|
5,259 | 6,064 | ||||||
|
Other
non-current liabilities
|
14,355 | 11,048 | ||||||
|
Total
liabilities
|
112,939 | 113,202 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $.01 par value; authorized shares: 10,000,000 at December 27, 2008
and March 29, 2008; none issued and outstanding
|
— | — | ||||||
|
Common
stock, $.01 par value; authorized shares: 60,000,000 at December 27, 2008
and March 29, 2008; issued and outstanding shares: 21,838,486 at December
27, 2008 and 21,782,186 at March 29, 2008
|
218 | 218 | ||||||
|
Additional
paid-in capital
|
186,393 | 184,285 | ||||||
|
Accumulated
other comprehensive income (loss)
|
(1,288 | ) | 1,312 | |||||
|
Retained
earnings
|
69,659 | 41,688 | ||||||
|
Treasury
stock, at cost, 129,250 shares at December 27, 2008 and 113,322 shares at
March 29, 2008
|
(4,107 | ) | (3,593 | ) | ||||
|
Total
stockholders' equity
|
250,875 | 223,910 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 363,814 | $ | 337,112 | ||||
See
accompanying notes.
3
RBC
Bearings Incorporated
Consolidated
Statements of Operations
(dollars
in thousands, except share and per share data)
(Unaudited)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 27,
2008
|
December 29,
2007
|
December 27,
2008
|
December 29,
2007
|
|||||||||||||
|
Net
sales
|
$ | 85,281 | $ | 80,407 | $ | 271,955 | $ | 238,462 | ||||||||
|
Cost
of sales
|
56,779 | 52,853 | 182,681 | 157,226 | ||||||||||||
|
Gross
margin
|
28,502 | 27,554 | 89,274 | 81,236 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
14,403 | 12,042 | 41,482 | 35,232 | ||||||||||||
|
Other,
net
|
1,304 | 401 | 2,783 | 1,117 | ||||||||||||
|
Total
operating expenses
|
15,707 | 12,443 | 44,265 | 36,349 | ||||||||||||
|
Operating
income
|
12,795 | 15,111 | 45,009 | 44,887 | ||||||||||||
|
Interest
expense, net
|
749 | 849 | 2,080 | 2,748 | ||||||||||||
|
Loss
on early extinguishment of debt
|
— | — | 319 | 27 | ||||||||||||
|
Other
non-operating expense (income)
|
325 | (360 | ) | 491 | (712 | ) | ||||||||||
|
Income
before income taxes
|
11,721 | 14,622 | 42,119 | 42,824 | ||||||||||||
|
Provision
for income taxes
|
4,021 | 5,041 | 14,148 | 14,669 | ||||||||||||
|
Net
income
|
$ | 7,700 | $ | 9,581 | $ | 27,971 | $ | 28,155 | ||||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.36 | $ | 0.45 | $ | 1.30 | $ | 1.31 | ||||||||
|
Diluted
|
$ | 0.35 | $ | 0.44 | $ | 1.29 | $ | 1.29 | ||||||||
|
Weighted
average common shares:
|
||||||||||||||||
|
Basic
|
21,575,756 | 21,458,764 | 21,568,227 | 21,422,581 | ||||||||||||
|
Diluted
|
21,745,996 | 21,833,870 | 21,763,105 | 21,811,793 | ||||||||||||
See
accompanying notes.
4
RBC
Bearings Incorporated
Consolidated
Statements of Cash Flows
(dollars
in thousands)
(Unaudited)
|
Nine Months Ended
|
||||||||
|
December 27,
2008
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December 29,
2007
|
|||||||
|
Cash flows from operating
activities:
|
||||||||
|
Net
income
|
$ | 27,971 | $ | 28,155 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
|
8,387 | 6,725 | ||||||
|
Excess
tax benefits from stock-based compensation
|
(99 | ) | (8,789 | ) | ||||
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Deferred
income taxes
|
(18 | ) | (1,238 | ) | ||||
|
Amortization
of intangible assets
|
1,159 | 891 | ||||||
|
Amortization
of deferred financing costs
|
174 | 168 | ||||||
|
Stock-based
compensation
|
1,756 | 770 | ||||||
|
Loss
on disposition of assets
|
615 | 25 | ||||||
|
Loss
on early extinguishment of debt (non-cash portion)
|
319 | 27 | ||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||
|
Accounts
receivable
|
3,138 | (403 | ) | |||||
|
Inventory
|
(10,858 | ) | (11,124 | ) | ||||
|
Prepaid
expenses and other current assets
|
(1,807 | ) | (993 | ) | ||||
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Other
non-current assets
|
(997 | ) | 1,671 | |||||
|
Accounts
payable
|
(2,506 | ) | 2,712 | |||||
|
Accrued
expenses and other current liabilities
|
3,155 | 6,726 | ||||||
|
Other
non-current liabilities
|
2,176 | (717 | ) | |||||
|
Net
cash provided by operating activities
|
32,565 | 24,606 | ||||||
|
Cash flows from investing
activities:
|
||||||||
|
Purchase
of property, plant and equipment
|
(17,727 | ) | (14,288 | ) | ||||
|
Acquisition
of businesses, net of cash acquired
|
(6,579 | ) | (7,947 | ) | ||||
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Proceeds
from sale of assets
|
562 | 14 | ||||||
|
Net
cash used in investing activities
|
(23,744 | ) | (22,221 | ) | ||||
|
Cash flows from financing
activities:
|
||||||||
|
Net
increase (decrease) in revolving credit facility
|
12,000 | (7,000 | ) | |||||
|
Exercise
of stock options
|
253 | 1,753 | ||||||
|
Excess
tax benefits from stock-based compensation
|
99 | 8,789 | ||||||
|
Repurchase
of common stock
|
(515 | ) | (750 | ) | ||||
|
Retirement
of industrial revenue bonds
|
(15,500 | ) | (1,155 | ) | ||||
|
Payments
on notes payable
|
(60 | ) | — | |||||
|
Principal
payments on capital lease obligations
|
(144 | ) | (141 | ) | ||||
|
Financing
fees paid in connection with senior credit facility
|
(27 | ) | (53 | ) | ||||
|
Net
cash provided by (used in) financing activities
|
(3,894 | ) | 1,443 | |||||
|
Effect
of exchange rate changes on cash
|
312 | 182 | ||||||
|
Cash and cash
equivalents:
|
||||||||
|
Increase
during the period
|
5,239 | 4,010 | ||||||
|
Cash,
at beginning of period
|
9,859 | 5,184 | ||||||
|
Cash,
at end of period
|
$ | 15,098 | $ | 9,194 | ||||
|
Supplemental disclosures of
cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | 1,848 | $ | 2,464 | ||||
|
Income
taxes
|
$ | 14,154 | $ | 5,727 | ||||
See
accompanying notes.
5
RBC
Bearings Incorporated
Notes
to Unaudited Interim Consolidated Financial Statements
(dollars
in thousands, except share and per share data)
The
consolidated financial statements included herein have been prepared by RBC
Bearings Incorporated, a Delaware corporation (collectively with its
subsidiaries, the “Company”), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The March 29, 2008 fiscal
year end balance sheet data have been derived from the Company’s audited
financial statements, but do not include all disclosures required by generally
accepted accounting principles in the United States. The interim financial
statements included with this report have been prepared on a consistent basis
with the Company’s audited financial statements and notes thereto included in
the Company’s Annual Report on Form 10-K for the fiscal year ended March 29,
2008.
The consolidated financial statements
include the accounts of RBC Bearings Incorporated and its wholly-owned
subsidiary, Roller Bearing Company of America, Inc. (“RBCA”) and its
wholly-owned subsidiaries, Industrial Tectonics Bearings Corporation (“ITB”),
RBC Linear Precision Products, Inc. (“LPP”), RBC Nice Bearings, Inc.
(“Nice”), RBC Precision Products - Bremen, Inc. (“Bremen (MBC)”), RBC
Precision Products - Plymouth, Inc. (“Plymouth”), Tyson Bearings, Inc.
(“Tyson”), Schaublin Holdings S.A. and its wholly-owned subsidiaries
(“Schaublin”), RBC de Mexico S DE RL DE CV (“Mexico”), RBC Oklahoma, Inc.
(“RBC Oklahoma”), RBC Aircraft Products, Inc. (“API”), Shanghai
Representative office of Roller Bearing Company of America, Inc. (“RBC
Shanghai”), RBC Southwest Products, Inc. (“SWP”), All Power Manufacturing Co.
(“All Power”), RBC Bearings U.K. Limited and its wholly-owned subsidiary Phoenix
Bearings Limited (“Phoenix”) and RBC CBS Coastal Bearing Services LLC (“CBS”),
as well as the Transport Dynamics (“TDC”), Heim (“Heim”), Engineered Components
(“ECD”), A.I.D. Company (“AID”), BEMD Company (“BEMD”) and PIC Design
(“PIC Design”) divisions of RBCA. U.S. Bearings (“USB”) is a division of SWP and
Schaublin USA is a division of Nice. All material intercompany
balances and transactions have been eliminated in consolidation.
These
financial statements reflect all adjustments, accruals and estimates consisting
only of items of a normal recurring nature, which are, in the opinion of
management, necessary for the fair presentation of the consolidated financial
condition and consolidated results of operations for the interim periods
presented. These financial statements should be read in conjunction
with the Company’s audited financial statements and notes thereto included in
the Annual Report on Form 10-K for the year ended March 29, 2008.
The
Company operates in four reportable business segments—roller bearings, plain
bearings, ball bearings, other and corporate—in which it manufactures roller
bearing components and assembled parts and designs and manufactures
high-precision roller and ball bearings. The Company sells to a wide variety of
original equipment manufacturers (“OEMs”) and distributors who are widely
dispersed geographically.
The results of operations for the
three month and nine month periods ended December 27, 2008 are not necessarily
indicative of the operating results for the full year. The nine month periods
ended December 27, 2008 and December 29, 2007 each include 39 weeks. The amounts
shown are in thousands, unless otherwise indicated.
Certain
reclassifications have been made to prior year’s financial statements to conform
with current year presentation.
Adoption
of Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 157 “Fair Value
Measurements” (“SFAS No. 157”) in order to establish a single definition of fair
value and a framework for measuring fair value that is intended to result in
increased consistency and comparability in fair value measurements. In February
2008, the FASB issued Staff Position FAS 157-2, which delayed by one year the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The delay
pertains to items including, but not limited to, non-financial assets and
non-financial liabilities initially measured at fair value in a business
combination, reporting units measured at fair value in the first step of
evaluating goodwill for impairment, indefinite-lived intangible assets measured
at fair value for impairment assessment, and long-lived assets measured at fair
value for impairment assessment. The adoption of SFAS No. 157 as of
the beginning of the 2009 fiscal year did not have a significant impact on the
measurement of the Company’s financial assets and liabilities. The Company plans
to adopt the remaining provisions of SFAS No. 157 as of the beginning of its
2010 fiscal year and does not expect SFAS No. 157 to have a material impact on
its results of operations and financial position.
6
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Liabilities, Including
an amendment of FASB Statement No. 115,” (“SFAS No. 159”). This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. The Company chose to not adopt the fair value
measurement provisions of SFAS No. 159.
Pending
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and
SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” These
new standards will significantly change the financial accounting and reporting
of business combination transactions and noncontrolling (or minority) interests
in consolidated financial statements.
In
comparison to current practice, the most significant changes to business
combination accounting pursuant to SFAS No. 141(R) include requirements
to:
|
|
·
|
Recognize,
with certain exceptions, 100 percent of the fair values of assets
acquired, liabilities assumed, and noncontrolling interests in
acquisitions of less than a 100 percent controlling interest when the
acquisition constitutes a change in control of the acquired
entity.
|
|
|
·
|
Measure
acquirer shares issued in consideration for a business combination at fair
value on the acquisition date.
|
|
|
·
|
Recognize
contingent consideration arrangements at their acquisition-date fair
values, with subsequent changes in fair value generally reflected in
earnings.
|
|
|
·
|
With
certain exceptions, recognize preacquisition loss and gain contingencies
at their acquisition-date fair
values.
|
|
|
·
|
Capitalize
in-process research and development (IPR&D) assets
acquired.
|
|
|
·
|
Expense,
as incurred, acquisition-related transaction
costs.
|
|
|
·
|
Capitalize
acquisition-related restructuring costs only if the criteria in SFAS No.
146 are met as of the acquisition
date.
|
|
|
·
|
Recognize
changes that result from a business combination transaction in an
acquirer’s existing income tax valuation allowances and tax uncertainty
accruals as adjustments to income tax
expense.
|
The
premise of SFAS No. 160 is based on the economic entity concept of consolidated
financial statements. Under the economic entity concept, all residual
economic interest holders in an entity have an equity interest in the
consolidated entity, even if the residual interest is relative to only a portion
of the entity (i.e., a residual interest in a subsidiary). Therefore, SFAS No.
160 requires that a noncontrolling interest in a consolidated subsidiary be
displayed in the consolidated statement of financial position as a separate
component of equity because the noncontrolling interests meet the definition of
equity of the consolidated entity. SFAS No. 141(R) is required to be adopted
concurrently with SFAS No. 160 and is effective for business combination
transactions for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, which for
the Company is fiscal 2010. Early adoption is prohibited. The Company
is currently assessing the impact that SFAS No. 141(R) and SFAS No. 160 will
have on its results of operations and financial position.
7
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an amendment
of FASB Statement No. 133.” SFAS No. 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” SFAS
No.161 requires entities to provide greater transparency about (a) how and why
an entity uses derivative instruments, (b) how derivative instruments and hedged
items are accounted for under SFAS 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flow. To meet those objectives, SFAS
No. 161 requires (1) qualitative disclosures about objectives for using
derivatives by primary underlying risk exposure (e.g., interest rate, credit or
foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow
hedge, net investment hedge, and non-hedges), (2) information about the volume
of derivative activity in a flexible format the preparer believes is the most
relevant and practicable, (3) tabular disclosures about balance sheet location
and gross fair value amounts of derivative instruments, income statement and
other comprehensive income (OCI) location and amounts of gains and losses on
derivative instruments by type of contract (e.g., interest rate contracts,
credit contracts or foreign exchange contracts), and (4) disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years or interim periods
beginning after November 15, 2008. Early application is encouraged, as are
comparative disclosures for earlier periods, but neither are
required. The Company currently has only one interest rate swap and
will adopt the disclosure provisions of SFAS No. 161 in the fourth quarter of
fiscal 2009.
1. Acquisition
On June 6, 2008, the Company acquired
the assets of Precision Industrial Components LLC (“PIC Design”) for $6,579 in
cash and the assumption of certain liabilities. As a result of the acquisition,
the Company recorded intangible assets of $1,055, fixed assets of $1,678,
goodwill of $998, other long-term assets of $57, other long-term liabilities of
$420 and $3,211 of working capital. PIC Design, located in
Middlebury, Connecticut, is a manufacturer and supplier of tight-tolerance,
precision mechanical components for use in the motion control industry. PIC
Design is included in the Other segment. Proforma net sales and net income
inclusive of PIC Design are not materially different from the amounts
as reported in the accompanying consolidated statements of
operations.
2.
Net Income Per Common Share
Basic net
income per common share is computed by dividing net income available to common
stockholders by the weighted-average number of common shares
outstanding.
Diluted
net income per common share is computed by dividing net income by the sum of the
weighted-average number of common shares, dilutive common share equivalents then
outstanding using the treasury stock method. Common share equivalents consist of
the incremental common shares issuable upon the exercise of stock
options.
The table
below reflects the calculation of weighted-average shares outstanding for each
period presented as well as the computation of basic and diluted net income per
common share:
8
|
Three Months Ended
|
Nine months Ended
|
|||||||||||||||
|
December 27,
2008
|
December 29,
2007
|
December 27,
2008
|
December 29,
2007
|
|||||||||||||
|
Net
income
|
$ | 7,700 | $ | 9,581 | $ | 27,971 | $ | 28,155 | ||||||||
|
Denominator
for basic net income per common share—weighted-average
shares
|
21,575,756 | 21,458,764 | 21,568,227 | 21,422,581 | ||||||||||||
|
Effect
of dilution due to employee stock options
|
170,240 | 375,106 | 194,878 | 389,212 | ||||||||||||
|
Denominator
for diluted net income per common share — weighted-average
shares
|
21,745,996 | 21,833,870 | 21,763,105 | 21,811,793 | ||||||||||||
|
Basic
net income per common share
|
$ | 0.36 | $ | 0.45 | $ | 1.30 | $ | 1.31 | ||||||||
|
Diluted
net income per common share
|
$ | 0.35 | $ | 0.44 | $ | 1.29 | $ | 1.29 | ||||||||
3. Inventory
Inventories
are stated at the lower of cost or market, using the first-in, first-out method,
and are summarized below:
|
December 27,
2008
|
March 29,
2008
|
|||||||
|
Raw
materials
|
$ | 12,123 | $ | 11,561 | ||||
|
Work
in process
|
41,319 | 38,488 | ||||||
|
Finished
goods
|
81,663 | 73,771 | ||||||
| $ | 135,105 | $ | 123,820 | |||||
4. Comprehensive
Income
Total
comprehensive income is as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 27,
2008
|
December 29,
2007
|
December 27,
2008
|
December 29,
2007
|
|||||||||||||
|
Net
income
|
$ | 7,700 | $ | 9,581 | $ | 27,971 | $ | 28,155 | ||||||||
|
Net
prior service cost and actuarial losses, net of taxes
|
(14 | ) | 15 | (41 | ) | 43 | ||||||||||
|
Change
in fair value of derivatives, net of taxes
|
(969 | ) | — | (552 | ) | — | ||||||||||
|
Foreign
currency translation adjustments
|
682 | 474 | (2,007 | ) | 1,377 | |||||||||||
|
Total
comprehensive income
|
$ | 7,399 | $ | 10,070 | $ | 25,371 | $ | 29,575 | ||||||||
5.
Debt
On October 27, 2008, Schaublin entered
into a new bank credit facility with Credit Suisse (the “Swiss Credit Facility”)
which replaced the prior bank credit facility of December 8, 2003 and its
amendment of November 8, 2004. This facility provides for up to 4,000
Swiss francs, or $3,721, of revolving credit loans and letters of
credit. Borrowings under the Swiss Credit Facility bear interest at
Credit Suisse’s prevailing prime bank rate. As of December 27, 2008,
there were no borrowings under the Swiss Credit Facility.
9
On January 8, 2008, the Company entered
into an interest rate swap agreement with a total notional value of $30,000 to
hedge a portion of its variable rate debt. Under the terms of the agreement, the
Company pays interest at a fixed rate (3.64%) and receives interest
at variable rates. The maturity date of the interest swap is June 24, 2011. The
fair value of this swap at December 27, 2008 was a liability of $1,645 and was
included in other current liabilities. This instrument is designated and
qualifies as a cash flow hedge. Accordingly, the gain or loss on both the
hedging instrument and the hedged item attributable to the hedged risk are
recognized in other comprehensive income.
On May 1, 2008, the Company voluntarily
paid off the Series 1999 Industrial Revenue Bond (“IRB”), the prinicipal amount
of which was $4,800. In addition, on June 2, 2008, the Company voluntarily paid
off the Series 1994 A and B IRBs, the principal amounts of which were $7,700 and
$3,000, respectively. The Company recorded a non-cash pre-tax charge of
approximately $319 in the nine month period ended December 27, 2008 to write off
deferred financing costs associated with the voluntary payoff of the
IRBs.
The
balances payable under all borrowing facilities are as follows:
|
December 27,
2008
|
March 29,
2008
|
|||||||
|
KeyBank
Credit Agreement
|
||||||||
|
Five-year
senior secured revolving credit facility; amounts outstanding bear
interest at the prime rate or LIBOR, plus a specified margin, depending on
the type of borrowing being made (prime rate 3.50% and 5.25% at December
27, 2008 and March 29, 2008, respectively, and LIBOR 1.44% and 2.69% at
December 27, 2008 and March 29, 2008, respectively)
|
$ | 53,000 | $ | 41,000 | ||||
|
Note Payable, payable
through September 2009
|
1,190 | 1,250 | ||||||
|
Industrial Development Revenue
Bonds
|
||||||||
|
Series
1994 A, bears interest at a variable rate payable monthly through
September 2017
|
— | 7,700 | ||||||
|
Series
1994 B, bears interest at a variable rate, payable monthly through
December 2017
|
— | 3,000 | ||||||
|
Series
1999, bearing interest at variable rates, payable monthly through April
2024
|
— | 4,800 | ||||||
|
Total
Debt
|
54,190 | 57,750 | ||||||
|
Less:
Current Portion
|
1,190 | 750 | ||||||
|
Long-Term
Debt
|
$ | 53,000 | $ | 57,000 | ||||
The current portion of long-term debt
as of December 27, 2008 include $440 notes payable related to the acquisitions
of AID and BEMD and a $750 note payable related to the All Power
acquisition.
6. Income
Taxes
The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. With few exceptions, the Company is
no longer subject to state or foreign income tax examinations by tax authorities
for years ending before March 31, 2001. The Company is no
longer subject to U.S. federal tax examination by the Internal Revenue Service
for years ending before March 31, 2003.
The
Company does not expect any material changes to the unrecognized tax benefits
within the next twelve months. The total amount of unrecognized tax
benefits during the three month period ended December 27, 2008 increased by
$2,829 as a result of filing amended tax returns relating to research
credits.
The
effective income tax rates for the three and nine month periods ended December
27, 2008 and December 29, 2007 were 34.3% and 34.5% and 33.6% and 34.3%,
respectively. The effective income tax rates are below the U.S. statutory rate
due to foreign income taxed at lower rates and a special manufacturing deduction
in the U.S.
10
7. Reportable
Segments
The Company operates through operating
segments for which separate financial information is available, and for which
operating results are evaluated regularly by the Company's chief operating
decision maker in determining resource allocation and assessing performance.
Those operating segments with similar economic characteristics and that meet all
other required criteria, including nature of the products and production
processes, distribution patterns and classes of customers, are aggregated as
reportable segments. Certain other operating segments do not exhibit the common
attributes mentioned above and do not meet the quantitative thresholds for
separate disclosure, and their information is combined and disclosed as “Other.”
There is also a segment reflecting corporate charges.
The Company has four reportable
business segments engaged in the manufacture and sale of the
following:
Roller
Bearings. Roller bearings are anti-friction bearings that use
rollers instead of balls. The Company manufactures four basic types of roller
bearings: heavy duty needle roller bearings with inner rings, tapered roller
bearings, track rollers and aircraft roller bearings.
Plain
Bearings. Plain bearings are produced with either
self-lubricating or metal-to-metal designs and consist of several sub-classes,
including rod end bearings, spherical plain bearings and journal bearings.
Unlike ball bearings, which are used in high-speed rotational applications,
plain bearings are primarily used to rectify inevitable misalignments in various
mechanical components.
Ball
Bearings. The Company manufactures four basic types of ball
bearings: high precision aerospace, airframe control, thin section and
commercial ball bearings which are used in high-speed rotational
applications.
Other. Other
consists of four minor operating locations that do not fall into the above
segmented categories. The Company produces precision ground ball bearing screws
that offer repeatable positioning accuracy in machine tools, transfer lines,
robotic handling and semiconductor equipment. The Company’s precision machine
tool collets provide effective part holding and accurate part
location during machining operations. Additionally, the Company provides
machining for integrated bearing assemblies and aircraft components for the
commercial and defense aerospace markets and tight-tolerance, precision
mechanical components for use in the motion control industry.
Corporate. Corporate
consists of expenses incurred at the corporate office.
Segment
performance is evaluated based on segment net sales and operating income. Items
not allocated to segment operating income include corporate administrative
expenses and certain other amounts.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 27,
2008
|
December 29,
2007
|
December 27,
2008
|
December 29,
2007
|
|||||||||||||
|
Net
External Sales
|
||||||||||||||||
|
Roller
|
$ | 20,969 | $ | 22,832 | $ | 71,592 | $ | 69,582 | ||||||||
|
Plain
|
39,898 | 38,653 | 126,794 | 112,548 | ||||||||||||
|
Ball
|
16,157 | 13,004 | 47,758 | 40,257 | ||||||||||||
|
Other
|
8,257 | 5,918 | 25,811 | 16,075 | ||||||||||||
| $ | 85,281 | $ | 80,407 | $ | 271,955 | $ | 238,462 | |||||||||
|
Operating
Income
|
||||||||||||||||
|
Roller
|
$ | 5,842 | $ | 6,813 | $ | 19,700 | $ | 20,698 | ||||||||
|
Plain
|
9,569 | 10,504 | 31,611 | 30,115 | ||||||||||||
|
Ball
|
3,867 | 2,794 | 11,108 | 9,455 | ||||||||||||
|
Other
|
692 | 744 | 1,945 | 1,753 | ||||||||||||
|
Corporate
|
(7,175 | ) | (5,744 | ) | (19,355 | ) | (17,134 | ) | ||||||||
| $ | 12,795 | $ | 15,111 | $ | 45,009 | $ | 44,887 | |||||||||
|
Geographic External
Sales
|
||||||||||||||||
|
Domestic
|
$ | 72,150 | $ | 67,330 | $ | 229,430 | $ | 202,291 | ||||||||
|
Foreign
|
13,131 | 13,077 | 42,525 | 36,171 | ||||||||||||
| $ | 85,281 | $ | 80,407 | $ | 271,955 | $ | 238,462 | |||||||||
|
Intersegment
Sales
|
||||||||||||||||
|
Roller
|
$ | 2,599 | $ | 2,378 | $ | 7,828 | $ | 6,659 | ||||||||
|
Plain
|
317 | 373 | 1,379 | 875 | ||||||||||||
|
Ball
|
2,003 | 1,948 | 6,195 | 5,381 | ||||||||||||
|
Other
|
4,977 | 4,352 | 14,680 | 12,923 | ||||||||||||
| $ | 9,896 | $ | 9,051 | $ | 30,082 | $ | 25,838 | |||||||||
11
All
intersegment sales are eliminated in consolidation.
8. Restructuring
of Operations
In
December 2008, the Company completed the consolidation and rationalization of
its Walterboro, South Carolina plant. This resulted in a total charge of $1,398
of which $405 was related to the net disposal and impairment of fixed assets,
$741 was for impairment of excess inventory, $165 for severance costs and $87
for other miscellaneous items. Of the total charge, $792 was recorded in the
third quarter of this fiscal year. These costs are classified in the
other, net section of the consolidated statements of operations.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary
Statement As To Forward-Looking Information
The
information in this discussion contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the “safe harbor” created
by those sections. All statements other than statements of historical facts,
included in this quarterly report on Form 10-Q regarding our strategy, future
operations, future financial position, future revenues, projected costs,
prospects and plans and objectives of management are “forward-looking
statements” as the term is defined in the Private Securities Litigation Reform
Act of 1995.
The
words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,”
“plans,” “projects,” “will,” “would” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. We may not actually achieve the
plans, intentions or expectations disclosed in our forward-looking statements
and you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the
plans, intentions and expectations disclosed in the forward-looking statements
that we make. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements, including, without
limitation: (a) the bearing industry is highly competitive, and this
competition could reduce our profitability or limit our ability to grow; (b) the
loss of a major customer could result in a material reduction in our revenues
and profitability; (c) weakness in any of the industries in which our customers
operate, as well as the cyclical nature of our customers’ businesses generally,
could materially reduce our revenues and profitability; (d) future reductions or
changes in U.S. government spending could negatively affect our business; (e)
fluctuating supply and costs of raw materials and energy resources could
materially reduce our revenues, cash flow from operations and profitability; (f)
our products are subject to certain approvals, and the loss of such approvals
could materially reduce our revenues and profitability; (g) restrictions in our
indebtedness agreements could limit our growth and our ability to respond to
changing conditions; (h) work stoppages and other labor problems could
materially reduce our ability to operate our business; (i) our business is
capital intensive and may consume cash in excess of cash flow from our
operations; (j) unexpected equipment failures, catastrophic events or capacity
constraints may increase our costs and reduce our sales due to production
curtailments or shutdowns; (k) we may not be able to continue to make the
acquisitions necessary for us to realize our growth strategy; (l) the costs and
difficulties of integrating acquired businesses could impede our future growth;
(m) we depend heavily on our senior management and other key personnel, the loss
of whom could materially affect our financial performance and prospects; (n) our
international operations are subject to risks inherent in such activities; (o)
currency translation risks may have a material impact on our results of
operations; (p) we may be required to make significant future contributions to
our pension plan; (q) we may incur material losses for product liability and
recall related claims; (r) environmental regulations impose substantial costs
and limitations on our operations, and environmental compliance may be more
costly than we expect; (s) our intellectual property and other proprietary
rights are valuable, and any inability to protect them could adversely affect
our business and results of operations; in addition, we may be subject to
infringement claims by third parties; (t) cancellation of orders in our backlog
of orders could negatively impact our revenues; (u) if we fail to maintain an
effective system of internal controls, we may not be able to accurately report
our financial results or prevent fraud; and (v) provisions in our charter
documents may prevent or hinder efforts to acquire a controlling interest in us.
Additional information regarding these and other risks and uncertainties is
contained in our periodic filings with the SEC, including, without limitation,
the risks identified under the heading “Risk Factors” set forth in the Annual
Report on Form 10-K for the year ended March 29, 2008 and the Quarterly Report
on Form 10-Q for the period ended September 27, 2008. 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.
12
Overview
We are an
international manufacturer and marketer of highly engineered precision plain,
roller and ball bearings. Bearings, which 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 bearing categories, we
focus primarily on highly technical or regulated bearing products for
specialized markets that require sophisticated design, testing and manufacturing
capabilities. We believe our unique expertise has enabled us to garner leading
positions in many of the product markets in which we primarily compete. We have
been providing bearing solutions to our customers since 1919. Over the past ten
years, we have significantly broadened our end markets, products, customer base
and geographic reach. We currently have 25 facilities, of which 22 are
manufacturing facilities, in four countries.
Demand
for bearings generally follows the market for products in which bearings are
incorporated and the economy as a whole. Purchasers of bearings include
industrial equipment and machinery manufacturers, producers of commercial and
military aerospace equipment such as missiles and radar systems, agricultural
machinery manufacturers, construction and specialized equipment manufacturers
and automotive and commercial truck manufacturers. The markets for our products
are cyclical, and general market conditions could negatively impact our
operating results. We have endeavored to mitigate the cyclicality of our product
markets by entering into sole-source relationships and long-term purchase
orders, through diversification across multiple market segments within the
aerospace and defense and diversified industrial segments, by increasing sales
to the aftermarket and by focusing on developing highly customized
solutions.
Outlook
Backlog, as of December 27, 2008, was
$221.4 million versus $192.7 million as of December 29, 2007. Management
believes that operating cash flows and available credit under the secured credit
facility will provide adequate resources to fund internal and external growth
initiatives for the foreseeable future.
Results
of Operations
The following table sets forth the
various components of our consolidated statements of operations, expressed as a
percentage of net sales, for the periods indicated that are used in connection
with the discussion herein.
13
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 27,
2008
|
December 29,
2007 |
December 27,
2008
|
December 29,
2007
|
|||||||||||||
|
Statement of Operations
Data:
|
||||||||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Gross
margin
|
33.4 | 34.3 | 32.8 | 34.1 | ||||||||||||
|
Selling,
general and administrative
|
16.9 | 15.0 | 15.3 | 14.8 | ||||||||||||
|
Other,
net
|
1.5 | 0.5 | 1.0 | 0.5 | ||||||||||||
|
Operating
income
|
15.0 | 18.8 | 16.5 | 18.8 | ||||||||||||
|
Interest
expense, net
|
0.9 | 1.0 | 0.7 | 1.2 | ||||||||||||
|
Loss
on early extinguishment of debt
|
— | — | 0.1 | — | ||||||||||||
|
Other
non-operating expense (income)
|
0.4 | (0.4 | ) | 0.2 | (0.3 | ) | ||||||||||
|
Income
before income taxes
|
13.7 | 18.2 | 15.5 | 17.9 | ||||||||||||
|
Provision
for income taxes
|
4.7 | 6.3 | 5.2 | 6.1 | ||||||||||||
|
Net
income
|
9.0 | 11.9 | 10.3 | 11.8 | ||||||||||||
Three
Month Period Ended December 27, 2008 Compared to Three Month Period Ended
December 29, 2007
Net Sales. Net
sales for the three month period ended December 27, 2008 were $85.3 million, an
increase of $4.9 million, or 6.1%, compared to $80.4 million for the
same period in the prior year. During the three month period ended December 27,
2008, we experienced net sales growth in three of our four business segments,
driven by demand across our end markets as well as our continued efforts to
supply new products to existing and new customers. Net sales to aerospace and
defense customers grew 21.2% in the three month period ended December 27, 2008
compared to the same period last year, driven mainly by commercial and military
aerospace aftermarket, OEM demand and the $3.1 million contribution of
newly-acquired divisions AID, BEMD and PIC Design. Our net sales to
our diversified industrial customers declined 10.2% in the three month period
ended December 27, 2008 compared to the same period last year due to a decline
in the overall global industrial markets. The inclusion of our PIC Design
acquisition offset this decline by $1.6 million.
The Plain
Bearings segment achieved net sales of $39.9 million for the three month
period ended December 27, 2008, an increase of $1.2 million, or 3.2%, compared
to $38.7 million for the same period in the prior year. The commercial and
military aerospace market grew $2.2 million due to an increase in airframe and
aerospace bearing shipments to aircraft manufacturers, continued demand for
aftermarket product and $1.5 million from the inclusion of newly-acquired
division AID. This was offset by a $1.0 million decline in net sales to our
diversified industrial customers.
The
Roller Bearings segment achieved net sales of $21.0 million for the three
month period ended December 27, 2008, a decrease of $1.8 million, or 8.2%,
compared to $22.8 million for the same period in the prior year. General
industrial demand declined $1.6 million compared to the same period last fiscal
year, while the commercial and military aerospace market declined by $0.2
million attributable primarily to the timing of airframe and
aerospace bearing shipments.
The Ball
Bearings segment achieved net sales of $16.2 million for the three month period
ended December 27, 2008, an increase of $3.2 million, or 24.2%, compared to
$13.0 million for the same period in the prior year. Sales to
the aerospace and defense segment increased $4.5 million due to continued demand
from aircraft manufacturers offset by a decline in the industrial sector of $1.3
million compared to the same period last fiscal year.
14
The Other
segment, which is focused mainly on the sale of precision ball screws, machine
tool collets and precision mechanical components, achieved net sales of
$8.3 million for the three month period ended December 27, 2008, an
increase of $2.4 million, or 39.5%, compared to $5.9 million for the same
period last year. This increase was due to the inclusion of $3.1 million from
newly-acquired divisions BEMD and PIC Design offset by a decline of $0.7 million
in the sale of machine tool collets in Europe.
Gross
Margin. Gross margin was $28.5 million, or 33.4% of net
sales, for the three month period ended December 27, 2008, versus
$27.6 million, or 34.3% of net sales, for the comparable period in fiscal
2008. The decrease in our gross margin as a percentage of net sales was mainly
driven by start-up costs associated with our expansion into new bearing products
and the inclusion of recent acquisitions which are currently operating at lower
gross margin levels.
Selling, General and
Administrative. SG&A expenses increased by
$2.4 million, or 19.6%, to $14.4 million for the three month period
ended December 27, 2008 compared to $12.0 million for the same period in
fiscal 2008. As a percentage of net sales, SG&A increased to 16.9% for the
three month period ended December 27, 2008 from 15.0% for the three month period
ended December 29, 2007. The increase of $2.4 million was primarily due to $1.3
million related to additional personnel necessary to support our increased
volume, $0.6 million from the inclusion of AID, BEMD and PIC Design, $0.4
million of additional stock compensation expense and $0.1 million for severance
relating to workforce reductions.
Other, net. Other,
net for the three month period ended December 27, 2008 increased by $0.9
million, to $1.3 million compared to $0.4 million for the
comparable period in fiscal 2008. For the three month period ended December 27,
2008, other, net consisted of $0.4 million of amortization of intangibles, $0.8
million related to the consolidation of our Walterboro, South Carolina
operations and $0.1 million of miscellaneous expenses. For the three month
period ended December 29, 2007, other, net consisted of $0.3 million of
amortization of intangibles and $0.1 million of moving expenses related to
the relocation of our aircraft products manufacturing facility.
Operating Income. The
increase in operating income in one of our four segments was driven primarily by
volume. Our operating income as a percentage of net sales declined in three of
our four business segments mainly driven by start-up costs associated with our
expansion into new bearing products and the inclusion of recent acquisitions
which are currently operating at lower gross margin levels.
Operating
income was $12.8 million, or 15.0% of net sales, for the three month period
ended December 27, 2008 compared to $15.1 million, or 18.8% of net sales,
for the three month period ended December 29, 2007. Operating income for the
Plain Bearings segment was $9.6 million for the three month period ended
December 27, 2008, or 24.0% of net sales, compared to $10.5 million for the
same period last year, or 27.2% of net sales. Our Roller Bearings segment
achieved an operating income for the three month period ended December 27, 2008
of $5.8 million, or 27.9% of net sales, compared to $6.8 million, or
29.8% of net sales, for the three month period ended December 29,
2007. Our Ball Bearings segment achieved an operating income of
$3.9 million, or 23.9% of net sales, for the three month period ended
December 27, 2008, compared to $2.8 million, or 21.5% of net sales, for the
same period in fiscal 2008. Our Other segment achieved an operating income of
$0.7 million, or 8.4% of net sales, for the three month period ended
December 27, 2008, compared to $0.7 million, or 12.6% of net sales, for the
same period in fiscal 2008.
Other Non-Operating Expense
(Income). We incurred a foreign exchange loss of approximately
$0.6 million for the three month period ended December 27, 2008 related
primarily to a loan to our Phoenix subsidiary and denominated in British Pound
Sterling. This was partially offset by payments received under the Continued
Dumping and Subsidy Offset Act (CDSOA). We received approximately $0.4 million
and $0.3 million in the three month periods ended December 27, 2008 and December
29, 2007, respectively, in payments under the CDSOA for 2008 and 2007. The CDSOA
distributes antidumping duties paid by overseas companies to domestic firms hurt
by unfair trade.
15
Interest Expense,
net. Interest expense, net decreased by $0.1 million, or
11.8%, to $0.7 million in the three month period ended December 27, 2008,
compared to $0.8 million in the same period last fiscal year, mainly driven by
debt reduction.
Income Before Income
Taxes. Income before taxes decreased by $2.9 million, to
$11.7 million for the three month period ended December 27, 2008 compared
to $14.6 million for the three month period ended December 29,
2007.
Income
Taxes. Income tax expense for the three month period ended
December 27, 2008 was $4.0 million compared to $5.0 million for the three
month period ended December 29, 2007. Our effective income tax rate for the
three month period ended December 27, 2008 was 34.3% compared to 34.5% for the
three month period ended December 29, 2007. The effective income tax
rates are below the U.S. statutory rate due to foreign income taxed at lower
rates and a special manufacturing deduction in the U.S.
Net Income. Net
income decreased by $1.9 million to $7.7 million for the three month
period ended December 27, 2008 compared to $9.6 million for the three month
period ended December 29, 2007.
Nine
Month Period Ended December 27, 2008 Compared to Nine Month Period Ended
December 29, 2007
Net Sales. Net
sales for the nine month period ended December 27, 2008 were $272.0 million, an
increase of $33.5 million, or 14.0%, compared to $238.5 million for
the same period in the prior year. During the nine month period ended December
27, 2008, we experienced net sales growth in all four of our business segments,
driven by demand across our end markets as well as our continued efforts to
supply new products to existing and new customers. Net sales to aerospace and
defense customers grew 23.6% in the nine month period ended December 27, 2008
compared to the same period last year, driven mainly by commercial and military
aerospace aftermarket, OEM demand and the $9.3 million contribution of
newly-acquired divisions AID, BEMD and PIC Design. Our net sales to our
diversified industrial customers increased 3.9% in the nine month period ended
December 27, 2008 compared to the same period last year. The inclusion of
our PIC Design acquisition contributed $3.9 million towards this
increase.
The Plain
Bearings segment achieved net sales of $126.8 million for the nine month
period ended December 27, 2008, an increase of $14.3 million, or 12.7%, compared
to $112.5 million for the same period in the prior year. The commercial
and military aerospace market grew $8.9 million due to an increase in airframe
and aerospace bearing shipments to aircraft manufacturers, continued demand for
aftermarket product and $4.4 million from the inclusion of AID. This was
complemented by a $1.0 million increase in net sales to our diversified
industrial customers.
The
Roller Bearings segment achieved net sales of $71.6 million for the nine
month period ended December 27, 2008, an increase of $2.0 million, or 2.9%,
compared to $69.6 million for the same period in the prior year. This
increase was due to $1.4 million from the commercial and military aerospace
market combined with growth of $0.6 million attributable to general industrial
demand compared to the same period last fiscal year.
The Ball
Bearings segment achieved net sales of $47.8 million for the nine month period
ended December 27, 2008, an increase of $7.5 million, or 18.6%, compared to
$40.3 million for the same period in the prior
year. Increased aerospace and defense demand contributed $8.1
million of the increase offset by a $0.6 million decline in the industrial
sector compared to the same period last fiscal year.
The Other
segment, which is focused mainly on the sale of precision ball screws, machine
tool collets and precision mechanical components, achieved net sales of
$25.8 million for the nine month period ended December 27, 2008, an
increase of $9.7 million, or 60.6%, compared to $16.1 million for the same
period last year. This increase was due to increased sales of machine tool
collets in Europe combined with $8.9 million from the inclusion of BEMD and PIC
Design.
16
Gross
Margin. Gross margin was $89.3 million, or 32.8% of net
sales, for the nine month period ended December 27, 2008, versus
$81.2 million, or 34.1% of net sales, for the comparable period in fiscal
2008. The decrease in our gross margin as a percentage of net sales was mainly
driven by start-up costs associated with our expansion into new bearing products
and the inclusion of recent acquisitions which are currently
operating at lower gross margin levels.
Selling, General and
Administrative. SG&A expenses increased by
$6.3 million, or 17.7%, to $41.5 million for the nine month period
ended December 27, 2008 compared to $35.2 million for the same period in
fiscal 2008. As a percentage of net sales, SG&A increased to 15.3% for the
nine month period ended December 27, 2008 compared to 14.8% for the comparable
period last fiscal year. The increase of $6.3 million was primarily due to $3.5
million related to additional personnel necessary to support our increased
volume, $1.7 million from the inclusion of AID, BEMD and PIC Design, $1.0
million of additional stock compensation expense and $0.1 million relating to
workforce reductions.
Other, net. Other,
net for the nine month period ended December 27, 2008 increased by $1.7 million,
to $2.8 million compared to $1.1 million for the comparable
period in fiscal 2008. For the nine month period ended December 27, 2008, other,
net consisted of $1.2 million of amortization of intangibles, $1.4 million
related to the consolidation of our Walterboro, South Carolina operations and
$0.2 million of miscellaneous expenses. For the nine month period
ended December 29, 2007, other, net consisted of $0.9 million of amortization of
intangibles and $0.2 million of moving expenses related to the relocation
of our aircraft products manufacturing facility.
Operating Income. The
increase in operating income in three of our four segments was driven primarily
by volume and acquisitions. Our operating income as a percentage of net sales
decreased in all four business segments mainly driven by start-up costs
associated with our expansion into new bearing products and the inclusion of
recent acquisitions which are currently operating at lower gross margin
levels.
Operating
income was $45.0 million, or 16.5% of net sales, for the nine month period
ended December 27, 2008 compared to $44.9 million, or 18.8% of net sales,
for the nine month period ended December 29, 2007. Operating income for the
Plain Bearings segment was $31.6 million for the nine month period ended
December 27, 2008, or 24.9% of net sales, compared to $30.1 million for the
same period last year, or 26.8% of net sales. Our Roller Bearings segment
achieved an operating income for the nine month period ended December 27, 2008
of $19.7 million, or 27.5% of net sales, compared to $20.7 million, or
29.7% of net sales, for the nine month period ended December 29,
2007. Our Ball Bearings segment achieved an operating income of
$11.1 million, or 23.3% of net sales, for the nine month period ended
December 27, 2008, compared to $9.5 million, or 23.5% of net sales, for the
same period in fiscal 2008. Our Other segment achieved an operating income of
$1.9 million, or 7.5% of net sales, for the nine month period ended
December 27, 2008, compared to $1.8 million, or 10.9% of net sales, for the
same period in fiscal 2008.
Other Non-Operating Expense
(Income). We incurred a foreign exchange loss of approximately $0.9
million for the nine month period ended December 27, 2008 related primarily to a
loan to our Phoenix subsidiary and denominated in British Pound Sterling. This
was offset by payments received under the Continued Dumping and Subsidy Offset
Act (CDSOA). We received approximately $0.4 million and $0.3 million in the nine
month periods ended December 27, 2008 and December 29, 2007, respectively, in
payments under the CDSOA for 2008 and 2007. The CDSOA distributes antidumping
duties paid by overseas companies to domestic firms hurt by unfair
trade.
Interest Expense,
net. Interest expense, net decreased by $0.6 million, or
24.3%, to $2.1 million in the nine month period ended December 27, 2008,
compared to $2.7 million in the same period last fiscal year, mainly driven by
debt reduction.
Loss on Early Extinguishment of
Debt. For the nine month period ended December 27, 2008, loss
on extinguishment of debt was $0.3 million for the non-cash write-off of
deferred financing fees associated with the paydown of $15.5 million of
industrial revenue bonds.
17
Income Before Income
Taxes. Income before taxes decreased by $0.7 million, to
$42.1 million for the nine month period ended December 27, 2008 compared to
$42.8 million for the nine month period ended December 29,
2007.
Income
Taxes. Income tax expense for the nine month period ended
December 27, 2008 was $14.1 million compared to $14.7 million for the
nine month period ended December 29, 2007. Our effective income tax rate for the
nine month period ended December 27, 2008 was 33.6% compared to 34.3% for the
nine month period ended December 29, 2007. The effective income tax
rates are below the U.S. statutory rate due to foreign income taxed at lower
rates and a special manufacturing deduction in the U.S.
Net Income. Net
income declined by $0.2 million to $28.0 million for the nine month
period ended December 27, 2008 compared to $28.2 million for the nine month
period ended December 29, 2007.
Liquidity
and Capital Resources
Liquidity
Our
credit agreement (the “KeyBank Credit Agreement”) provides the Company with a
$150.0 million five-year senior secured revolving credit facility which can be
increased by up to $75.0 million, in increments of $25.0 million, under
certain circumstances and subject to certain conditions (including the receipt
from one or more lenders of the additional commitment).
Amounts
outstanding under the KeyBank Credit Agreement generally bear interest at the
prime rate, or LIBOR plus a specified margin, depending on the type of borrowing
being made. The applicable margin is based on our consolidated ratio of net debt
to adjusted EBITDA from time to time. Currently, our margin is 0.0% for prime
rate loans and 0.625% for LIBOR rate loans. Amounts outstanding under the
KeyBank Credit Agreement are due and payable on its expiration date
(June 24, 2011). We may elect to prepay some or all of the outstanding
balance from time to time without penalty.
The KeyBank Credit Agreement allows us
to, among other things, make distributions to shareholders, repurchase our
stock, incur other debt or liens, or acquire or dispose of assets provided that
we comply with certain requirements and limitations of the credit agreement. Our
obligations under the KeyBank Credit Agreement are secured by a pledge of
substantially all of our and RBCA’s assets and a guaranty by us of RBCA’s
obligations. Capital expenditures (excluding acquisitions) in any
fiscal year are not to exceed $30.0 million. As of December 27, 2008, $53.0
million was outstanding under the KeyBank Credit
Agreement. Approximately $6.1 million of the KeyBank Credit Agreement
is being utilized to provide letters of credit to secure our obligations
relating to certain insurance programs. As of December 27, 2008, we had the
ability to borrow up to an additional $90.9 million under the KeyBank Credit
Agreement.
On October 27, 2008, Schaublin entered
into a new bank credit facility with Credit Suisse (the “Swiss Credit Facility”)
which replaced the prior bank credit facility of December 8, 2003 and its
amendment of November 8, 2004. This facility provides for up to 4.0
million Swiss francs, or $3.7 million, of revolving credit loans and letters of
credit. Borrowings under the Swiss Credit Facility bear interest at
Credit Suisse’s prevailing prime bank rate. As of December 27, 2008,
there were no borrowings under the Swiss Credit Facility.
On June 15, 2007, our board of
directors authorized us to repurchase up to $10.0 million of our common stock
from time to time on the open market, through block trades, or in privately
negotiated transactions depending on market conditions, alternative uses of
capital and other factors. Purchases may be commenced, suspended or
discontinued at any time without prior notice. The program does not
have an expiration date. As of December 27, 2008, 91,894 shares have
been repurchased under this plan for an aggregate cost of $3.1
million.
On May 1, 2008, the Company voluntarily
paid off the Series 1999 Industrial Revenue Bond (“IRB”), the prinicipal amount
of which was $4.8 million. In addition, on June 2, 2008, the Company voluntarily
paid off the Series 1994 A and B IRBs, the principal amounts of which were $7.7
million and $3.0 million, respectively. The Company recorded a non-cash pre-tax
charge of approximately $0.3 million in the nine month period ended December 27,
2008 to write off deferred financing costs associated with the voluntary payoff
of the IRBs.
18
Our ability to meet future working
capital, capital expenditures and debt service requirements will depend on our
future financial performance, which will be affected by a range of economic,
competitive and business factors, particularly interest rates, cyclical changes
in our end markets and prices for steel and our ability to pass through price
increases on a timely basis, many of which are outside of our
control. In addition, future acquisitions could have a significant
impact on our liquidity position and our need for additional funds.
From time to time we evaluate our
existing facilities and operations and their strategic importance to us. If we
determine that a given facility or operation does not have future strategic
importance, we may sell, partially or completely, relocate production lines,
consolidate or otherwise dispose of those operations. Although we believe our
operations would not be materially impaired by such dispositions, relocations or
consolidations, we could incur significant cash or non-cash charges in
connection with them.
Cash
Flows
Nine
month Period Ended December 27, 2008 Compared to the Nine month Period Ended
December 29, 2007
In the
nine month period ended December 27, 2008, we generated cash of
$32.6 million from operating activities compared to $24.6 million for
the nine month period ended December 29, 2007. The increase of $8.0 million
was mainly a result of a decrease in net income of $0.2 million, a decrease in
the change in operating assets and liabilities of $5.5 million and an
increase in non-cash adjustments of $13.7 million.
Cash used
for investing activities for the nine month period ended December 27, 2008
included $17.7 million related to capital expenditures compared to $14.3 million
for the nine month period ended December 29, 2007. Investing activities in the
nine month period ended December 27, 2008 also included $6.6 million related to
the acquisition of PIC Design offset by proceeds of $0.6 million related
primarily to the consolidation of our South Carolina operations.
Financing
activities used $3.9 million in the nine month period ended December 27,
2008. We used $15.5 million for the payoff of industrial revenue bonds, $0.5
million for the repurchase of common stock, $0.1 million for payments on notes
payable and $0.2 million for the payment of capital lease obligations offset by
a net increase in our revolving credit facility of $12.0 million, the exercise
of stock options of $0.3 million and an income tax benefit of $0.1 million
related to the exercise of non-qualified stock options.
Capital
Expenditures
Our capital expenditures were $17.7
million for the nine month period ended December 27, 2008. We expect to make
capital expenditures of approximately $22.0 to $24.0 million during fiscal
2009 in connection with our existing business and the expansion into new bearing
market segments. We intend to fund our fiscal 2009 capital expenditures
principally through existing cash, internally generated funds and borrowings
under our KeyBank Credit Agreement. We may also make substantial additional
expenditures in connection with acquisitions.
Obligations
and Commitments
As of
December 27, 2008, there was no material change in debt and interest, capital
lease, operating lease or pension and postretirement obligations as compared to
such obligations and liabilities as of March 29, 2008.
19
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
Quantitative
and Qualitative Disclosure 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
are exposed to market risk from changes in the interest rates on a significant
portion of our outstanding indebtedness. Outstanding balances under our KeyBank
Credit Agreement generally bear interest at the prime rate or LIBOR (the London
inter-bank offered rate for deposits in U.S. dollars for the applicable LIBOR
period) plus a specified margin, depending on the type of borrowing being made.
The applicable margin is based on our consolidated ratio of net debt to adjusted
EBITDA from time to time. As of December 27, 2008, our margin is 0.0% for prime
rate loans (prime rate at December 27, 2008 was 3.50%) and 0.625% for LIBOR rate
loans (one month LIBOR rate at December 27, 2008 was 1.4375%).
Our interest rate risk management
objective is to limit the impact of interest rate changes on our net income and
cash flow. To achieve our objective, we regularly evaluate the amount of our
variable rate debt as a percentage of our aggregate debt. As of December 27,
2008, our average outstanding variable rate debt, after taking into account the
average outstanding notional amount of our interest rate swap agreement, was 42%
of our average outstanding debt. We manage a significant portion of our exposure
to interest rate fluctuations in our variable rate debt through an interest rate
swap agreement. This agreement effectively converts interest rate exposure from
variable rates to fixed rates of interest.
Based on
the aggregate amount of our variable rate indebtedness of $23.0 million, a 100
basis point change in interest rates would have changed our interest expense by
approximately $0.2 million per year, after taking into account the $30.0
million notional amount of our interest rate swap agreement at December 27,
2008.
Foreign Currency Exchange
Rates. As a result of increased sales in Europe, our exposure
to risk associated with fluctuating currency exchange rates between the U.S.
dollar, the Euro, the Swiss Franc and the British Pound Sterling (GBP) has
increased. Our Swiss operations utilize the Swiss Franc as the functional
currency, our French operations utilize the Euro as the functional currency and
our English operations utilize the British Pound Sterling as the functional
currency. Foreign currency transaction gains and losses are included in
earnings. In May 2007, we loaned our Phoenix subsidiary
1,386,985GBP. At that time, the exchange rate was 1.00GBP to
approximately 1.98 U.S. dollars. The rate at December 27, 2008 was
1.00GBP to approximately 1.47 U.S. dollars. This strengthening of the
U.S. dollar has resulted in a foreign exchange loss of $0.8 million since loan
inception. We also loaned our Phoenix subsidiary 346,000GBP in
September 2008, resulting in an additional foreign exchange loss of $0.1
million. Since these loans are not considered long-term in nature,
the resulting translation losses are included in net income.
Approximately
16% of our net sales were denominated in foreign currencies in the first nine
months of fiscal 2009 compared to 15% in the comparable period last fiscal year.
We expect that this proportion is likely to increase as we seek to increase our
penetration of foreign markets, particularly within the aerospace and defense
markets. Foreign currency transaction exposure arises primarily from the
transfer of foreign currency from one subsidiary to another within the group,
and to foreign currency denominated trade receivables. Unrealized currency
translation gains and losses are recognized upon translation of the foreign
subsidiaries’ balance sheets to U.S. dollars. Because our financial statements
are denominated in U.S. dollars, changes in currency exchange rates between the
U.S. dollar and other currencies have had, and will continue to have, an impact
on our earnings. We currently do not have exchange rate hedges in place to
reduce the risk of an adverse currency exchange movement. Although currency
fluctuations have not had a material impact on our financial performance in the
past, such fluctuations may materially affect our financial performance in the
future. The impact of future exchange rate fluctuations on our results of
operations cannot be accurately predicted.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
20
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 December 27, 2008. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
December 27, 2008.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting occurred during the three month
period ended December 27, 2008 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).
21
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 during the
nine month period ended December 27, 2008. For a discussion of the Risk Factors,
refer to Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual
Report on Form 10-K for the period ended March 29, 2008 and in the Company’s
Quarterly Report on Form 10-Q for the period ended September 27,
2008.
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Unregistered
Sales of Equity Securities
None.
Use of Proceeds
Not
applicable.
Issuer Purchases of Equity
Securities
On June 15, 2007, our board of
directors authorized us to repurchase up to $10.0 million of our common stock
from time to time on the open market, through block trades, or in privately
negotiated transactions depending on market conditions, alternative uses of
capital and other factors. Purchases may be commenced, suspended or
discontinued at any time without prior notice. The program does not have an
expiration date.
Total share repurchases for the three
months ended December 27, 2008 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)
|
||||||||||||
|
09/28/2008–10/25/2008
|
60 | 31.51 | 60 | $ | 6,946 | |||||||||||
|
10/26/2008–11/22/2008
|
158 | 19.84 | 158 | 6,943 | ||||||||||||
|
11/23/2008–12/27/2008
|
— | — | — | $ | 6,943 | |||||||||||
|
Total
|
218 | $ | 22.88 | 218 | ||||||||||||
22
ITEM
3. Defaults Upon Senior Securities
Not
applicable.
ITEM
4. Submission of Matters to a Vote of Security Holders
Not
applicable.
ITEM
5. Other Information
Not
applicable.
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).*
|
*
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.
23
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/ Dr. Michael J.
Hartnett
|
|
|
Name:
|
Dr.
Michael J. Hartnett
|
|
|
Title:
|
Chief
Executive Officer
|
|
|
Date:
|
February
5, 2009
|
|
|
By:
|
/s/ Daniel A.
Bergeron
|
|
|
Name:
|
Daniel
A. Bergeron
|
|
|
Title:
|
Chief
Financial Officer
|
|
|
Date:
|
February
5,
2009
|
|
24
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).*
|
*
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.
25