UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2013
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to           .
 
Commission File Number:  333-124824
 
RBC Bearings Incorporated
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
95-4372080
(I.R.S. Employer Identification No.)
 
 
 
One Tribology Center
Oxford, CT
(Address of principal executive offices)
  
 
06478
(Zip Code)
 
(203) 267-7001
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ           Accelerated filer  ¨
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)   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 October 25, 2013, RBC Bearings Incorporated had 23,089,619 shares of Common Stock outstanding.
 
 
 
   
TABLE OF CONTENTS
 
Part I -
FINANCIAL INFORMATION
3
 
 
 
ITEM 1.
Financial Statements
3
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 13
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk.
26
ITEM 4.
Controls and Procedures.
26
 
Changes in Internal Control over Financial Reporting.
26
 
 
 
Part II -
OTHER INFORMATION.
27
 
 
 
ITEM 1.
Legal Proceedings
27
ITEM 1A.
Risk Factors
27
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
ITEM 3.
Defaults Upon Senior Securities
28
ITEM 4.
Mine Safety Disclosures
28
ITEM 5.
Other Information
28
ITEM 6.
Exhibits
28
 
 
2

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
RBC Bearings Incorporated
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
 
 
 
September 28, 
2013
 
March 30, 
2013
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
110,202
 
$
114,480
 
Short-term investments
 
 
2,137
 
 
1,298
 
Accounts receivable, net of allowance for doubtful accounts of $1,005 at September
   28, 2013 and $1,719 at March 30, 2013
 
 
72,051
 
 
69,715
 
Inventory
 
 
193,179
 
 
174,585
 
Deferred income taxes
 
 
11,015
 
 
9,864
 
Prepaid expenses and other current assets
 
 
4,530
 
 
3,579
 
Total current assets
 
 
393,114
 
 
373,521
 
Property, plant and equipment, net
 
 
127,252
 
 
116,118
 
Goodwill
 
 
40,252
 
 
34,713
 
Intangible assets, net of accumulated amortization of $11,688 at September 28, 2013
   and $10,783 at March 30, 2013
 
 
14,576
 
 
11,158
 
Other assets
 
 
7,474
 
 
6,932
 
Total assets
 
$
582,668
 
$
542,442
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
25,822
 
$
25,259
 
Accrued expenses and other current liabilities
 
 
20,558
 
 
20,069
 
Current portion of long-term debt
 
 
1,262
 
 
1,240
 
Total current liabilities
 
 
47,642
 
 
46,568
 
Deferred income taxes
 
 
5,874
 
 
4,236
 
Long-term debt
 
 
9,220
 
 
9,060
 
Other non-current liabilities
 
 
21,121
 
 
20,383
 
Total liabilities
 
 
83,857
 
 
80,247
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
Preferred stock, $.01 par value; authorized shares: 10,000,000 at September 28, 2013
   and March 30, 2013; none issued and outstanding
 
 
 
 
 
Common stock, $.01 par value; authorized shares: 60,000,000 at September 28, 2013
   and March 30, 2013; issued and outstanding shares: 23,382,528 at September 28,
   2013 and 23,277,928 at March 30, 2013
 
 
234
 
 
233
 
Additional paid-in capital
 
 
238,857
 
 
234,151
 
Accumulated other comprehensive income
 
 
(692)
 
 
(3,469)
 
Retained earnings
 
 
270,975
 
 
241,734
 
Treasury stock, at cost, 291,427 shares at September 28, 2013 and 289,234 shares
   at March 30, 2013
 
 
(10,563)
 
 
(10,454)
 
Total stockholders' equity
 
 
498,811
 
 
462,195
 
Total liabilities and stockholders' equity
 
$
582,668
 
$
542,442
 
 
See accompanying notes.
 
 
3

 
RBC Bearings Incorporated
Consolidated Statements of Operations
(dollars in thousands, except share and per share data)
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
September 28, 
2013
 
September 29, 
2012
 
September 28, 
2013
 
September 29, 
2012
 
Net sales
 
$
101,954
 
$
100,375
 
$
204,622
 
$
203,709
 
Cost of sales
 
 
61,363
 
 
62,845
 
 
123,562
 
 
127,736
 
Gross margin
 
 
40,591
 
 
37,530
 
 
81,060
 
 
75,973
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
 
17,140
 
 
15,772
 
 
34,124
 
 
31,869
 
Other, net
 
 
1,935
 
 
563
 
 
3,122
 
 
915
 
Total operating expenses
 
 
19,075
 
 
16,335
 
 
37,246
 
 
32,784
 
Operating income
 
 
21,516
 
 
21,195
 
 
43,814
 
 
43,189
 
Interest expense, net
 
 
253
 
 
183
 
 
494
 
 
398
 
Other non-operating (income) expense
 
 
(15)
 
 
111
 
 
(207)
 
 
(3,190)
 
Income before income taxes
 
 
21,278
 
 
20,901
 
 
43,527
 
 
45,981
 
Provision for income taxes
 
 
7,153
 
 
4,407
 
 
14,286
 
 
12,323
 
Net income
 
$
14,125
 
$
16,494
 
$
29,241
 
$
33,658
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.62
 
$
0.74
 
$
1.28
 
$
1.52
 
Diluted
 
$
0.61
 
$
0.73
 
$
1.26
 
$
1.49
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
22,827,498
 
 
22,292,147
 
 
22,807,239
 
 
22,161,209
 
Diluted
 
 
23,204,508
 
 
22,714,107
 
 
23,152,876
 
 
22,655,255
 
 
See accompanying notes.
 
 
4

 
RBC Bearings Incorporated
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
September 28, 
2013
 
September 29, 
2012
 
September 28, 
2013
 
September 29, 
2012
 
Net income
 
$
14,125
 
$
16,494
 
$
29,241
 
$
33,658
 
Net prior service pension cost and actuarial losses, net of
   taxes
 
 
(230)
 
 
(195)
 
 
(459)
 
 
(389)
 
Change in unrealized loss on investments, net of taxes
 
 
34
 
 
(5)
 
 
(12)
 
 
(5)
 
Foreign currency translation adjustments
 
 
2,470
 
 
1,500
 
 
3,248
 
 
(1,950)
 
Total comprehensive income
 
$
16,399
 
$
17,794
 
$
32,018
 
$
31,314
 
 
See accompanying notes.
 
 
5

 
RBC Bearings Incorporated
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
 
 
 
Six Months Ended
 
 
 
September 28, 
2013
 
September 29, 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
 
$
29,241
 
$
33,658
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation
 
 
6,753
 
 
6,612
 
Excess tax benefits from stock-based compensation
 
 
(587)
 
 
(4,160)
 
Deferred income taxes
 
 
487
 
 
1,669
 
Amortization of intangible assets
 
 
837
 
 
764
 
Amortization of deferred financing costs
 
 
163
 
 
163
 
Stock-based compensation
 
 
2,739
 
 
2,440
 
Gain on disposition or sale of assets
 
 
8
 
 
(24)
 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
Accounts receivable
 
 
(2,672)
 
 
2,684
 
Inventory
 
 
(12,904)
 
 
(8,984)
 
Prepaid expenses and other current assets
 
 
(852)
 
 
(4,911)
 
Other non-current assets
 
 
(1,393)
 
 
(959)
 
Accounts payable
 
 
(1,030)
 
 
(290)
 
Accrued expenses and other current liabilities
 
 
364
 
 
4,024
 
Other non-current liabilities
 
 
385
 
 
(2,998)
 
Net cash provided by operating activities
 
 
21,539
 
 
29,688
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Purchase of property, plant and equipment
 
 
(14,592)
 
 
(11,602)
 
Purchase of short-term investments
 
 
(729)
 
 
(827)
 
Acquisition of businesses, net of cash acquired
 
 
(13,646)
 
 
 
Proceeds from sale of assets
 
 
35
 
 
45
 
Net cash used in investing activities
 
 
(28,932)
 
 
(12,384)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Exercise of stock options
 
 
1,382
 
 
10,646
 
Excess tax benefits from stock-based compensation
 
 
587
 
 
4,160
 
Repurchase of common stock
 
 
(109)
 
 
 
Payment of term loan
 
 
(247)
 
 
 
Other, net
 
 
(58)
 
 
(148)
 
Net cash provided by financing activities
 
 
1,555
 
 
14,658
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash
 
 
1,560
 
 
(1,399)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Increase during the period
 
 
(4,278)
 
 
30,563
 
Cash, at beginning of period
 
 
114,480
 
 
68,621
 
 
 
 
 
 
 
 
 
Cash, at end of period
 
$
110,202
 
$
99,184
 
 
See accompanying notes.
 
 
6

 
RBC Bearings Incorporated
Notes to Unaudited Interim Consolidated Financial Statements
(dollars in thousands, except share and per share data)
 
The consolidated financial statements included herein have been prepared by RBC Bearings Incorporated, a Delaware corporation (collectively with its subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The March 30, 2013 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 30, 2013.
               
These statements reflect all adjustments, accruals and estimates consisting only of items of a normal recurring nature, which are, in the opinion of management, necessary for the fair presentation of the consolidated financial condition and consolidated results of operations for the interim periods presented.  These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Annual Report on Form 10-K.
                 
                  The results of operations for the three month period ended September 28, 2013 are not necessarily indicative of the operating results for the full year. The six month periods ended September 28, 2013 and September 29, 2012 each include 26 weeks. The amounts shown are in thousands, unless otherwise indicated.
 
1.  Accumulated Other Comprehensive Income (Loss)
 
                The components of comprehensive income (loss) that relate to the Company are net income, derivatives, foreign currency translation adjustments and pension plan and postretirement benefits, all of which are presented in the consolidated statements of stockholders' equity and comprehensive income (loss).
 
                The following summarizes the activity within each component of accumulated other comprehensive income (loss):
 
 
 
Currency
Translation
 
Pension and
Postretirement
Liability
 
Investments
 
Total
 
Balance at March 30, 2013
 
$
4,116
 
$
(7,714)
 
$
129
 
$
(3,469)
 
Other comprehensive income (loss)
   before reclassifications
 
 
3,248
 
 
(664)
 
 
(12)
 
 
2,572
 
Amounts reclassified from accumulated
   other comprehensive income (loss)
 
 
 
 
(77)
 
 
 
 
(77)
 
Provision for income taxes related to
   other comprehensive income items
 
 
 
 
282
 
 
 
 
282
 
Net current period other comprehensive
   income (loss)
 
 
3,248
 
 
(459)
 
 
(12)
 
 
2,777
 
Balance at September 28, 2013
 
$
7,364
 
$
(8,173)
 
$
117
 
$
(692)
 

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.
 
 
7

 
Diluted net income per common share is computed by dividing net income by the sum of the weighted-average number of common shares and dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options.
 
The table below reflects the calculation of weighted-average shares outstanding for each period presented as well as the computation of basic and diluted net income per common share:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
14,125
 
$
16,494
 
$
29,241
 
$
33,658
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator for basic net income per common share—
   weighted-average shares outstanding
 
 
22,827,498
 
 
22,292,147
 
 
22,807,239
 
 
22,161,209
 
Effect of dilution due to employee stock options
 
 
377,010
 
 
421,960
 
 
345,637
 
 
494,046
 
Denominator for diluted net income per common share
   — weighted-average shares outstanding
 
 
23,204,508
 
 
22,714,107
 
 
23,152,876
 
 
22,655,255
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share
 
$
0.62
 
$
0.74
 
$
1.28
 
$
1.52
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per common share
 
$
0.61
 
$
0.73
 
$
1.26
 
$
1.49
 
 
                At September 28, 2013, 207,500 employee stock options and 2,000 restricted shares have been excluded from the calculation of diluted earnings per share. At September 29, 2012, 379,000 employee stock options and no restricted shares have been excluded from the calculation of diluted earnings per share. The inclusion of these employee stock options and unvested restricted stock shares would be anti-dilutive. 

3.  Cash and Cash Equivalents
 
                The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
                Short-term investments are comprised of equity securities and are measured at fair value by using quoted prices in active markets and are classified as Level 1 of the valuation hierarchy.

4.  Inventory
 
Inventories are stated at the lower of cost or market, using the first-in, first-out method, and are summarized below:
 
 
 
September 28, 
2013
 
March 30,
2013
 
Raw materials
 
$
18,431
 
$
16,966
 
Work in process
 
 
45,738
 
 
41,882
 
Finished goods
 
 
129,010
 
 
115,737
 
 
 
$
193,179
 
$
174,585
 
 
 
8

 
5.  Intangible Assets
 
 
 
 
 
September 28, 2013
 
March 30, 2013
 
 
 
Weighted
Average
Useful
Lives
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Product approvals
 
15
 
$
6,194
 
$
2,861
 
$
6,077
 
$
2,607
 
Customer relationships and lists
 
11
 
 
8,963
 
 
3,687
 
 
5,999
 
 
3,429
 
Trade names
 
15
 
 
2,228
 
 
1,137
 
 
1,380
 
 
1,102
 
Distributor agreements
 
5
 
 
722
 
 
722
 
 
722
 
 
722
 
Patents and trademarks
 
15
 
 
6,434
 
 
2,135
 
 
6,168
 
 
1,866
 
Domain names
 
10
 
 
437
 
 
233
 
 
437
 
 
211
 
Other
 
4
 
 
1,286
 
 
913
 
 
1,158
 
 
846
 
Total
 
 
 
$
26,264
 
$
11,688
 
$
21,941
 
$
10,783
 
 
                Amortization expense for definite-lived intangible assets for the three and six month periods ended September 28, 2013 was $444 and $837, respectively. Amortization expense for definite-lived intangible assets for the three and six month periods ended September 29, 2012 was $385 and $764, respectively. Estimated amortization expense for the remaining six months of fiscal 2014, the five succeeding fiscal years and thereafter is as follows:
 
2014
 
$
1,140
 
2015
 
 
1,865
 
2016
 
 
1,838
 
2017
 
 
1,728
 
2018
 
 
1,605
 
2019
 
 
1,403
 
2020 and thereafter
 
 
4,997
 

6. Debt
 
                The balances payable under all borrowing facilities are as follows:
 
 
 
September 28,
2013
 
March 30,
2013
 
Notes payable
 
$
10,482
 
$
10,300
 
Total debt
 
 
10,482
 
 
10,300
 
Less: current portion
 
 
1,262
 
 
1,240
 
Long-term debt
 
$
9,220
 
$
9,060
 
 
  On October 1, 2012, Schaublin purchased the land and building, which it occupied and had been leasing, for 14,067 CHF (approximately $14,910). Schaublin obtained a 20 year fixed rate mortgage of 9,300 CHF (approximately $9,857) at an interest rate of 2.9%. The balance of the purchase price of 4,767 CHF (approximately $5,053) was paid from cash on hand. The balance on this mortgage as of September 28, 2013 was 8,835 CHF, or $9,732.
 
                On November 30, 2010, the Company entered into a new credit agreement (the “JP Morgan Credit Agreement”) and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides Roller Bearing Company of America, Inc. (“RBCA”), as borrower, with a $150,000 five-year senior secured revolving credit facility which can be increased by up to $100,000, in increments of $25,000, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).
 
 
9

 
Amounts outstanding under the JP Morgan Credit Agreement generally bear interest at the prime rate or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based upon the Company’s consolidated ratio of net debt to adjusted EBITDA, measured at the end of each quarter. As of September 28, 2013, the Company’s margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans.
 
                The JP Morgan Credit Agreement requires the Company to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.25 to 1; and (2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. The credit agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the agreement. As of September 28, 2013, the Company was in compliance with all such covenants.
 
                Approximately $6,047 of the JP Morgan Credit Agreement is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain insurance programs. As of September 28, 2013, RBCA had the ability to borrow up to an additional $143,953 under the JP Morgan 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 4,000 CHF, or $4,406, 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 September 28, 2013, there were no borrowings under the Swiss Credit Facility. 

7.  Income Taxes
 
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to state or foreign income tax examinations by tax authorities for years ending before April 2, 2005.  The Company is no longer subject to U.S. federal corporate income tax examination by the Internal Revenue Service for fiscal years ending before April 3, 2010.  A U.S. federal corporate income tax examination by the Internal Revenue Service for the fiscal year ended April 2, 2011 was deemed effectively settled in the Company’s first quarter of the fiscal year ended March 29, 2014 and the statute of limitations expired for the Company’s fiscal year ended March 28, 2009 in the Company’s third quarter of the fiscal year ended March 30, 2013.
 
The effective income tax rates for the three month periods ended September 28, 2013 and September 29, 2012, were 33.6% and 21.1%.  The effective income tax rates for the six month periods ended September 28, 2013 and September 29, 2012 were 32.8% and 26.8%, respectively.  In addition to discrete items, the effective income tax rates for these periods are different from the U.S. statutory rates due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and state income taxes which increases the rate.
 
The effective income tax rate for the three month period ended September 28, 2013 of 33.6% includes discrete items of $167 which are substantially comprised of the reversal of unrecognized tax benefits associated with the expiration of statutes of limitations and the conclusion of federal and state income tax audits as well as the recognition of interest on unrecognized tax positions.  The effective income tax rate for the three month period ended September 29, 2012 of 21.1% includes the reversal of unrecognized tax benefits associated with the conclusion of federal and state income tax audits of $2,838.  The effective income tax rate without discrete items for the three month periods ended September 28, 2013 and September 29, 2012 would have been 34.4% and 34.7%, respectively.   The Company believes it is reasonably possible that some of its unrecognized tax positions may be effectively settled within the next twelve months due to the closing of audits and the statute of limitations expiring in varying jurisdictions.  The decrease, pertaining primarily to credits and state tax, is estimated to be approximately $725.
 
 
10

 
8.  Reportable Segments
 
                The Company operates through operating segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Those operating segments with similar economic characteristics and that meet all other required criteria, including nature of the products and production processes, distribution patterns and classes of customers, are aggregated as reportable segments. Certain other operating segments that do not exhibit the common attributes mentioned above and do not meet the quantitative thresholds for separate disclosure are combined and disclosed as "Other".
 
                The Company has four reportable business segments, Plain Bearings, Roller Bearings, Ball Bearings and Other, which are described below. Within the Plain Bearings, Roller Bearings and Ball Bearings reportable segments, the Company has not aggregated any operating segments.  Within the Other reportable segment, the Company has aggregated operating segments because they do not meet the quantitative threshold for separate disclosure.
 
                Plain Bearings.  Plain bearings are produced with either self-lubricating or metal-to-metal designs and consists of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components.
 
                Roller Bearings.  Roller bearings are anti-friction bearings that use rollers instead of balls. The Company manufactures four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.
               
                Ball Bearings.  The Company manufactures four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings which are used in high-speed rotational applications.
 
                Other.  Other consists of three operating locations that do not fall into the above segmented categories. 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.
               
Segment performance is evaluated based on segment net sales and operating income. Items not allocated to segment operating income include corporate administrative expenses and certain other amounts.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
September 28, 
2013
 
September 29, 
2012
 
September 28, 
2013
 
September 29, 
2012
 
Net External Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain
 
$
52,828
 
$
53,272
 
$
109,918
 
$
108,669
 
Roller
 
 
30,277
 
 
30,052
 
 
58,627
 
 
61,449
 
Ball
 
 
11,200
 
 
9,980
 
 
20,655
 
 
19,367
 
Other
 
 
7,649
 
 
7,071
 
 
15,422
 
 
14,224
 
 
 
$
101,954
 
$
100,375
 
$
204,622
 
$
203,709
 
Gross Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain
 
$
20,708
 
$
20,362
 
$
42,942
 
$
41,648
 
Roller
 
 
12,943
 
 
12,214
 
 
25,242
 
 
23,682
 
Ball
 
 
4,037
 
 
2,333
 
 
7,045
 
 
4,502
 
Other
 
 
2,903
 
 
2,621
 
 
5,831
 
 
6,141
 
 
 
$
40,591
 
$
37,530
 
$
81,060
 
$
75,973
 
 
 
11

 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
September 28, 
2013
 
September 29, 
2012
 
September 28, 
2013
 
September 29, 
2012
 
Selling, General & Administrative Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain
 
$
4,204
 
$
3,630
 
$
8,553
 
$
7,387
 
Roller
 
 
1,791
 
 
1,709
 
 
3,507
 
 
3,416
 
Ball
 
 
1,005
 
 
769
 
 
1,657
 
 
1,550
 
Other
 
 
1,063
 
 
859
 
 
2,119
 
 
1,786
 
Corporate
 
 
9,077
 
 
8,805
 
 
18,288
 
 
17,730
 
 
 
$
17,140
 
$
15,772
 
$
34,124
 
$
31,869
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain
 
$
16,131
 
$
16,503
 
$
33,734
 
$
33,786
 
Roller
 
 
10,946
 
 
9,715
 
 
21,449
 
 
20,063
 
Ball
 
 
2,265
 
 
2,184
 
 
3,928
 
 
2,882
 
Other
 
 
1,847
 
 
1,731
 
 
3,857
 
 
4,376
 
Corporate
 
 
(9,673)
 
 
(8,938)
 
 
(19,154)
 
 
(17,918)
 
 
 
$
21,516
 
$
21,195
 
$
43,814
 
$
43,189
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Geographic External Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
$
86,490
 
$
86,599
 
$
172,623
 
$
175,855
 
Foreign
 
 
15,464
 
 
13,776
 
 
31,999
 
 
27,854
 
 
 
$
101,954
 
$
100,375
 
$
204,622
 
$
203,709
 
Intersegment Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain
 
$
980
 
$
728
 
$
1,904
 
$
1,311
 
Roller
 
 
4,377
 
 
4,489
 
 
9,250
 
 
8,518
 
Ball
 
 
585
 
 
680
 
 
910
 
 
1,047
 
Other
 
 
6,688
 
 
5,929
 
 
13,251
 
 
11,217
 
 
 
$
12,630
 
$
11,826
 
$
25,315
 
$
22,093
 
 
All intersegment sales are eliminated in consolidation.

9.  Restructuring of Operations
 
In the fourth quarter of fiscal 2013, the Company reached a decision to consolidate and restructure its large bearing manufacturing facilities and capacity. This decision was based on the Company’s intent to better align manufacturing abilities and product development.  The consolidation of the Texas facility into the South Carolina operation will strengthen and bring critical engineering and manufacturing mass to the large bearing product line.  The consolidation and restructuring  includes: (1) consolidation of the machinery and equipment from Texas into South Carolina resulting in a certain portion being impaired and the remaining portion used to service the large bearing product offering; (2) sale or lease of the Texas building; and (3) a reduction in workforce in Texas due to the realignment.  The majority of the expense associated with the consolidation and restructuring was incurred in fiscal 2013 with continued effort to sell the equipment and sell or lease the building to be completed in fiscal 2014.  As a result, the Company recorded a pre-tax charge of $6,738 under operating expenses in the Other, net category of the income statement for fiscal 2013 associated with this consolidation and restructuring. This charge included $466 in employee related costs, $100 in moving and relocation costs and $6,172 impairment to fair value of certain equipment used in the manufacturing of large bearings.  The Company determined that the market approach was the most appropriate method to estimate the fair value for the equipment and building using comparable sales data and actual quotes from potential buyers in the market place.  These assets continue to be classified in fixed assets on the September 28, 2013 balance sheet.  This analysis of fair value of assets resulted in a $6,172 impairment loss in fiscal 2013 and is attributable to the Ball Bearings segment in which all of these assets reside.  The Company incurred period costs of $1,498 in the first six months of fiscal 2014, bringing the total incurred due to the restructuring and consolidation to $8,236.  The Company will continue to incur operational costs such as depreciation, utilities and maintenance until the building is sold or leased.
 
 
12

 
10.  Acquisitions
 
On August 16, 2013, the Company acquired Climax Metal Products Company (“CMP”) located in Mentor, Ohio for $13,646.  The purchase price included $10,672 in cash and $2,974 of debt. CMP is a manufacturer of precision shaft collars, rigid couplings, keyless locking devices, and bearings for the industrial markets.  CMP’s net sales for the last calendar year were approximately $14,100.  The purchase price allocation is as follows: accounts receivable ($1,206), inventory ($4,509), other current assets ($73), fixed assets ($2,466), goodwill ($5,538), intangible assets ($3,904), other non-current assets ($10), other current liabilities ($2,086), and noncurrent liabilities ($1,974). CMP is included in the Ball Bearings segment. Proforma net sales and net income inclusive of CMP are not materially different from the amounts reported in the accompanying consolidated statements of operations.
 
On March 1, 2013, Roller Bearing Company of America, Inc. and RBC Southwest Products, Inc. acquired Western Precision Aero LLC (“WPA”), a manufacturer of precision components and gears for the aerospace and industrial markets located in Garden Grove, California for $2,628.  The purchase price included $1,408 in cash and $1,220 of debt.  The purchase price allocation is as follows: accounts receivable ($646), inventory ($1,369), other current assets ($66), fixed assets ($1,290), intangible assets ($645), other non-current assets ($24), other current liabilities ($1,085) and a gain on acquisition ($327).  The Company believes that it was able to acquire WPA for less than the fair value of its assets because of (i) the Company’s unique position as a market leader in the aerospace and industrial bearing market and (ii) the seller’s distressed operations.  This addition expands the Company’s offering to customers and expands its portfolio into the aerospace and industrial markets.  WPA is included in the Plain Bearings segment. Proforma net sales and net income inclusive of WPA are not materially different from the amounts reported in the accompanying consolidated statements of operations.

11.  Subsequent Event
 
                On October 7, 2013, the Company acquired the net assets of Turbine Components Inc. (“TCI”) for approximately $3,925.  Located in San Diego, California, TCI is an FAA certified aircraft gas turbine repair station and manufacturer of precision components for aerospace markets.  TCI’s net sales for the last calendar year were approximately $4,000.

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.
 
 
13

 
                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 30, 2013.  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.
 
Overview
 
                We are a well known international manufacturer of highly engineered precision plain, roller and ball bearings. 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 bearing categories, we focus primarily on the higher end of the bearing market where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. We have been providing bearing solutions to our customers since 1919. Under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 28 facilities of which 25 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, energy, mining 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.
 
 
14

 
Outlook
 
                Our backlog, as of September 28, 2013, was $222.3 million compared to $216.1 million as of September 29, 2012.  Our net sales for the six month period ended September 28, 2013 increased 0.4% compared to the same period last fiscal year.  Our aerospace and defense markets contributed 18.7% to this increase offset by a 17.6% decrease in the diversified industrial markets.  The performance in the aerospace and defense market was driven by commercial aircraft build rates, the aerospace aftermarkets and the acquisition of WPA. The diversified industrial market decrease was attributable to OEM volume declines in mining, construction and military vehicles offset by the acquisition of CMP.
 
                Management believes that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. We have $110.2 million in cash and cash equivalents as of September 28, 2013, of which $36.7 million is foreign cash restricted to funding internal and external growth initiatives in our foreign entities. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign entities.
 
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. 
 
 
Three Months Ended
 
Six Months Ended
 
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
100.0
%
 
 
100.0
%
 
 
100.0
%
 
 
100.0
%
Gross margin
 
 
39.8
 
 
 
37.4
 
 
 
39.6
 
 
 
37.3
 
Selling, general and administrative
 
 
16.8
 
 
 
15.7
 
 
 
16.7
 
 
 
15.6
 
Other, net
 
 
1.9
 
 
 
0.6
 
 
 
1.5
 
 
 
0.5
 
Operating income
 
 
21.1
 
 
 
21.1
 
 
 
21.4
 
 
 
21.2
 
Interest expense, net
 
 
0.2
 
 
 
0.2
 
 
 
0.2
 
 
 
0.1
 
Other non-operating (income) expense
 
 
0.0
 
 
 
0.1
 
 
 
(0.1)
 
 
 
(1.4)
 
Income before income taxes
 
 
20.9
 
 
 
20.8
 
 
 
21.3
 
 
 
22.5
 
Provision for income taxes
 
 
7.0
 
 
 
4.4
 
 
 
7.0
 
 
 
6.0
 
Net income
 
 
13.9
 
 
 
16.4
 
 
 
14.3
 
 
 
16.5
 
 
Segment Information
 
                We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Other. Other consists of three operating locations that do not fall into the above segmented categories, primarily machine tool collets, machining for integrated bearing assemblies and aircraft components and tight-tolerance, precision mechanical components. Within the Plain Bearings, Roller Bearings and Ball Bearings segments, we have not aggregated any operating segments. Within the Other reportable segment, we have aggregated operating segments because they do not meet the quantitative threshold for separate disclosure.
 
 
15

 
Three Month Period Ended September 28, 2013 Compared to Three Month Period Ended September 29, 2012
 
Net Sales.
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
September 28, 
2013
September 29, 
2012
$  
Change
 
%  
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
52.8
 
$
53.3
 
$
(0.5)
 
 
(0.8)
%
 
Roller Bearings
 
 
30.3
 
 
30.0
 
 
0.3
 
 
0.7
%
 
Ball Bearings
 
 
11.2
 
 
10.0
 
 
1.2
 
 
12.2
%
 
Other
 
 
7.7
 
 
7.1
 
 
0.6
 
 
8.2
%
 
Total
 
$
102.0
 
$
100.4
 
$
1.6
 
 
1.6
%
 
 
Net sales for the three month period ended September 28, 2013 were $102.0 million, an increase of $1.6 million, or 1.6%, compared to $100.4 million for the three month period ended September 29, 2012. Excluding the $1.4 million and $1.7 million impacts of WPA and CMP which were acquired in March 2013 and August 2013, respectively, net sales decreased $1.5 million as compared to the three month period ended September 29, 2012.  Net sales to aerospace and defense customers increased 15.2% in the three month period ended September 28, 2013 compared to the same period last fiscal year, mainly driven by commercial aircraft build rates, the aerospace aftermarkets and the inclusion of WPA. In contrast, the diversified industrial markets decreased 12.8%, resulting primarily from lower activity in mining, construction and a $4.1 million drop in military vehicle sales offset by the impact of CMP of $1.7 million.
 
The Plain Bearings segment achieved net sales of $52.8 million in the three month period ended September 28, 2013, a decrease of $0.5 million compared to $53.3 million for the same period in the prior fiscal year.  Excluding the $1.4 million impact of WPA, the net sales decrease of $1.9 million for this segment was attributable to a decline of $4.4 million in mining, construction and military vehicles to diversified industrial customers offset by higher net sales to aerospace and defense customers of $2.2 million mainly due to higher build rates and favorable exchange rates of $0.3 million.
 
The Roller Bearings segment achieved net sales of $30.3 million in the three month period ended September 28, 2013, an increase of $0.3 million, compared to $30.0 million for the same period in the prior fiscal year. Net sales to the aerospace and defense sector increased by $2.3 million offset by a decline of $2.0 million in the diversified industrial sector. This segment was primarily affected by the lower activity in mining and construction.
 
The Ball Bearings segment achieved net sales of $11.2 million in the three month period ended September 28, 2013, an increase of $1.2 million, or 12.2 %, compared to $10.0 million for the same period in the prior fiscal year. Excluding the $1.7 million impact of CMP, net sales decreased $0.5 million.
 
The Other segment, which is focused mainly on the sale of machine tool collets and precision components, achieved net sales of $7.7 million in the three month period ended September 28, 2013, an increase of $0.6 million, or 8.2 %, compared to $7.1 million for the same period in the prior fiscal year. Of this increase, $0.1 million is due to increased demand for mechanical components mainly in the U.S. market combined with a $0.5 million increase in volume of machine tool collets mainly in Europe.
 
Gross Margin.
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
September 28,  
2013
September 29,  
2012

Change
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
20.7
 
$
20.4
 
$
0.3
 
1.7
%
 
Roller Bearings
 
 
13.0
 
 
12.2
 
 
0.8
 
6.0
%
 
Ball Bearings
 
 
4.0
 
 
2.3
 
 
1.7
 
73.0
%
 
Other
 
 
2.9
 
 
2.6
 
 
0.3
 
10.8
%
 
Total
 
$
40.6
 
$
37.5
 
$
3.1
 
8.2
%
 
 
 
16

 
                Gross margin was $40.6 million, or 39.8% of net sales, in the three month period ended September 28, 2013, versus $37.5 million, or 37.4% of net sales, for the same period in fiscal 2013. Excluding the $0.5 million and $0.6 million impact of WPA and CMP, respectively, gross margin increased $2.0 million.
 
                Gross margin for the Plain Bearings segment was $20.7 million, or 39.2%, in the three month period ended September 28, 2013 versus $20.4 million, or 38.2% for the comparable period in fiscal 2013. WPA contributed $0.5 million to this improved performance. Excluding this impact, this segment’s lower performance of $0.2 million was due primarily to product mix of $0.9 million offset by cost efficiencies of $0.7 million.
               
                The Roller Bearings segment reported gross margin of $13.0 million in the three month period ended September 28, 2013 compared to $12.2 million in the same period in the prior fiscal year. This segment was favorably impacted by approximately $0.8 million in higher volume and product mix.
 
The Ball Bearings segment reported gross margin of $4.0 million, or 36.0%, in the three month period ended September 28, 2013 versus $2.3 million, or 23.4%, in the same period in fiscal 2013. CMP contributed $0.6 million to this improved performance.  Excluding this impact, this segment’s performance was primarily attributable to cost efficiencies.
 
During the three month period ended September 28, 2013, the Other segment reported gross margin of $2.9 million, or 38.0%, compared to $2.6 million, or 37.1%, for the same period in the prior fiscal year.  This gross margin performance was favorably impacted by $0.2 million of cost efficiencies and by higher volume of $0.1 million. Performance in this segment was favorably impacted by improved net sales of machine tool collets mainly in Europe.
 
Selling, General and Administrative.
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
September 28,  
2013
 
September 29,  
2012
 
$
  Change
 
 %  Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
4.2
 
$
3.6
 
$
0.6
 
15.8
%
 
Roller Bearings
 
 
1.8
 
 
1.7
 
 
0.1
 
4.8
%
 
Ball Bearings
 
 
1.0
 
 
0.8
 
 
0.2
 
30.7
%
 
Other
 
 
1.0
 
 
0.9
 
 
0.1
 
23.7
%
 
Corporate
 
 
9.1
 
 
8.8
 
 
0.3
 
3.1
%
 
Total
 
$
17.1
 
$
15.8
 
$
1.3
 
8.7
%
 
 
SG&A expenses increased by $1.3 million, or 8.7%, to $17.1 million for the three month period ended September 28, 2013 compared to $15.8 million for the same period in fiscal 2013. The increase of $1.3 million was primarily attributable to an increase of $0.3 million in personnel-related expenses, $0.3 million in professional fees, $0.2 million in incentive stock compensation expense, $0.1 million in other expenses, and $0.4 million related to the addition of two acquisitions. As a percentage of net sales, SG&A was 16.8% for the three month period ended September 28, 2013 compared to 15.7% for the same period in fiscal 2013.
 
 
17

 
Other, Net.  Other, net for the three month period ended September 28, 2013 was expense of $1.9 million compared to expense of $0.6 million for the same period in fiscal 2013.  For the three month period ended September 28, 2013, other, net consisted of $0.9 million associated with the consolidation and restructuring of the large bearing facilities, $0.4 million of amortization of intangibles, $0.4 million of costs associated with acquisitions and $0.2 million in other professional expenses.  For the three month period ended September 29, 2012, other, net consisted of $0.4 million of amortization of intangibles and $0.2 million of other expenses. 
 
Operating Income.
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
September 28, 
2013
 
September 29, 
2012
 

Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
16.1
 
$
16.5
 
$
(0.4)
 
(2.3)
%
 
Roller Bearings
 
 
11.0
 
 
9.7
 
 
1.3
 
12.7
%
 
Ball Bearings
 
 
2.3
 
 
2.2
 
 
0.1
 
3.7
%
 
Other
 
 
1.8
 
 
1.7
 
 
0.1
 
6.7
%
 
Corporate
 
 
(9.7)
 
 
(8.9)
 
 
(0.8)
 
8.2
%
 
Total
 
$
21.5
 
$
21.2
 
$
0.3
 
1.5
%
 
 
                Operating income was $21.5 million, or 21.1% of net sales, in the three month period ended September 28, 2013 compared to $21.2 million, or 21.1% of net sales, in the comparable period in fiscal 2013. The increase in operating income in three of our four segments was mostly attributable to increased commercial aircraft build rates, the aerospace aftermarket and the inclusion of WPA and CMP.  This increase was offset by a decline in the diversified industrial markets in addition to higher SG&A expenses and other expenses.
 
                The Plain Bearings segment achieved an operating income of $16.1 million in the three month period ended September 28, 2013 compared to $16.5 million for the same period last fiscal year. The decrease is primarily due to the decline in the diversified industrial market offset by the impact of the acquisition of WPA of $0.3 million.
 
                The Roller Bearings segment achieved an operating income of $11.0 million in the three month period ended September 28, 2013 compared to $9.7 million in the comparable period in fiscal 2013.  This segment was favorably impacted by cost efficiencies and product mix.
 
The Ball Bearings segment achieved an operating income of $2.3 million in the three month period ended September 28, 2013 compared to $2.2 million for the same period in the prior fiscal year.  This increase was due to the impact of the acquisition of CMP of $0.2 million. 
 
The Other segment achieved an operating income of $1.8 million in the three month period ended September 28, 2013 compared to $1.7 million for the same period in the prior fiscal year. 
 
Interest Expense, Net.  Interest expense, net was $0.3 million and $0.2 million in the three month periods ended September 28, 2013 and September 29, 2012, respectively. 
 
Income Before Income Taxes.  Income before taxes increased by $0.4 million to $21.3 million for the three month period ended September 28, 2013 compared to $20.9 million for the three month period ended September 29, 2012.
 
 
18

 
Income Taxes.  Income tax expense for the three month period ended September 28, 2013 was $7.2 million compared to $4.4 million for the three month period ended September 29, 2012. Our effective income tax rate for the three month period ended September 28, 2013 was 33.6% compared to 21.1% for the three month period ended September 29, 2012.  The effective income tax rate for the three month period ended September 28, 2013 of 33.6% includes discrete items in the amount of $0.2 million which are substantially comprised of the reversal of unrecognized tax benefits associated with the expiration of statutes of limitations and the conclusion of income tax audits as well as the recognition of interest on unrecognized tax positions.  The effective income tax rate without these discrete items would have been 34.4%.  The effective income tax rate for the three month period ended September 29, 2012 of 21.1% includes discrete items in the amount of $2.8 million which are substantially comprised of the reversal of unrecognized tax benefits associated with the conclusion of income tax audits.  The effective income tax rate without these discrete items would have been 34.7%.
 
Net Income.  Net income decreased by $2.4 million to $14.1 million for the three month period ended September 28, 2013 compared to $16.5 million for the three month period ended September 29, 2012.
 
Six Month Period Ended September 28, 2013 Compared to Six Month Period Ended September 29, 2012
 
Net Sales.
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
September 28,  
2013
 
September 29,  
2012
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
109.9
 
$
108.7
 
$
1.2
 
1.1
%
 
Roller Bearings
 
 
58.6
 
 
61.4
 
 
(2.8)
 
(4.6)
%
 
Ball Bearings
 
 
20.7
 
 
19.4
 
 
1.3
 
6.7
%
 
Other
 
 
15.4
 
 
14.2
 
 
1.2
 
8.4
%
 
Total
 
$
204.6
 
$
203.7
 
$
0.9
 
0.4
%
 
 
Net sales for the six month period ended September 28, 2013 were $204.6 million, an increase of $0.9 million, or 0.4%, compared to $203.7 million for the six month period ended September 29, 2012. Excluding the $2.5 million and $1.7 million impacts of WPA and CMP which were acquired in March 2013 and August 2013, respectively, net sales decreased $3.3 million as compared to the six month period ended September 29, 2012. Net sales to aerospace and defense customers increased 18.7% in the six month period ended September 28, 2013 compared to the same period last fiscal year, mainly driven by commercial aircraft build rates, the aerospace aftermarkets and the inclusion of WPA. In contrast, the diversified industrial markets decreased 17.6%, resulting primarily from lower activity in mining, construction and military vehicles offset by the inclusion of CMP.
 
The Plain Bearings segment achieved net sales of $109.9 million in the six month period ended September 28, 2013, an increase of $1.2 million, or 1.1%, compared to $108.7 million for the same period in the prior fiscal year.  Excluding the $2.5 million impact of WPA, the net sales decrease of $1.3 million for this segment was attributable to a decline of $11.1 million to diversified industrial customers in mining, construction and military vehicles offset by higher net sales to aerospace and defense customers of $9.8 million attributed to higher build rates.
 
                The Roller Bearings segment achieved net sales of $58.6 million in the six month period ended September 28, 2013, a decrease of $2.8 million, or 4.6%, compared to $61.4 million for the same period in the prior fiscal year. Net sales to the diversified industrial sector declined $6.0 million offset by an increase of $3.2 million from the aerospace and defense sector. This segment was primarily affected by the lower activity in mining and construction.
 
The Ball Bearings segment achieved net sales of $20.7 million in the six month period ended September 28, 2013, an increase of $1.3 million, or 6.7%, compared to $19.4 million for the same period in the prior fiscal year. Excluding the $1.7 million impact of CMP, net sales decreased $0.4 million.
 
 
19

 
The Other segment, which is focused mainly on the sale of machine tool collets and precision components, achieved net sales of $15.4 million in the six month period ended September 28, 2013, an increase of $1.2 million, or 8.4%, compared to $14.2 million for the same period in the prior fiscal year. Of this increase, $0.3 million is due to increased demand for mechanical components mainly in the U.S. market combined with $0.9 million of increased volume of machine tool collets, mainly in Europe.
 
Gross Margin.
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
September 28, 
2013
 
September 29, 
2012
 

Change
 

Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
43.0
 
$
41.7
 
$
1.3
 
3.1
%
 
Roller Bearings
 
 
25.2
 
 
23.7
 
 
1.5
 
6.6
%
 
Ball Bearings
 
 
7.1
 
 
4.5
 
 
2.6
 
56.5
%
 
Other
 
 
5.8
 
 
6.1
 
 
(0.3)
 
(5.0)
%
 
Total
 
$
81.1
 
$
76.0
 
$
5.1
 
6.7
%
 
 
                Gross margin was $81.1 million, or 39.6% of net sales, in the six month period ended September 28, 2013, versus $76.0 million, or 37.3% of net sales, for the same period in fiscal 2013. Excluding the $0.9 million and $0.6 million impact of WPA and CMP, respectively, gross margin increased $3.6 million.
               
Gross margin for the Plain Bearings segment was $43.0 million, or 39.1%, in the six month period ended September 28, 2013 versus $41.7 million, or 38.3% for the comparable period in fiscal 2013. WPA contributed $0.9 million to this improved performance. Excluding this impact, this segment’s improved performance of $0.4 million was due primarily to product mix/pricing of $0.1 million and $0.3 million of cost efficiencies.
 
The Roller Bearings segment reported gross margin of $25.2 million, or 43.1%, in the six month period ended September 28, 2013 compared to $23.7 million, or 38.5%, in the same period in the prior fiscal year. This segment was favorably impacted by approximately $0.8 million in cost efficiencies and $0.7 million in product mix/pricing.
 
The Ball Bearings segment reported gross margin of $7.1 million, or 34.1%, in the six month period ended September 28, 2013 versus $4.5 million, or 23.2%, in the same period in fiscal 2013. CMP contributed $0.6 million to this improved performance. Excluding this impact, this segment’s performance was primarily attributable to cost efficiencies.
 
During the six month period ended September 28, 2013, the Other segment reported gross margin of $5.8 million, or 37.8%, compared to $6.1 million, or 43.2%, for the same period in the prior fiscal year.  This gross margin performance was unfavorably impacted by higher costs of $0.6 million offset by higher volume of $0.3 million.
 
 
20

 
Selling, General and Administrative.
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
September 28,  
2013
 
September 29,  
2012
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
 
$
8.5
 
$
7.4
 
$
1.1
 
15.8
%
Roller Bearings
 
 
3.5
 
 
3.4
 
 
0.1
 
2.7
%
Ball Bearings
 
 
1.7
 
 
1.6
 
 
0.1
 
6.9
%
Other
 
 
2.1
 
 
1.8
 
 
0.3
 
18.6
%
Corporate
 
 
18.3
 
 
17.7
 
 
0.6
 
3.1
%
Total
 
$
34.1
 
$
31.9
 
$
2.2
 
7.1
%
 
SG&A expenses increased by $2.2 million, or 7.1%, to $34.1 million for the six month period ended September 28, 2013 compared to $31.9 million for the same period in fiscal 2013. The increase of $2.2 million was primarily attributable to an increase of $0.6 million in personnel-related expenses, $0.3 million in professional fees, $0.3 million in incentive stock compensation expense, $0.5 million in advertising expenses and $0.5 million related to the addition of two acquisitions.  As a percentage of net sales, SG&A was 16.7% for the six month period ended September 28, 2013 compared to 15.6% for the same period in fiscal 2013.
 
Other, Net.  Other, net for the six month period ended September 28, 2013 was expense of $3.1 million, an increase of $2.2 million, compared to expense of $0.9 million for the same period in fiscal 2013.  For the six month period ended September 28, 2013, other, net consisted of $1.5 million associated with the consolidation and restructuring of the large bearing facilities, $0.8 million of amortization of intangibles, $0.4 million of costs associated with acquisitions and $0.4 million in professional expenses. For the six month period ended September 29, 2012, other, net consisted of $0.8 million of amortization of intangibles and $0.1 million of other miscellaneous expense.
 
Operating Income.
 
 
Six Months Ended
 
 
 
 
 
 
 
 
September 28, 
2013
 
September 29, 
2012
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Plain Bearings
$
33.7
 
$
33.8
 
$
(0.1)
 
(0.2)
%
 
Roller Bearings
 
21.4
 
 
20.1
 
 
1.3
 
6.9
%
 
Ball Bearings
 
3.9
 
 
2.9
 
 
1.0
 
36.3
%
 
Other
 
3.9
 
 
4.3
 
 
(0.4)
 
(11.9)
%
 
Corporate
 
(19.1)
 
 
(17.9)
 
 
(1.2)
 
6.9
%
 
Total
$
43.8
 
$
43.2
 
$
0.6
 
1.4
%
 
 
                Operating income was $43.8 million, or 21.4% of net sales, in the six month period ended September 28, 2013 compared to $43.2 million, or 21.2% of net sales, in the comparable period in fiscal 2013.  The increase is primarily due to the acquisitions of WPA and CMP.
 
The increase in operating income in two of our four segments was mostly attributable to increased commercial aircraft build rates, the aerospace aftermarket and the inclusion of WPA and CMP.  This increase was offset by a decline in the diversified industrial markets in addition to higher SG&A expenses.
                 
The Plain Bearings segment achieved an operating income of $33.7 million in the six month period ended September 28, 2013 compared to $33.8 million for the same period last fiscal year. The decrease is primarily due to the decline in the diversified industrial market offset by the impact of the acquisition of WPA of $0.6 million.
 
 
21

 
The Roller Bearings segment achieved an operating income of $21.4 million in the six month period ended September 28, 2013 compared to $20.1 million in the comparable period in fiscal 2013.  This segment was favorably impacted by $0.8 million in cost efficiencies and $0.7 million in product mix/pricing offset by a slight increase in SG&A.
 
The Ball Bearings segment achieved an operating income of $3.9 million in the six month period ended September 28, 2013 compared to $2.9 million for the same period in the prior fiscal year.  This increase was primarily due to cost efficiencies and the impact of the acquisition of CMP of $0.2 million.
 
The Other segment achieved an operating income of $3.9 million in the six month period ended September 28, 2013 compared to $4.3 million for the same period in the prior fiscal year. 
 
Interest Expense, Net.  Interest expense, net increased by $0.1 million to $0.5 million in the six month period ended September 28, 2013, compared to $0.4 million in the same period last fiscal year.
 
Other Non-Operating (Income) Expense.  Other non-operating income was $0.2 million in the six month period ended September 28, 2013 compared to income of $3.2 million in the same period last fiscal year. The change of $3.0 million was primarily due to the receipt of a CDSOA distribution payment in the amount of $3.6 million offset by $0.6 million from the impact of foreign exchange rates on foreign currency deposits.
 
Income Before Income Taxes.  Income before taxes decreased by $2.5 million to $43.5 million for the six month period ended September 28, 2013 compared to $46.0 million for the six month period ended September 29, 2012.
 
Income Taxes.  Income tax expense for the six month period ended September 28, 2013 was $14.3 million compared to $12.3 million for the six month period ended September 29, 2012. Our effective income tax rate for the six month period ended September 28, 2013 was 32.8% compared to 26.8% for the six month period ended September 29, 2012.  The effective income tax rate for the six month period ended September 28, 2013 of 32.8% includes discrete items in the amount of $0.5 million which are substantially comprised of the reversal of unrecognized tax benefits associated with the expiration of statutes of limitations and the conclusion of income tax audits as well as the recognition of interest on unrecognized tax positions.  The effective income tax rate without these discrete items would have been 34.1%.  The effective income tax rate for the six month period ended September 29, 2012 of 26.8% includes discrete items in the amount of $3.7 million which are substantially comprised of the reversal of unrecognized tax benefits associated with the conclusion of income tax audits.  The effective income tax rate without these discrete items would have been 34.9%.  In addition to discrete items, the effective income tax rates are different from U.S. statutory rates due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and an officers’ compensation adjustment and state income taxes which increase the rate.
 
Net Income.  Net income decreased by $4.5 million to $29.2 million for the six month period ended September 28, 2013 compared to $33.7 million for the six month period ended September 29, 2012.
 
Liquidity and Capital Resources
 
                Our business is capital intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth in part through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.
 
 
22

 
  
Liquidity
 
    On October 1, 2012, Schaublin purchased the land and building, which it currently occupies and had been leasing, for 14.1 million CHF (approximately $15.0 million). Schaublin obtained a 20 year fixed rate mortgage for 9.3 million CHF (approximately $9.9 million) at an interest rate of 2.9%. The balance of the purchase price of 4.8 million CHF (approximately $5.1 million) was paid from cash on hand. As of September 28, 2013, the balance on this mortgage was 8.8 million CHF, or $9.7 million.
 
                On November 30, 2010, we and RBCA terminated the previous KeyBank Credit Agreement and the related credit, security and ancillary agreements, and entered into a new credit agreement (the “JP Morgan Credit Agreement”) and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides RBCA with a $150.0 million five-year senior secured revolving credit facility which can be increased by up to $100.0 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 JP Morgan Credit Agreement generally bear interest at the prime rate, or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, our margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans.
 
                The JP Morgan Credit Agreement requires us to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA not to exceed 3.25 to 1; and (2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. As of September 28, 2013, we were in compliance with all such covenants.
 
                The JP Morgan 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 JP Morgan 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.
 
                On November 30, 2010, we borrowed approximately $30.0 million under the JP Morgan Credit Agreement and used such funds to repay the approximately $30.0 million balance outstanding under the KeyBank Credit Agreement. In the first quarter of fiscal 2012, we paid down the $30.0 million outstanding revolver balance. Amounts outstanding under the new credit agreement are generally due and payable on the expiration date of November 30, 2015. We may elect to prepay some or all of the outstanding balance from time to time without penalty.
 
                Approximately $6.0 million of the JP Morgan Credit Agreement is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain insurance programs. As of September 28, 2013, RBCA had the ability to borrow up to an additional $144.0 million under the JP Morgan Credit Agreement.
 
                On October 27, 2008, Schaublin entered into a new bank credit facility with Credit Suisse 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 CHF, or $4.4 million, of revolving credit loans and letters of credit. Borrowings under this facility bear interest at Credit Suisse’s prevailing prime bank rate. As of September 28, 2013, there were no borrowings under the Swiss Credit Facility.
 
 
23

 
                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.
 
As of September 28, 2013, we had cash and cash equivalents of $110.2 million of which approximately $36.7 million was cash held by our foreign operations.  We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign entities. 
 
Cash Flows
 
Six Month Period Ended September 28, 2013 Compared to the Six Month Period Ended September 29, 2012
               
In the six month period ended September 28, 2013, we generated cash of $21.5 million from operating activities compared to $29.7 million for the six month period ended September 29, 2012. The decrease of $8.2 million was mainly a result of a decrease of $4.4 million in net income, the addition of non-cash charges of $2.8 million and the net of a change in operating assets and liabilities of $6.6 million. The change in working capital investment was primarily attributable to increases in accounts receivable of $5.4 million, inventory build of $3.9 million, a decrease in prepaid expenses and other current assets of $4.1 million, an increase in other non-current assets of $0.4 million, a decrease in accounts payable of $0.7 million and a decrease in accrued expenses and other current liabilities of $3.7 million offset by an increase in non-current liabilities of $3.4 million. Inventory turnover for the six month period ended September 28, 2013 decreased to 1.7 as compared to 1.9 for the same period in the prior fiscal year.  Days sales outstanding remained at 60 as of September 28, 2013 and September 29, 2012, respectively.
 
Cash used in investing activities for the six month period ended September 28, 2013 included $14.6 million for capital expenditures, $0.7 million for the purchase of short-term investments and $13.6 for the acquisition of business. Cash used in investing activities for the six month period ended September 29, 2012 included $11.6 million related to capital expenditures and $0.8 million for the purchase of short-term investments.
 
Financing activities provided $1.5 million in the six month period ended September 28, 2013 compared to $14.7 million for the six month period ended September 29, 2012. The six month period ended September 28, 2013 included $1.4 million from the exercise of stock options and $0.5 million in excess tax benefits from stock-based compensation offset by $0.1 million from the repurchase of common stock and $0.3 million of payments on notes payable. The six month period ended September 29, 2012 included $10.6 million from the exercise of stock options and $4.1 million in excess tax benefits from stock-based compensation.
 
Capital Expenditures
 
                Our capital expenditures were $14.6 million for the six month period ended September 28, 2013.  In addition, we expect to make additional capital expenditures of $15.0 to $20.0 million during fiscal 2014 including the construction of a new manufacturing facility in Poland. We expect to fund fiscal 2014 capital expenditures principally through existing cash, internally generated funds and debt. We may also make substantial additional capital expenditures in connection with acquisitions.
 
Obligations and Commitments
 
As of September 28, 2013, there were no material changes in capital lease, operating lease or pension and postretirement obligations as compared to such obligations and liabilities as of March 30, 2013.
 
 
24

 
Other Matters
 
Critical Accounting Estimates
 
                Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our fiscal 2013 Annual Report, incorporated by reference in our fiscal 2013 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2014.
 
 
25

 

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 no debt outstanding under the credit agreement. If we do incur debt in the future, we would evaluate the impact of interest rate changes on our net income and cash flow and take appropriate action to limit our exposure.
 
                Foreign Currency Exchange Rates.  As a result of our operations in Europe, we are exposed to risk associated with fluctuating currency exchange rates between the U.S. dollar, the Euro, the Swiss Franc and the British Pound Sterling.  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. Approximately 14% of our net sales were impacted by foreign currency fluctuations in the first six months of fiscal 2014 compared to approximately 11% in the same period in fiscal 2013. We expect that this proportion is likely to increase as we seek to increase our penetration of foreign markets, particularly within the aerospace and defense markets. Foreign currency transaction exposure arises primarily from the transfer of foreign currency from one subsidiary to another within the group, and to foreign currency denominated trade receivables. Unrealized currency translation gains and losses are recognized upon translation of the foreign subsidiaries’ balance sheets to U.S. dollars. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our earnings.  We periodically enter into derivative financial instruments in the form of forward exchange contracts to reduce the effect of fluctuations in exchange rates on certain third-party sales transactions denominated in non-functional currencies. Based on the accounting guidance related to derivatives and hedging activities, we record derivative financial instruments at fair value. For derivative financial instruments designated and qualifying as cash flow hedges (of which there were none at September 28, 2013), the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (“AOCI”), and is reclassified into earnings when the hedged transaction affects earnings. As of September 28, 2013, the net impact of existing gains or losses expected to be reclassified from AOCI into earnings over the next twelve months is not material.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 

ITEM 4.   Controls and Procedures

 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 28, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 28, 2013, 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 September 28, 2013 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).
 
 
26

 
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 six month period ended September 28, 2013. For a discussion of the Risk Factors, refer to Part I, Item 2, “Cautionary Statement As To Forward-Looking Information,” contained in this report and Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the period ended March 30, 2013.
 

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

 
Unregistered Sales of Equity Securities
 
None.
 
Use of Proceeds
 
Not applicable.
 
Issuer Purchases of Equity Securities
 
                On February 7, 2013, our board of directors authorized us to repurchase up to $50.0 million of our common stock, from time to time on the open market, in block trade transactions and through privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18 depending on market conditions, alternative uses of capital and other relevant factors.  Purchases may be commenced, suspended, or discontinued at any time without prior notice.  This repurchase authorization terminates and replaces the existing $10.0 million stock repurchase program announced by us on June 15, 2007.
 
                Total share repurchases for the three months ended September 28, 2013 are as follows:
 
Period
 
Total
number
of shares
Purchased
 
Average
price paid
per share
 
Number of
shares
purchased
as part of the
publicly
announced
program
 
Approximate
dollar value
of shares still
available to be
purchased
under the
program
(000’s)
 
06/30/2013 – 7/27/2013
 
 
 
 
$
49,819
 
07/28/2013 – 08/24/2013
 
 
 
 
 
49,819
 
08/25/2013 – 09/28/2013
 
 
 
 
$
49,819
 
Total
 
 
 
 
 
 
 
 
 
27

 
ITEM 3.                Defaults Upon Senior Securities
 
Not applicable.
 
ITEM 4.                Mine Safety Disclosures
 
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.
 
 
28

 
SIGNATURES
 
                Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
RBC Bearings Incorporated
 
 
(Registrant)
 
 
 
 
By:
/s/ Michael J. Hartnett
 
 
Name:
Michael J. Hartnett
 
 
Title:
Chief Executive Officer
 
 
Date:
November 7, 2013
 
 
 
 
 
By:
/s/ Daniel A. Bergeron
 
 
Name:
Daniel A. Bergeron
 
 
Title:
Chief Financial Officer
 
 
Date:
November 7, 2013
 
 
29

 
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.
 
 
30

 
Exhibit 31.01
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Michael J. Hartnett, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of RBC Bearings Incorporated;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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; and
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 7, 2013
By:
/s/ Michael J. Hartnett
 
 
 
Michael J. Hartnett
 
 
 
President and Chief Executive Officer
 
 
 
Exhibit 31.02
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Daniel A. Bergeron, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of RBC Bearings Incorporated;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to 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; and
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 7, 2013
By:
/s/ Daniel A. Bergeron
 
 
 
Daniel A. Bergeron
 
 
 
Chief Financial Officer
 
 
 
Exhibit 32.01
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C SECTION 1350
 
The undersigned, Michael J. Hartnett, the President and Chief Executive Officer of RBC Bearings Incorporated (the “Company”), pursuant to 18 U.S.C. §1350, hereby certifies that:
 
(i) the Quarterly Report on Form 10-Q for the period ended September 28, 2013 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated: November 7, 2013
 
 
/s/ Michael J. Hartnett
 
Michael J. Hartnett
 
President and Chief Executive Officer
 
 
Exhibit 32.02
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
 
The undersigned, Daniel A. Bergeron, Chief Financial Officer, of RBC Bearings Incorporated (the “Company”), pursuant to 18 U.S.C. §1350, hereby certifies:
 
(i) the Quarterly Report on Form 10-Q for the period ended September 28, 2013 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated: November 7, 2013
 
 
/s/ Daniel A. Bergeron
 
Daniel A. Bergeron
 
Chief Financial Officer