UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 
FORM 10-Q
 
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2008
 
OR
 
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to           .
 
Commission File Number:  333-124824

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

Delaware
95-4372080
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)

One Tribology Center
 
06478
(Address of principal executive offices)
(Zip Code)
 
(203) 267-7001
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
 
As of February 2, 2009, RBC Bearings Incorporated had 21,709,236 shares of Common Stock outstanding.
 


 
 

 
 
TABLE OF CONTENTS

Part I -  FINANCIAL INFORMATION
3
     
ITEM 1.
Unaudited Consolidated Financial Statements
3
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
20
ITEM 4.
Controls and Procedures
21
 
Changes in Internal Control over Financial Reporting
21
   
22
     
ITEM 1.
Legal Proceedings
22
ITEM 1A.
Risk Factors
22
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22
ITEM 3.
Defaults Upon Senior Securities
23
ITEM 4.
Submission of Matters to a Vote of Security Holders
23
Other Information
23
ITEM 6.
Exhibits
23

 
2

 

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
 
RBC Bearings Incorporated
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
 
   
December 27, 
2008
   
March 29, 
2008
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash
  $ 15,098     $ 9,859  
Accounts receivable, net of allowance for doubtful accounts of $1,191 at December 27, 2008 and $1,018 at March 29, 2008
    62,954       66,137  
Inventory
    135,105       123,820  
Deferred income taxes
    4,787       5,567  
Prepaid expenses and other current assets
    11,789       9,976  
Total current assets
    229,733       215,359  
Property, plant and equipment, net
    83,562       73,243  
Goodwill
    32,829       31,821  
Intangible assets, net of accumulated amortization of $4,742 at December 27, 2008 and $3,583 at March 29, 2008
    12,863       11,404  
Other assets
    4,827       5,285  
Total assets
  $ 363,814     $ 337,112  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
           
Accounts payable
  $ 22,201     $ 24,851  
Accrued expenses and other current liabilities
    16,934       13,489  
Current portion of long-term debt
    1,190       750  
Total current liabilities
    40,325       39,090  
Long-term debt, less current portion
    53,000       57,000  
Deferred income taxes
    5,259       6,064  
Other non-current liabilities
    14,355       11,048  
Total liabilities
    112,939       113,202  
                 
Stockholders' equity:
               
Preferred stock, $.01 par value; authorized shares: 10,000,000 at December 27, 2008 and March 29, 2008; none issued and outstanding
           
Common stock, $.01 par value; authorized shares: 60,000,000 at December 27, 2008 and March 29, 2008; issued and outstanding shares: 21,838,486 at December 27, 2008 and 21,782,186 at March 29, 2008
    218       218  
Additional paid-in capital
    186,393       184,285  
Accumulated other comprehensive income (loss)
    (1,288 )     1,312  
Retained earnings
    69,659       41,688  
Treasury stock, at cost, 129,250 shares at December 27, 2008 and 113,322 shares at March 29, 2008
    (4,107 )     (3,593 )
Total stockholders' equity
    250,875       223,910  
Total liabilities and stockholders' equity
  $ 363,814     $ 337,112  
 
See accompanying notes.

 
3

 

RBC Bearings Incorporated
Consolidated Statements of Operations
(dollars in thousands, except share and per share data)
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
    
December 27,
2008
   
December 29,
2007
   
December 27,
2008
   
December 29,
2007
 
Net sales
  $ 85,281     $ 80,407     $ 271,955     $ 238,462  
Cost of sales
    56,779       52,853       182,681       157,226  
Gross margin
    28,502       27,554       89,274       81,236  
Operating expenses:
                               
      Selling, general and administrative
    14,403       12,042       41,482       35,232  
      Other, net
    1,304       401       2,783       1,117  
Total operating expenses
    15,707       12,443       44,265       36,349  
Operating income
    12,795       15,111       45,009       44,887  
Interest expense, net
    749       849       2,080       2,748  
Loss on early extinguishment of debt
                319       27  
Other non-operating expense (income)
    325       (360 )     491       (712 )
Income before income taxes
    11,721       14,622       42,119       42,824  
Provision for income taxes
    4,021       5,041       14,148       14,669  
Net income
  $ 7,700     $ 9,581     $ 27,971     $ 28,155  
Net income per common share:
                               
Basic
  $ 0.36     $ 0.45     $ 1.30     $ 1.31  
Diluted
  $ 0.35     $ 0.44     $ 1.29     $ 1.29  
Weighted average common shares:
                               
Basic
    21,575,756       21,458,764       21,568,227       21,422,581  
Diluted
    21,745,996       21,833,870       21,763,105       21,811,793  

See accompanying notes.

 
4

 

RBC Bearings Incorporated
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
 
   
Nine Months Ended
 
    
December 27,
 2008
   
December 29,
 2007
 
Cash flows from operating activities:
           
Net income
  $ 27,971     $ 28,155  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    8,387       6,725  
Excess tax benefits from stock-based compensation
    (99 )     (8,789 )
Deferred income taxes
    (18 )     (1,238 )
Amortization of intangible assets
    1,159       891  
Amortization of deferred financing costs
    174       168  
Stock-based compensation
    1,756       770  
Loss on disposition of assets
    615       25  
Loss on early extinguishment of debt (non-cash portion)
    319       27  
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
    3,138       (403 )
Inventory
    (10,858 )     (11,124 )
Prepaid expenses and other current assets
    (1,807 )     (993 )
Other non-current assets
    (997 )     1,671  
Accounts payable
    (2,506 )     2,712  
Accrued expenses and other current liabilities
    3,155       6,726  
Other non-current liabilities
    2,176       (717 )
Net cash provided by operating activities
    32,565       24,606  
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (17,727 )     (14,288 )
Acquisition of businesses, net of cash acquired
    (6,579 )     (7,947 )
Proceeds from sale of assets
    562       14  
Net cash used in investing activities
    (23,744 )     (22,221 )
                 
Cash flows from financing activities:
               
Net increase (decrease) in revolving credit facility
    12,000       (7,000 )
Exercise of stock options
    253       1,753  
Excess tax benefits from stock-based compensation
    99       8,789  
Repurchase of common stock
    (515 )     (750 )
Retirement of industrial revenue bonds
    (15,500 )     (1,155 )
Payments on notes payable
    (60 )      
Principal payments on capital lease obligations
    (144 )     (141 )
Financing fees paid in connection with senior credit facility
    (27 )     (53 )
Net cash provided by (used in) financing activities
    (3,894 )     1,443  
                 
Effect of exchange rate changes on cash
    312       182  
                 
Cash and cash equivalents:
               
Increase during the period
    5,239       4,010  
Cash, at beginning of period
    9,859       5,184  
Cash, at end of period
  $ 15,098     $ 9,194  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 1,848     $ 2,464  
Income taxes
  $ 14,154     $ 5,727  
 
See accompanying notes.

 
5

 

RBC Bearings Incorporated
Notes to Unaudited Interim Consolidated Financial Statements
(dollars in thousands, except share and per share data)

The consolidated financial statements included herein have been prepared by RBC Bearings Incorporated, a Delaware corporation (collectively with its subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The March 29, 2008 fiscal year end balance sheet data have been derived from the Company’s audited financial statements, but do not include all disclosures required by generally accepted accounting principles in the United States. The interim financial statements included with this report have been prepared on a consistent basis with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2008.

The consolidated financial statements include the accounts of RBC Bearings Incorporated and its wholly-owned subsidiary, Roller Bearing Company of America, Inc. (“RBCA”) and its wholly-owned subsidiaries, Industrial Tectonics Bearings Corporation (“ITB”), RBC Linear Precision Products, Inc. (“LPP”), RBC Nice Bearings, Inc. (“Nice”), RBC Precision Products - Bremen, Inc. (“Bremen (MBC)”), RBC Precision Products - Plymouth, Inc. (“Plymouth”), Tyson Bearings, Inc. (“Tyson”), Schaublin Holdings S.A. and its wholly-owned subsidiaries (“Schaublin”), RBC de Mexico S DE RL DE CV (“Mexico”), RBC Oklahoma, Inc. (“RBC Oklahoma”), RBC Aircraft Products, Inc. (“API”), Shanghai Representative office of Roller Bearing Company of America, Inc. (“RBC Shanghai”), RBC Southwest Products, Inc. (“SWP”), All Power Manufacturing Co. (“All Power”), RBC Bearings U.K. Limited and its wholly-owned subsidiary Phoenix Bearings Limited (“Phoenix”) and RBC CBS Coastal Bearing Services LLC (“CBS”), as well as the Transport Dynamics (“TDC”), Heim (“Heim”), Engineered Components (“ECD”), A.I.D. Company (“AID”),  BEMD Company (“BEMD”) and PIC Design (“PIC Design”) divisions of RBCA. U.S. Bearings (“USB”) is a division of SWP and Schaublin USA is a division of Nice.  All material intercompany balances and transactions have been eliminated in consolidation.

These financial statements reflect all adjustments, accruals and estimates consisting only of items of a normal recurring nature, which are, in the opinion of management, necessary for the fair presentation of the consolidated financial condition and consolidated results of operations for the interim periods presented.  These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended March 29, 2008.

The Company operates in four reportable business segments—roller bearings, plain bearings, ball bearings, other and corporate—in which it manufactures roller bearing components and assembled parts and designs and manufactures high-precision roller and ball bearings. The Company sells to a wide variety of original equipment manufacturers (“OEMs”) and distributors who are widely dispersed geographically.

The results of operations for the three month and nine month periods ended December 27, 2008 are not necessarily indicative of the operating results for the full year. The nine month periods ended December 27, 2008 and December 29, 2007 each include 39 weeks. The amounts shown are in thousands, unless otherwise indicated.

Certain reclassifications have been made to prior year’s financial statements to conform with current year presentation.

Adoption of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS No. 157”) in order to establish a single definition of fair value and a framework for measuring fair value that is intended to result in increased consistency and comparability in fair value measurements. In February 2008, the FASB issued Staff Position FAS 157-2, which delayed by one year the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay pertains to items including, but not limited to, non-financial assets and non-financial liabilities initially measured at fair value in a business combination, reporting units measured at fair value in the first step of evaluating goodwill for impairment, indefinite-lived intangible assets measured at fair value for impairment assessment, and long-lived assets measured at fair value for impairment assessment.  The adoption of SFAS No. 157 as of the beginning of the 2009 fiscal year did not have a significant impact on the measurement of the Company’s financial assets and liabilities. The Company plans to adopt the remaining provisions of SFAS No. 157 as of the beginning of its 2010 fiscal year and does not expect SFAS No. 157 to have a material impact on its results of operations and financial position.

 
6

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”).  This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  The Company chose to not adopt the fair value measurement provisions of SFAS No. 159.

Pending Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements.

In comparison to current practice, the most significant changes to business combination accounting pursuant to SFAS No. 141(R) include requirements to:

 
·
Recognize, with certain exceptions, 100 percent of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity.
 
·
Measure acquirer shares issued in consideration for a business combination at fair value on the acquisition date.
 
·
Recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings.
 
·
With certain exceptions, recognize preacquisition loss and gain contingencies at their acquisition-date fair values.
 
·
Capitalize in-process research and development (IPR&D) assets acquired.
 
·
Expense, as incurred, acquisition-related transaction costs.
 
·
Capitalize acquisition-related restructuring costs only if the criteria in SFAS No. 146 are met as of the acquisition date.
 
·
Recognize changes that result from a business combination transaction in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals as adjustments to income tax expense.

The premise of SFAS No. 160 is based on the economic entity concept of consolidated financial statements.  Under the economic entity concept, all residual economic interest holders in an entity have an equity interest in the consolidated entity, even if the residual interest is relative to only a portion of the entity (i.e., a residual interest in a subsidiary). Therefore, SFAS No. 160 requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity because the noncontrolling interests meet the definition of equity of the consolidated entity. SFAS No. 141(R) is required to be adopted concurrently with SFAS No. 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for the Company is fiscal 2010.  Early adoption is prohibited. The Company is currently assessing the impact that SFAS No. 141(R) and SFAS No. 160 will have on its results of operations and financial position.

 
7

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  SFAS No. 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS No.161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flow. To meet those objectives, SFAS No. 161 requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure (e.g., interest rate, credit or foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge, net investment hedge, and non-hedges), (2) information about the volume of derivative activity in a flexible format the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income (OCI) location and amounts of gains and losses on derivative instruments by type of contract (e.g., interest rate contracts, credit contracts or foreign exchange contracts), and (4) disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years or interim periods beginning after November 15, 2008. Early application is encouraged, as are comparative disclosures for earlier periods, but neither are required.  The Company currently has only one interest rate swap and will adopt the disclosure provisions of SFAS No. 161 in the fourth quarter of fiscal 2009.

1.  Acquisition

On June 6, 2008, the Company acquired the assets of Precision Industrial Components LLC (“PIC Design”) for $6,579 in cash and the assumption of certain liabilities. As a result of the acquisition, the Company recorded intangible assets of $1,055, fixed assets of $1,678, goodwill of $998, other long-term assets of $57, other long-term liabilities of $420 and $3,211 of working capital.  PIC Design, located in Middlebury, Connecticut, is a manufacturer and supplier of tight-tolerance, precision mechanical components for use in the motion control industry. PIC Design is included in the Other segment. Proforma net sales and net income inclusive of  PIC Design are not materially different from the amounts as reported in the accompanying consolidated statements of operations.

2. Net Income Per Common Share

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

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

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

 
8

 

   
Three Months Ended
   
Nine months Ended
 
    
December 27,
2008
   
December 29,
2007
   
December 27,
2008
   
December 29,
2007
 
                         
Net income
  $ 7,700     $ 9,581     $ 27,971     $ 28,155  
                                 
Denominator for basic net income  per common share—weighted-average shares
    21,575,756       21,458,764       21,568,227       21,422,581  
Effect of dilution due to employee stock options
    170,240       375,106       194,878       389,212  
Denominator for diluted net income per common share — weighted-average shares
    21,745,996       21,833,870       21,763,105       21,811,793  
                                 
Basic net income per common share
  $ 0.36     $ 0.45     $ 1.30     $ 1.31  
                                 
Diluted net income per common share
  $ 0.35     $ 0.44     $ 1.29     $ 1.29  

3.  Inventory

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

   
December 27, 
2008
   
March 29, 
2008
 
Raw materials
  $ 12,123     $ 11,561  
Work in process
    41,319       38,488  
Finished goods
    81,663       73,771  
    $ 135,105     $ 123,820  

4.  Comprehensive Income

Total comprehensive income is as follows:

   
Three Months Ended
   
Nine Months Ended
 
    
December 27,
2008
   
December 29,
2007
   
December 27,
2008
   
December 29,
2007
 
Net income
  $ 7,700     $ 9,581     $ 27,971     $ 28,155  
Net prior service cost and actuarial losses, net of taxes
    (14 )      15       (41 )      43  
Change in fair value of derivatives, net of taxes
    (969 )           (552 )      
Foreign currency translation adjustments
    682       474       (2,007 )     1,377  
Total comprehensive income
  $ 7,399     $ 10,070     $ 25,371     $ 29,575  

5.  Debt

On October 27, 2008, Schaublin entered into a new bank credit facility with Credit Suisse (the “Swiss Credit Facility”) which replaced the prior bank credit facility of December 8, 2003 and its amendment of November 8, 2004.  This facility provides for up to 4,000 Swiss francs, or $3,721, of revolving credit loans and letters of credit.  Borrowings under the Swiss Credit Facility bear interest at Credit Suisse’s prevailing prime bank rate.  As of December 27, 2008, there were no borrowings under the Swiss Credit Facility.

 
9

 

On January 8, 2008, the Company entered into an interest rate swap agreement with a total notional value of $30,000 to hedge a portion of its variable rate debt. Under the terms of the agreement, the Company pays interest at a fixed rate (3.64%)  and receives interest at variable rates. The maturity date of the interest swap is June 24, 2011. The fair value of this swap at December 27, 2008 was a liability of $1,645 and was included in other current liabilities. This instrument is designated and qualifies as a cash flow hedge. Accordingly, the gain or loss on both the hedging instrument and the hedged item attributable to the hedged risk are recognized in other comprehensive income.

On May 1, 2008, the Company voluntarily paid off the Series 1999 Industrial Revenue Bond (“IRB”), the prinicipal amount of which was $4,800. In addition, on June 2, 2008, the Company voluntarily paid off the Series 1994 A and B IRBs, the principal amounts of which were $7,700 and $3,000, respectively. The Company recorded a non-cash pre-tax charge of approximately $319 in the nine month period ended December 27, 2008 to write off deferred financing costs associated with the voluntary payoff of the IRBs.

The balances payable under all borrowing facilities are as follows:
 
   
December 27,
2008
   
March 29,
2008
 
KeyBank Credit Agreement
           
Five-year senior secured revolving credit facility; amounts outstanding bear interest at the prime rate or LIBOR, plus a specified margin, depending on the type of borrowing being made (prime rate 3.50% and 5.25% at December 27, 2008 and March 29, 2008, respectively, and LIBOR 1.44% and 2.69% at December 27, 2008 and March 29, 2008, respectively)
  $ 53,000     $ 41,000  
Note Payable, payable through September 2009
    1,190       1,250  
Industrial Development Revenue Bonds
               
Series 1994 A, bears interest at a variable rate payable monthly through September 2017
          7,700  
Series 1994 B, bears interest at a variable rate, payable monthly through December 2017
          3,000  
Series 1999, bearing interest at variable rates, payable monthly through April 2024
          4,800  
Total Debt
    54,190       57,750  
Less: Current Portion
    1,190       750  
Long-Term Debt
  $ 53,000     $ 57,000  

The current portion of long-term debt as of December 27, 2008 include $440 notes payable related to the acquisitions of AID and BEMD and a $750 note payable related to the All Power acquisition.

6.  Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to state or foreign income tax examinations by tax authorities for years ending before March 31, 2001.   The Company is no longer subject to U.S. federal tax examination by the Internal Revenue Service for years ending before March 31, 2003.

The Company does not expect any material changes to the unrecognized tax benefits within the next twelve months.  The total amount of unrecognized tax benefits during the three month period ended December 27, 2008 increased by $2,829 as a result of filing amended tax returns relating to research credits.

The effective income tax rates for the three and nine month periods ended December 27, 2008 and December 29, 2007 were 34.3% and 34.5% and 33.6% and 34.3%, respectively. The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

 
10

 
 
7.           Reportable Segments

The Company operates through operating segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Those operating segments with similar economic characteristics and that meet all other required criteria, including nature of the products and production processes, distribution patterns and classes of customers, are aggregated as reportable segments. Certain other operating segments do not exhibit the common attributes mentioned above and do not meet the quantitative thresholds for separate disclosure, and their information is combined and disclosed as “Other.” There is also a segment reflecting corporate charges.

The Company has four reportable business segments engaged in the manufacture and sale of the following:
 
Roller Bearings.  Roller bearings are anti-friction bearings that use rollers instead of balls. The Company manufactures four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.
 
Plain Bearings.  Plain bearings are produced with either self-lubricating or metal-to-metal designs and consist of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components.

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

Other.  Other consists of four minor operating locations that do not fall into the above segmented categories. The Company produces precision ground ball bearing screws that offer repeatable positioning accuracy in machine tools, transfer lines, robotic handling and semiconductor equipment. The Company’s precision machine tool collets  provide effective part holding and accurate part location during machining operations. Additionally, the Company provides machining for integrated bearing assemblies and aircraft components for the commercial and defense aerospace markets and tight-tolerance, precision mechanical components for use in the motion control industry.

Corporate.  Corporate consists of expenses incurred at the corporate office.

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

   
Three Months Ended
   
Nine Months Ended
 
    
December 27,
2008
   
December 29,
2007
   
December 27,
2008
   
December 29,
2007
 
  Net External Sales
                       
Roller
  $ 20,969     $ 22,832     $ 71,592     $ 69,582  
Plain
    39,898       38,653       126,794       112,548  
Ball
    16,157       13,004       47,758       40,257  
Other
    8,257       5,918       25,811       16,075  
    $ 85,281     $ 80,407     $ 271,955     $ 238,462  
  Operating Income
                               
Roller
  $ 5,842     $ 6,813     $ 19,700     $ 20,698  
Plain
    9,569       10,504       31,611       30,115  
Ball
    3,867       2,794       11,108       9,455  
Other
    692       744       1,945       1,753  
Corporate
    (7,175 )     (5,744 )     (19,355 )     (17,134 )
    $ 12,795     $ 15,111     $ 45,009     $ 44,887  
  Geographic External Sales
                               
Domestic
  $ 72,150     $ 67,330     $ 229,430     $ 202,291  
Foreign
    13,131       13,077       42,525       36,171  
    $ 85,281     $ 80,407     $ 271,955     $ 238,462  
                                 
  Intersegment Sales
                               
Roller
  $ 2,599     $ 2,378     $ 7,828     $ 6,659  
Plain
    317       373       1,379       875  
Ball
    2,003       1,948       6,195       5,381  
Other
    4,977       4,352       14,680       12,923  
    $ 9,896     $ 9,051     $ 30,082     $ 25,838  

 
11

 

All intersegment sales are eliminated in consolidation.

8.  Restructuring of Operations

In December 2008, the Company completed the consolidation and rationalization of its Walterboro, South Carolina plant. This resulted in a total charge of $1,398 of which $405 was related to the net disposal and impairment of fixed assets, $741 was for impairment of excess inventory, $165 for severance costs and $87 for other miscellaneous items. Of the total charge, $792 was recorded in the third quarter of this fiscal year.  These costs are classified in the other, net section of the consolidated statements of operations.

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement As To Forward-Looking Information
 
The information in this discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the “safe harbor” created by those sections. All statements other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are “forward-looking statements” as the term is defined in the Private Securities Litigation Reform Act of 1995.

 The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.  Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make.  These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation:  (a) the bearing industry is highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer could result in a material reduction in our revenues and profitability; (c) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers’ businesses generally, could materially reduce our revenues and profitability; (d) future reductions or changes in U.S. government spending could negatively affect our business; (e) fluctuating supply and costs of raw materials and energy resources could materially reduce our revenues, cash flow from operations and profitability; (f) our products are subject to certain approvals, and the loss of such approvals could materially reduce our revenues and profitability; (g) restrictions in our indebtedness agreements could limit our growth and our ability to respond to changing conditions; (h) work stoppages and other labor problems could materially reduce our ability to operate our business; (i) our business is capital intensive and may consume cash in excess of cash flow from our operations; (j) unexpected equipment failures, catastrophic events or capacity constraints may increase our costs and reduce our sales due to production curtailments or shutdowns; (k) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (l) the costs and difficulties of integrating acquired businesses could impede our future growth; (m) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (n) our international operations are subject to risks inherent in such activities; (o) currency translation risks may have a material impact on our results of operations; (p) we may be required to make significant future contributions to our pension plan; (q) we may incur material losses for product liability and recall related claims; (r) environmental regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (s) our intellectual property and other proprietary rights are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (t) cancellation of orders in our backlog of orders could negatively impact our revenues; (u) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; and (v) provisions in our charter documents may prevent or hinder efforts to acquire a controlling interest in us. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC, including, without limitation, the risks identified under the heading “Risk Factors” set forth in the Annual Report on Form 10-K for the year ended March 29, 2008 and the Quarterly Report on Form 10-Q for the period ended September 27, 2008.  Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement.  The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.

 
12

 

Overview

We are an international manufacturer and marketer of highly engineered precision plain, roller and ball bearings. Bearings, which are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on highly technical or regulated bearing products for specialized markets that require sophisticated design, testing and manufacturing capabilities. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. We have been providing bearing solutions to our customers since 1919. Over the past ten years, we have significantly broadened our end markets, products, customer base and geographic reach. We currently have 25 facilities, of which 22 are manufacturing facilities, in four countries.

Demand for bearings generally follows the market for products in which bearings are incorporated and the economy as a whole. Purchasers of bearings include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and general market conditions could negatively impact our operating results. We have endeavored to mitigate the cyclicality of our product markets by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.

Outlook

Backlog, as of December 27, 2008, was $221.4 million versus $192.7 million as of December 29, 2007. Management believes that operating cash flows and available credit under the secured credit facility will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.

Results of Operations

The following table sets forth the various components of our consolidated statements of operations, expressed as a percentage of net sales, for the periods indicated that are used in connection with the discussion herein.

 
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Three Months Ended
   
Nine Months Ended
 
    
December 27,
2008
   
December 29, 
2007
   
December 27,
2008
   
December 29,
2007
 
Statement of Operations Data:
                       
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Gross margin
    33.4       34.3       32.8       34.1  
Selling, general and administrative
    16.9       15.0       15.3       14.8  
Other, net
    1.5       0.5       1.0       0.5  
Operating income
    15.0       18.8       16.5       18.8  
Interest expense, net
    0.9       1.0       0.7       1.2  
Loss on early extinguishment of debt
                0.1        
Other non-operating expense (income)
    0.4       (0.4 )     0.2       (0.3 )
Income before income taxes
    13.7       18.2       15.5       17.9  
Provision for income taxes
    4.7       6.3       5.2       6.1  
Net income
    9.0       11.9       10.3       11.8  

Three Month Period Ended December 27, 2008 Compared to Three Month Period Ended December 29, 2007

Net Sales.  Net sales for the three month period ended December 27, 2008 were $85.3 million, an increase of $4.9 million, or 6.1%, compared to $80.4 million for the same period in the prior year. During the three month period ended December 27, 2008, we experienced net sales growth in three of our four business segments, driven by demand across our end markets as well as our continued efforts to supply new products to existing and new customers. Net sales to aerospace and defense customers grew 21.2% in the three month period ended December 27, 2008 compared to the same period last year, driven mainly by commercial and military aerospace aftermarket, OEM demand and the $3.1 million contribution of newly-acquired divisions AID, BEMD and PIC Design.  Our net sales to our diversified industrial customers declined 10.2% in the three month period ended December 27, 2008 compared to the same period last year due to a decline in the overall global industrial markets. The inclusion of our PIC Design acquisition offset this decline by $1.6 million.

The Plain Bearings segment achieved net sales of $39.9 million for the three month period ended December 27, 2008, an increase of $1.2 million, or 3.2%, compared to $38.7  million for the same period in the prior year. The commercial and military aerospace market grew $2.2 million due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers, continued demand for aftermarket product and $1.5 million from the inclusion of newly-acquired division AID. This was offset by a $1.0 million decline in net sales to our diversified industrial customers.

The Roller Bearings segment achieved net sales of $21.0 million for the three month period ended December 27, 2008, a decrease of $1.8 million, or 8.2%, compared to $22.8 million for the same period in the prior year. General industrial demand declined $1.6 million compared to the same period last fiscal year, while the commercial and military aerospace market declined by $0.2 million attributable primarily to the timing of  airframe and aerospace bearing shipments.

The Ball Bearings segment achieved net sales of $16.2 million for the three month period ended December 27, 2008, an increase of $3.2 million, or 24.2%, compared to $13.0 million for the same period in the prior year.  Sales to the aerospace and defense segment increased $4.5 million due to continued demand from aircraft manufacturers offset by a decline in the industrial sector of $1.3 million compared to the same period last fiscal year.

 
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The Other segment, which is focused mainly on the sale of precision ball screws, machine tool collets and precision mechanical components, achieved net sales of $8.3 million for the three month period ended December 27, 2008, an increase of $2.4 million, or 39.5%, compared to $5.9 million for the same period last year. This increase was due to the inclusion of $3.1 million from newly-acquired divisions BEMD and PIC Design offset by a decline of $0.7 million in the sale of machine tool collets in Europe.

Gross Margin.  Gross margin was $28.5 million, or 33.4% of net sales, for the three month period ended December 27, 2008, versus $27.6 million, or 34.3% of net sales, for the comparable period in fiscal 2008. The decrease in our gross margin as a percentage of net sales was mainly driven by start-up costs associated with our expansion into new bearing products and the inclusion of recent acquisitions which are currently operating at lower gross margin levels.

Selling, General and Administrative.  SG&A expenses increased by $2.4 million, or 19.6%, to $14.4 million for the three month period ended December 27, 2008 compared to $12.0 million for the same period in fiscal 2008. As a percentage of net sales, SG&A increased to 16.9% for the three month period ended December 27, 2008 from 15.0% for the three month period ended December 29, 2007. The increase of $2.4 million was primarily due to $1.3 million related to additional personnel necessary to support our increased volume, $0.6 million from the inclusion of AID, BEMD and PIC Design, $0.4 million of additional stock compensation expense and $0.1 million for severance relating to workforce reductions.

Other, net.  Other, net for the three month period ended December 27, 2008 increased by $0.9 million, to $1.3 million compared to $0.4 million for  the comparable period in fiscal 2008. For the three month period ended December 27, 2008, other, net consisted of $0.4 million of amortization of intangibles, $0.8 million related to the consolidation of our Walterboro, South Carolina operations and $0.1 million of miscellaneous expenses. For the three month period ended December 29, 2007, other, net consisted of $0.3 million of amortization of intangibles and $0.1 million of moving expenses related to the relocation of our aircraft products manufacturing facility.

Operating Income. The increase in operating income in one of our four segments was driven primarily by volume. Our operating income as a percentage of net sales declined in three of our four business segments mainly driven by start-up costs associated with our expansion into new bearing products and the inclusion of recent acquisitions which are currently operating at lower gross margin levels.

Operating income was $12.8 million, or 15.0% of net sales, for the three month period ended December 27, 2008 compared to $15.1 million, or 18.8% of net sales, for the three month period ended December 29, 2007. Operating income for the Plain Bearings segment was $9.6 million for the three month period ended December 27, 2008, or 24.0% of net sales, compared to $10.5 million for the same period last year, or 27.2% of net sales. Our Roller Bearings segment achieved an operating income for the three month period ended December 27, 2008 of $5.8 million, or 27.9% of net sales, compared to $6.8 million, or 29.8% of net sales, for the three month period ended December 29, 2007.  Our Ball Bearings segment achieved an operating income of $3.9 million, or 23.9% of net sales, for the three month period ended December 27, 2008, compared to $2.8 million, or 21.5% of net sales, for the same period in fiscal 2008. Our Other segment achieved an operating income of $0.7 million, or 8.4% of net sales, for the three month period ended December 27, 2008, compared to $0.7 million, or 12.6% of net sales, for the same period in fiscal 2008.

Other Non-Operating Expense (Income). We incurred a foreign exchange  loss of approximately $0.6 million for the three month period ended December 27, 2008 related primarily to a loan to our Phoenix subsidiary and denominated in British Pound Sterling. This was partially offset by payments received under the Continued Dumping and Subsidy Offset Act (CDSOA). We received approximately $0.4 million and $0.3 million in the three month periods ended December 27, 2008 and December 29, 2007, respectively, in payments under the CDSOA for 2008 and 2007. The CDSOA distributes antidumping duties paid by overseas companies to domestic firms hurt by unfair trade.

 
15

 
Interest Expense, net.  Interest expense, net decreased by $0.1 million, or 11.8%, to $0.7 million in the three month period ended December 27, 2008, compared to $0.8 million in the same period last fiscal year, mainly driven by debt reduction.

Income Before Income Taxes.  Income before taxes decreased by $2.9 million, to $11.7 million for the three month period ended December 27, 2008 compared to $14.6 million for the three month period ended December 29, 2007.

Income Taxes.  Income tax expense for the three month period ended December 27, 2008 was $4.0 million compared to $5.0 million for the three month period ended December 29, 2007. Our effective income tax rate for the three month period ended December 27, 2008 was 34.3% compared to 34.5% for the three month period ended December 29, 2007.  The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

Net Income.  Net income decreased by $1.9 million to $7.7 million for the three month period ended December 27, 2008 compared to $9.6 million for the three month period ended December 29, 2007.

Nine Month Period Ended December 27, 2008 Compared to Nine Month Period Ended December 29, 2007

Net Sales.  Net sales for the nine month period ended December 27, 2008 were $272.0 million, an increase of $33.5 million, or 14.0%, compared to $238.5 million for the same period in the prior year. During the nine month period ended December 27, 2008, we experienced net sales growth in all four of our business segments, driven by demand across our end markets as well as our continued efforts to supply new products to existing and new customers. Net sales to aerospace and defense customers grew 23.6% in the nine month period ended December 27, 2008 compared to the same period last year, driven mainly by commercial and military aerospace aftermarket, OEM demand and the $9.3 million contribution of newly-acquired divisions AID, BEMD and PIC Design. Our net sales to our diversified industrial customers increased 3.9% in the nine month period ended December 27, 2008 compared to the same period last year. The inclusion of our  PIC Design acquisition contributed $3.9 million towards this increase.

The Plain Bearings segment achieved net sales of $126.8 million for the nine month period ended December 27, 2008, an increase of $14.3 million, or 12.7%, compared to $112.5  million for the same period in the prior year. The commercial and military aerospace market grew $8.9 million due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers, continued demand for aftermarket product and $4.4 million from the inclusion of AID. This was complemented by a $1.0 million increase in net sales to our diversified industrial customers.

The Roller Bearings segment achieved net sales of $71.6 million for the nine month period ended December 27, 2008, an increase of $2.0 million, or 2.9%, compared to $69.6 million for the same period in the prior year. This increase was due to $1.4 million from the commercial and military aerospace market combined with growth of $0.6 million attributable to general industrial demand compared to the same period last fiscal year.

The Ball Bearings segment achieved net sales of $47.8 million for the nine month period ended December 27, 2008, an increase of $7.5 million, or 18.6%, compared to $40.3 million for the same period in the prior year.   Increased aerospace and defense demand contributed $8.1 million of the increase offset by a $0.6 million decline in the industrial sector compared to the same period last fiscal year.

The Other segment, which is focused mainly on the sale of precision ball screws, machine tool collets and precision mechanical components, achieved net sales of $25.8 million for the nine month period ended December 27, 2008, an increase of $9.7 million, or 60.6%, compared to $16.1 million for the same period last year. This increase was due to increased sales of machine tool collets in Europe combined with $8.9 million from the inclusion of BEMD and PIC Design.

 
16

 

Gross Margin.  Gross margin was $89.3 million, or 32.8% of net sales, for the nine month period ended December 27, 2008, versus $81.2 million, or 34.1% of net sales, for the comparable period in fiscal 2008. The decrease in our gross margin as a percentage of net sales was mainly driven by start-up costs associated with our expansion into new bearing products and the inclusion of  recent acquisitions which are currently operating at lower gross margin levels.

Selling, General and Administrative.  SG&A expenses increased by $6.3 million, or 17.7%, to $41.5 million for the nine month period ended December 27, 2008 compared to $35.2 million for the same period in fiscal 2008. As a percentage of net sales, SG&A increased to 15.3% for the nine month period ended December 27, 2008 compared to 14.8% for the comparable period last fiscal year. The increase of $6.3 million was primarily due to $3.5 million related to additional personnel necessary to support our increased volume, $1.7 million from the inclusion of AID, BEMD and PIC Design, $1.0 million of additional stock compensation expense and $0.1 million relating to workforce reductions.

Other, net.  Other, net for the nine month period ended December 27, 2008 increased by $1.7 million, to $2.8 million compared to $1.1 million for  the comparable period in fiscal 2008. For the nine month period ended December 27, 2008, other, net consisted of $1.2 million of amortization of intangibles, $1.4 million related to the consolidation of our Walterboro, South Carolina operations and $0.2 million of miscellaneous expenses.  For the nine month period ended December 29, 2007, other, net consisted of $0.9 million of amortization of intangibles and $0.2 million of moving expenses related to the relocation of our aircraft products manufacturing facility.

Operating Income. The increase in operating income in three of our four segments was driven primarily by volume and acquisitions. Our operating income as a percentage of net sales decreased in all four business segments mainly driven by start-up costs associated with our expansion into new bearing products and the inclusion of recent acquisitions which are currently operating at lower gross margin levels.

Operating income was $45.0 million, or 16.5% of net sales, for the nine month period ended December 27, 2008 compared to $44.9 million, or 18.8% of net sales, for the nine month period ended December 29, 2007. Operating income for the Plain Bearings segment was $31.6 million for the nine month period ended December 27, 2008, or 24.9% of net sales, compared to $30.1 million for the same period last year, or 26.8% of net sales. Our Roller Bearings segment achieved an operating income for the nine month period ended December 27, 2008 of $19.7 million, or 27.5% of net sales, compared to $20.7 million, or 29.7% of net sales, for the nine month period ended December 29, 2007.  Our Ball Bearings segment achieved an operating income of $11.1 million, or 23.3% of net sales, for the nine month period ended December 27, 2008, compared to $9.5 million, or 23.5% of net sales, for the same period in fiscal 2008. Our Other segment achieved an operating income of $1.9 million, or 7.5% of net sales, for the nine month period ended December 27, 2008, compared to $1.8 million, or 10.9% of net sales, for the same period in fiscal 2008.

Other Non-Operating Expense (Income). We incurred a foreign exchange loss of approximately $0.9 million for the nine month period ended December 27, 2008 related primarily to a loan to our Phoenix subsidiary and denominated in British Pound Sterling. This was offset by payments received under the Continued Dumping and Subsidy Offset Act (CDSOA). We received approximately $0.4 million and $0.3 million in the nine month periods ended December 27, 2008 and December 29, 2007, respectively, in payments under the CDSOA for 2008 and 2007. The CDSOA distributes antidumping duties paid by overseas companies to domestic firms hurt by unfair trade.

Interest Expense, net.  Interest expense, net decreased by $0.6 million, or 24.3%, to $2.1 million in the nine month period ended December 27, 2008, compared to $2.7 million in the same period last fiscal year, mainly driven by debt reduction.

Loss on Early Extinguishment of Debt.  For the nine month period ended December 27, 2008, loss on extinguishment of debt was $0.3 million for the non-cash write-off of deferred financing fees associated with the paydown of $15.5 million of industrial revenue bonds.

 
17

 

Income Before Income Taxes.  Income before taxes decreased by $0.7 million, to $42.1 million for the nine month period ended December 27, 2008 compared to $42.8 million for the nine month period ended December 29, 2007.

Income Taxes.  Income tax expense for the nine month period ended December 27, 2008 was $14.1 million compared to $14.7 million for the nine month period ended December 29, 2007. Our effective income tax rate for the nine month period ended December 27, 2008 was 33.6% compared to 34.3% for the nine month period ended December 29, 2007.  The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

Net Income.  Net income declined by $0.2 million to $28.0 million for the nine month period ended December 27, 2008 compared to $28.2 million for the nine month period ended December 29, 2007.

Liquidity and Capital Resources

Liquidity

Our credit agreement (the “KeyBank Credit Agreement”) provides the Company with a $150.0 million five-year senior secured revolving credit facility which can be increased by up to $75.0 million, in increments of $25.0 million, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).

Amounts outstanding under the KeyBank Credit Agreement generally bear interest at the prime rate, or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, our margin is 0.0% for prime rate loans and 0.625% for LIBOR rate loans. Amounts outstanding under the KeyBank Credit Agreement are due and payable on its expiration date (June 24, 2011). We may elect to prepay some or all of the outstanding balance from time to time without penalty.

The KeyBank Credit Agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain requirements and limitations of the credit agreement. Our obligations under the KeyBank Credit Agreement are secured by a pledge of substantially all of our and RBCA’s assets and a guaranty by us of RBCA’s obligations.  Capital expenditures (excluding acquisitions) in any fiscal year are not to exceed $30.0 million. As of December 27, 2008, $53.0 million was outstanding under the KeyBank Credit Agreement.  Approximately $6.1 million of the KeyBank Credit Agreement is being utilized to provide letters of credit to secure our obligations relating to certain insurance programs. As of December 27, 2008, we had the ability to borrow up to an additional $90.9 million under the KeyBank Credit Agreement.

On October 27, 2008, Schaublin entered into a new bank credit facility with Credit Suisse (the “Swiss Credit Facility”) which replaced the prior bank credit facility of December 8, 2003 and its amendment of November 8, 2004.  This facility provides for up to 4.0 million Swiss francs, or $3.7 million, of revolving credit loans and letters of credit.  Borrowings under the Swiss Credit Facility bear interest at Credit Suisse’s prevailing prime bank rate.  As of December 27, 2008, there were no borrowings under the Swiss Credit Facility.

On June 15, 2007, our board of directors authorized us to repurchase up to $10.0 million of our common stock from time to time on the open market, through block trades, or in privately negotiated transactions depending on market conditions, alternative uses of capital and other factors.  Purchases may be commenced, suspended or discontinued at any time without prior notice.  The program does not have an expiration date.  As of December 27, 2008, 91,894 shares have been repurchased under this plan for an aggregate cost of $3.1 million.

On May 1, 2008, the Company voluntarily paid off the Series 1999 Industrial Revenue Bond (“IRB”), the prinicipal amount of which was $4.8 million. In addition, on June 2, 2008, the Company voluntarily paid off the Series 1994 A and B IRBs, the principal amounts of which were $7.7 million and $3.0 million, respectively. The Company recorded a non-cash pre-tax charge of approximately $0.3 million in the nine month period ended December 27, 2008 to write off deferred financing costs associated with the voluntary payoff of the IRBs.

 
18

 

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

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

Cash Flows

Nine month Period Ended December 27, 2008 Compared to the Nine month Period Ended December 29, 2007

In the nine month period ended December 27, 2008, we generated cash of $32.6 million from operating activities compared to $24.6 million for the nine month period ended December 29, 2007. The increase of $8.0 million was mainly a result of a decrease in net income of $0.2 million, a decrease in the change in operating assets and liabilities of $5.5 million and an increase in non-cash adjustments of $13.7 million.

Cash used for investing activities for the nine month period ended December 27, 2008 included $17.7 million related to capital expenditures compared to $14.3 million for the nine month period ended December 29, 2007. Investing activities in the nine month period ended December 27, 2008 also included $6.6 million related to the acquisition of PIC Design offset by proceeds of $0.6 million related primarily to the consolidation of our South Carolina operations.

Financing activities used $3.9 million in the nine month period ended December 27, 2008. We used $15.5 million for the payoff of industrial revenue bonds, $0.5 million for the repurchase of common stock, $0.1 million for payments on notes payable and $0.2 million for the payment of capital lease obligations offset by a net increase in our revolving credit facility of $12.0 million, the exercise of stock options of $0.3 million and an income tax benefit of $0.1 million related to the exercise of non-qualified stock options.

Capital Expenditures

Our capital expenditures were $17.7 million for the nine month period ended December 27, 2008. We expect to make capital expenditures of approximately $22.0 to $24.0 million during fiscal 2009 in connection with our existing business and the expansion into new bearing market segments. We intend to fund our fiscal 2009 capital expenditures principally through existing cash, internally generated funds and borrowings under our KeyBank Credit Agreement. We may also make substantial additional expenditures in connection with acquisitions.

Obligations and Commitments
 
As of December 27, 2008, there was no material change in debt and interest, capital lease, operating lease or pension and postretirement obligations as compared to such obligations and liabilities as of March 29, 2008.

 
19

 

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Quantitative and Qualitative Disclosure About Market Risk

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

Interest Rates.  We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding indebtedness. Outstanding balances under our KeyBank Credit Agreement generally bear interest at the prime rate or LIBOR (the London inter-bank offered rate for deposits in U.S. dollars for the applicable LIBOR period) plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. As of December 27, 2008, our margin is 0.0% for prime rate loans (prime rate at December 27, 2008 was 3.50%) and 0.625% for LIBOR rate loans (one month LIBOR rate at December 27, 2008 was 1.4375%).

Our interest rate risk management objective is to limit the impact of interest rate changes on our net income and cash flow. To achieve our objective, we regularly evaluate the amount of our variable rate debt as a percentage of our aggregate debt. As of December 27, 2008, our average outstanding variable rate debt, after taking into account the average outstanding notional amount of our interest rate swap agreement, was 42% of our average outstanding debt. We manage a significant portion of our exposure to interest rate fluctuations in our variable rate debt through an interest rate swap agreement. This agreement effectively converts interest rate exposure from variable rates to fixed rates of interest.

Based on the aggregate amount of our variable rate indebtedness of $23.0 million, a 100 basis point change in interest rates would have changed our interest expense by approximately $0.2 million per year, after taking into account the $30.0 million notional amount of our interest rate swap agreement at December 27, 2008.

Foreign Currency Exchange Rates.  As a result of increased sales in Europe, our exposure to risk associated with fluctuating currency exchange rates between the U.S. dollar, the Euro, the Swiss Franc and the British Pound Sterling (GBP) has increased. Our Swiss operations utilize the Swiss Franc as the functional currency, our French operations utilize the Euro as the functional currency and our English operations utilize the British Pound Sterling as the functional currency. Foreign currency transaction gains and losses are included in earnings. In May 2007, we loaned our Phoenix subsidiary 1,386,985GBP.  At that time, the exchange rate was 1.00GBP to approximately 1.98 U.S. dollars.  The rate at December 27, 2008 was 1.00GBP to approximately 1.47 U.S. dollars.  This strengthening of the U.S. dollar has resulted in a foreign exchange loss of $0.8 million since loan inception.  We also loaned our Phoenix subsidiary 346,000GBP in September 2008, resulting in an additional foreign exchange loss of $0.1 million.  Since these loans are not considered long-term in nature, the resulting translation losses are included in net income.

Approximately 16% of our net sales were denominated in foreign currencies in the first nine months of fiscal 2009 compared to 15% in the comparable period last fiscal year. We expect that this proportion is likely to increase as we seek to increase our penetration of foreign markets, particularly within the aerospace and defense markets. Foreign currency transaction exposure arises primarily from the transfer of foreign currency from one subsidiary to another within the group, and to foreign currency denominated trade receivables. Unrealized currency translation gains and losses are recognized upon translation of the foreign subsidiaries’ balance sheets to U.S. dollars. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our earnings. We currently do not have exchange rate hedges in place to reduce the risk of an adverse currency exchange movement. Although currency fluctuations have not had a material impact on our financial performance in the past, such fluctuations may materially affect our financial performance in the future. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

 
20

 

ITEM 4.   Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 27, 2008. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 27, 2008.

Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting occurred during the three month period ended December 27, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 
21

 

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings
 
From time to time, we are involved in litigation and administrative proceedings which arise in the ordinary course of our business. We do not believe that any litigation or proceeding in which we are currently involved, either individually or in the aggregate, is likely to have a material adverse effect on our business, financial condition, operating results, cash flow or prospects.

ITEM 1A.  Risk Factors
 
There have been no material changes to our risk factors and uncertainties during the nine month period ended December 27, 2008. For a discussion of the Risk Factors, refer to Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the period ended March 29, 2008 and in the Company’s Quarterly Report on Form 10-Q for the period ended September 27, 2008.

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

None.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

On June 15, 2007, our board of directors authorized us to repurchase up to $10.0 million of our common stock from time to time on the open market, through block trades, or in privately negotiated transactions depending on market conditions, alternative uses of capital and other factors.  Purchases may be commenced, suspended or discontinued at any time without prior notice. The program does not have an expiration date.

Total share repurchases for the three months ended December 27, 2008 are as follows:

Period
 
Total
number
of shares
Purchased
   
Average
price paid
per share
   
Number of
shares
purchased
as part of the
publicly
announced
program
   
Approximate
dollar value
of shares still
available to be
purchased
under the
program
(000’s)
 
09/28/2008–10/25/2008
    60       31.51       60     $ 6,946  
10/26/2008–11/22/2008
    158       19.84       158       6,943  
11/23/2008–12/27/2008
                    $ 6,943  
Total                                              
    218      $ 22.88       218          

 
22

 

ITEM 3.  Defaults Upon Senior Securities
 
Not applicable.
 
ITEM 4.  Submission of Matters to a Vote of Security Holders
 
Not applicable.
 
ITEM 5.  Other Information
 
Not applicable.
 
ITEM 6.  Exhibits

Exhibit
Number
 
Exhibit Description
31.01
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
31.02
 
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
32.01
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*
32.02
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*
 

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

 
23

 

SIGNATURES

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

RBC Bearings Incorporated
 
(Registrant)
     
By:
/s/ Dr. Michael J. Hartnett  
 
Name:
Dr. Michael J. Hartnett
 
Title:
Chief Executive Officer
 
Date:
February 5, 2009
     
By:
/s/ Daniel A. Bergeron   
 
Name:
Daniel A. Bergeron
 
Title:
Chief Financial Officer
 
Date:
February 5, 2009

 
24

 

EXHIBIT INDEX

Exhibit
Number
 
Exhibit Description
31.01
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
31.02
 
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).
32.01
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*
32.02
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).*

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

 
25

 

Exhibit 31.01
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Dr. 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: February 5, 2009
By:
/s/ Dr. Michael J. Hartnett  
 
   
Dr. 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: February 5, 2009
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, Dr. 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 December 27, 2008 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:  February 5, 2009
 
/s/ Dr. Michael J. Hartnett  
Dr. 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 December 27, 2008 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:  February 5, 2009
 
/s/ Daniel A. Bergeron  
Daniel A. Bergeron
Chief Financial Officer