RBC BEARINGS INCORPORATED Cautionary Statement as to Forward-Looking Information
The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The information in this discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the "safe harbor" created by those sections. All statements, other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are "forward-looking statements" as the term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing and engineered products industries are highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer, or a material adverse change in a major customer's business, could result in a material reduction in our revenues, cash flows and profitability; (c) our results have been and are likely to continue to be impacted by the COVID-19 pandemic; (d) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers' businesses generally, could materially reduce our revenues, cash flows and profitability; (e) future reductions or changes inU.S. government spending could negatively affect our business; (f) fluctuating supply and costs of subcomponents, raw materials and energy resources, or the imposition of import tariffs, could materially reduce our revenues, cash flows and profitability; (g) our results could be impacted by governmental trade policies and tariffs relating to our supplies imported from foreign vendors or our finished goods exported to other countries; (h) our products are subject to certain approvals and government regulations and the loss of such approvals, or our failure to comply with such regulations, could materially reduce our revenues, cash flows and profitability; (i) the retirement of commercial aircraft could reduce our revenues, cash flows and profitability; (j) work stoppages and other labor problems could materially reduce our ability to operate our business; (k) unexpected equipment failures, catastrophic events or capacity constraints could increase our costs and reduce our sales due to production curtailments or shutdowns; (l) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (m) businesses that we have acquired (such as Dodge) or that we may acquire in the future may have liabilities that are not known to us; (n) goodwill and indefinite-lived intangibles comprise a significant portion of our total assets, and if we determine that goodwill and indefinite-lived intangibles have become impaired in the future, our results of operations and financial condition in such years may be materially and adversely affected; (o) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (p) our international operations are subject to risks inherent in such activities; (q) currency translation risks may have a material impact on our results of operations; (r) we are subject to changes in legislative, regulatory and legal developments involving income and other taxes; (s) we may be required to make significant future contributions to our pension plan; (t) we may incur material losses for product liability and recall-related claims; (u) environmental and health and safety laws and regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (v) our intellectual property and proprietary information are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (w) cancellation of orders in our backlog could negatively impact our revenues, cash flows and profitability; (x) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (y) litigation could adversely affect our financial condition; (z) changes in accounting standards or changes in the interpretations of existing standards could affect our financial results; (aa) risks associated with utilizing information technology systems could adversely affect our operations; (bb) our quarterly performance can be affected by the timing of government product inspections and approvals; (cc) we may not be able to efficiently integrate Dodge into our operations; and (dd) we may fail to realize some or all of the anticipated benefits of the Dodge acquisition or those benefits may take longer to realize than expected; (ee) we incurred substantial debt in order to complete the Dodge acquisition, which could constrain our business and exposes us to the risk of defaults under our debt instruments; and (ff) increases in interest rates would increase the cost of servicing Term Loan Facility and could reduce our profitability. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with theSEC , including, without limitation, the risks identified under the heading "Risk Factors" set forth in the Annual Report on Form 10-K for the year endedApril 3, 2021 . Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this
Quarterly Report.
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Overview
We are a well-known international manufacturer and maker of highly engineered
precision bearings and components. Our precision solutions are integral to the
manufacture and operation of most machines and mechanical systems, reduce wear
to moving parts, facilitate proper power transmission, and reduce damage and
energy loss caused by friction. While we manufacture products in all major
bearings categories, we focus primarily on the higher end of the bearing and
engineered component markets where we believe our value-added manufacturing and
engineering capabilities enable us to differentiate ourselves from our
competitors and enhance profitability. We believe our unique expertise has
enabled us to garner leading positions in many of the product markets in which
we primarily compete. With 42 facilities in 7 countries, of which 30 are
manufacturing facilities, we have been able to significantly broaden our end
markets, products, customer base and geographic reach. We currently operate
under four reportable business segments: Plain Bearings, Roller Bearings, Ball
Bearings, and Engineered Products. The following further describes these
reportable segments:
Plain Bearings. Plain bearings are produced with either self-lubricating or
metal-to-metal designs and consists of several sub-classes, including rod end
bearings, spherical plain bearings and journal bearings. Unlike ball bearings,
which are used in high-speed rotational applications, plain bearings are
primarily used to rectify inevitable misalignments in various mechanical
components.
Roller Bearings. Roller bearings are anti-friction bearings that use rollers
instead of balls. We manufacture four basic types of roller bearings: heavy-duty
needle roller bearings with inner rings, tapered roller bearings, track rollers
and aircraft roller bearings.
Ball Bearings. We manufacture four basic types of ball bearings: high precision
aerospace, airframe control, thin section and commercial ball bearings, which
are used in high-speed rotational applications.
Engineered Products. Engineered Products consist of highly engineered hydraulics, fasteners, collets, tool holders and precision components used in aerospace, marine and industrial applications.
Purchasers of bearings and engineered products include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment, agricultural machinery manufacturers, construction, energy, mining and specialized equipment manufacturers, and marine products, automotive and commercial truck manufacturers. The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into sole-source relationships and long-term purchase agreements, through diversification across multiple market segments within the aerospace and industrial segments, by increasing sales to the aftermarket, and by focusing on developing highly customized solutions.
Currently, our strategy is built around maintaining our role as a leading manufacturer of precision-engineered bearings and components through the following efforts:
? Developing innovative solutions. By leveraging our design and manufacturing
expertise and our extensive customer relationships, we continue to develop new
products for markets in which there are substantial growth opportunities.
? Expanding customer base and penetrating end markets. We continually seek
opportunities to access new customers, geographic locations and bearing
platforms with existing products or profitable new product opportunities.
? Increasing aftermarket sales. We believe that increasing our aftermarket sales
of replacement parts will further enhance the continuity and predictability of
our revenues and enhance our profitability. Such sales include sales to third
party distributors and sales to OEMs for replacement products and aftermarket
services. We will increase the percentage of our revenues derived from the
replacement market by continuing to implement several initiatives.
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? Pursuing selective acquisitions. The acquisition of businesses that complement
or expand our operations has been and continues to be an important element of
our business strategy. We believe that there will continue to be consolidation
within the industry that may present us with acquisition opportunities. Outlook Our net sales for the three-month period endedOctober 2, 2021 increased 10.0% compared to the same period last fiscal year. The increase in net sales was a result of a 31.1% increase in our industrial markets offset by a 4.4% decrease in our aerospace markets. The increase in industrial sales was driven by increases in the mining, energy, marine and general industrial markets. The decrease in aerospace sales was experienced primarily in our commercial OEM markets. Our backlog, as ofOctober 2, 2021 , was$456.7 million compared to$394.8 million as ofApril 3, 2021 . Our sales to industrial markets experienced growth of 31.1% in the second quarter of fiscal 2022 as compared to the same three-month period last year. This continued the growth we experienced in the first quarter of fiscal 2022. Sales to industrial markets were up 31.0% as compared to the same six-month period last year. We have experienced growth across most of our industrial products both to OEM and distribution customers. The general economic environment, both domestic and international, has led to sustained strength in our industrial order book which we expect to continue through the remainder
of fiscal 2022. The COVID-19 health crisis continues to impact our commercial aerospace sales in fiscal 2022 as a result of build rate changes within the industry. The commercial aerospace OEM market and aftermarket have been impacted by reduced air travel and changes in production rates but are expected to improve in the fourth quarter of the fiscal year. OnNovember 1, 2021 , subsequent to the end of the quarter, RBC completed the acquisition of Dodge. The results of this business will be reflected in our results starting in the third quarter of fiscal 2022. Dodge operates in the industrial market, with a significant amount of their sales directed to customers in industrial distribution. Including the positive impact of this acquisition, the Company expects net sales to be approximately$245.0 million to$255.0 million in the third quarter of fiscal 2022. We experienced strong cash flow generation during the second quarter of fiscal 2022 (as discussed in the section "Liquidity and Capital Resources" below). With the addition of Dodge, we expect this trend to continue throughout the fiscal year as customer demand continues to be significant. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future, including at least the next 12 months. For further discussion regarding the funding of the Dodge acquisition, refer to Part I, Item 1 - Notes 5 and 12. As ofOctober 2, 2021 , we had cash and cash equivalents of$1,348.6 million of which approximately$9.6 million was cash held by our foreign operations. As discussed within Part I, Item 1 - Note 12, approximately$1,100.0 million of this was used for the acquisition of Dodge onNovember 1, 2021 . Results of Operations (dollars in millions) Three Months Ended October 2, September 26, $ % 2021 2020 Change Change Total net sales$ 160.9 $ 146.3$ 14.6 10.0 % Net income$ 6.9 $ 20.4$ (13.5 ) (66.1 )% Net income per share available to common stockholders: diluted$ 0.25 $ 0.82 Weighted average common shares: diluted 25,775,794 24,957,158
20
Our net sales for the three-month period ended October 2, 2021 increased 10.0%
compared to the same period last fiscal year. The increase in net sales was a
result of a 31.1% increase in our industrial markets partially offset by a 4.4%
decrease in our aerospace markets. The increase in industrial sales was driven
by the mining, energy, marine and general industrial markets. The decrease in
aerospace sales was primarily due to the commercial OEM markets, which decreased
by 7.7% as compared to the same three-month period last year.
Net income for the second quarter of fiscal 2022 was $6.9 million compared to
$20.4 million for the same period last year. Net income for the second quarter
of fiscal 2022 was affected by approximately $13.0 million of after-tax costs
associated with the acquisition of Dodge, $1.5 million of after-tax
restructuring costs primarily associated with consolidation efforts at one of
our domestic manufacturing facilities, and $2.0 million of discrete tax expense
primarily associated with establishing a valuation allowance on a prior loss
carryforward. These costs were partially offset by $0.1 million of tax benefits
associated with share-based compensation. Net income for the second quarter of
fiscal 2021 was affected by $2.8 million of after-tax restructuring costs and
related items primarily associated with the consolidation of two manufacturing
facilities, and $0.1 million of losses on foreign exchange partially offset by
$0.4 million of tax benefits associated with share-based compensation and $0.1
million of other discrete tax benefits.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 317.1 $ 302.8 $ 14.3 4.7 %
Net income $ 32.9 $ 43.1 $ (10.2 ) (23.6 )%
Net income per share available to common
stockholders: diluted $ 1.27 $ 1.73
Weighted average common shares: diluted 25,544,088 24,944,608
Net sales increased $14.3 million , or 4.7% for the six-month period ended
October 2, 2021 over the same period last year. The increase in net sales was
mainly the result of a 31.0% increase in industrial sales partially offset by an
11.8% decrease in aerospace sales. The increase in industrial sales was
primarily due to mining, energy, and general industrial markets. The decrease in
aerospace sales was realized in both our commercial and defense markets over the
six-month period.
Net income for the six months ended October 2, 2021 was $32.9 million compared
to $43.1 million for the same period last year. Net income for the six-month
period in fiscal 2022 was affected by approximately $13.0 million of after-tax
costs associated with the acquisition of Dodge, $2.0 million of after-tax
restructuring costs, and $2.0 million of discrete tax expense primarily
associated with establishing a valuation allowance on a prior loss carryforward.
These costs were partially offset by $2.2 million of tax benefits associated
with share-based compensation and $0.2 million of other discrete tax benefits.
Net income of $43.1 million in fiscal 2021 was affected by $3.7 million of
after-tax restructuring costs and related items, and $0.2 million of losses on
foreign exchange partially offset by $0.7 million of tax benefits associated
with share-based compensation, and $0.1 million of other discrete tax benefits.
Gross Margin
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Gross Margin $ 62.5 $ 56.6 $ 5.9 10.4 %
% of net sales 38.8 % 38.7 %
21
Gross margin was 38.8% of net sales for the second quarter of fiscal 2022
compared to 38.7% for the second quarter of fiscal 2021. Gross margin for the
second quarter of fiscal 2022 was impacted by approximately $0.9 million of
restructuring costs associated with consolidation efforts at one of our domestic
facilities. Gross margin for the second quarter of fiscal 2022 included $2.0
million in inventory rationalization costs associated with the consolidation of
two manufacturing facilities.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Gross Margin $ 126.2 $ 116.0 $ 10.2 8.8 %
% of net sales 39.8 % 38.3 %
Gross margin was 39.8% of net sales for the first six months of fiscal 2022 compared to 38.3% for the same period last year. Gross margin for the six-month period of fiscal 2022 was impacted by approximately$0.9 million of restructuring costs associated with consolidation efforts at one of our domestic facilities. Gross margin for the six-month period of fiscal 2021 was impacted by$0.8 million of capacity inefficiencies driven by the decrease in volume and$2.0 million in inventory rationalization costs associated with the consolidation of two manufacturing facilities. The increase in gross margin year over year was primarily the result of cost efficiencies achieved through recent restructuring and consolidation efforts made throughout the Company.
Selling, General and Administrative
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
SG&A $ 29.7 $ 26.0 $ 3.7 14.0 %
% of net sales 18.4 % 17.8 %
SG&A for the second quarter of fiscal 2022 was $29.7 million , or 18.4% of net
sales, as compared to $26.0 million , or 17.8% of net sales, for the same period
of fiscal 2021. This increase was due to $2.4 million of additional personnel
costs, $1.0 million of additional share-based compensation, and $0.3 million of
other items.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
SG&A $ 59.5 $ 52.9 $ 6.6 12.5 %
% of net sales 18.8 % 17.5 %
SG&A expenses increased by $6.6 million to $59.5 million for the first six
months of fiscal 2022 compared to $52.9 million for the same period last year.
This increase was due to $4.8 million of additional personnel costs, $1.3
million additional share-based compensation, and $0.5 million of other items.
22
Other, Net
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Other, net $ 5.7 $ 4.2 $ 1.5 34.6 %
% of net sales 3.5 % 2.9 %
Other operating expenses for the second quarter of fiscal 2022 totaled $5.7
million compared to $4.2 million for the same period last year. For the second
quarter of fiscal 2022, other operating expenses included $1.1 million of
restructuring costs and related items, $2.8 million of amortization of
intangible assets, $1.4 million of costs associated with the acquisition of
Dodge and $0.4 million of other costs. For the second quarter of fiscal 2021,
other operating expenses included $1.5 million of restructuring costs and
related items, $2.6 million of amortization of intangible assets and $0.1
million of other costs.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Other, net $ 8.9 $ 8.0 $ 0.9 11.2 %
% of net sales 2.8 % 2.6 %
Other operating expenses for the first six months of fiscal 2022 totaled $8.9
million compared to $8.0 million for the same period last year. For the first
six months of fiscal 2022, other operating expenses were comprised mainly of
$5.4 million in amortization of intangibles, $1.6 million of restructuring and
related items, $1.4 million of costs associated with the acquisition of Dodge,
and $0.5 million of other items. For the first six months of fiscal 2021, other
operating expenses were comprised mainly of $5.1 million in amortization of
intangibles, $2.6 million of restructuring and related items and $0.3 million of
other items.
Interest Expense, Net
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Interest expense, net $ 15.8 $ 0.3 $ 15.5 4,497.7 %
% of net sales 9.8 % 0.2 %
Interest expense, net, generally consists of interest charged on the Company's
debt agreements and amortization of deferred financing fees, offset by interest
income (see "Liquidity and Capital Resources" below). Interest expense, net, was
$15.8 million for the second quarter of fiscal 2022 compared to $0.3 million for
the same period last year. During the second quarter, the Company incurred
approximately $15.5 million in costs associated with the amortization of fees
for a bridge financing commitment established in association with the Dodge
acquisition. Subsequent to the end of the quarter, this commitment was replaced
with the permanent financings discussed in Notes 5 and 12 of Part 1, Item 1
above.
23
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Interest expense, net $ 16.1 $ 0.8 $ 15.3 1,994.9 %
% of net sales 5.1 % 0.3 %
Interest expense, net was$16.1 million for the first six months of fiscal 2022 compared to$0.8 million for the first six months of fiscal 2021. During the six months endedOctober 2, 2021 the Company incurred approximately$15.5 million in costs associated with the amortization of fees for a bridge financing commitment established in association with the Dodge acquisition. Subsequent to the end of the second quarter, this commitment was replaced with the permanent financings discussed in Notes 5 and 12 of Part 1, Item 1 above.
Other Non-operating Expense
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Other non-operating expense$ (0.3 ) $ 0.2 $ (0.5
) (237.9 )% % of net sales (0.2 )% 0.1 %
Other non-operating expenses were$(0.3) million for the second quarter of fiscal 2022 compared to$0.2 million for the same period in the prior year. For the second quarter of fiscal 2022, other non-operating expenses were comprised of$0.5 million of income associated with short-term marketable securities partially offset by$0.1 million of foreign exchange loss and$0.1 million of other items. For the second quarter of fiscal 2021, other non-operating expenses were comprised of$0.1 million of foreign exchange loss and$0.1 million of
other items.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Other non-operating expense$ (0.8 ) $ 0.3 $ (1.1
) (398.8 )% % of net sales (0.2 )% 0.1 % Other non-operating expenses were$(0.8) million for the first six months of fiscal 2022 compared to$0.3 million for the same period in the prior year. For the first six months of fiscal 2022, other non-operating expenses were comprised of$1.2 million of income associated with short-term marketable securities partially offset by$0.1 million of foreign exchange loss and$0.3 million of other items. For the first six months of fiscal 2021, other non-operating expenses were comprised of$0.2 million of foreign exchange loss and$0.1 million of other items. Income Taxes Three Months Ended October 2, September 26, 2021 2020 Income tax expense$ 4.7 $ 5.4 Effective tax rate 40.5 % 20.9 % 24 Income tax expense for the three-month period endedOctober 2, 2021 was$4.7 million compared to$5.4 million for the three-month period endedSeptember 26, 2020 . Our effective income tax rate for the three-month period endedOctober 2, 2021 was 40.5% compared to 20.9% for the three-month period endedSeptember 26, 2020 . The effective income tax rate for the three-month period endedOctober 2, 2021 of 40.5% included$2.0 million of discrete tax expense primarily associated with establishing a valuation allowance on a prior loss carryforward partially offset by$0.1 million of tax benefits associated with share-based compensation; the effective income tax rate without these items would have been 24.5%. The effective income tax rate for the three-month period endedSeptember 26, 2020 of 20.9% included$0.4 million of tax benefits associated with share-based compensation; the effective income tax rate without these benefits would have been 22.0%. Six Months Ended October 2, September 26, 2021 2020 Income tax expense$ 9.6 $ 11.0 Effective tax rate 22.5 % 20.4 %
Income tax expense for the six-month period endedOctober 2, 2021 was$9.6 million compared to$11.0 million for the six-month period endedSeptember 26, 2020 . Our effective income tax rate for the six-month period endedOctober 2, 2021 was 22.5% compared to 20.4% for the six-month period endedSeptember 26, 2020 . The effective income tax rate for the six-month period endedOctober 2, 2021 of 22.5% included$2.2 million of tax benefits associated with share-based compensation partially offset by$2.0 million of discrete tax expense primarily associated with establishing a valuation allowance on a loss carryforward; the effective income tax rate without these benefits would have been 23.6%. The effective income tax rate for the six-month period endedSeptember 26, 2020 of 20.4% included$0.7 million of tax benefits associated with share-based compensation; the effective income tax rate without these benefits would have been 21.6%. Segment Information
We have four reportable product segments: Plain Bearings, Roller Bearings, Ball
Bearings and Engineered Products. We use gross margin as the primary measurement
to assess the financial performance of each reportable segment.
Plain Bearings Segment
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 74.1 $ 71.1 $ 3.0 4.3 %
Gross margin $ 28.0 $ 29.8 $ (1.8 ) (6.0 )%
% of segment net sales 37.7 % 41.9 %
SG&A $ 5.9 $ 5.3 $ 0.6 12.7 %
% of segment net sales 8.0 % 7.4 %
Net sales increased $3.0 million , or 4.3%, for the three months ended October 2,
2021 compared to the same period last year. The 4.3% increase was primarily
driven by a 22.8% increase in the industrial markets partially offset by a
decrease of 3.0% in our aerospace markets. The increase in industrial net sales
was mostly driven by the general industrial markets to both OEM and distribution
customers. The decrease in aerospace net sales was due to the commercial
aerospace OEM market and aftermarket.
25
Gross margin as a percentage of segment net sales was 37.7% for the second quarter of fiscal 2022 compared to 41.9% for the same period last year. Gross margin for the three-month period endedOctober 2, 2021 was impacted by approximately$0.9 million of inventory rationalization costs as part of a restructuring effort at one of our domestic facilities. The decrease in gross margin as a percentage of net sales was also impacted by product mix. Six Months Ended October 2, September 26, $ % 2021 2020 Change Change Total net sales$ 147.4 $ 149.9$ (2.5 ) (1.7 )% Gross margin$ 59.5 $ 61.8$ (2.3 ) (3.8 )% % of segment net sales 40.4 % 41.2 % SG&A$ 11.8 $ 10.5$ 1.3 12.2 % % of segment net sales 8.0 % 7.0 %
Net sales decreased$2.5 million , or 1.7%, for the six months endedOctober 2, 2021 compared to the same period last year. The 1.7% decrease was primarily driven by a decrease of 10.8% in our aerospace markets offset by a 23.8% increase in the industrial markets. The decrease in aerospace was primarily due to both the commercial and defense markets. The increase in industrial sales was mostly driven by the general industrial markets to both OEM and distribution customers.
Gross margin as a percentage of net sales decreased to 40.4% for the first six months of fiscal 2022 compared to 41.2% for the same period last year. Gross margin for the six-month period endedOctober 2, 2021 was impacted by approximately$0.9 million of inventory rationalization costs as part of a restructuring effort at one of our domestic facilities. Roller Bearings Segment Three Months Ended October 2, September 26, $ % 2021 2020 Change Change Total net sales$ 27.3 $ 21.6$ 5.7 26.6 % Gross margin$ 10.1 $ 6.2$ 3.9 62.4 % % of segment net sales 37.1 % 28.9 % SG&A$ 1.5 $ 1.2$ 0.3 26.1 % % of segment net sales 5.4 % 5.4 % Net sales increased$5.7 million , or 26.6%, for the three months endedOctober 2, 2021 compared to the same period last year. Our industrial markets increased by 68.9% while our aerospace markets decreased 16.7%. The increase in industrial net sales was primarily due to the mining, class 8 truck, energy, and general industrial markets. The decrease in aerospace was driven by the commercial
and
defense OEM and aftermarkets.
26
Gross margin for the three months ended October 2, 2021 was 37.1% of net sales,
compared to 28.9% in the comparable period in fiscal 2021. This increase in the
gross margin as a percentage of net sales was primarily due to $2.0 million in
inventory rationalization costs incurred in fiscal 2021 associated with the
consolidation of two manufacturing facilities and decreased volumes during
the
period.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 52.6 $ 44.5 $ 8.1 18.2 %
Gross margin $ 19.2 $ 14.6 $ 4.6 31.4 %
% of segment net sales 36.6 % 32.9 %
SG&A $ 2.8 $ 2.4 $ 0.4 17.6 %
% of segment net sales 5.4 % 5.4 %
Net sales increased $8.1 million , or 18.2%, for the six months ended October 2,
2021 compared to the same period last year. Our industrial markets increased
69.5% while our aerospace markets decreased by 26.0%. The increase in industrial
sales was primarily due to mining, energy, class 8 truck and general industrial
market activity while the decrease in aerospace was driven by the commercial OEM
and commercial and defense aftermarkets.
Gross margin for the six months ended October 2, 2021 was 36.6% of net sales,
compared to 32.9% in the comparable period in fiscal 2021. This increase in the
gross margin as a percentage of net sales was primarily due to $2.0 million in
inventory rationalization costs incurred in fiscal 2021 associated with the
consolidation of two manufacturing facilities and decreased volumes during the
period. During the first six months of fiscal 2021, gross margin was also
impacted by approximately $0.3 million of capacity inefficiencies driven by the
impact of the COVID-19 pandemic.
Ball Bearings Segment
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 24.4 $ 21.1 $ 3.3 15.8 %
Gross margin $ 11.1 $ 9.1 $ 2.0 21.5 %
% of segment net sales 45.4 % 43.3 %
SG&A $ 1.6 $ 1.3 $ 0.3 24.9 %
% of segment net sales 6.6 % 6.1 %
Net sales increased by
27
Gross margin as a percentage of net sales was 45.4% for the second quarter of
fiscal 2022 as compared to 43.3% for the same period last year. The increase in
gross margin year over year is a result of product mix during the period.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 47.6 $ 39.9 $ 7.7 19.1 %
Gross margin $ 21.8 $ 17.1 $ 4.7 27.7 %
% of segment net sales 45.8 % 42.7 %
SG&A $ 3.3 $ 2.6 $ 0.7 23.4 %
% of segment net sales 6.8 % 6.6 %
Net sales increased$7.7 million , or 19.1% for the six months endedOctober 2, 2021 compared to the same period last year. Our industrial market sales increased 26.2% while sales to our aerospace markets increased 6.3%. The increase in industrial was primarily due to the general industrial market to both distribution and OEM customers. The increase in aerospace net sales was primarily driven by the defense markets.
Gross margin as a percentage of net sales increased to 45.8% for the six months
ended
Engineered Products Segment
Three Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 35.1 $ 32.6 $ 2.5 7.6 %
Gross margin $ 13.3 $ 11.5 $ 1.8 15.8 %
% of segment net sales 37.9 % 35.2 %
SG&A $ 4.2 $ 3.8 $ 0.4 10.1 %
% of segment net sales 12.0 % 11.8 %
Net sales increased$2.5 million , or 7.6%, for the second quarter of fiscal 2022 compared to the same period last year. Our industrial markets increased 25.8% while our aerospace markets decreased 6.9%. The increase in our industrial net sales was driven by the marine, machine tools and general industrial markets. The decrease in aerospace net sales was primarily driven by the commercial
and
defense OEM markets.
28
Gross margin as a percentage of net sales was 37.9% for the second quarter of
fiscal 2022 compared to 35.2% for the same period last year. This increase,
period over period, was primarily attributable to product mix and realization of
benefit from recent consolidation and restructuring efforts.
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
Total net sales $ 69.6 $ 68.5 $ 1.1 1.6 %
Gross margin $ 25.7 $ 22.5 $ 3.2 14.2 %
% of segment net sales 37.0 % 32.9 %
SG&A $ 8.5 $ 7.7 $ 0.8 10.8 %
% of segment net sales 12.2 % 11.2 %
Net sales increased$1.1 million , or 1.6%, for the six months endedOctober 2, 2021 compared to the same period last year. Our industrial sales increased 18.8% while our aerospace sales decreased 12.6%. The increase in industrial sales was driven by the machine tools and general industrial markets. The decrease in aerospace sales was primarily driven by the commercial and defense OEM markets. Gross margin as a percentage of net sales increased to 37.0% for the six months endedOctober 2, 2021 compared to 32.9% for the same period last year. This increase was primarily attributable to the realization of cost efficiencies achieved through recent consolidation and restructuring efforts. During the first half of fiscal 2021, gross margin was also impacted by approximately$0.5 million of capacity inefficiencies driven by the impact of the COVID-19 pandemic. Corporate Three Months Ended October 2, September 26, $ % 2021 2020 Change Change SG&A$ 16.4 $ 14.5$ 1.9 13.6 % % of total net sales 10.2 % 9.9 %
Corporate SG&A increased
Six Months Ended
October 2, September 26, $ %
2021 2020 Change Change
SG&A $ 33.1 $ 29.6 $ 3.5 11.7 %
% of total net sales 10.4 % 9.8 %
Corporate SG&A increased $3.5 million for the six months ended October 2, 2021
compared to the same period last year due to an increase of $2.0 million in
personnel costs, $1.3 million of share-based compensation expenses, and $0.2
million of other items.
29
Liquidity and Capital Resources
(dollars in millions in tables)
Our business is capital-intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth, in part, through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future. For further discussion regarding the funding of the Dodge acquisition, refer to
Part I, Item 1 - Notes 5 and 12. 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. Liquidity As ofOctober 2, 2021 , we had cash and cash equivalents of$1,348.6 million , of which, approximately$9.6 million was cash held by our foreign operations. As discussed within Part I, Item 1 - Note 12, approximately$1,100.0 million of this was used for the acquisition of Dodge onNovember 1, 2021 . We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign subsidiaries. Domestic Credit Facility The Company's credit agreement with Wells Fargo, as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer, and the other lenders party thereto (the "2015 Credit Agreement") provides the Company with a$250.0 million revolving credit facility (the "Revolver"), which expires onJanuary 31, 2024 . As ofOctober 2, 2021 ,$0.9 million in unamortized debt issuance costs remained. Amounts outstanding under the Revolver generally bear interest at (a) a base rate determined by reference to the higher of (1) Wells Fargo's prime lending rate, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one-month LIBOR rate plus 1%, or (b) LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA at each measurement date. As ofOctober 2, 2021 , the Company's margin was 0.00% for base rate loans and 0.75% for LIBOR loans. The 2015 Credit Agreement requires the Company to comply with various covenants including, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 3.50 to 1. The 2015 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 2015 Credit Agreement. As ofOctober 2, 2021 , the Company was in compliance with all such covenants. The Company's domestic subsidiaries have guaranteed the Company's obligations under the 2015 Credit Agreement, and the Company's obligations and the domestic subsidiaries' guaranty are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries. As ofOctober 2, 2021 , approximately$3.6 million of the Revolver was being utilized to provide letters of credit to secure the Company's obligations relating to certain insurance programs, and the Company had the ability to borrow up to an additional$246.4 million under the Revolver as ofOctober 2, 2021 . OnNovember 1, 2021 , the 2015 Credit Agreement was terminated and replaced with the New Credit Agreement referred to below. Our New Credit Agreement with Wells Fargo provides the Company with (a) the Term Loan Facility, a$1,300 million term loan facility that was used to fund a portion of the cash purchase price for the acquisition of Dodge and to pay related fees and expenses, and (b) the Revolving Credit Facility, a$500 million revolving credit facility. Amounts outstanding under the Facilities generally bear interest at either, at our option, (a) a base rate determined by reference to the higher of (i) Wells Fargo's prime lending rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the one-month LIBOR rate plus 1.00% or (b) the LIBOR rate plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA from time to time. Currently, the Company's margin is 0.75% for base rate loans and 1.75% for LIBOR rate loans. The Facilities are subject to a "LIBOR" floor of 0.00% and contain "hard-wired" LIBOR replacement provisions as set forth in the New Credit Agreement. The Term Loan Facility and the Revolving Credit Facility will mature onNovember 2, 2026 (the "Maturity Date"). The Company can elect to prepay some or all of the outstanding balance from time to time without penalty. Commencing one full fiscal quarter after the execution of the New Credit Agreement, the Term Loan Facility will amortize in quarterly installments as set forth in the schedule included in Note 12 of Part 1, Item 1, above, with the balance payable on the Maturity Date unless otherwise extended in accordance with the terms
of
the Term Loan Facility.
30
The New Credit Agreement requires the Company to comply with various covenants,
including the following financial covenants beginning with the test period
ending December 31, 2021 : (a) a maximum Total Net Leverage Ratio of 5.50:1.00,
which maximum Total Net Leverage Ratio shall decrease during certain subsequent
test periods as set forth in the New Credit Agreement (provided that, no more
than once during the term of the Facilities, such maximum ratio applicable at
such time may be increased by the Borrower by 0.50:1.00 for a period of twelve
(12) months after the consummation of a material acquisition), and (b) a minimum
Interest Coverage Ratio of 2.00:1.00.
The Company's domestic subsidiaries have guaranteed the Company's obligations
under the New Credit Agreement, and the Company's obligations and the domestic
subsidiaries' guaranty are secured by a pledge of substantially all of the
domestic assets of the Company and its domestic subsidiaries.
Approximately $3.6 million of the Revolving Credit Facility is being utilized to
provide letters of credit to secure the Company's obligations relating to
certain insurance programs. The Company has the ability to borrow up to an
additional $496.4 million under the Revolving Credit Facility as of November 1,
2021 .
Foreign Term Loan and Revolving Credit Facility
Our Foreign Credit Agreements withCredit Suisse (Switzerland) Ltd. provided us with financing to acquire Swiss Tool in 2019 and provide future working capital for Schaublin, our foreign subsidiary. The Foreign Credit Agreements provide (a) the Foreign Term Loan, aCHF 15.0 million (approximately$15.4 million ) term loan, which expires onJuly 31, 2024 , and (b) the Foreign Revolver, aCHF 15.0 million (approximately$15.4 million ) revolving credit facility, which continues in effect until terminated by either Schaublin or Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements totaledCHF 0.3 million (approximately$0.3 million ) and will be amortized throughout the life of the Foreign Credit Agreements. As ofOctober 2, 2021 , approximately$0.1 million in unamortized debt issuance costs remain. Amounts outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable margin is based on Schaublin's ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin's margin is 1.00%. The Foreign Credit Agreements require Schaublin to comply with various covenants, which are tested annually onMarch 31 . These covenants include, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 2.50 to 1 as ofMarch 31, 2021 and thereafter. Schaublin is also required to maintain an economic equity ofCHF 20.0 million at all times. The Foreign Credit Agreements allow Schaublin to, among other things, incur other debt or liens and acquire or dispose of assets provided that Schaublin complies with certain requirements and limitations of the Foreign Credit Agreements. As ofOctober 2, 2021 , Schaublin was in compliance with all such covenants. Schaublin's parent company,Schaublin Holding , has guaranteed Schaublin's obligations under the Foreign Credit Agreements.Schaublin Holding's guaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the three operating companies in the Swiss Tool System group of companies. As ofOctober 2, 2021 , there was approximately$3.1 million outstanding under the Foreign Term Loan and no amounts outstanding under the Foreign Revolver. Schaublin has the ability to borrow up to an additional$16.1 million under the Foreign Revolver as ofOctober 2, 2021 .
Schaublin's required future principal payments are approximately
Other Notes Payable In 2012 Schaublin purchased the land and building that it occupies for approximately$14.9 million . Schaublin obtained a 20-year fixed-rate mortgage of approximately$9.9 million at an interest rate of 2.9%. The balance of the purchase price of approximately$5.0 million was paid from cash on hand. The balance on this mortgage as ofOctober 2, 2021 was approximately$5.5 million and has been classified as Level 2 of the valuation hierarchy. The Company's required future principal payments are approximately$0.3 million for the remainder of fiscal 2022,$0.5 million for each year from fiscal 2023 through fiscal 2026 and$3.2 million thereafter.
On
31
Cash Flows
Six-month Period Ended
The following table summarizes our cash flow activities:
$
FY22 FY21 Change
Net cash provided by (used in):
Operating activities $ 93.5 $ 74.5 $ 19.0
Investing activities 83.6 (5.8 ) 89.4
Financing activities 1,020.3 (5.5 ) 1,025.8
Effect of exchange rate changes on cash 0.1 (0.1 ) 0.2
Increase in cash and cash equivalents
During the first six months of fiscal 2022, we generated cash of$93.5 million from operating activities compared to$74.5 million of cash generated during the same period of fiscal 2021. The increase of$19.0 million for fiscal 2022 was mainly a result of the favorable impact of a net change in operating assets and liabilities of$14.0 million and a favorable change in non-cash charges of$15.2 million , offset by a decrease in net income of$10.2 million . The favorable change in operating assets and liabilities is detailed in the table below, while the increase in non-cash charges resulted from$15.5 million of amortization of deferred financing costs,$1.3 million of share-based compensation charges, and$0.3 million of amortization of intangible assets, partially offset by unfavorable changes of$1.1 million in deferred taxes,$0.3 million of depreciation, and$0.5 million of loss on disposition of assets.
The following chart summarizes the favorable change in operating assets and
liabilities of
FY22 FY21
Cash provided by (used in):
Accounts receivable $ (20.6 ) $ 19.0
Inventory (2.2 ) 8.1
Prepaid expenses and other current assets (9.3 ) 2.8
Other noncurrent assets 5.6 (5.1 )
Accounts payable 22.8 (12.2 )
Accrued expenses and other current liabilities 18.1 1.6 Other noncurrent liabilities
(0.4 ) 5.9
Total change in operating assets and liabilities:
During the first six months of fiscal 2022, we generated$83.6 million for investing activities as compared to$5.8 million used during the first six months of fiscal 2021. This increase in cash generated was attributable to the sale of$120.5 million of highly liquid marketable securities during the current period, partially offset by the purchase of$29.9 million of highly liquid marketable securities during the current period, a$0.9 million increase in capital expenditures, and a purchase price adjustment in fiscal 2021 related to the Swiss Tool acquisition of$0.3 million . During the first six months of fiscal 2022, we generated$1,020.3 million for financing activities compared to$5.5 million used during the first six months of fiscal 2021. This increase in cash used was primarily attributable to$605.7 million proceeds received from the issuance of common stock during the current period,$445.5 million proceeds received from the issuance of preferred stock during the current period, and$14.4 million more exercises of share-based awards offset by$32.2 million of finance fees paid in connection with credit facilities and term loans in the current period,$5.6 million more payments made on outstanding debt and$2.0 million more treasury stock purchases. Capital Expenditures
Our capital expenditures were$3.5 million and$6.9 million for the three- and six-month periods endedOctober 2, 2021 , respectively. We expect to make additional capital expenditures of$10.0 to$15.0 million during the remainder of fiscal 2022 in connection with our existing business, excluding capital expenditures we may incur related to the acquisition of Dodge. We expect to fund these capital expenditures principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions. 32 Other Matters
Critical Accounting Policies and Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements in our fiscal 2021 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2022 other than the following:
Valuation of Business Combinations
We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition, including identifiable intangible assets, which either arise from a contractual or legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management's best estimates of inputs and assumptions that a market participant would use. We allocate to goodwill any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred through other, net on the consolidated statements of operations.
Off-Balance Sheet Arrangements
As of
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