Nov. 12, 2021, 5:23 p.m. EST

10-Q: RBC BEARINGS INC

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(EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement as to Forward-Looking Information

The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources.

The information in this discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the "safe harbor" created by those sections. All statements, other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are "forward-looking statements" as the term is defined in the Private Securities Litigation Reform Act of 1995.

The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing and engineered products industries are highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer, or a material adverse change in a major customer's business, could result in a material reduction in our revenues, cash flows and profitability;

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.

? Pursuing selective acquisitions. The acquisition of businesses that complement or expand our operations has been and continues to be an important element of our business strategy. We believe that there will continue to be consolidation within the industry that may present us with acquisition opportunities.

Outlook

Our net sales for the three-month period ended 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 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 of October 2, 2021, was $456.7 million compared to $394.8 million as of April 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.

On November 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







        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
        


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 %
        


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.







        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.







                                                    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 ended October 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 . . .

Nov 12, 2021

COMTEX_396806765/2041/2021-11-12T17:22:41

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