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| ROLL > SEC Filings for ROLL > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
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 31, 2012. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Overview
We are a well known international manufacturer of highly engineered precision plain, roller and ball bearings. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on the higher end of the bearing market where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. We have been providing bearing solutions to our customers since 1919. Under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 25 facilities of which 23 are manufacturing facilities in four countries.
Demand for bearings generally follows the market for products in which bearings are incorporated and the economy as a whole. Purchasers of bearings include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction, energy, mining and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and general market conditions could negatively impact our operating results. We have endeavored to mitigate the cyclicality of our product markets by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.
Outlook
Our backlog, as of June 30, 2012, was $211.5 million compared to $206.4 million as of July 2, 2011. Our net sales for the three month period ended June 30, 2012 increased 10.7% compared to the same period last fiscal year. Our diversified industrial and aerospace and defense markets contributed 6.7% and 15.3%, respectively, to this growth. The performance in the diversified industrial markets resulted primarily from growth in the general industrial markets, industrial distribution and from military vehicles. We continued to experience the favorable impact of increased activity from the commercial aircraft industry, with growth in both the aerospace distribution and aerospace OEM and defense sectors.
Management believes that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. We have $90.9 million in cash as of June 30, 2012, of which $34.3 million is foreign cash restricted to funding internal and external growth initiatives in our foreign entities. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign entities.
During the three month period ended June 30, 2012, we received approximately $3.6 million in distribution payments under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) relating to antidumping claims filed during the past six years. As a result of recent rulings by the Federal Circuit and the United States Court of International Trade, these distribution payments, which we received on or about April 25, 2012, were based on our allocation of the CDSOA funds distributed in each of the past six years. This amount is recorded in other non-operating (income) expense.
Results of Operations
The following table sets forth the various components of our consolidated
statements of operations, expressed as a percentage of net sales, for the
periods indicated that are used in connection with the discussion herein.
Three Months Ended
June 30, July 2,
2012 2011
Statement of Operations Data:
Net sales 100.0 % 100.0 %
Gross margin 37.2 34.1
Selling, general and administrative 15.6 15.6
Other, net 0.3 0.3
Operating income 21.3 18.2
Interest expense, net 0.2 0.5
Other non-operating (income) expense (3.2 ) 0.2
Income before income taxes 24.3 17.5
Provision for income taxes 7.7 6.0
Net income 16.6 11.5
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Segment Information
We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Other. Other consists of three operating locations that do not fall into the above segmented categories, primarily machine tool collets, machining for integrated bearing assemblies and aircraft components and tight-tolerance, precision mechanical components. Within the Plain Bearings, Roller Bearings and Ball Bearings segments, we have not aggregated any operating segments. Within the Other reportable segment, we have aggregated operating segments because they do not meet the quantitative threshold for separate disclosure.
Three Month Period Ended June 30, 2012 Compared to Three Month Period Ended July 2, 2011
Net Sales.
Three Months Ended
June 30, July 2, $ %
2012 2011 Change Change
Plain Bearings $ 55.4 $ 47.1 $ 8.3 17.5 %
Roller Bearings 31.4 28.2 3.2 11.5 %
Ball Bearings 9.4 10.1 (0.7 ) (6.9 )%
Other 7.1 7.9 (0.8 ) (9.8 )%
Total $ 103.3 $ 93.3 $ 10.0 10.7 %
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Net sales for the three month period ended June 30, 2012 were $103.3 million, an increase of $10.0 million, or 10.7%, compared to $93.3 million for the three month period ended July 2, 2011. The increase of $10.0 million was primarily attributable to $8.2 million of volume and $2.9 million of product mix and pricing offset by $1.1 million of unfavorable foreign exchange rates. Net sales to diversified industrial customers grew 6.7% in the three month period ended June 30, 2012 compared to the same period last fiscal year. The performance in the diversified industrial markets resulted primarily from growth in the general industrial markets, industrial distribution and from military vehicles. Net sales to aerospace and defense customers increased 15.3% in the three month period ended June 30, 2012 compared to the same period last fiscal year, mainly driven by increased build rates by major aircraft manufacturers combined with higher demand from the general aerospace aftermarket.
The Plain Bearings segment achieved net sales of $55.4 million in the three month period ended June 30, 2012, an increase of $8.3 million, or 17.5%, compared to $47.1 million for the same period in the prior fiscal year. This segment was favorably impacted by volume of approximately $6.2 million and $2.9 million in product mix and pricing offset by $0.8 million from unfavorable foreign exchange rates. Net sales to diversified industrial customers increased $4.7 million combined with a $3.6 million increase in net sales to aerospace and defense customers compared with the same period in the prior fiscal year. This segment was favorably impacted by improvements in industrial distribution combined with growth in military vehicles as well as by increased build rates by aircraft manufacturers and higher demand from the general aerospace aftermarket.
The Roller Bearings segment achieved net sales of $31.4 million in the three month period ended June 30, 2012, an increase of $3.2 million, or 11.5%, compared to $28.2 million for the same period in the prior fiscal year. This segment was favorably impacted by volume of $2.9 million and product mix and pricing of $0.3 million. Of this increase, net sales to aerospace and defense customers contributed $2.5 million combined with an increase of $0.7 million from the industrial sector. This performance was favorably impacted by increased build rates by major aircraft manufacturers combined with higher demand from the general aerospace aftermarket.
The Ball Bearings segment achieved net sales of $9.4 million in the three month period ended June 30, 2012, a decrease of $0.7 million, or 6.9%, compared to $10.1 million for the same period in the prior fiscal year. Of this decline, approximately $0.3 million was attributable to volume and $0.4 million to product mix and pricing. Net sales to diversified industrial customers contributed $0.8 million to this decline offset by an increase of $0.1 million from the aerospace and defense sector.
The Other segment, which is focused mainly on the sale of machine tool collets and precision components, achieved net sales of $7.1 million in the three month period ended June 30, 2012, a decrease of $0.8 million, or 9.8%, compared to $7.9 million for the same period in the prior fiscal year. The decline in net sales was attributable to approximately $0.6 million of lower volume and $0.2 million of unfavorable foreign exchange rates. Of this decline, $1.1 million was attributable to lower net sales of machine tool collets mainly in Europe and $0.2 million to unfavorable foreign exchange rates offset by an increase of $0.5 million due to increased demand for mechanical components mainly in the U.S. market.
Gross Margin.
Three Months Ended
June 30, July 2, $ %
2012 2011 Change Change
Plain Bearings $ 21.3 $ 16.6 $ 4.7 28.5 %
Roller Bearings 11.4 9.6 1.8 19.1 %
Ball Bearings 2.2 2.2 - (3.1 )%
Other 3.5 3.4 0.1 4.7 %
Total $ 38.4 $ 31.8 $ 6.6 20.9 %
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Gross margin was $38.4 million, or 37.2% of net sales, in the three month period ended June 30, 2012, versus $31.8 million, or 34.1% of net sales, for the same period in fiscal 2012. The increase of $6.6 million in gross margin dollars was driven by approximately $4.4 million in volume, $1.7 million in product mix and pricing, and $0.8 million in cost reduction programs offset by $0.3 million from unfavorable exchange rates across both the diversified industrial and aerospace and defense markets.
Gross margin for the Plain Bearings segment was $21.3 million, or 38.4%, in the three month period ended June 30, 2012 versus $16.6 million, or 35.1% for the comparable period in fiscal 2012. Of this increase, approximately $3.1 million was attributable to volume, $1.6 million to product mix and pricing and $0.2 million to cost reduction programs offset by $0.2 million related to unfavorable foreign exchange rates. This segment was favorably impacted by improvements in industrial distribution combined with growth in military vehicles as well as by increased build rates by aircraft manufacturers and higher demand from the general aerospace aftermarket.
The Roller Bearings segment reported gross margin of $11.4 million, or 36.5%, in three month period ended June 30, 2012 compared to $9.6 million, or 34.2%, in the same period in the prior fiscal year. This segment was favorably impacted by approximately $1.6 million in volume and $0.2 million in cost reduction programs. This performance was favorably impacted by increased build rates by major aircraft manufacturers combined with higher demand from the general aerospace aftermarket.
The Ball Bearings segment reported gross margin of $2.2 million, or 23.1%, in the three month period ended June 30, 2012 versus $2.2 million, or 22.2%, in the same period in fiscal 2012. Of this gross margin percentage improvement, $0.1 million was attributable to product mix and pricing offset by $0.1 million related to material and other costs.
During the three month period ended June 30, 2012, the Other segment reported gross margin of $3.5 million, or 49.2%, compared to $3.4 million, or 42.4%, for the same period in the prior fiscal year. This increase in gross margin was primarily driven by approximately $0.4 million from cost reduction programs offset by $0.2 million from lower volume and $0.1 million from the impact of unfavorable foreign exchange. Performance in this segment was impacted by lower net sales of machine tool collets mainly in Europe.
Selling, General and Administrative.
Three Months Ended
June 30, July 2, $ %
2012 2011 Change Change
Plain Bearings $ 3.8 $ 3.6 $ 0.2 3.5 %
Roller Bearings 1.7 1.6 0.1 10.8 %
Ball Bearings 0.8 0.7 0.1 10.0 %
Other 0.9 1.0 (0.1 ) (10.3 )%
Corporate 8.9 7.6 1.3 17.1 %
Total $ 16.1 $ 14.5 $ 1.6 10.8 %
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SG&A expenses increased by $1.6 million, or 10.8%, to $16.1 million for the three month period ended June 30, 2012 compared to $14.5 million for the same period in fiscal 2012. The increase of $1.6 million was primarily attributable to an increase of $1.7 million in personnel-related costs as a result of headcount and salary increases and $0.1 million in incentive stock compensation offset by lower professional fees of $0.1 million and $0.1 million from the favorable impact of foreign exchange. As a percentage of net sales, SG&A was 15.6% for the three month periods ended June 30, 2012 and July 2, 2011. While SG&A expenses increased $1.6 million, or 10.8%, in three month period ended June 30, 2012, net sales during this fiscal period increased by $10.7 million, contributing to the flat SG&A percentage to net sales of 15.6%.
Other, net.Other, net for the three month period ended June 30, 2012 was expense of $0.4 million, an increase of $0.1 million, compared to expense of $0.3 million for the same period last fiscal year. For the three month period ended June 30, 2012, other, net consisted of $0.4 million of amortization of intangibles. For the three month period ended July 2, 2011, other, net consisted of $0.4 million amortization of intangibles offset by miscellaneous income of $0.1 million.
Operating Income.
Three Months Ended
June 30, July 2, $ %
2012 2011 Change Change
Plain Bearings $ 17.3 $ 12.8 $ 4.5 34.6 %
Roller Bearings 10.4 8.6 1.8 19.6 %
Ball Bearings 0.7 1.0 (0.3 ) (26.9 )%
Other 2.6 2.3 0.3 14.7 %
Corporate (9.0 ) (7.7 ) (1.3 ) 15.9 %
Total $ 22.0 $ 17.0 $ 5.0 29.3 %
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Operating income was $22.0 million, or 21.3% of net sales, in the three month period ended June 30, 2012 compared to $17.0 million, or 18.2% of net sales, in the comparable period in fiscal 2012. The increase of $5.0 million in operating income dollars was driven primarily by $4.5 million in volume and $1.7 million in product mix and pricing, offset by higher SG&A and other costs of $1.0 million and $0.2 million from unfavorable exchange rates across both the diversified industrial and aerospace and defense markets.
The increase in operating income, primarily in our Plain Bearings and Roller Bearings segments, was mostly attributable to improvements in industrial distribution combined with growth in military vehicles along with increased build rates by aircraft manufacturers and higher demand from the general aerospace aftermarket. This increase was offset by higher SG&A expenses, primarily driven by higher compensation costs.
The Plain Bearings segment achieved an operating income of $17.3 million in the three month period ended June 30, 2012 compared to $12.8 million for the same period last year. This improved contribution resulted from approximately a $3.1 million increase in volume and $1.6 million in product mix and pricing offset by $0.1 million increase in other costs and $0.1 million of unfavorable foreign exchange. This segment was favorably impacted by improvements in industrial distribution combined with growth in military vehicles as well as by increased build rates by aircraft manufacturers and higher demand from the general aerospace aftermarket.
The Roller Bearings segment achieved an operating income of $10.4 million in the three month period ended June 30, 2012 compared to $8.6 million in the comparable period in fiscal 2012. The increase of $1.8 million in operating income was mainly the result of approximately $1.6 million of higher volume and $0.2 million in cost reduction programs. This performance was favorably impacted by increased build rates by major aircraft manufacturers combined with higher demand from the general aerospace aftermarket.
The Ball Bearings segment achieved an operating income of $0.7 million in the three month period ended June 30, 2012 compared to $1.0 million for the same period in the prior fiscal year. This segment's performance was impacted by a $0.3 million increase in other costs.
The Other segment achieved an operating income of $2.6 million in the three month period ended June 30, 2012 compared to $2.3 million for the same period in the prior fiscal year. The increase of $0.3 million was mainly due to approximately $0.6 million from cost reduction programs offset by $0.2 from lower volume and by $0.1 million from the unfavorable impact of foreign exchange. Performance in this segment was impacted by lower net sales of machine tool collets mainly in Europe.
Interest Expense, net. Interest expense, net decreased by $0.3 million to $0.2 million in the three month period ended June 30, 2012, compared to $0.5 million in the same period last fiscal year.
Other Non-Operating (Income) Expense. Other non-operating income was $3.3 million in the three month period ended June 30, 2012 compared to expense of $0.2 million in the same period last fiscal year. The change of $3.5 million was primarily due to the receipt of a CDSOA distribution payment in the amount of $3.6 million offset by $0.1 million from the impact of unfavorable foreign exchange rates on foreign currency deposits.
Income Before Income Taxes. Income before taxes increased by $8.8 million to $25.1 million for the three month period ended June 30, 2012 compared to $16.3 million for the three month period ended July 2, 2011.
Income Taxes.Income tax expense for the three month period ended June 30, 2012 was $7.9 million compared to $5.6 million for the three month period ended July 2, 2011. Our effective income tax rate for the three month period ended June 30, 2012 was 31.6% compared to 34.5% for the three month period ended July 2, 2011. The effective income tax rate for the three month period ended June 30, 2012 of 31.6% includes the reversal of unrecognized tax benefits associated with the conclusion of state income tax audits in the amount of $0.9 million. The effective income tax rate without these discrete items would have been 35.0%. In addition to discrete items, the effective income tax rates are different from the U.S. statutory rate due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and state income taxes and an officers' compensation adjustment which increase the rate.
Net Income.Net income increased by $6.5 million to $17.2 million for the three month period ended June 30, 2012 compared to $10.7 million for the three month period ended July 2, 2011.
Liquidity and Capital Resources
Our business is capital intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth in part through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.
Liquidity
On November 30, 2010, we and RBCA terminated the previous KeyBank Credit Agreement and the related credit, security and ancillary agreements, and entered into a new credit agreement (the "JP Morgan Credit Agreement") and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides RBCA with a $150.0 million five-year senior secured revolving credit facility which can be increased by up to $100.0 million, in increments of $25.0 million, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).
Amounts outstanding under the JP Morgan Credit Agreement generally bear interest at the prime rate, or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, our margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans.
The JP Morgan Credit Agreement requires us to comply with various covenants,
including among other things, financial covenants to maintain the following: (1)
a ratio of consolidated net debt to adjusted EBITDA not to exceed 3.25 to 1; and
(2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. As of
June 30, 2012, we were in compliance with all such covenants.
The JP Morgan Credit Agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain . . .
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