RBC Bearings Incorporated: MANAGEMENT REPORT AND MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

The financial and business analysis below provides information which we believe
is relevant to an assessment and understanding of our consolidated financial
position, results of operations and cash flows. This financial and business
analysis should be read in conjunction with the consolidated financial
statements and related notes. All references to "Notes" in this Item 7 refer to
the "Notes to Consolidated Financial Statements" included in Item 8 of this
Annual Report on Form 10-K.



The following discussion contains statements reflecting our views on our future performance that constitute “forward-looking statements” within the meaning of the Safe Harbor provisions of the Company. we Private Securities Litigation Reform Act of 1995. See information provided in Part I, point 1A. “Risk Factors” of this Annual Report on Form 10-K under the heading “Caution Regarding Forward-Looking Information”.




We have omitted our discussion of fiscal 2019 from this section as permitted by
Regulation S-K. Discussion and analysis of our financial condition and results
of operations for fiscal 2019 can be found within Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of our
Annual Report on Form 10-K filed with the SEC on May 20, 2020.



Overview



We are a well-known international manufacturer 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 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. With 43 facilities in
seven countries, of which 31 are manufacturing facilities, we have been able to
significantly broaden our end markets, products, customer base and geographic
reach. We have a fiscal year consisting of 52 or 53 weeks, ending on the
Saturday closest to March 31. Based on this policy, fiscal year 2021 had 53
weeks and fiscal year 2020 had 52 weeks. 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 consist of several sub-classes, including rod end
bearings, spherical plain bearings and journal bearings. Unlike ball bearings,
which are used in high-speed rotational applications, plain bearings are
primarily used to rectify inevitable misalignments in various mechanical
components.



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.



Engineering products. Engineered products consist of highly sophisticated hydraulic components, 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.



                                       21




Currently, our strategy revolves around maintaining our leadership role in the manufacturing of precision bearings and components through the following efforts:

? Develop innovative solutions. By leveraging our design and manufacturing

expertise and extensive customer relationships, we continue to develop new

products for markets in which there are substantial growth opportunities.

? Expansion of customer base and penetration of end markets. We are continually looking

opportunities to access new customers, geographic locations and

platforms with existing products or new profitable product opportunities.

? Increased sales in the secondary market. We believe that the increase in our sales in the secondary market

spare parts will further improve the continuity and predictability of

our revenues and improve our profitability. These sales include sales to a third party

distributors and OEM sales for aftermarket and aftermarket products

services. We plan to increase the percentage of our revenue coming from

replacement market by continuing to implement several initiatives.

? Pursuit of selective acquisitions. The acquisition of complementary businesses

or expanding our business has been and continues to be an important part of

our business strategy. We believe there will continue to be consolidation

   within the industry that may present us with acquisition opportunities.




We have demonstrated expertise in acquiring and integrating bearing and
precision engineered component manufacturers that have complementary products or
distribution channels and have provided significant margin enhancement. We have
consistently increased the profitability of acquired businesses through a
process of methods and systems improvement coupled with the introduction of
complementary and proprietary new products. Since 1992 we have completed 26
acquisitions, which have broadened our end markets, products, customer base
and
geographic reach.



Recent Significant Events



Acquisition



On August 15, 2019, the Company, through its Schaublin SA subsidiary, acquired
all of the outstanding shares of Swiss Tool for a purchase price of
approximately $33.6 million (CHF 32.8 million). We have finalized the purchase
price allocation with no material adjustments subsequent to March 28, 2020.

Restructuring and consolidation




Throughout fiscal 2021, the Company consolidated certain manufacturing
facilities to increase efficiencies of our operations. This resulted in $7.2
million of restructuring charges incurred during the year, including $3.1
million of inventory rationalization costs included within cost of sales, $2.0
million of which were attributable to the Roller segment and $1.1 million of
which were attributable to the Plain segment. The restructuring charges also
included $1.3 million of fixed asset disposals included within other operating
costs, a $0.1 million lease impairment charge, $0.7 million of personnel-related
costs and $2.0 million of other items. Of these $4.1 million of other operating
costs, $1.5 million are related to the Plain segment, $0.8 million are related
to the Roller segment, less than $0.1 million are related to the Ball segment,
$1.1 million are related to the Engineered Products segment and $0.6 million are
Corporate costs. The Company secured operating lease assets obtained in exchange
for new operating lease liabilities of $7.7 million as part of this
restructuring. The Company anticipates additional costs associated with these
consolidation efforts of $0.3 million to $0.5 million to be incurred in the
first quarter of fiscal 2022.



Outlook



We ended fiscal 2021 with a backlog of $394.8 million compared to $478.6 million
for the same period last fiscal year. Our net sales decreased 16.3% year over
year due to a 24.8% decrease in sales in the aerospace markets and a 0.9%
decrease in sales to the industrial markets.



The COVID-19 health crisis, which was declared a pandemic in March 2020, has led
to governments around the world implementing measures to reduce the spread.
These measures include quarantines, "shelter in place" orders, travel
restrictions, and other measures and have resulted in a slowdown of worldwide
economic activity.



Our business is operating as an essential business, and as such, our facilities
have remained open, with the exception of a few temporary closures at some of
our international locations. The COVID-19 pandemic impacted our commercial
aerospace and industrial sales in fiscal 2021. Our commercial aerospace sales
continue to face headwinds associated with build rate changes within the
industry, while the general decline in global economic activity has had an
impact on the industrial markets.



                                       22





Our production and sales have been negatively affected by the economic
implications of the pandemic. We anticipate that our production and sales in
fiscal 2022 will continue to be affected by the economic implications of the
pandemic. The commercial aerospace OEM and aftermarket will continue to be
impacted by reduced air travel and changes in production rates in the first half
of fiscal 2022, but are expected to grow over the next year. Our sales to
defense markets are expected to continue to improve in the second half of the
fiscal year. Our sales to industrial markets have begun to show signs of
recovery, growing 12.9% in the fourth quarter of fiscal 2021 as compared to the
same period last year, and are expected to continue to improve throughout the
course of the next fiscal year. We expect to see demand increasing as "shelter
in place" directives are eliminated. Management is continuously evaluating the
status of our orders and operations, and restructuring efforts have been
implemented where necessary to align our cost structure to the new demand levels
we experience in the marketplace.



We experienced strong cash flow generation during fiscal 2021 (as discussed in
the section "Liquidity and Capital Resources" below). We expect this trend to
continue during fiscal 2022. Management believes that these operating cash flows
and available credit under all credit agreements will provide adequate resources
to fund internal and external growth initiatives for the foreseeable future,
including at least the next 12 months. As of April 3, 2021, we had cash and cash
equivalents and highly liquid marketable securities of $241.3 million of which
approximately $13.9 million was cash held by our foreign operations.



Sources of Revenue



A contract with a customer exists when there is commitment and approval from
both parties involved, the rights of the parties are identified, payment terms
are defined, the contract has commercial substance and collectability of
consideration is probable. The Company has determined that the contract with the
customer is established when the customer purchase order is accepted or
acknowledged. Long-term agreements (LTAs) are used by the Company and certain of
its customers to reduce their supply uncertainty for a period of time, typically
multiple years. While these LTAs define commercial terms including pricing,
termination rights and other contractual requirements, they do not represent the
contract with the customer for revenue recognition purposes.



Approximately 96% and 95% of the Company's revenue was generated from the sale
of products to customers in the industrial and aerospace markets for each of the
years ended April 3, 2021 and March 28, 2020, respectively. During fiscal 2021,
approximately 4% of the Company's revenue was derived from services performed
for customers, which included repair and refurbishment work performed on
customer-controlled assets as well as design and test work, compared to
approximately 5% for fiscal 2020.



Refer to Note 2 – “Summary of significant accounting policies” for more details on the Company’s revenue policy.



Cost of Sales


Cost of sales includes compensation and employee benefits, raw materials, external processing, depreciation of manufacturing machinery and equipment, supplies and manufacturing overheads.




Approximately 20% to 30% of our costs, depending on product mix, are
attributable to raw materials, purchased components and outside processing. When
we experience raw material inflation, we offset these cost increases by changing
our buying patterns, expanding our vendor network and passing through price
increases when possible. The overall impact on raw material costs for this
fiscal year was not material as a percent change on a year-over-year basis.



We monitor gross margin performance through a process of monthly operation
reviews with all our divisions. We develop new products to target certain
markets allied to our strategies by first understanding volume levels and
product pricing and then constructing manufacturing strategies to achieve
defined margin objectives. We only pursue product lines where we believe that
the developed manufacturing process will yield the targeted margins. Management
monitors gross margins of all product lines on a monthly basis to determine
which manufacturing processes or prices should be adjusted.



                                       23




Fiscal year 2021 compared to fiscal year 2020




Results of Operations



                                               FY21             FY20          $ Change       % Change
Net sales                                  $      609.0     $      727.5     $   (118.5 )        (16.3 )%
Net income                                 $       89.6     $      126.0   

(36.4) $ (28.9)% Net earnings per common share: diluted $ 3.58 $ 5.06
Weighted average ordinary shares: diluted 25,048,451 24,922,631





Net sales for the twelve months ended April 3, 2021 decreased $118.5 million, or
16.3%, for fiscal 2021 compared to fiscal 2020. This was mainly the result of a
24.8% decrease in net sales to the aerospace markets and a decrease of 0.9% in
the industrial markets. The decrease in aerospace sales during the year was
primarily driven by reduced air travel and changes to production rates within
the industry. This reduction in commercial aerospace was partially offset by
increases in our defense OEM and aftermarket business. The slight decrease in
industrial sales year over year was due primarily to mining and energy markets,
which was partially offset by increases in semiconductor, military vehicles,
wind, nuclear, and our marine business. Further, our industrial sales evidenced
growth during the fourth quarter of fiscal 2021, which provides a positive
indication of recovery in the market.



Net income decreased by $36.4 million to $89.6 million for fiscal 2021 compared
to fiscal 2020. The year-over-year decrease was primarily driven by decreased
sales volume during fiscal 2021. The net income of $89.6 million in fiscal 2021
was impacted by $5.8 million of after-tax costs associated with restructuring,
$1.3 million of after-tax costs associated with the cyber event, and $0.2
million of losses on foreign exchange, partially offset by $3.1 million of tax
benefits associated with share-based compensation. The net income of $126.0
million in fiscal 2020 was impacted by $1.1 million of after-tax gain on the
sale of our Houston facility, and $5.9 million of discrete tax benefits
including share-based compensation, partially offset by $1.1 million of
after-tax costs associated with the acquisition of Swiss Tool, $0.8 million of
restructuring and integration costs, and $0.7 million of loss on foreign
exchange.



Gross Margin



                  FY21        FY20        $ Change       % Change
Gross Margin     $ 234.1     $ 289.1     $    (55.0 )        (19.0 )%
Gross Margin %      38.4 %      39.7 %



Gross margin decreased $55.0 million, or 19.0%, for fiscal 2021 compared to the
same period last fiscal year. The decrease in gross margin was mainly driven by
decreased volume, partially offset by cost efficiencies achieved during the
current period related to restructuring and consolidation efforts. Gross margins
in fiscal 2021 were impacted by $3.1 million of inventory rationalization costs
associated with the consolidation of certain manufacturing facilities and $0.8
million of capacity inefficiencies driven by the decrease in volume. Gross
margins in fiscal 2020 were impacted by $0.4 million of purchase accounting
adjustments associated with the acquisition of Swiss Tool.



Selling, general and administrative expenses



                  FY21        FY20        $ Change       % Change
SG&A             $ 106.0     $ 122.6     $    (16.6 )        (13.5 )%
% of net sales      17.4 %      16.8 %



General and administrative costs decreased by $ 16.6 million at $ 106.0 million for fiscal year 2021 compared to fiscal year 2020. This decrease is mainly explained $ 16.5 million reduced personnel costs and $ 0.1 million other articles.



                                       24





Other, Net



                  FY21      FY20      $ Change       % Change
Other, net       $ 16.7     $ 9.8     $     6.9           70.7 %
% of net sales      2.7 %     1.3 %



Other operating expenses for fiscal 2021 totaled $16.7 million compared to $9.8
million for fiscal 2020. For fiscal 2021, other operating expenses were
comprised of $10.2 million of amortization of intangible assets, $2.9 million of
restructuring and consolidation costs, $1.5 million of forensic specialist and
remediation costs related to a cyber event, $1.3 million loss on disposal of
assets, $0.5 million of bad debt expense, and $0.3 million of other items. For
fiscal 2020, other operating expenses were comprised of $9.6 million of
amortization of intangible assets, $0.9 million of acquisition costs, and $1.0
million of restructuring costs, partially offset by $1.2 million of gain on
disposal of assets and $0.5 million of other income.



Interest Expense, Net



                   FY21      FY20       $ Change       % Change

Interest expense 1.4 USD 1.9 USD (0.5) $ (24.1) %% of sales 0.2% 0.3%





Interest expense, net, generally consists of interest charged on our debt and
amortization of debt issuance costs offset by interest income (see "Liquidity
and Capital Resources - Liquidity" below). Interest expense, net was $1.4
million for fiscal 2021 compared to $1.9 million for fiscal 2020. This included
amortization of debt issuance costs of $0.5 million for fiscal 2021 and $0.5
million for fiscal 2020. The decrease in interest expense is a result of the
Company having substantially less outstanding debt throughout fiscal 2021
compared to 2020.



Other non-operational expenses




                               FY21       FY20       $ Change      % Change

Other non-operational expenses $ (0.0) 0.8 USD (0.8) (104.1) %% of sales

                  (0.0 )%     0.1 %




Other non-operating expense for fiscal 2020 totaled $0.8 million, consisting
primarily of $1.0 million associated with loss on foreign exchange partially
offset by $0.2 million of other non-operating income.



Income Taxes



                                             FY21       FY20
Income tax expense                          $ 20.4     $ 28.1

Effective tax rate with discrete elements 18.6% 18.2% Effective tax rate without discrete elements 20.6% 22.1%





Income tax expense for fiscal 2021 was $20.4 million compared to $28.1 million
for fiscal 2020. Our effective income tax rate for fiscal 2021 was 18.6%
compared to 18.2% for fiscal 2020. The effective income tax rates are different
from the U.S. statutory rate due to the U.S. credits for increasing research
activities and foreign-derived intangible income provision which decrease the
rate and differences in foreign and state income taxes which increase the rate.
The effective income tax rate for fiscal 2021 of 18.6% included discrete items
of $2.2 million benefit which are comprised substantially of a benefit
associated with share-based compensation and unrecognized tax benefits
associated with the expiration of statutes of limitations. The effective income
tax rate for fiscal 2021 without these discrete items would have been 20.6%. The
effective income tax rate for fiscal 2020 of 18.2% includes discrete items of
$5.9 million benefit which are comprised substantially of a benefit associated
with share-based compensation, tax benefit of other permanent adjustments from
filing the Company's tax returns and unrecognized tax benefits associated with
the expiration of statutes of limitations. The effective income tax rate for
fiscal 2020 without these discrete items would have been 22.1%.



                                       25





Segment Information



We have four reportable product segments: Plain Bearings, Roller Bearings, Ball
Bearings and Engineered Products. We use net sales and gross margin as the
primary measurement to assess the financial performance of each reportable
segment.



Plain Bearing Segment:



                          FY21        FY20        $ Change       % Change
Net sales                $ 294.0     $ 358.3     $    (64.3 )        (17.9 )%

Gross margin             $ 118.5     $ 145.0     $    (26.5 )        (18.2 )%
Gross margin %              40.3 %      40.5 %

SG&A                     $  21.6     $  26.3     $     (4.7 )        (17.6 )%
% of segment net sales       7.4 %       7.3 %




Net sales decreased $64.3 million, or 17.9%, for fiscal 2021 compared to fiscal
2020. Total industrial sales were $83.8 million, which increased 3.9% from $80.7
million in fiscal 2020. The increase was driven by energy and certain general
industrial markets. Aerospace sales were $210.2 million, down 24.3% from sales
of $277.6 million in fiscal 2020. The decrease was driven by reductions in our
commercial aerospace OEM and aftermarket business, offset by year over year
increases in our defense OEM business.



Gross margin was $118.5 million, or 40.3% of sales, in fiscal 2021 compared to
$145.0 million, or 40.5% of sales, for the same period in fiscal 2020.
Approximately $1.1 million of inventory rationalization costs associated with
the consolidation of certain manufacturing facilities impacted gross margin
during fiscal 2021.



Roller Bearing Segment:



                          FY21       FY20        $ Change       % Change
Net sales                $ 91.7     $ 132.6     $    (40.9 )        (30.9 )%

Gross margin             $ 31.6     $  55.5     $    (23.9 )        (43.1 )%
Gross margin %             34.5 %      41.9 %

SG&A                     $  4.7     $   6.4     $     (1.7 )        (25.4 )%
% of segment net sales      5.2 %       4.8 %



Net sales decreased $40.9 million, or 30.9%, during fiscal 2021 compared to the
same period last year. Total industrial sales were $48.2 million, which were
down 21.4% from sales of $61.2 million in fiscal 2020. The decrease in
industrial sales was driven primarily by the energy and mining markets. Total
aerospace sales were $43.5 million as compared to $71.4 million in fiscal 2020.
The 39.1% reduction was driven primarily by reduced air travel and the impact of
changes in the build rates of commercial aircraft.



The Roller Bearings segment achieved a gross margin of $31.6 million, or 34.5%
of sales, in fiscal 2021 compared to $55.5 million, or 41.9% of sales, in fiscal
2020. Approximately $2.0 million of inventory rationalization costs associated
with the consolidation of certain manufacturing facilities and $0.3 million of
capacity inefficiencies driven by the impact of the COVID-19 pandemic impacted
gross margins during fiscal 2021. The remaining decrease in gross margin was due
to decreased volume and product mix during the period.



                                       26





Ball Bearing Segment:



                          FY21       FY20       $ Change       % Change
Net sales                $ 83.7     $ 74.2     $      9.5           12.8 %

Gross margin             $ 37.1     $ 33.0     $      4.1           12.2 %
Gross margin %             44.3 %     44.5 %

SG&A                     $  5.4     $  6.5     $     (1.1 )        (17.4 )%

% of segment net sales 6.4% 8.7%





Net sales increased $9.5 million, or 12.8%, for fiscal 2021 compared to fiscal
2020. Total industrial sales were $55.5 million, which increased 9.2% from sales
of $50.8 million in fiscal 2020. The increase in industrial sales was driven
primarily by the semiconductor and general industrial markets. Total aerospace
sales were $28.2 million, which increased 20.5% from sales of $23.4 million in
fiscal 2020. The increase in aerospace sales was driven by strength in the
defense OEM market during the year.



The gross margin for the year was $ 37.1 million, or 44.3% of sales, compared to
$ 33.0 million, or 44.5% of sales, in fiscal year 2020. This change results from savings made during the fiscal year.




Engineered Products Segment:



                          FY21        FY20        $ Change       % Change
Net sales                $ 139.6     $ 162.3     $    (22.7 )        (14.0 )%

Gross margin             $  46.9     $  55.6     $     (8.7 )        (15.6 )%
Gross margin %              33.6 %      34.2 %

SG&A                     $  15.4     $  17.7     $     (2.3 )        (13.3 )%
% of segment net sales      11.0 %      10.9 %



Net sales decreased $22.7 million, or 14.0%, in fiscal 2021 compared to the same
period last fiscal year. Total industrial sales were $68.4 million, an increase
of 4.5% as compared to sales of $65.5 million in fiscal 2020. The increase in
sales year over year was driven by growth in the marine market. Total aerospace
sales were $71.2 million as compared to $96.8 million in fiscal 2020. The
decrease, year over year, was driven by reduced air travel and the impact of
changes in production schedules of commercial aircraft.



Gross margin for the year was $46.9 million, or 33.6% of sales compared to $55.6
million or 34.2% of sales during fiscal 2020. Gross margin in fiscal 2021 was
impacted by approximately $0.5 million of capacity inefficiencies driven by the
impact of the COVID-19 pandemic.



Corporate:



                        FY21       FY20       $ Change       % Change
SG&A                   $ 58.9     $ 65.7     $     (6.8 )        (10.4 )%
% of total net sales      9.7 %      9.0 %



General and administrative costs of the company have decreased $ 6.8 million or 10.4% for the 2021 financial year compared to the 2020 financial year. This is explained by the reduction in staff costs of $ 8.2 million and other costs $ 0.4 million partially offset by increases in the stock-based compensation expense of $ 1.1 million and professional fees of $ 0.7 million.



                                       27




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 Revolver and Foreign Revolver (see below) will provide adequate
resources to fund internal and external growth initiatives for the foreseeable
future.



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 the COVID-19 pandemic, 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 of April 3, 2021, we had cash and cash equivalents and highly liquid
marketable securities of $241.3 million, of which, approximately $13.9 million
was cash held by our foreign operations. We expect that our undistributed
foreign earnings will be re-invested indefinitely for working capital, internal
growth and acquisitions for and by our foreign subsidiaries.



Domestic Credit Facility


The Company's credit agreement with Wells Fargo Bank, National Association, as
Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit
Issuer, and the other lenders party thereto (the "Credit Agreement") provides
the Company with a $250.0 million revolving credit facility (the "Revolver"),
which expires on January 31, 2024. Debt issuance costs associated with the
Credit Agreement totaled $0.9 million and will be amortized through January 31,
2024 along with the unamortized debt issuance costs remaining from the Company's
prior credit agreement. As of April 3, 2021, $1.1 million in unamortized debt
issuance costs remain.



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. Currently, the Company's margin is 0.00% for base rate loans and 0.75% for
LIBOR loans.


The 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 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 Credit Agreement. As of April 3, 2021, the Company was in
compliance with all such covenants.



The domestic subsidiaries of the company have guaranteed the obligations of the company under the credit agreement, and the obligations of the company and the guarantee of the domestic subsidiaries are secured by a pledge of substantially all of the domestic assets of the company and of its national subsidiaries.

About $ 3.5 million Revolver is used to provide letters of credit to secure the company’s obligations under certain insurance programs. The Company has the option of borrowing up to an additional amount $ 246.5 million under the gun from April 3, 2021.



                                       28




Foreign term loan and revolving credit facility




On August 15, 2019, one of our foreign subsidiaries, Schaublin SA ("Schaublin"),
entered into two separate credit agreements (the "Foreign Credit Agreements")
with Credit Suisse (Switzerland) Ltd. to finance the acquisition of Swiss Tool
and provide future working capital. The Foreign Credit Agreements provided
Schaublin with a CHF 15.0 million (approximately $15.4 million) term loan (the
"Foreign Term Loan"), which expires on July 31, 2024 and a CHF 15.0 million
(approximately $15.4 million) revolving credit facility (the "Foreign
Revolver"), which continues in effect until terminated by either Schaublin or
Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements
totaled CHF 0.3 million (approximately $0.3 million) and will be amortized
throughout the life of the Foreign Credit Agreements. As of April 3, 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 on March 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 of March 31, 2021 and
thereafter. Schaublin is also required to maintain an economic equity of CHF
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 of April 3, 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 group of companies.



As of April 3, 2021, there was approximately $11.7 million outstanding under the
Foreign Term Loan and no amounts outstanding under the Foreign Revolver. These
borrowings have been classified as Level 2 of the valuation hierarchy. Schaublin
has the ability to borrow up to an additional $15.9 million under the Foreign
Revolver as of April 3, 2021.



Schaublin's required future annual principal payments are approximately $2.1
million for fiscal 2022, $3.2 million for both fiscal 2023 and fiscal 2024 and
$3.2 million for fiscal 2025.



Other Notes Payable



On October 1, 2012, Schaublin purchased the land and building that it occupied
and had been leasing 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 $5.1 million was paid
from cash on hand. The balance on this mortgage as of April 3, 2021 was
approximately $5.7 million.



The Company's required future annual principal payments for the next five years
are $0.5 million for each year from fiscal 2022 through fiscal 2026 and $3.2
million thereafter.



Cash Flows


Fiscal year 2021 compared to fiscal year 2020

The following table summarizes our treasury activities:




                                            FY21        FY20        $ 

Switch

Net cash provided by (used in):
Operating activities                      $  152.4     $ 155.6     $     (3.2 )
Investing activities                        (101.5 )     (62.8 )        (38.7 )
Financing activities                          (3.4 )     (20.3 )         16.9

Effect of exchange rate variations on cash 0.3 0.9 (0.6) Increase in cash and cash equivalents $ 47.8 $ 73.4 (25.6) $




                                       29





During fiscal 2021 we generated cash of $152.4 million from operating activities
compared to $155.6 million for fiscal 2020. The decrease of $3.2 million for
fiscal 2021 was mainly the result of a $36.4 million decrease in net income
partially offset by a net change in operating assets and liabilities of $31.1
million and $2.1 million fewer non-cash charges. The favorable change in
operating assets and liabilities is detailed in the table below. The change in
non-cash charges were primarily driven by a $2.5 million favorable change
related to the disposal of assets, $2.2 million favorable change in
consolidation and restructuring charges, an additional $1.1 million in
share-based compensation, $0.7 million more depreciation and $0.6 million more
amortization of intangible assets. This was partially offset by a $5.0 million
decrease in deferred taxes.


The following graph summarizes the favorable evolution of the operating assets and liabilities of $ 31.1 million for fiscal year 2021 compared to fiscal year 2020 and $ 29.1 million for fiscal year 2020 compared to fiscal year 2019.



                                                    FY21        FY20
Cash provided by (used in):
Accounts receivable                                $  15.7     $ 20.6
Inventory                                             26.3       12.5
Prepaid expenses and other current assets              3.5       (3.4 )
Other noncurrent assets                               (7.0 )      2.4
Accounts payable                                     (15.7 )     (5.0 )

Accrued expenses and other current liabilities 2.6 2.5 Other non-current liabilities

                           5.7       (0.5 )

Total change in operating assets and liabilities $ 31.1 $ 29.1





During fiscal 2021, we used $101.5 million for investing activities as compared
to $62.8 million for fiscal 2020. This increase in cash used was attributable to
the purchase of $100.1 million of highly liquid marketable securities during the
current period and $8.2 million fewer proceeds from the sale of assets compared
to the prior year when we sold a building in Houston, Texas. This was partially
offset by a $25.5 million decrease in capital expenditures, $10.0 million in
proceeds received from the sale of marketable securities in the current year,
the use of $33.8 million in the prior year for the acquisition of Swiss Tool and
a purchase price adjustment in the current year related to the Swiss Tool
acquisition of $0.3 million.



During fiscal 2021, we used $3.4 million for financing activities compared to
$20.3 million in fiscal 2020. This decrease in cash used was primarily
attributable to $38.3 million less payments made on outstanding debt, $0.3
million less financing fees paid in connection with credit facilities, and $5.3
million less treasury stock purchases, partially offset by proceeds received
from borrowings of $24.8 million for the acquisition of Swiss Tool in the prior
year and $2.2 million less exercises of share-based awards



Capital Expenditures



Our capital expenditures in fiscal 2021 were $11.8 million compared to $37.3
million in fiscal 2020. We expect to make capital expenditures of approximately
$14.0 million to $16.0 million during fiscal 2022 in connection with our
existing business. We funded our fiscal 2021 capital expenditures, and expect to
fund fiscal 2022 capital expenditures, principally through existing cash and
internally generated funds. We may also make substantial additional capital
expenditures in connection with acquisitions.



                                       30




Quarterly operating results



                                                                    Quarter Ended
                      Apr. 3,      Dec. 26,      Sep. 26,      Jun. 27,      Mar. 28,      Dec. 28,      Sep. 28,      Jun. 29,
                       2021          2020          2020          2020          2020          2019          2019          2019
                                                                     (Unaudited)
                                                        (in thousands, except per share data)

Net sales            $ 160,295     $ 145,861     $ 146,335     $ 156,493     $ 185,843     $ 177,019     $ 181,909     $ 182,690
Gross margin            62,469        55,588        56,596        59,453   

76,584 70,711 71,114 70,694 Operating result 29,740 26,541 26,363 28,814

        43,520        37,466        37,309        38,490
Net income           $  24,954     $  21,569     $  20,421     $  22,689     $  33,752     $  30,515     $  31,270     $  30,499
Net income per
common share:
Basic(1)(2)          $    1.00     $    0.87     $    0.82     $    0.92     $    1.36     $    1.24     $    1.27     $    1.24
Diluted(1)(2)        $    0.99     $    0.86     $    0.82     $    0.91     $    1.35     $    1.22     $    1.26     $    1.23



(1) See note 2 “Summary of significant accounting policies – Net earnings per common share

     Share."



(2) Net earnings per common share is calculated independently for each of the

quarters presented. Therefore, the sum of quarterly earnings per share

     may not necessarily equal the total for the year.



Accounting policies and critical estimates




Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis. Estimates are used for, but not
limited to, the accounting for the allowance for doubtful accounts, valuation of
inventories, goodwill and intangible assets, depreciation and amortization,
income taxes and tax reserves and the valuation of options. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. We believe our judgments
related to these accounting estimates are appropriate. Actual results may differ
from these estimates under different assumptions or conditions.



Revenue Recognition.The performance obligations for the majority of RBC's
product sales are satisfied at the point in time in which the products are
shipped, consistent with the pattern of revenue recognition under the previous
accounting standard. The Company has determined that the customer obtains
control upon shipment of the product based on the shipping terms (either when it
ships from RBC's dock or when the product arrives at the customer's dock) and
recognizes revenue accordingly. Once a product has shipped, the customer is able
to direct the use of, and obtain substantially all of the remaining benefits
from, the asset. Approximately 96% of the Company's revenue was recognized in
this manner based on sales for the year ended April 3, 2021 compared to
approximately 95% for the year ended March 28, 2020.



                                       31




The Company has determined performance obligations are satisfied over time for
customer contracts where RBC provides services to customers and also for a
limited number of product sales. RBC has determined revenue recognition over
time is appropriate for our service revenue contracts as they create or enhance
an asset that the customer controls throughout the duration of the contract.
Approximately 4% of the Company's revenue was recognized in this manner based on
sales for the year ended April 3, 2021 compared to approximately 5% for the year
ended March 28, 2020. Revenue recognition over time is appropriate for customer
contracts with product sales in which the product sold has no alternative use to
RBC without significant economic loss and an enforceable right to payment
exists, including a normal profit margin from the customer, in the event of
contract termination. These types of contracts comprised less than 1% of total
sales for the year ended April 3, 2021 and the year ended March 28, 2020. For
both of these types of contracts, revenue is recognized over time based on the
extent of progress towards completion of the performance obligation. The Company
utilizes the cost-to-cost measure of progress for over-time revenue recognition
contracts as we believe this measure best depicts the transfer of control to the
customer, which occurs as we incur costs on contracts. Revenues, including
profits, are recorded proportionally as costs are incurred. Costs to fulfill
include labor, materials, subcontractors' costs, and other direct and indirect
costs.



Pursuant to the over-time revenue recognition model, revenue may be recognized
prior to the customer being invoiced. An unbilled receivable is recorded to
reflect revenue that is recognized when (1) the cost-to-cost method is applied
and (2) such revenue exceeds the amount invoiced to the customer. Contract
assets are included within prepaid expenses and other current assets or other
assets on the consolidated balance sheets.



Accounts Receivable.We are required to estimate the collectability of our
accounts receivable, which requires a considerable amount of judgment in
assessing the ultimate realization of these receivables, including the current
credit-worthiness of each customer. Changes in required reserves may occur in
the future as conditions in the marketplace change.



Inventory. Inventories are stated at the lower of cost or net realizable value.
Cost is determined by the first-in, first-out method. We account for inventory
under a full absorption method. We record adjustments to the value of inventory
based upon past sales history and forecasted plans to sell our inventories. The
physical condition, including age and quality, of the inventories is also
considered in establishing its valuation. These adjustments are estimates, which
could vary significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory levels or
competitive conditions differ from our expectations.



Goodwill and Indefinite-Lived Intangible Assets. Goodwill (representing the
excess of the amount paid to acquire a company over the estimated fair value of
the net assets acquired) and indefinite lived intangible assets are not
amortized but instead are tested for impairment annually, or when events or
circumstances indicate that the carrying value of such asset may not be
recoverable. Separate tests are performed for goodwill and indefinite lived
intangible assets. We completed a quantitative test of impairment on the
indefinite lived intangible assets with no impairment noted in the current year.
The determination of any goodwill impairment is made at the reporting unit
level. The Company determines the fair value of a reporting unit and compares it
to its carrying amount. If the carrying amount of the reporting unit exceeds its
fair value, an impairment loss is recognized for any amount by which the
carrying amount exceeds the reporting unit's fair value up to the value of
goodwill. The Company applies the income approach (discounted cash flow method)
in testing goodwill for impairment. The key assumptions used in the discounted
cash flow method used to estimate fair value include discount rates, revenue
growth rates, terminal growth rates and cash flow projections. Discount rates,
revenue growth rates and cash flow projections are the most sensitive and
susceptible to change as they require significant management judgment. Discount
rates are determined by using a weighted average cost of capital ("WACC"). The
WACC considers market and industry data as well as Company-specific risk factors
for each reporting unit in determining the appropriate discount rate to be used.
The discount rate utilized for each reporting unit for our fiscal 2021 test was
9.5% and is indicative of the return an investor would expect to receive for
investing in such a business. Terminal growth rate determination follows common
methodology of capturing the present value of perpetual cash flow estimates
beyond the last projected period assuming a constant WACC and long-term growth
rates. The terminal growth rate used for our fiscal 2021 test was 2.5%. The
Company has determined that, to date, no impairment of goodwill exists and fair
value of the reporting units exceeded the carrying value in total by
approximately 137.4%. The fair value of the reporting units exceeds the carrying
value by a minimum of 49.2% at each of the four reporting units. A decrease of
1.0% in our terminal growth rate would not result in impairment of goodwill for
any of our reporting units. An increase of 1.0% in our discount rate would not
result in impairment of goodwill for any of our reporting units. The Company
performs the annual impairment testing during the fourth quarter of each fiscal
year. Although no changes are expected, if the actual results of the Company are
less favorable than the assumptions the Company makes regarding estimated cash
flows, the Company may be required to record an impairment charge in the future.



Income Taxes. As part of the process of preparing the consolidated financial
statements, we are required to estimate the income taxes in each jurisdiction in
which we operate. This process involves estimating the actual current tax
liabilities together with assessing temporary differences resulting from the
differing treatment of items for tax and financial reporting purposes. These
differences result in deferred tax assets and liabilities, which are included in
the consolidated balance sheets. We must then assess the likelihood that the
deferred tax assets will be recovered, and to the extent that we believe that
recovery is not more than likely, we are required to establish a valuation
allowance. If a valuation allowance is established or increased during any
period, we are required to include this amount as an expense within the tax
provision in the consolidated statements of operations. Significant judgment is
required in determining our provision for income taxes, deferred tax assets and
liabilities, accrual for uncertain tax positions and any valuation allowance
recognized against net deferred tax assets.



                                       32




Stock-based compensation. We recognize the compensation cost related to all share-based payment transactions in the financial statements based on the grant date fair value of the instruments issued during the required service period.




The fair value for our options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:



                                                    Fiscal Year Ended
                                         April 3,       March 28,       March 30,
                                           2021           2020            2019
Dividend yield                                0.00 %          0.00 %          0.00 %
Expected weighted-average life (yrs.)          5.0             5.0         
   5.0
Risk-free interest rate                       0.35 %          1.82 %          2.77 %
Expected volatility                          41.35 %         26.93 %         25.16 %



The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, the existing models do not necessarily provide a
reliable single measure of the fair value of our options.



                                       33




Recent accounting statements

For an analysis of recent accounting statements, see note 2 – “Summary of significant accounting policies – Recent accounting statements”.

Impact of inflation, changes in commodity prices and fluctuations in interest rates

In fiscal 2021, inflation in the economy as a whole did not have a material impact on our business. We started to experience inflation in the fourth quarter. We buy steel at market prices, which fluctuate due to supply and demand in the market. To date, we have managed the price increases by changing our purchasing habits, expanding our supplier network and passing the increases on to our customers through price increases on our products, assessment of steel surcharges. on our customers or entering into long-term agreements with our customers containing escalator provisions related to our invoiced price of steel. However, even though we are able to pass these surcharges or price increases on to our customers, there may be a lag of several months between when a price increase becomes effective and our ability to implement surcharges or price increases, especially for orders. already in our backlog. As a result, our gross margin percentage may drop.




Competitive pressures and the terms of certain of our long-term contracts may
require us to absorb at least part of these cost increases, particularly during
periods of high inflation. Our principal raw materials are stainless and 52100
wire and rod steel (types of high alloy steel), which have historically been
readily available. We have never experienced a work stoppage due to a supply
shortage. We maintain multiple sources for raw materials including steel and
have various supplier agreements. Through sole-source arrangements, supplier
agreements and pricing, we have been able to minimize our exposure to
fluctuations in raw material prices.



Our suppliers and sources of raw materials are based in the U.S., Europe and
Asia. We believe that our sources are adequate for our needs in the foreseeable
future, that there exist alternative suppliers for our raw materials and that in
most cases readily available alternative materials can be used for most of
our
raw materials.


Off-balance sheet arrangements




As of April 3, 2021, we had no significant off-balance sheet arrangements other
than $3.5 million of outstanding standby letters of credit, all of which were
under the Revolver.

© Edgar Online, source Previews


Source link

About Andrew Estofan

Check Also

AMMB profit before provision amounts to RM 2.4 billion

Growth reflects the strength of the bank’s diverse franchise and effective cost management strategy despite …