RBC BEARINGS INCORPORATED Cautionary Statement as to Forward-Looking Information
The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The information in this discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the "safe harbor" created by those sections. All statements, other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are "forward-looking statements" as the term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing and engineered products industries are highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer, or a material adverse change in a major customer's business, could result in a material reduction in our revenues, cash flows and profitability; (c) our results have been and are likely to continue to be impacted by the COVID-19 pandemic; (d) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers' businesses generally, could materially reduce our revenues, cash flows and profitability; (e) future reductions or changes inU.S. government spending could negatively affect our business; (f) fluctuating supply and costs of subcomponents, raw materials and energy resources, or the imposition of import tariffs, could materially reduce our revenues, cash flows and profitability; (g) our results could be impacted by governmental trade policies and tariffs relating to our supplies imported from foreign vendors or our finished goods exported to other countries; (h) our products are subject to certain approvals and government regulations and the loss of such approvals, or our failure to comply with such regulations, could materially reduce our revenues, cash flows and profitability; (i) the retirement of commercial aircraft could reduce our revenues, cash flows and profitability; (j) work stoppages and other labor problems could materially reduce our ability to operate our business; (k) unexpected equipment failures, catastrophic events or capacity constraints could increase our costs and reduce our sales due to production curtailments or shutdowns; (l) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (m) businesses that we have acquired (such as Dodge) or that we may acquire in the future may have liabilities that are not known to us; (n) goodwill and indefinite-lived intangibles comprise a significant portion of our total assets, and if we determine that goodwill and indefinite-lived intangibles have become impaired in the future, our results of operations and financial condition in such years may be materially and adversely affected; (o) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (p) our international operations are subject to risks inherent in such activities; (q) currency translation risks may have a material impact on our results of operations; (r) we are subject to changes in legislative, regulatory and legal developments involving income and other taxes; (s) we may be required to make significant future contributions to our pension plan; (t) we may incur material losses for product liability and recall-related claims; (u) environmental and health and safety laws and regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (v) our intellectual property and proprietary information are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (w) cancellation of orders in our backlog could negatively impact our revenues, cash flows and profitability; (x) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (y) litigation could adversely affect our financial condition; (z) changes in accounting standards or changes in the interpretations of existing standards could affect our financial results; (aa) risks associated with utilizing information technology systems could adversely affect our operations; (bb) our quarterly performance can be affected by the timing of government product inspections and approvals; (cc) we may not be able to efficiently integrate Dodge into our operations; (dd) we may fail to realize some or all of the anticipated benefits of the Dodge acquisition or those benefits may take longer to realize than expected; (ee) we incurred substantial debt in order to complete the Dodge acquisition, which could constrain our business and exposes us to the risk of defaults under our debt instruments; and (ff) increases in interest rates would increase the cost of servicing the Term Loan Facility and could reduce our profitability. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with theSEC , including, without limitation, the risks identified under the heading "Risk Factors" set forth in the Annual Report on Form 10-K/A for the year endedApril 2, 2022 . 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.
21
Overview
We are a well-known international manufacturer and maker of highly-engineered
bearings and precision 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 expertise has enabled us
to garner leading positions in many of the product markets in which we primarily
compete. With 56 facilities in 10 countries, of which 37 are manufacturing
facilities, we have been able to significantly broaden our end markets,
products, customer base and geographic reach.
Previously we operated under four reportable business segments - Plain Bearings,
Roller Bearings, Ball Bearings, and Engineered Products - but the Dodge
acquisition has resulted in a change in the internal organization of the Company
and how our chief operating decision maker makes operating decisions, assesses
the performance of the business, and allocates resources so that we now operate
under two reportable business segments - Aerospace/Defense and Industrial:? Aerospace/Defense. This segment represents the end markets for the Company's
highly engineered bearings and precision components used in commercial
aerospace, defense aerospace, and marine and ground defense applications.
? Industrial. This segment represents the end markets for the Company's highly
engineered bearings, gearings and precision components used in various
industrial applications including: power transmission; construction, mining,
energy and specialized equipment manufacturing; semiconductor production equipment manufacturing; agricultural machinery, commercial truck and automotive manufacturing; and tool holding.
Financial information for fiscal 2022 has been recast to conform to the new segment presentation.
The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into single and sole-source relationships and long-term purchase agreements, through diversification across multiple market segments within the Aerospace/Defense 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 highly-engineered bearings and precision 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. The acquisition of Dodge has had a profound impact on our sales
volumes to distributors and other aftermarket customers. We will further
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.
22
Outlook
Our net sales for the three-month period ended July 2, 2022 increased 126.7%
compared to the same period last fiscal year; excluding Dodge sales in the first
quarter of fiscal 2023, net sales were up 13.1% period over period. The increase
in net sales was a result of a 286.8% increase in our Industrial segment and
10.0% increase in our Aerospace/Defense segment. Excluding sales from Dodge, our
Industrial segment increased 17.3% year over year. Our backlog, as of July 2,
2022 , was $635.7 million compared to $603.1 million as of April 2, 2022 .
We are continuing to see the recovery of the commercial aerospace business,
which has increased by 18.9% versus the same period last year. We anticipate
this recovery to accelerate throughout the rest of the fiscal year and beyond.
Orders have continued to grow as evidenced by our backlog. Defense sales, which
represented approximately 35.0% of segment sales this period, were down 3.4%
year over year. This is in part due to the timing of delivery on parts that
require government approval and/or completion of certain milestone achievements
prior to invoicing.
The increase in our industrial sales reflects a pattern of sustained growth over the last year, with strong results in several areas. Mining increased by more than 25.0% year over year. Our oil and gas business this quarter showed the start of a strong recovery which is expected to continue into future periods. Other notable strengths in industrial were in semiconductor and general industrial markets. The increase in our global industrial sales was negatively impacted by the Covid related shut downs inChina , where Dodge has a plant
inShanghai .
The Company expects net sales to be approximately
We experienced strong cash flow generation during the first quarter of fiscal 2023 (as discussed in the section "Liquidity and Capital Resources" below). 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. As ofJuly 2, 2022 , we had cash and cash equivalents of$119.6 million of which approximately$24.8 million was cash held by our foreign operations. Results of Operations (dollars in millions) Three Months Ended July 3, July 2, 2021 2022 (As Restated) (1) $ Change % Change Total net sales$ 354.1 $ 156.2$ 197.9 126.7 % Net income available to common stockholders$ 31.7 $ 24.0$ 7.7 31.8 % Net income per share available to common stockholders: diluted$ 1.09 $
0.95
Weighted average common shares: diluted 28,944,955 25,392,047 Our net sales for the three-month period endedJuly 2, 2022 increased 126.7% compared to the same period last fiscal year; excluding Dodge sales in the first quarter of fiscal 2023, net sales were up 13.1% period over period. The increase in net sales was a result of a 286.8% increase in our Industrial segment. Sales to our Aerospace/Defense segment were led by aircraft OEM, which was up 23.2% compared to the same period in the prior year. Sales to the defense sector were down 3.4%. Excluding Dodge sales, sales to our industrial segment increased 17.3% year over year. This reflects a pattern of sustained growth in our industrial sales, with strong results in areas including the semiconductor, mining, energy, and general industrial markets. Within aerospace, we experienced an increase in our commercial aerospace business while the defense end markets were down as compared to the same period last year. The increase in commercial aerospace reflects the recovery in build rates from large OEMs and stability in the aftermarket. Defense sales were negatively impacted by the timing of shipments associated with our marine business. Net income available to common stockholders for the first quarter of fiscal 2023 was$31.7 million compared to$24.0 million (1) for the same period last year. Net income for the first quarter of fiscal 2023 was affected by approximately$3.7 million of pre-tax transition services costs associated with the Dodge acquisition. Net income for the first quarter of fiscal 2022 was affected by$0.2 million of discrete tax benefit.
(1) See Note 2, Summary of Significant Accounting Policies - Restatement, for
discussion regarding the impacts of the Restatement.
23
Gross Margin
Three Months Ended
July 2, July 3, $ %
2022 2021 Change Change
Gross Margin
Gross margin was 39.9% of net sales for the first quarter of fiscal 2023 compared to 40.8% for the first quarter of fiscal 2022. The decrease in gross margin as a percentage of net sales was driven by product mix.
Selling, General and Administrative
Three Months Ended
July 3, 2021 $ %
July 2, 2022 (As Restated) (1) Change Change
SG&A $ 55.8 $ 31.2 $ 24.6 78.9 %
% of net sales 15.8 % 20.0 %
SG&A for the first quarter of fiscal 2023 was $55.8 million , or 15.8% of net
sales, as compared to $31.2 million (1), or 20.0%(1) of net sales, for the same
period of fiscal 2022. SG&A for the first quarter of fiscal 2023 includes
approximately $23.9 million of costs from the Dodge business. The remainder of
the increase is primarily associated with an increase in personnel costs year
over year.
(1) See Note 2, Summary of Significant Accounting Policies - Restatement, for
discussion regarding the impacts of the Restatement.
Other, Net
Three Months Ended
July 2, July 3, $ %
2022 2021 Change Change
Other, net $ 20.9 $ 3.2 $ 17.7 542.1 %
% of net sales 5.9 % 2.1 %
Other operating expenses for the first quarter of fiscal 2023 totaled$20.9 million compared to$3.2 million for the same period last year. For the first quarter of fiscal 2023, other operating expenses included$3.8 million ofTSA costs and other costs associated with the Dodge acquisition and$17.3 million of amortization of intangible assets partially offset by$0.2 million of other income. For the first quarter of fiscal 2022, other operating expenses were comprised mainly of$2.6 million of amortization of intangible assets and$0.6 million of restructuring costs and other items. Interest Expense, Net Three Months Ended July 2, July 3, $ % 2022 2021 Change Change
Interest expense, net$ 15.8 $ 0.3 $ 15.5 4,852.7 % % of net sales 4.5 % 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 first quarter of fiscal 2023 compared to$0.3 million for the same period last year. The increase in interest cost during the period is a result of the addition of the Term Loan Facility and Senior Notes in the third quarter of fiscal 2022. 24
Other Non-Operating Expense
Three Months Ended
July 2, July 3, $ %
2022 2021 Change Change
Other non-operating expense
0.2 % (0.3 )%
Other non-operating expenses were $0.8 million for the first quarter of fiscal
2023 compared to $0.5 million of income for the same period in the prior year.
For the first quarter of fiscal 2023, other non-operating expenses were
comprised of $0.6 million of post-retirement benefit costs, and $0.2 million of
other items. For the first quarter of fiscal 2022, other non-operating income of
$0.5 million was primarily comprised of dividend income received from short-term
marketable securities.
Income Taxes
Three Months Ended
July 2, July 3, 2021
2022 (As Restated) (1)
Income tax expense $ 10.5 $ 5.4
Effective tax rate 21.8 % 18.4 %
Income tax expense for the three-month period endedJuly 2, 2022 was$10.5 million compared to$5.4 million (1) for the three-month period endedJuly 3, 2021 . Our effective income tax rate for the three-month period endedJuly 2, 2022 was 21.8% compared to 18.4%(1) for the three-month period endedJuly 3, 2021 . The effective income tax rate for the three-month period endedJuly 2, 2022 of 21.8% included$0.6 million of tax benefits associated with share-based compensation; the effective income tax rate without these items would have been 23.1%. The effective income tax rate for the three-month period endedJuly 3, 2021 of 18.4%(1) included$2.1 million of tax benefit associated with share-based compensation along with$0.2 million of tax benefit associated with the release of unrecognized tax positions associated with the statute of limitations expiration. The effective income tax rate without these benefits and other items for the three-month period endedJuly 3, 2021 would have been 26.2%(1).
(1) See Note 2, Summary of Significant Accounting Policies - Restatement, for
discussion regarding the impacts of the Restatement.
Segment Information
We previously reported our financial results under four operating segments
(Plain Bearings; Roller Bearings; Ball Bearings; and Engineered Products), but
the Dodge acquisition has resulted in a change in the internal organization of
the Company and how our chief operating decision maker makes operating
decisions, assesses the performance of the business, and allocates resources.
Accordingly, we will now report our financial results under two operating
segments: Aerospace/Defense; and Industrial. Financial information for fiscal
2022 has been recast to conform to the new segment presentation. We use gross
margin as the primary measurement to assess the financial performance of each
reportable segment.
Aerospace/Defense Segment
Three Months Ended
July 2, July 3, $ %
2022 2021 Change Change
Total net sales $ 99.4 $ 90.4 $ 9.0 10.0 %
Gross margin $ 38.6 $ 38.6 $ (0.0 ) (0.1 )%
% of segment net sales 38.8 % 42.8 %
SG&A $ 7.5 $ 7.3 $ 0.2 3.0 %
% of segment net sales 7.5 % 8.0 %
Net sales increased$9.0 million , or 10.0%, for the three months endedJuly 2, 2022 compared to the same period last year. Commercial aerospace increased during the period 18.9% year over year. The aerospace OEM component was up 23.2%, demonstrating early signs of a recovery in the OEM markets. This was further evidenced by continuing expansion of our backlog during the period. Our defense markets, which represent about 35.0% of segment sales, decreased by approximately 3.4% during the period. These markets were impacted by the timing of deliveries to certain government customers which require sign off or achievement of certain milestones prior to shipment. Overall distribution and aftermarket sales, which represent 18.3% of segment sales, increased 2.7% year over year. Gross margin as a percentage of segment net sales was 38.8% for the first quarter of fiscal 2023 compared to 42.8% for the same period last year. The decrease in gross margin as a percentage of net sales was driven by product mix during the period. 25 Industrial Segment Three Months Ended July 2, July 3, $ % 2022 2021 Change Change Total net sales$ 254.7 $ 65.8 $ 188.9 286.8 % Gross margin$ 102.6 $ 25.2 $ 77.4 307.9 % % of segment net sales 40.3 % 38.2 % SG&A$ 30.0 $ 5.7 $ 24.3 421.5 % % of segment net sales 11.8 % 8.7 % Net sales increased$188.9 million , or 286.8%, for the three months endedJuly 2, 2022 compared to the same period last year. The increase was primarily due to three months of Dodge sales in fiscal 2023 and continued strong performance across the majority of our industrial markets. Excluding Dodge sales of$177.5 million , net sales increased$11.4 million , or 17.3%, period over period. This increase was driven by performance in semiconductor, energy, mining, and the general industrial markets. Sales to distribution and the aftermarket reflected 63.4% of our quarterly industrial sales. These distribution and aftermarket sales increased 565.0% compared to the same quarter in the prior year, and 11.6% excluding associated sales from Dodge. Gross margin for the three months endedJuly 2, 2022 was 40.3% of net sales, compared to 38.2% in the comparable period in fiscal 2022. The improved gross margin is primarily due to price increases put into place and product mix.
Corporate
Three Months Ended
July 2, July 3, 2021 $ %
2022 (As Restated) (1) Change Change
SG&A $ 18.3 $ 18.2 $ 0.1 0.9 %
% of total net sales 5.2 % 11.7 %
Corporate SG&A was
(1) See Note 2, Summary of Significant Accounting Policies - Restatement, for
discussion regarding the impacts of the Restatement.
Liquidity and Capital Resources
(dollars in millions in tables)
Our business is capital-intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth, in part, through acquisitions, including the Dodge acquisition completed onNovember 1, 2021 . We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future. For further discussion regarding the funding of the Dodge acquisition, refer to
Part
I, Item 1 - Note 13.
Our ability to meet future working capital, capital expenditures and debt
service requirements will depend on our future financial performance, which will
be affected by a range of economic, competitive and business factors,
particularly interest rates, cyclical changes in our end markets and prices for
steel and our ability to pass through price increases on a timely basis, many of
which are outside of our control. In addition, future acquisitions could have a
significant impact on our liquidity position and our need for additional funds.
From time to time, we evaluate our existing facilities and operations and their
strategic importance to us. If we determine that a given facility or operation
does not have future strategic importance, we may sell, relocate, 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.
26
Liquidity
As ofJuly 2, 2022 , we had cash and cash equivalents of$119.6 million , of which, approximately$24.8 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 entered into the New Credit Agreement with Wells Fargo and the other lenders party thereto onNovember 1, 2021 and terminated the 2015 Credit Agreement. The New Credit Agreement provides the Company with (a) the$1,300.0 million Term Loan Facility, which was used to fund a portion of the cash purchase price for the acquisition of Dodge and to pay related fees and expenses, and (b) the$500.0 million Revolving Credit Facility. Debt issuance costs associated with the New Credit Agreement totaled$14.9 million and will be amortized over the life of the New Credit Agreement. Amounts outstanding under the Facilities generally bear interest at either, at the Company's option, (a) a base rate determined by reference to the higher of (i) Wells Fargo's prime lending rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the one-month LIBOR rate plus 1.00% or (b) the LIBOR rate plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA from time to time. Currently, the Company's margin is 0.50% for base rate loans and 1.50% for LIBOR rate loans. The Facilities are subject to a "LIBOR" floor of 0.00% and contain "hard-wired" LIBOR replacement provisions as set forth in the New Credit Agreement. As ofJuly 2, 2022 , the Company's commitment fee rate is 0.20% and the letter of credit fee rate is 1.50%. The Term Loan Facility and the Revolving Credit Facility will mature onNovember 2, 2026 . The Company can elect to prepay some or all of the outstanding balance from time to time without penalty. Commencing one full fiscal quarter after the execution of the New Credit Agreement, the Term Loan Facility will amortize in quarterly installments as set forth in Part I, Item 1 - Note 10, with the balance payable on the Maturity Date unless otherwise extended in accordance with the terms of the Term Loan Facility. The New Credit Agreement requires the Company to comply with various covenants, including the following financial covenants beginning with the test period endingDecember 31, 2021 : (a) a maximum Total Net Leverage Ratio of 5.50:1.00, which maximum Total Net Leverage Ratio shall decrease during certain subsequent test periods as set forth in the New Credit Agreement (provided that, no more than once during the term of the Facilities, such maximum ratio applicable at such time may be increased by the Borrower by 0.50:1.00 for a period of twelve (12) months after the consummation of a material acquisition), and (b) a minimum Interest Coverage Ratio of 2.00:1.00. The New 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 New Credit Agreement. The Company's domestic subsidiaries have guaranteed the Company's obligations under the New Credit Agreement, and the Company's obligations and the domestic subsidiaries' guaranty are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries.
As of
Senior Notes OnOctober 7, 2021 , RBCA issued$500.0 million aggregate principal amount of the Senior Notes and used the approximately$492.0 million of net proceeds from the issuance (after deducting initial purchasers' discounts and commissions and offering expenses) to fund a portion of the cash purchase price for the acquisition of Dodge. 27 The Senior Notes were issued pursuant to the Indenture withWilmington Trust, National Association , as trustee. The Indenture contains covenants limiting the ability of the Company to (i) incur additional indebtedness or guarantee indebtedness, (ii) declare or pay dividends, redeem stock or make other distributions to stockholders, (iii) make investments, (iv) create liens or use assets as security in other transactions, (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets, (vi) enter into transactions with affiliates, and (vii) sell or transfer certain assets. These covenants contain various exceptions, limitations and qualifications. At any time that the Senior Notes are rated investment grade, certain covenants will be suspended.
The Senior Notes are guaranteed jointly and severally on a senior unsecured
basis by
Interest on the Senior Notes accrues at a rate of 4.375% and is payable
semi-annually in cash in arrears on
The Senior Notes will mature onOctober 15, 2029 . The Company may redeem some or all of the Senior Notes at any time on or afterOctober 15, 2024 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The Company may also redeem up to 40% of the Senior Notes using the proceeds of certain equity offerings completed beforeOctober 15, 2024 , at a redemption price equal to 104.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior toOctober 15, 2024 , the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount, plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company sells certain of its assets or experiences specific kinds of changes in control, the Company must offer to purchase the Senior Notes.
Foreign Term Loan and Revolving Credit Facility
Our Foreign Credit Agreements withCredit Suisse (Switzerland) Ltd. provided us with financing to acquire Swiss Tool in 2019 and provide future working capital for Schaublin, our foreign subsidiary. The Foreign Credit Agreements provide (a) the Foreign Term Loan, aCHF 15.0 million (approximately$15.4 million ) term loan, which was extinguished inFebruary 2022 , and (b) the Foreign Revolver, aCHF 15.0 million (approximately$15.4 million ) revolving credit facility, which continues in effect until terminated by either Schaublin or Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements totaledCHF 0.3 million (approximately$0.3 million ). Amounts outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable margin is based on Schaublin's ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin's margin is 1.00%. The Foreign Credit Agreements require Schaublin to comply with various covenants, which are tested annually onMarch 31 . These covenants include, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 2.50 to 1 as ofMarch 31, 2021 and thereafter. Schaublin is also required to maintain an economic equity ofCHF 20.0 million at all times. The Foreign Credit Agreements allow Schaublin to, among other things, incur other debt or liens and acquire or dispose of assets provided that Schaublin complies with certain requirements and limitations of the Foreign Credit Agreements. As ofJuly 2, 2022 , Schaublin was in compliance with all such covenants. Schaublin's parent company,Schaublin Holding , has guaranteed Schaublin's obligations under the Foreign Credit Agreements.Schaublin Holding's guaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the three operating companies in the Swiss Tool System group of companies.
As of
28
Cash Flows
Three-month Period Ended
The following table summarizes our cash flow activities:
FY23 FY22 $ Change
Net cash provided by (used in):
Operating activities $ 59.0 $ 53.3 $ 5.7
Investing activities 15.2 (33.3 ) 48.5
Financing activities (136.4 ) 4.5 (140.9 )Effect of exchange rate changes on cash (1.1 ) 0.2
(1.3 )
Increase/(Decrease) in cash and cash equivalents
During the first three months of fiscal 2023, we generated cash of$59.0 million from operating activities compared to$53.3 million of cash generated during the same period of fiscal 2022. The increase of$5.7 million for fiscal 2023 was mainly a result of a favorable change in non-cash activity of$13.3 million and an increase in net income of$13.4 million , partially offset by the unfavorable impact of a net change in operating assets and liabilities of$21.0 million . The unfavorable change in operating assets and liabilities is detailed in the table below, while the increase in non-cash charges resulted from$20.4 million of depreciation and amortization and$2.2 million of amortization of deferred financing costs, partially offset by unfavorable changes of$5.4 million in deferred taxes,$3.4 million of share-based compensation charges and$0.5 million of restructuring and consolidation charges.
(1) See Note 2, Summary of Significant Accounting Policies - Restatement, for
discussion regarding the impacts of the Restatement.
The following chart summarizes the unfavorable change in operating assets and
liabilities of
FY23 FY22
Cash provided by (used in):
Accounts receivable $ 6.5 $ (11.0 )
Inventory (23.3 ) (1.6 )
Prepaid expenses and other current assets (0.6 ) (3.4 )
Other noncurrent assets (0.6 ) 2.7
Accounts payable (2.6 ) 5.5
Accrued expenses and other current liabilities 10.4 7.1 Other noncurrent liabilities
(10.8 ) 3.9
Total change in operating assets and liabilities:
During the first three months of fiscal 2023, we generated$15.2 million in investing activities as compared to$33.3 million used during the first three months of fiscal 2022. This increase from cash used to cash generated was attributable to Dodge acquisition purchase price adjustments of$23.0 million and$29.9 million less in purchase of marketable securities partially offset by an increase in capital expenditures of$4.4 million . During the first three months of fiscal 2023, we used$136.4 million in financing activities compared to$4.5 million generated during the first three months of fiscal 2022. This decrease from cash generated to cash used was primarily attributable to$119.2 million more payments made on outstanding debt,$15.2 million fewer exercises of share-based awards,$5.8 million more cash dividends paid on preferred stock, and$1.0 million in principal payments made on finance lease obligations during the current fiscal year partially offset by$0.3 million less in treasury stock purchases. 29 Capital Expenditures
Our capital expenditures were$7.9 million for the three-month period endedJuly 2, 2022 . We expect to make additional capital expenditures of$30.0 million to$25.0 million during the remainder of fiscal 2023 in connection with our existing business. We expect to fund these capital expenditures principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions. Obligations and Commitments The Company's fixed contractual obligations and commitments are primarily comprised of our debt obligations disclosed within Part I, Item 1- Note 10 of this report. We also have lease obligations which are materially consistent with what we have disclosed within our Form 10-K/A for the fiscal year endedApril 2, 2022 . Other Matters
Critical Accounting Policies and Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements in our fiscal 2022 Annual Report on Form 10-K/A describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the first three months of fiscal 2023.
Off-Balance Sheet Arrangements
As ofJuly 2, 2022 , we had no significant off-balance sheet arrangements other than$3.7 million of outstanding standby letters of credit, all of which were under the Revolving Credit Facility.
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