RBC BEARINGS INCORPORATED 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 about our
future performance that constitute "forward-looking statements" within the
meaning of the safe harbor provisions of the
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 theSEC onMay 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 toMarch 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.
Engineered Products. Engineered Products consist of highly engineered hydraulics, fasteners, collets, tool holders and precision components used in aerospace, marine and industrial applications.
Purchasers of bearings and engineered products include industrial equipment and
machinery manufacturers, producers of commercial and military aerospace
equipment, agricultural machinery manufacturers, construction, energy, mining
and specialized equipment manufacturers, and marine products, automotive and
commercial truck manufacturers. The markets for our products are cyclical, and
we have endeavored to mitigate this cyclicality by entering into sole-source
relationships and long-term purchase agreements, through diversification across
multiple market segments within the aerospace and industrial segments, by
increasing sales to the aftermarket, and by focusing on developing highly
customized solutions.
21
Currently, our strategy is built around maintaining our role as a leading manufacturer of precision bearings and components through the following efforts:
? Developing innovative solutions. By leveraging our design and manufacturing
expertise and our extensive customer relationships, we continue to develop new
products for markets in which there are substantial growth opportunities.
? Expanding customer base and penetrating end markets. We continually seek
opportunities to access new customers, geographic locations and bearing
platforms with existing products or profitable new product opportunities.
? Increasing aftermarket sales. We believe that increasing our aftermarket sales
of replacement parts will further enhance the continuity and predictability of
our revenues and enhance our profitability. Such sales include sales to third
party distributors, and sales to OEMs for replacement products and aftermarket
services. We expect to 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. 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 OnAugust 15, 2019 , the Company, through itsSchaublin 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 toMarch 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 inMarch 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 ofApril 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 endedApril 3, 2021 andMarch 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 further discussion regarding the Company's revenue policy.
Cost of Sales
Cost of sales includes employee compensation and benefits, raw materials, outside processing, depreciation of manufacturing machinery and equipment, supplies and manufacturing overhead.
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 2021 Compared to Fiscal 2020
Results of Operations
FY21 FY20 $ Change % Change
Net sales $ 609.0 $ 727.5 $ (118.5 ) (16.3 )%
Net income $ 89.6 $ 126.0 Net sales for the twelve months endedApril 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 ourHouston 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
FY21 FY20 $ Change % Change
SG&A $ 106.0 $ 122.6 $ (16.6 ) (13.5 )%
% of net sales 17.4 % 16.8 %
SG&A expenses decreased by
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
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-Operating Expense
FY21 FY20 $ Change % Change
Other non-operating expense
(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 items 18.6 % 18.2 % Effective tax rate without discrete items 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 theU.S. statutory rate due to theU.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.
Gross margin for the year was
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 %
Corporate SG&A decreased
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 ofApril 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 withWells 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 onJanuary 31, 2024 . Debt issuance costs associated with the Credit Agreement totaled$0.9 million and will be amortized throughJanuary 31, 2024 along with the unamortized debt issuance costs remaining from the Company's prior credit agreement. As ofApril 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 ofApril 3, 2021 , the Company was in compliance with all such covenants.
The Company's domestic subsidiaries have guaranteed the Company's obligations under the Credit Agreement, and the Company's obligations and the domestic subsidiaries' guarantee are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries.
Approximately
28
Foreign Term Loan and Revolving Credit Facility
OnAugust 15, 2019 , one of our foreign subsidiaries,Schaublin SA ("Schaublin"), entered into two separate credit agreements (the "Foreign Credit Agreements") withCredit Suisse (Switzerland) Ltd. to finance the acquisition of Swiss Tool and provide future working capital. The Foreign Credit Agreements provided Schaublin with aCHF 15.0 million (approximately$15.4 million ) term loan (the "Foreign Term Loan"), which expires onJuly 31, 2024 and aCHF 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 totaledCHF 0.3 million (approximately$0.3 million ) and will be amortized throughout the life of the Foreign Credit Agreements. As ofApril 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 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 ofApril 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 ofApril 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 ofApril 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 OnOctober 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 ofApril 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 2021 Compared to Fiscal 2020
The following table summarizes our cash flow activities:
FY21 FY20 $ Change
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 changes on cash 0.3 0.9 (0.6 )
Increase in cash and cash equivalents
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 chart summarizes the favorable change in operating assets and
liabilities of
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 noncurrent liabilities
5.7 (0.5 )
Total change in operating assets and liabilities
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 inHouston, 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 Results of Operations
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 income 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 Income Per Common
Share."
(2) Net income per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share
may not necessarily equal the total for the year.
Critical Accounting Policies and 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 withU.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 endedApril 3, 2021 compared to approximately 95% for the year endedMarch 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 endedApril 3, 2021 compared to approximately 5% for the year endedMarch 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 endedApril 3, 2021 and the year endedMarch 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 compensation cost relating to all share-based payment transactions in the financial statements based upon the grant-date fair value of the instruments issued over the requisite 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 Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 - "Summary of Significant Accounting Policies - Recent Accounting Pronouncements."
Impact of Inflation, Changes in Prices of Raw Materials and Interest Rate Fluctuations
In fiscal 2021, inflation in the economy as a whole has not significantly affected our operations. We started to experience inflation in our fourth quarter. We purchase steel at market prices, which fluctuate as a result of supply and demand in the marketplace. To date, we have managed price increases by changing our buying patterns, expanding our vendor network, and passing increases on to our customers through price increases on our products, the assessment of steel surcharges on our customers, or entry into long-term agreements with our customers containing escalator provisions tied to our invoiced price of steel. However, even if we are able to pass these steel surcharges or price increases to our customers, there may be a time lag of several months between the time a price increase goes into effect and our ability to implement surcharges or price increases, particularly for orders already in our backlog. As a result, our gross margin percentage may decline.
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 theU.S. ,Europe andAsia . 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 ofApril 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
