ROLL RBC Bearings Inc

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement As To Forward-Looking Information

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

The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing 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 could result in a material reduction in our revenues and profitability; (c) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers’ businesses generally, could materially reduce our revenues and profitability; (d) future reductions or changes in U.S. government spending could negatively affect our business; (e) fluctuating or interruption to supply, and availability of raw materials, components and energy resources could materially increase our costs or reduce our revenues, cash flow from operations and profitability; (f) our products are subject to certain approvals, and the loss of such approvals could materially reduce our revenues and profitability; (g) restrictions in our indebtedness agreements could limit our growth and our ability to respond to changing conditions; (h) work stoppages and other labor problems could materially reduce our ability to operate our business; (i) our business is capital intensive and may consume cash in excess of cash flow from our operations; (j) unexpected equipment failures, catastrophic events or capacity constraints may increase our costs and reduce our sales due to production curtailments or shutdowns; (k) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (l) the costs and difficulties of integrating acquired businesses could impede our future growth; (m) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (n) our international operations are subject to risks inherent in such activities; (o) currency translation risks may have a material impact on our results of operations; (p) we may be required to make significant future contributions to our pension plan; (q) we may incur material losses for product liability and recall related claims; (r) environmental regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (s) our intellectual property and other proprietary rights are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (t) cancellation of orders in our backlog of orders could negatively impact our revenues; (u) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (v) provisions in our charter documents may prevent or hinder efforts to acquire a controlling interest in us; (w) health care reform could adversely affect our operating results; (x) we may not pay cash dividends in the foreseeable future; (y) retirement of commercial aircraft could reduce our revenues, and (z) we may not achieve satisfactory operating results in the integration of acquired companies. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC, including, without limitation, the risks identified under the heading “Risk Factors” set forth in the Annual Report on Form 10-K for the year ended April 2, 2016. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.

Overview

We are a well-known international manufacturer and maker of highly engineered precision bearings and components. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearings categories, we focus primarily on the higher end of the bearing and engineered component markets where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. With 39 facilities, of which 34 are manufacturing facilities in six countries, we have been able to significantly broaden our end markets, products, customer base and geographic reach. We currently operate under four reportable business segments: Plain Bearings; Roller Bearings; Ball Bearings; and Engineered Products. The following further describes these reportable segments:

Plain Bearings. Plain bearings are produced with either self-lubricating or metal-to-metal designs and consists of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components.

Roller Bearings. Roller bearings are anti-friction bearings that use rollers instead of balls. We manufacture four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.

Ball Bearings . We manufacture four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings which are used in high-speed rotational applications.

Engineered Products. Engineered Products consists of highly engineered hydraulics, fasteners, collets 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 such as missiles and radar systems, agricultural machinery manufacturers, construction, energy, mining, marine and specialized equipment manufacturers, 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 defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.

Currently, our strategy is built around maintaining our role as a leading manufacturer of precision engineered bearings and components through the following efforts:

Outlook

Our net sales for the three month period ended December 31, 2016 increased 1.7% compared to the same period last fiscal year. Our aerospace markets increased 1.2% and the industrial markets increased 2.7%. Our backlog, as of December 31, 2016, was $349.1 million compared to $351.3 million as of December 26, 2015.

Management believes that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. As of December 31, 2016, we had cash and cash equivalents of $39.5 million of which approximately $29.0 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 entities.

Our net sales for the three month period ended December 31, 2016 increased 1.7% compared to the same period last fiscal year. The increase in net sales was a result of an 1.2% increase in our aerospace markets and a 2.7% increase in the industrial markets. The increase in aerospace sales was mainly due to the commercial aerospace OEM which was partly offset by lower defense and distribution activity. The increase in industrial sales was mostly driven by marine, mining, and semicon activity.

Net income for the third quarter of fiscal 2017 was $12.8 million compared to $17.0 million for the same period last year. Excluding the after tax impact of $4.9 million of costs related to restructuring offset by $0.3 million of discrete tax benefit and foreign currency gains, net income for the third quarter of fiscal 2017 would have been $17.4 million. Excluding the after tax impact of $0.4 million in costs associated with the acquisition offset by $0.1 of discrete tax benefit, net income for the third quarter of fiscal 2016 would have been $17.3 million.

Net sales increased $20.0 million or 4.6% for the nine month period ended December 31, 2016 over the same period last year. The increase in net sales was mainly the result of a 5.2% increase in aerospace sales and a 3.3% increase in industrial. The increase in aerospace sales was mostly attributable to an increase in commercial aerospace OEM offset by a decrease in aerospace distribution and defense. The increase in industrial sales was mostly attributable to an increase in marine, mining aftermarket, and semicon activity partly offset by energy and light construction activity

Net income for the nine months ended December 31, 2016 was $49.0 million compared to $45.0 million for the same period last year. Excluding the after tax impact of $0.3 million in costs associated with the acquisition and $4.9 million in costs related to restructuring offset by $0.2 million of discrete tax benefit and $0.2 million of foreign exchange gain, net income would have been $53.8 million. Excluding the after tax impact of $3.4 million in costs associated with the acquisition, $4.8 million in inventory purchase accounting associated with the Sargent acquisition, $0.7 million of costs associated with integration and restructuring and $0.1 million loss on extinguishment of debt, and offset by $0.2 million of favorable foreign exchange translation and $0.2 million of discrete tax benefit, net income would have been $53.6 million for the nine month period ended December 26, 2015.

Gross margin decreased $1.1 million, or 2.1%, in the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016. In the third quarter of fiscal 2017, the Company reached a decision to integrate and restructure its industrial manufacturing operation in South Carolina. The Company will exit a few smaller product offerings and consolidate two manufacturing facilities into one. These restructuring efforts will better align our manufacturing capacity and market focus. As a result, the Company recorded a charge associated with the restructuring in the third quarter of fiscal 2017 attributable to the Roller Bearings segment, $3.2 million of which related to inventory rationalization costs. Excluding the unfavorable impact of $3.2 million of restructuring charges, gross margin would have been $55.6 million for the three months ending December 31, 2016. Excluding charges of $0.6 million associated with the Sargent acquisition, gross margin would have been $54.1 million for the three month period ending December 26, 2015.

Gross margin increased $8.0 million or 5.0% for the first nine months of fiscal 2017 compared to the same period last year. Excluding the unfavorable impact of $3.2 million of restructuring charges and $0.4 million of inventory purchase accounting associated with the Sargent acquisition, gross margin would have been $170.0 million for the nine month period ended December 31, 2016. Excluding $7.1 million of inventory purchase accounting associated with the Sargent acquisition, gross margin would have been $165.6 million for the nine month period ended December 26, 2015.

SG&A expenses increased by $1.8 million to $25.7 million for the third quarter of fiscal 2017 compared to the same period last year. This increase was mainly driven by $0.9 million of personnel related costs, $0.4 million of additional stock compensation expense, $0.2 million in professional fees and $0.3 million of other items.

SG&A increased as a percentage of net sales to 16.8% for the first nine months of fiscal 2017 from 16.7% for the same period last year. SG&A expenses increased by $4.2 million to $76.7 million for the first nine months of fiscal 2017 compared to the same period last year. This increase is primarily due to $1.7 million of additional stock compensation, $1.7 million of additional personnel related expenses and $0.8 million of other items.

Other operating expenses for the third quarter of fiscal 2017 totaled $6.1 million compared to $2.6 million for the same period last year. For the third quarter of fiscal 2017 other operating expenses were comprised mainly of $3.8 million of integration and restructuring costs and $2.3 million of amortization of intangible assets. Other operating expenses last year consisted primarily of $2.5 million in amortization of intangibles and $0.1 million of other costs.

Other operating expenses for the first nine months of fiscal 2017 totaled $10.4 million compared to $12.9 million for the same period last year. For the first nine months of fiscal 2017 other operating expenses were comprised mainly of $4.0 million of integration and restructuring costs and $6.9 million in amortization of intangibles offset by $0.5 million of other income. For the first nine months of fiscal 2016 other operating expenses were comprised primarily of $6.6 million in amortization of intangibles, $5.1 million of acquisition related costs, $1.0 million in integration and restructuring costs and $0.2 million in other costs.

Interest expense, net, generally consists of interest charged on our credit facilities and amortization of deferred financing fees, offset by interest income (see “Liquidity and Capital Resources – Liquidity”, below). Interest expense, net was $2.1 million for the third quarter of fiscal 2017 compared to $2.2 million for the same period last year. The Company had total debt of $294.9 million at December 31, 2016 compared to $385.0 million at December 26, 2015.

Interest expense, net, generally consists of interest charged on our credit facilities and amortization of deferred financing fees, offset by interest income (see “Liquidity and Capital Resources – Liquidity”, below). Interest expense, net was $6.7 million for the first nine months of fiscal 2017 compared to $6.2 million for the same period last year. For the first nine months of fiscal 2017 interest expense, net consisted of interest expense of $5.6 million and deferred debt fees of $1.1 million.

Income tax expense for the three month period ended December 31, 2016 was $5.9 million compared to $7.8 million for the three month period ended December 26, 2015. Our effective income tax rate for the three month period ended December 31, 2016 was 31.5% compared to 31.5% for the three month period ended December 26, 2015. The effective income tax rate for the three month period ended December 31, 2016 of 31.5% includes immaterial discrete expense of $0.1 million substantially comprised of the reversal of unrecognized tax benefits associated with the expiration of the statute of limitations as well as the recognition of additional expense associated with the filing of the prior year federal and state tax returns. The effective income tax rate without discrete items for the three month period ended December 31, 2016 would have been 31.8%. The effective income tax rate for the three month period ended December 26, 2015 of 31.5% includes immaterial discrete expense of $0.2 million which is substantially comprised of the recognition of benefits for federal law changes. The effective income tax rate without discrete items for the three month period ended December 26, 2015 would have been 32.1%.

Income tax expense for the nine month period ended December 31, 2016 was $23.6 million compared to $21.9 million for the nine month period ended December 26, 2015. Our effective income tax rate for the nine month period ended December 31, 2016 was 32.5% compared to 32.7% for the nine month period ended December 26, 2015. The effective income tax rate for the nine month period ended December 31, 2016 of 32.5% includes immaterial discrete benefit of $0.2 million comprised substantially of the reversal of unrecognized tax benefits associated with the expiration of the statute of limitations as well as the recognition of additional expense associated with the filing of the prior year federal and state tax returns. The effective income tax rate without discrete items for the nine month period ended December 31, 2016 would have been 32.8%. The effective income tax rate for the nine month period ended December 26, 2015 of 32.7% includes immaterial discrete benefit of $0.2 million, comprised substantially of benefits from federal law changes, the reversals of unrecognized tax positions associated with the expiration of statutes of limitations and the recognition of interest on unrecognized tax positions. The effective income tax rate without discrete items for the nine month period ended December 26, 2015 would have been 33.0%.

Segment Information

We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Engineered Products. In fiscal 2016 we integrated the Sargent businesses into our Plain Bearings and Engineered Products segments (see Notes 8 and 9 of Notes to Unaudited Interim Consolidated Financial Statements). We use gross margin as the primary measurement to assess the financial performance of each reportable segment.

Net sales increased $1.6 million, or 2.6%, for the three months ended December 31, 2016 compared to the same period last year. The 2.6% increase was primarily driven by an increase of 4.9% in our aerospace markets offset by a decrease of 4.6% in the industrial markets. The increase in aerospace sales was mainly due to the commercial aerospace build rates. The decrease in industrial sales was driven by energy and general industrial OEM partly offset by distribution.

Gross margin as a percent of sales increased to 40.7% for the third quarter of fiscal 2017 compared to 35.4% for the same period last year. Excluding inventory purchase price adjustments associated with the Sargent acquisition of $1.2 million, gross margin for the third quarter of fiscal 2016 would have been $23.9 million, or 37.2% of sales. The increase was primarily due to cost efficiencies and favorable product mix.

Net sales increased $7.6 million, or 3.9%, for the nine months ended December 31, 2016 compared to the same period last year. The 3.9% increase was primarily driven by an increase of 6.2% in our aerospace markets offset by a decrease of 2.8% in the industrial markets. The increase in aerospace sales was mainly due to the commercial aerospace build rates. The decrease in industrial sales was mostly driven by energy and general industrial OEM partly offset by distribution.

Gross margin as a percent of sales increased to 39.0% for the first nine months of fiscal 2017 compared to 38.2% for the same period last year. Excluding inventory purchase price adjustments associated with the Sargent acquisition of $1.2 million, gross margin for the first nine months of fiscal 2016 would have been 76.6 million, or 38.8% of sales.

Net sales decreased $0.1 million, or 0.5%, for the three months ended December 31, 2016 compared to the same period last year. Our industrial markets decreased 7.2%, partly offset by increases in our aerospace markets of 5.2%. The decrease in industrial sales was primarily due to industrial OEM and aftermarket while the increases in aerospace were due to our commercial OEM markets.

Gross margin for the three months ended December 31, 2016 was $6.4 million, or 24.5% of sales. Excluding the integration and restructuring charge during the period of $3.2 million, gross margin would have been $9.6 million, or 36.7% of sales compared to $11.5 million, or 43.8% in the comparable period in fiscal 2016. This decrease in the gross margin percentage was primarily due to the impact of unfavorable product mix during the period.

Net sales decreased $3.2 million, or 3.9%, for the nine months ended December 31, 2016 compared to the same period last year. Our industrial markets decreased 15.3% while our aerospace markets increased by 7.5%. The decrease in industrial sales was primarily due to general industrial activity mainly in energy offset by our commercial aerospace markets.

Gross margin for the nine months ended December 31, 2016 was $30.2 million, or 37.4% of sales. Excluding the integration and restructuring charges during the period of $3.2 million, gross margin would have been $33.4 million, or 41.3% of sales compared to $35.8 million, or 42.6%, in the comparable period in fiscal 2016. This decrease in the gross margin percentage was primarily due to the impact unfavorable pricing and product mix.

Net sales increased $0.9 million, or 6.6%, for the third quarter of fiscal 2017 compared to the same period last year. Our industrial markets increased 19.7% while aerospace markets decreased 18.2% during the period. The increase in industrial sales was a result of the industrial OEM and distribution mainly driven by semiconductor and general industrial markets while the decrease in aerospace sales was primarily driven by commercial aerospace OEM markets.

Gross margin as a percent of sales decreased to 38.9% for the third quarter of fiscal 2017 compared to 40.5% for the same period last year. The decrease was primarily due to unfavorable product mix.

Net sales increased $3.2 million, or 8.2%, for the nine months ended December 31, 2016 compared to the same period last year. Our aerospace markets decreased 6.5% while our industrial markets increased 16.1%. The 6.5% decrease in aerospace sales was primarily driven by the commercial aerospace OEM market, while the increase in industrial sales was a result of the industrial OEM and distribution mainly driven by semiconductor and general industrial markets.

Gross margin as a percent of sales decreased to 37.7% for the nine months ended December 31, 2016 compared to 40.4% for the same period last year. The decrease was primarily due to unfavorable product mix.

Net sales increased $0.1 million, or 0.2%, for the third quarter of fiscal 2017 compared to the same period last year. Our aerospace markets decreased 4.2% while our industrial markets increased 10.0%. The decrease in aerospace sales was mainly due to the commercial OEM markets. The increase in industrial sales was driven by marine activity.

Gross margin as a percent of sales decreased to 33.8% for the third quarter of fiscal 2017 compared to 34.5% for the same period last year driven by unfavorable product mix.

Net sales increased $12.3 million, or 10.8%, for the nine months ended December 31, 2016 compared to the same period last year. Our aerospace markets increased 4.3% while our industrial markets increased 27.2%. The increase in aerospace sales was mainly due to the commercial aerospace OEM market. The increase in industrial sales was driven by marine and European collet activity.

Gross margin as a percent of sales increased to 31.7% for the nine months ended December 31, 2016 compared to 27.5% for the same period last year, mainly due to cost efficiencies during the period.

Corporate SG&A increased for both the third quarter and first nine months of fiscal 2017 compared to the same periods last year. This was primarily due to an increase in stock compensation expenses.

Liquidity and Capital Resources

Our business is capital intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth in part through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.

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, 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 December 31, 2016, we had cash and cash equivalents of $39.5 million of which approximately $29.0 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 entities.

The Credit Facility

In connection with the Sargent acquisition on April 24, 2015, the Company entered into the Credit Agreement and related Guarantee, Pledge Agreement and Security 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 and terminated the JP Morgan Credit Agreement. The Credit Agreement provides RBCA, as Borrower, with (a) a $200 million Term Loan and (b) a $350 million Revolver and together with the Term Loan (the “Facilities”).

Amounts outstanding under the Facilities 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 ½ of 1% and (3) the one-month LIBOR rate plus 1% or (b) 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, our margin is 0.5% for base rate loans and 1.5% for LIBOR rate loans. As of December 31, 2016, there was $107.5 million outstanding under the Revolver and $185.0 million outstanding under the Term Loan, offset by $4.7 million in debt issuance costs (original amount was $7.1 million).

The Credit Agreement requires us to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.50 to 1; and (2) a consolidated interest coverage ratio not to exceed 2.75 to 1. The New Credit Agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain requirements and limitations of the agreement. As of December 31, 2016, we were in compliance with all such covenants.

Our obligations under the Credit Agreement are secured as well as providing for a pledge of substantially all of our assets. We and certain of our subsidiaries have also entered into a Guarantee to guarantee our obligations under the Credit Agreement.

Approximately $3.7 million of the Revolver is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain insurance programs. As of December 31, 2016, RBCA has the ability to borrow up to an additional $238.8 million under the Revolver.

Other Notes Payable

On October 1, 2012, Schaublin purchased the land and building, which it occupied and had been leasing, for 14.1 million CHF (approximately $14.9 million). Schaublin obtained a 20 year fixed rate mortgage of 9.3 million CHF (approximately $9.9 million) at an interest rate of 2.9%. The balance of the purchase price of 4.8 million CHF (approximately $5.1 million) was paid from cash on hand. The balance on this mortgage as of December 31, 2016 was 7.3 million CHF, or $7.2 million.

During fiscal 2017 we generated cash of $74.6 million from operating activities compared to generating cash of $61.8 million for fiscal 2016. The increase of $12.8 million for fiscal 2017 was mainly a result of the favorable impact of the net change in operating assets and liabilities of $2.7 million, an increase in net income of $4.1 million and non-cash charges of $6.0 million. The favorable change in operating assets and liabilities was primarily the result of a decrease in the amount of cash being used for working capital items as detailed in the table below, while the non-cash charges were primarily driven by a decrease in the excess tax impact from stock-based compensation of $2.4 million offset by an increased loss on disposal of assets of $2.4 million, impairment charges of $1.4 million, an increase in deferred income taxes of $1.8 million, increased stock compensation of $1.7 million and increased depreciation of $1.0 million.

The following chart summarizes the favorable change in operating assets and liabilities of $2.7 million for fiscal 2017 versus fiscal 2016 and $(7.9) million for fiscal 2016 versus fiscal 2015.

During fiscal 2017, we used $14.9 million for investing activities as compared to $514.6 million for fiscal 2016. The decrease of cash used in investing activities of $499.7 million is primarily attributable to the $500.0 million used to finance the acquisition of Sargent.

During fiscal 2017, we used $57.7 million from financing activities compared to generating $371.1 million for fiscal 2016. This decrease in cash generated was primarily attributable to the $225.0 million revolving credit facility and $200.0 million proceeds from the term loan associated with the acquisition of Sargent in the first quarter of fiscal 2016.

Capital Expenditures

Our capital expenditures were $14.4 million for the nine month period ended December 31, 2016. In addition, we expect to make additional capital expenditures of $5.0 to $7.0 million during the fourth quarter fiscal 2017 in connection with our existing business. We expect to fund fiscal 2017 capital expenditures principally through existing cash, internally generated funds and debt. We may also make substantial additional capital expenditures in connection with acquisitions.

Obligations and Commitments

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Because these estimates are necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments and leases as of December 31, 2016:

Other Matters

Critical Accounting Policies and Estimates

Revenue Recognition. See page 7 in Notes to Unaudited Interim Consolidated Financial Statements.

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 2016 Annual Report, incorporated by reference in our fiscal 2016 Form 10-K, 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 nine months of fiscal 2017.