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 1, 2017. 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 45 facilities, of which 36 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 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 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 30, 2017 increased 13.8% compared to the same period last fiscal year. Our industrial markets increased 23.1% while the aerospace markets increased 8.9%. Our backlog, as of December 30, 2017, was $392.5 million compared to $349.1 million as of December 31, 2016.

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 30, 2017, we had cash and cash equivalents of $43.8 million of which approximately $40.5 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 30, 2017 increased 13.8% compared to the same period last fiscal year. The overall increase in net sales was a result of a 23.1% increase in our industrial markets and an 8.9% increase in our aerospace markets. The increase in industrial was a result of strong performance in marine, mining, semicon, energy, and general industrial activity. The increase in aerospace sales was driven mainly by commercial OEM.

Net income for the third quarter of fiscal 2018 was $23.8 million compared to $12.8 million for the same period last year. Net income of $23.8 million in the third quarter of fiscal 2018 was affected by restructuring costs of $1.1 million offset by a $1.2 million tax benefit related to the adoption of ASU 2016-09 and the impact of the new tax legislation signed during the third quarter. Net income for the third quarter of fiscal 2017 was affected by restructuring costs of $4.9 million offset by $0.3 million of discrete tax benefit and foreign currency gains.

Net sales increased $39.9 million or 8.8% for the nine month period ended December 30, 2017 over the same period last year. The increase in net sales was mainly the result of a 19.2% increase in industrial sales and an increase of 3.4% in aerospace sales. The increase in industrial sales was mostly attributable to an increase in marine, mining, semicon, energy, and general industrial activity. The increase in aerospace was primarily driven by aerospace OEM, both defense and commercial.

Net income for the nine months ended December 30, 2017 was $60.5 million compared to $49.0 million for the same period last year. The net income of $60.5 million in fiscal 2018 was affected by restructuring and integration costs of $6.7 million, a $3.9 million tax benefit related to the adoption of ASU 2016-09, the impact of the new tax legislation signed during the third quarter and $0.2 million of discrete tax benefits. Net income for the first nine months of fiscal 2017 was affected by $0.3 million in costs associated with the Sargent 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.

Gross margin increased $12.3 million, or 23.4%, in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017. The three months ended December 31, 2016 was affected by a restructuring charge of $3.2 million. The increase in gross margin was mainly driven by higher sales and cost efficiencies achieved during the current period.

Gross margin increased $22.0 million or 13.2% for the first nine months of fiscal 2018 compared to the same period last year. Gross margin for the first nine months of fiscal 2017 was affected by the unfavorable impact of $3.2 million of restructuring charges and $0.4 million of inventory purchase accounting associated with the Sargent acquisition. The increase in gross margin year over year is primarily a result of higher sales and cost efficiencies achieved.

SG&A expenses increased by $2.5 million to $28.2 million for the third quarter of fiscal 2018 as compared to $25.7 million for the third quarter of fiscal 2017. This increase was mainly driven by $1.7 million of personnel related expenses, $0.3 million of additional stock compensation expense, $0.2 million of professional fees and $0.3 million of other costs. As a percentage of sales, SG&A was 16.9% for the third quarter of fiscal 2018 compared to 17.5% for the same period last year.

SG&A expenses increased by $6.8 million to $83.5 million for the first nine months of fiscal 2018 compared to $76.7 million for the same period last year. This increase is primarily due to $5.0 million of personnel related expenses, $1.0 million of additional stock compensation and $0.8 million of other costs.

Other operating expenses for the third quarter of fiscal 2018 totaled $3.4 million compared to $6.1 million for the same period last year. For the third quarter of fiscal 2018, other operating expenses were comprised mainly of $1.1 million of restructuring costs and $2.3 million of amortization of intangible assets. For the third quarter of fiscal 2017, other operating expenses were comprised of $3.8 million of restructuring costs and $2.3 million of amortization of intangible assets.

Other operating expenses for the first nine months of fiscal 2018 totaled $14.7 million compared to $10.4 million for the same period last year. For the first nine months of fiscal 2018, other operating expenses were comprised mainly of $7.6 million of restructuring costs, $7.0 million of amortization of intangible assets and $0.1 million of other costs. For the first nine months of fiscal 2017, other operating expenses were comprised mostly of $4.0 million of restructuring costs and $6.9 million of amortization of intangible assets offset by $0.5 million of other revenue.

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 $1.8 million for the third quarter of fiscal 2018 compared to $2.1 million for the same period last year. The Company had total debt of $198.0 million at December 30, 2017 compared to $294.9 million at December 31, 2016.

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 $5.7 million for the first nine months of fiscal 2018 compared to $6.7 million for the first nine months of fiscal 2017.

Income tax expense for the three month period ended December 30, 2017 was $7.5 million compared to $5.9 million for the three month period ended December 31, 2016. Our effective income tax rate for the three month period ended December 30, 2017 was 23.9% compared to 31.5% for the three month period ended December 31, 2016. The effective income tax rate for the three month period ended December 30, 2017 of 23.9% was impacted by adjustments made in relation to the recently enacted Tax Cuts and Jobs Act (TCJA). These were mainly comprised of a charge of $9.5 million for the repatriation transition tax and a benefit of $8.7 million associated with the revaluation of our deferred tax liabilities. The third quarter provision also benefited from a lower blended statutory tax rate of 31.5% as a result of the enactment of TCJA and a $1.2 million benefit associated with ASU 2016-09 Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting . The effective income tax rate without discrete items for the three month period ended December 30, 2017 would have been 25.3%. The effective income tax rate for the three month period ended December 31, 2016 was 31.5%, which included approximately $0.1 million of immaterial discrete expense items. The effective income tax rate without discrete items for the three month period ended December 31, 2016 would have been 31.8%.

Income tax expense for the nine month period ended December 30, 2017 was $23.6 million compared to $23.6 million for the nine month period ended December 31, 2016. Our effective income tax rate for the nine month period ended December 30, 2017 was 28.0% compared to 32.5% for the nine month period ended December 31, 2016. The effective income tax rate for the nine month period ended December 30, 2017 of 28.0% was impacted by adjustments made in relation to the recently enacted Tax Cuts and Jobs Act (TCJA). These were mainly comprised of a charge of $9.5 million for the repatriation transition tax and a benefit of $8.7 million associated with the revaluation of our deferred tax liabilities. The effective tax rate also benefited from a lower blended statutory rate of 31.5% as a result of the enactment of TCJA, $3.9 million of benefit associated with ASU 2016-09 Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting , $0.9 million of benefit associated with restructuring and integration activities, and $0.2 million of other discrete benefits. The effective income tax rate without discrete items for the nine month period ended December 30, 2017 would have been 33.0%. The effective income tax rate for the nine month period ended December 31, 2016 was 32.5%, which included immaterial discrete benefit of $0.2 million. The effective income tax rate without discrete items for the nine month period ended December 31, 2016 would have been 32.8%. Based on our initial reviews and subject to further regulatory guidance issued in connection with TCJA, we estimate the fourth quarter of fiscal 2018 effective tax rate will be approximately 25.0% to 27.0% and we estimate the full year fiscal 2019 effective tax rate will be approximately 20.0% to 22.0%.

Integration and Restructuring of Operations

In the second quarter of fiscal 2018, the Company reached a decision to restructure its manufacturing operation in Montreal, Canada. After completing its obligations, the Company expects to close its RBC Canada location and consolidate certain residual assets into other locations by the end of this fiscal year. As a result, the Company recorded an after-tax charge of $5.6 million associated with the restructuring in the second quarter of fiscal 2018 attributable to the Engineered Products segment. The $5.6 million charge includes a $1.3 million impairment of fixed assets and a $5.2 million impairment of intangible assets offset by a $0.9 million tax benefit. The impairment charges were recognized within the “Other, net” line item within the consolidated statement of operations. The Company determined that the market approach was the most appropriate method to estimate the fair value of the fixed assets using comparable sales data and actual quotes from potential buyers in the market place. The fixed assets are comprised of land, a building, machinery and equipment. The Company assessed the fair value of the intangible assets in accordance with ASC 360-10, which are comprised of customer relationships, product approvals, tradenames and trademarks. In the third quarter of fiscal 2018, the Company incurred restructuring charges of $1.1 million comprised primarily of employee termination costs. These costs were recorded within the “Other, net” line item within the consolidated statement of operations and are all attributable to the Engineered Products segment. The cumulative restructuring charges as of the end of the third quarter of fiscal 2018, net of taxes, were $6.7 million. The total impact of this restructuring is expected to be between $7.0 million and $7.5 million in after-tax charges, all attributable to the Engineered Products segment, and is expected to conclude in the third quarter of fiscal 2019. The Company anticipates a positive cash flow result of approximately $5.2 million from this transaction.

Segment Information

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

Net sales increased $4.0 million, or 6.0%, for the three months ended December 30, 2017 compared to the same period last year. The 6.0% increase was primarily driven by an increase of 23.4% in our industrial markets and a 0.9% increase in our aerospace markets. The increase in industrial sales was mostly driven by general industrial OEM while the increase in aerospace sales was due to the commercial aerospace OEM.

Gross margin as a percentage of sales decreased to 38.2% for the third quarter of fiscal 2018 compared to 40.7% for the same period last year. The decrease was primarily due to product mix.

Net sales increased $9.7 million, or 4.7%, for the nine months ended December 30, 2017 compared to the same period last year. The 4.7% increase was primarily driven by an increase of 10.0% in the industrial markets and 3.1% in the aerospace markets. The increase in industrial sales was mostly driven by general industrial OEM. The increase in aerospace sales was mainly due to the commercial aerospace OEM and aftermarket.

Gross margin as a percentage of sales decreased to 38.5% for the first nine months of fiscal 2018 compared to 39.0% for the same period last year. The decrease was primarily due to product mix.

Net sales increased $6.3 million, or 24.2%, for the three months ended December 30, 2017 compared to the same period last year. Our industrial markets increased 37.8% while our aerospace markets increased 13.8%. The increase in industrial sales was primarily due to energy, mining and general industrial markets while the increases in aerospace were due to increases in defense and commercial OEM.

Gross margin for the three months ended December 30, 2017 was $14.4 million, or 44.4% of sales, compared to $6.4 million, or 24.5% of sales, in the comparable period in fiscal 2017. The gross margin for the three months ended December 31, 2016 was affected by $3.2 million of restructuring costs. The increase in gross margin was primarily due to higher sales and cost efficiencies achieved during the period.

Net sales increased $15.4 million, or 19.1%, for the nine months ended December 30, 2017 compared to the same period last year. Our industrial markets increased 36.4% while our aerospace markets increased by 5.6%. The increase in industrial sales was primarily due to energy, mining and general industrial activity while the increase in aerospace was driven by defense OEM sales partially offset by the commercial OEM market.

Gross margin for the nine months ended December 30, 2017 was $40.1 million, or 41.7% of sales, compared to $30.2 million, or 37.4%, in the comparable period in fiscal 2017. The gross margin for the nine months ended December 31, 2016 was affected by $3.2 million of restructuring costs.

Net sales increased $2.8 million, or 20.4%, for the third quarter of fiscal 2018 compared to the same period last year. Our industrial markets increased 13.8% while our aerospace markets increased 38.8% during the period. The increase in industrial sales was a result of semiconductor, energy, and general industrial markets. The increase in aerospace sales was driven by aerospace OEM market activity.

Gross margin as a percentage of sales increased to 42.6% for the third quarter of fiscal 2018 compared to 38.9% for the same period last year. The increase was primarily due to higher sales and product mix.

Net sales increased $6.8 million, or 16.1%, for the nine months ended December 30, 2017 compared to the same period last year. Our industrial markets increased 24.0% while our aerospace markets decreased 1.9% during the period. The increase in industrial sales was a result of semiconductor, energy, and general industrial markets. The decrease in aerospace sales was driven by the aerospace OEM market.

Gross margin as a percentage of sales increased to 40.9% for the nine months ended December 30, 2017 compared to 37.7% for the same period last year. The increase was primarily due to higher sales and cost efficiencies achieved during the period.

Net sales increased $7.1 million, or 17.4% for the third quarter of fiscal 2018 compared to the same period last year. Our aerospace markets increased 17.3% while our industrial markets increased 17.6%. The increase in aerospace sales was mainly due to our commercial and defense aerospace OEM markets. The increase in industrial sales was driven by marine and our European markets.

Gross margin as a percentage of sales increased to 34.5% for the third quarter of fiscal 2018 compared to 33.8% for the same period last year. This increase is primarily due to product mix and cost efficiencies achieved during the period.

Net sales increased $8.0 million, or 6.3%, for the nine months ended December 30, 2017 compared to the same period last year. Our industrial markets increased 12.1% while our aerospace markets increased 3.5%. The increase in industrial sales was driven by marine and European collets activity. The increase in aerospace sales was mainly due to the commercial and defense OEM markets.

Gross margin as a percentage of sales increased to 33.7% for the nine months ended December 30, 2017 compared to 31.7% for the same period last year. Gross margin for the first nine months of fiscal 2017 was affected by $0.3 million of acquisition related costs. This year over year increase was primarily attributable to volume, product mix and cost efficiencies achieved during the period.

Corporate SG&A increased for both the third quarter and first nine months of fiscal 2018 compared to the same periods last year. This was primarily due to an increase in stock compensation expenses and personnel related costs.

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 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 30, 2017, we had cash and cash equivalents of $43.8 million of which approximately $40.5 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.

Credit Facility

In connection with the Sargent Aerospace & Defense (“Sargent”) acquisition on April 24, 2015, the Company entered into a new credit agreement (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 $200.0 million Term Loan and (b) a $350.0 million Revolver and together with the Term Loan (the “Facilities”). The Facilities expire on April 24, 2020.

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 1/2 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, the Company’s margin is 0.00% for base rate loans and 1.00% for LIBOR rate loans. As of December 30, 2017, there was $21.8 million outstanding under the Revolver and $172.5 million outstanding under the Term Loan, offset by $3.3 million in debt issuance costs (original amount was $7.1 million).

The Credit Agreement requires the Company 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 be less than 2.75 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 agreement. As of December 30, 2017, the Company was in compliance with all such covenants.

The Company’s obligations under the Credit Agreement are secured as well as providing for a pledge of substantially all of the Company’s and RBCA’s assets. The Company and certain of its subsidiaries have also entered into a Guarantee to guarantee RBCA’s obligations under the Credit Agreement.

Approximately $3.9 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 30, 2017, RBCA has the ability to borrow up to an additional $324.3 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 30, 2017 was 6.9 million CHF, or $7.0 million.

Cash Flows

Nine month period Ended December 30, 2017 Compared to the Nine month period Ended December 31, 2016

The following table summarizes our cash flow activities:

During fiscal 2018, we generated cash of $92.5 million from operating activities compared to generating cash of $74.6 million for fiscal 2017. The increase of $17.9 million for fiscal 2018 was mainly a result of the favorable impact of an increase in net income of $11.5 million, non-cash charges of $4.4 million, and the net change in operating assets and liabilities of $2.0 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 $4.1 million of increased impairment charges, $4.9 million from the adoption of ASU 2016-09, which no longer requires the reclassification of the excess tax impact from stock-based compensation from operating to financing activities, an increase in stock compensation of $0.9 million, increased depreciation of $0.6 million, increased amortization of intangibles of $0.1 million and $0.3 million of acquisition expenses present in fiscal 2017 offset by a $4.0 million decrease in deferred taxes driven by the new tax legislation signed during the quarter and a $2.5 million loss on the disposal of fixed assets included in fiscal 2017.

The following chart summarizes the favorable change in operating assets and liabilities of $2.0 million for fiscal 2018 versus fiscal 2017 and favorable $2.7 million for fiscal 2017 versus fiscal 2016.

During the first nine months of fiscal 2018, we used $20.5 million for investing activities as compared to $14.9 million for fiscal 2017. The increase was attributable to an increase of $6.1 million in capital expenditures and $0.1 million in proceeds from the sale of assets offset by $0.6 million cash used for an acquisition in fiscal 2017.

During the first nine months of fiscal 2018, we used $68.6 million for financing activities compared to using $57.7 million for fiscal 2017. This increase in cash used was primarily attributable to the payment of $62.8 million on the revolving credit facility and $10.0 million on the term loan during the first nine months of fiscal 2018 as compared to $61.5 million and $7.5 million respectively during the same period of fiscal 2017.

Capital Expenditures

Our capital expenditures were $20.5 million for the nine month period ended December 30, 2017. In addition, we expect to make capital expenditures of $5.0 to $10.0 million during the remainder of fiscal 2018 in connection with our existing business. We expect to fund fiscal 2018 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 30, 2017:

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 2017 Annual Report, incorporated by reference in our fiscal 2017 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 2018.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.