Notes
to Unaudited Interim Consolidated Financial Statements
(dollars
in thousands, except share and per share data)
1.
Basis of Presentation
The
interim consolidated financial statements included herein have been prepared by RBC Bearings Incorporated, a Delaware corporation
(collectively with its subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The interim financial statements included with this report have been prepared on a consistent basis with
the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the fiscal year ended March 31, 2018. We condensed or omitted certain information and footnote disclosures normally included
in our annual audited financial statements, which we prepared in accordance with U.S. Generally Accepted Accounting Principles
(U.S. GAAP). As used in this report, the terms “we”, “us”, “our”, “RBC” and the
“Company” mean RBC Bearings Incorporated and its subsidiaries, unless the context indicates another meaning.
These
statements reflect all adjustments, accruals and estimates, consisting only of items of a normal recurring nature, that are, in
the opinion of management, necessary for the fair presentation of the consolidated financial condition and consolidated results
of operations for the interim periods presented. These financial statements should be read in conjunction with the Company’s
audited financial statements and notes thereto included in our Annual Report on Form 10-K.
The
results of operations for the three-month period ended September 29, 2018 are not necessarily indicative of the operating results
for the entire fiscal year ending March 30, 2019. The three-month periods ended September 29, 2018 and September 30, 2017 each
contain 13 weeks. The amounts shown are in thousands, unless otherwise indicated.
2.
Significant Accounting Policies
The
Company's significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies” of
our Annual Report on Form 10-K for the year ended March 31, 2018. Significant changes to our accounting policies as a result of
adopting new accounting standards are discussed below.
Recent
Accounting Standards Adopted
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
. The Company adopted this standard on April 1, 2018. This new guidance provides a five-step
model to determine when and how revenue is recognized, and requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.
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.
When
the Company accepts or acknowledges the customer purchase order, the type of good or service is defined on a line-by-line basis.
Individual performance obligations are established by virtue of the individual line items identified on the sales order acknowledgment
at the time of issuance. The majority of the Company’s revenue relates to the sale of goods and contains a single performance
obligation for each distinct good. The remainder of the Company’s revenue from customers is generated from services performed.
These services include repair and refurbishment work performed on customer-controlled assets as well as design and test work.
The performance obligations for these services are also identified on the sales order acknowledgement at the time of issuance
on a line-by-line basis.
Transaction
price reflects the amount of consideration that the Company expects to be entitled to in exchange for transferred goods or services.
A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance
obligation is satisfied. For the majority of our contracts, the Company may provide distinct goods or services, in which case
we separate the contract into more than one performance obligation (
i.e.,
a good or service is individually listed in a
contract or sold individually to a customer). The Company generally sells products and services with observable standalone selling
prices.
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
93% of the Company’s revenue was recognized in this manner based on sales for the three and six-month periods ended September
29, 2018, respectively.
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
7% of the Company’s revenue was recognized in this manner based on sales for the three and six-month periods ended September
29, 2018, respectively. 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 both the three and six-month periods ended September 29, 2018, respectively. 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.
Contract
costs are the incremental costs of obtaining and fulfilling a contract (
i.e
., costs that would not have been incurred if
the contract had not been obtained) to provide goods and services to customers. Contract costs largely consist of design and development
costs for molds, dies and other tools that RBC will own and that will be used in producing the products under the supply arrangements.
These contract costs are amortized to expense on a systematic and rational basis over a period consistent with the transfer to
the customer of the goods or services to which the asset relates. Costs incurred to obtain a contract are primarily related to
sales commissions and are expensed as incurred as they are generally not tied to specific customer contracts. These costs are
included within selling, general and administrative costs on the consolidated statements of operations.
In
certain contracts, the Company facilitates shipping and handling activities after control has transferred to the customer. The
Company has elected to record all shipping and handling activities as costs to fulfill a contract. In situations where the shipping
and handling costs have not been incurred at the time revenue is recognized, the estimated shipping and handling costs are accrued.
In
June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting
, as part of its simplification initiative. This update will expand the scope of Topic 718 to
include share-based payment transactions for acquiring goods and services from nonemployees. This ASU also clarifies that Topic
718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Topic 606,
Revenue from Contracts with
Customers
. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim
periods within that year. Early adoption is permitted, but no earlier than a company’s adoption of Topic 606. The Company
has early adopted this ASU in the second quarter of fiscal 2019 and it did not have a material impact on the Company’s consolidated
financial statements.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
,
in an effort to reduce diversity in practice as it relates to applying modification accounting for changes to the terms and conditions
of share-based payment awards. This ASU was effective for public companies for financial statements issued for annual periods
beginning after December 15, 2017, including interim periods within those annual periods. Early adoption was permitted. The Company
adopted this ASU on April 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.
In
March 2017, the FASB issued ASU No. 2017-07,
Compensation – Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, in an effort to improve the presentation of these
costs within the income statement. Prior to this ASU, all components of both net periodic pension cost and net periodic postretirement
cost were included within the same line items as other compensation costs arising from services rendered by pertinent employees
during the period on the income statement. This ASU requires entities to include only the service cost component within those
line items and all other components are to be included within other non-operating expense. In addition, only the service cost
component would be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or
a self-constructed asset). The amendments in this ASU should be applied retrospectively for the presentation of the service cost
component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement
and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension
cost and net periodic postretirement benefit in assets. This ASU was effective for public companies for the financial statements
issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. A practical
expedient allows the Company to use the amount disclosed for net periodic benefit costs for the prior comparative periods as the
estimation basis for applying the retrospective presentation requirements. The Company retrospectively adopted the ASU on April
1, 2018 and utilized this practical expedient. The adoption of this ASU resulted in the reclassification of $159 of net periodic
benefit cost from compensation costs ($107 included within cost of sales and $52 within other, net) to other non-operating expense
on the consolidated statement of operations for the three-month period ended September 30, 2017 and $318 of net periodic benefit
cost from compensation costs ($214 included within cost of sales and $104 within other, net) to other non-operating expense on
the consolidated statement of operations for the six-month period ended September 30, 2017.
In
October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
,
in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory.
Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset
has been sold to an outside party. This ASU established the requirement that an entity recognize the income tax consequences of
an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU was effective for public companies
for the financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual
periods. Earlier adoption was permitted as of the beginning of an interim or annual reporting period, with any adjustments reflected
as of the beginning of the fiscal year of adoption. The Company adopted this ASU on April 1, 2018 and it did not have a material
impact on the Company’s consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments
, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in
practice. This ASU was effective for public companies for the financial statements issued for annual periods beginning after December
15, 2017 and interim periods within those annual periods. Earlier adoption was permitted as of the beginning of an interim or
annual reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company adopted
this ASU on April 1, 2018 and it did not have a material impact on the Company’s consolidated financial statements.
Recent
Accounting Standards Yet to Be Adopted
In
February 2018, the FASB issued ASU No. 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income
which allows companies to reclassify stranded tax effects
resulting from the Tax Cuts and Jobs Act of 2017 (TCJA or “the Act”) from accumulated other comprehensive income to
retained earnings. These stranded tax effects refer to the tax amounts included in accumulated other comprehensive income at the
previous 35% U.S. corporate statutory federal tax rate, for which the related deferred tax asset or liability was remeasured to
the new 21% U.S. corporate statutory federal tax rate in the period of the TCJA’s enactment. The new standard is effective
for fiscal years beginning after December 15, 2018, with early adoption permitted, and can be applied either in the period of
adoption or retrospectively to each period impacted by the TCJA. The Company is evaluating the effect of adopting this new accounting
guidance, but does not expect adoption will have a material impact on the Company’s financial position as the adjustment
will be between accumulated other comprehensive income and retained earnings, both of which are components of total stockholders’
equity.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. The objective of this standard update is to simplify the subsequent measurement of goodwill, eliminating Step
2 from the goodwill impairment test. Under this ASU, an entity should perform its annual goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount
of goodwill for the reporting unit. The standard update is effective for fiscal years beginning after December 15, 2019. Early
adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated
financial statements.
In
September 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments
, which changes how entities will measure credit losses for most financial assets and certain
other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss
approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured
at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments,
net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected
credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures).
The estimate of expected credit losses should consider historical information, current information and reasonable and supportable
forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together
when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application
will require significant judgment. This ASU is effective for public companies in fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this
ASU will have on the Company's consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The core principle of this ASU is that an entity should
recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires
that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows
arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting
guidance is effective for public companies for fiscal years beginning after December 15, 2018 under a modified retrospective approach
and early adoption is permitted. The Company has formed an implementation team to assess its leases as defined under the new accounting
standard and anticipates making certain changes to existing processes, policies and systems during implementation. The Company
anticipates the amended guidance will have a material impact on its assets and liabilities due to the addition of right-of-use
assets and lease liabilities to the balance sheet; however, it does not expect the amended guidance to have a material impact
on its cash flows or results of operations.
Other
new pronouncements issued but not effective until after March 30, 2019 are not expected to have a material impact on our financial
position, results of operations or liquidity.
3.
Revenue from Contracts with Customers
Adoption
Method and Impact
The
Company adopted ASC 606 using the modified retrospective method and applied the related provisions to all open contracts. The
Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance
of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods. As a result of adoption, the Company recognized a $277 decrease to retained earnings at the beginning
of the 2019 fiscal year for the cumulative effect of adoption of this standard, representing the impact to prior results had the
over-time revenue recognition model been applied to service contracts. Contract assets of $1,323 and contract liabilities of $754
were recorded, along with an $847 reduction to work-in-process inventory as a result of the ASC 606 adoption using the modified
retrospective method.
In
addition, as a result of the accounting changes resulting from this new accounting standard, sales, operating income and net income
for the three-month period ended September 29, 2018 decreased by $269, $90 and $80, respectively. For the six-month period ended
September 29, 2018, sales, operating income and net income increased by $871, $460 and $393, respectively. Basic and diluted net
income per common share did not change for the three-month period ended September 29, 2018 as the overall impact was insignificant.
Basic and diluted net income per common share each increased by $0.02 for the six-month period ended September 29, 2018 as revenue
from service contracts was accelerated into the first six months of the fiscal year as a result of the change to an over-time
revenue recognition model. On the consolidated balance sheet, work-in-process inventory was $1,172 lower at September 29, 2018
than it would have been under the previous accounting guidance. In addition, prepaids and other current assets, accrued expenses
and other current liabilities, and retained earnings increased by $2,154, $735 and $97, respectively. The changes in other current
assets and accrued expenses were directly related to the activity within the customer contract assets and liabilities.
Disaggregation
of Revenue
The
Company operates in four business segments with similar economic characteristics, including nature of the products and production
processes, distribution patterns and classes of customers. Revenue is disaggregated within these business segments by our two
principal end markets: aerospace and industrial. Comparative information of the Company’s overall revenues for the three
and six-month periods ended September 29, 2018 and September 30, 2017 are as follows:
Principal
End Markets:
|
|
Three
Months Ended
|
|
|
|
September
29, 2018
|
|
|
September
30, 2017
|
|
|
|
Aerospace
|
|
|
Industrial
|
|
|
Total
|
|
|
Aerospace
|
|
|
Industrial
|
|
|
Total
|
|
Plain
|
|
$
|
57,821
|
|
|
$
|
19,659
|
|
|
$
|
77,480
|
|
|
$
|
54,890
|
|
|
$
|
17,502
|
|
|
$
|
72,392
|
|
Roller
|
|
|
18,155
|
|
|
|
18,845
|
|
|
|
37,000
|
|
|
|
15,151
|
|
|
|
17,166
|
|
|
|
32,317
|
|
Ball
|
|
|
5,017
|
|
|
|
13,021
|
|
|
|
18,038
|
|
|
|
3,757
|
|
|
|
12,723
|
|
|
|
16,480
|
|
Engineered Products
|
|
|
25,517
|
|
|
|
14,881
|
|
|
|
40,398
|
|
|
|
28,191
|
|
|
|
14,937
|
|
|
|
43,128
|
|
|
|
$
|
106,510
|
|
|
$
|
66,406
|
|
|
$
|
172,916
|
|
|
$
|
101,989
|
|
|
$
|
62,328
|
|
|
$
|
164,317
|
|
|
|
Six
Months Ended
|
|
|
|
September
29, 2018
|
|
|
September
30, 2017
|
|
|
|
Aerospace
|
|
|
Industrial
|
|
|
Total
|
|
|
Aerospace
|
|
|
Industrial
|
|
|
Total
|
|
Plain
|
|
$
|
114,205
|
|
|
$
|
41,800
|
|
|
$
|
156,005
|
|
|
$
|
109,361
|
|
|
$
|
35,683
|
|
|
$
|
145,045
|
|
Roller
|
|
|
35,042
|
|
|
|
37,828
|
|
|
|
72,870
|
|
|
|
31,090
|
|
|
|
32,640
|
|
|
|
63,730
|
|
Ball
|
|
|
9,021
|
|
|
|
27,091
|
|
|
|
36,112
|
|
|
|
7,402
|
|
|
|
24,859
|
|
|
|
32,260
|
|
Engineered Products
|
|
|
52,733
|
|
|
|
31,181
|
|
|
|
83,914
|
|
|
|
57,598
|
|
|
|
29,581
|
|
|
|
87,179
|
|
|
|
$
|
211,001
|
|
|
$
|
137,900
|
|
|
$
|
348,901
|
|
|
$
|
205,451
|
|
|
$
|
122,763
|
|
|
$
|
328,214
|
|
In
addition to disaggregating revenue by segment and principal end markets, the Company believes information about the timing of
transfer of goods or services, type of customer and distinguishing service revenue from product sales is also relevant. Refer
to Note 2 – “Significant Accounting Policies” for further details.
Remaining
Performance Obligations
Remaining
performance obligations represent the transaction price of orders meeting the definition of a contract in the new revenue standard
for which work has not been performed or has been partially performed and excludes unexercised contract options. The duration
of the majority of our contracts, as defined by ASC 606, is less than one year. The Company has elected to apply the practical
expedient, which allows companies to exclude remaining performance obligations with an original expected duration of one year
or less. Performance obligations having a duration of more than one year are concentrated in contracts for certain products and
services provided to the U.S. government or its contractors. The aggregate amount of the transaction price allocated to remaining
performance obligations for such contracts with a duration of more than one year was approximately $200,250 at September 29, 2018.
The Company expects to recognize revenue on approximately 67% and 95% of the remaining performance obligations over the next 12
and 24 months, respectively, with the remainder recognized thereafter.
Contract
Balances
The
timing of revenue recognition, invoicing and cash collections affect accounts receivable, unbilled receivables (contract assets)
and customer advances and deposits (contract liabilities) on the consolidated balance sheets.
Contract
Assets (Unbilled Receivables)
- 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
Liabilities (Deferred Revenue)
- The Company may receive a customer advance or deposit, or have an unconditional right to
receive a customer advance, prior to revenue being recognized. Since the performance obligations related to such advances may
not have been satisfied, a contract liability is established. Contract liabilities are included within accrued expenses and other
current liabilities or other non-current liabilities on the consolidated balance sheets until the respective revenue is recognized.
Advance payments are not considered a significant financing component as the timing of the transfer of the related goods or services
is at the discretion of the customer.
These
assets and liabilities are reported on the consolidated balance sheet on an individual contract basis at the end of each reporting
period. As of September 29, 2018 and March 31, 2018, accounts receivable with customers, net, were $119,521 and $116,890, respectively.
The tables below represent a roll-forward of contract assets and contract liabilities for the six-month period ended September
29, 2018:
Contract Assets - Current
(1)
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2018
|
|
$
|
1,323
|
|
Additional revenue recognized in excess of billings
|
|
|
1,847
|
|
Less: amounts billed to customers
|
|
|
(1,016
|
)
|
Balance at September 29, 2018
|
|
$
|
2,154
|
|
(1) Included within prepaid expenses and other current assets on the consolidated balance sheet.
|
Contract Liabilities – Current
(2)
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2018
|
|
$
|
14,450
|
|
Payments received prior to revenue being recognized
|
|
|
6,798
|
|
Revenue recognized on beginning balance
|
|
|
(9,555
|
)
|
Reclassification to/from noncurrent
|
|
|
369
|
|
Balance at September 29, 2018
|
|
$
|
12,062
|
|
(2) Included within accrued expenses and other current liabilities on the consolidated balance sheet.
|
Contract Liabilities – Noncurrent
(3)
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2018
|
|
$
|
1,254
|
|
Reclassification to/from current
|
|
|
(369
|
)
|
Balance at September 29, 2018
|
|
$
|
885
|
|
(3) Included within other non-current liabilities on the consolidated balance sheet.
|
As
of September 29, 2018, the Company does not have any contract assets classified as noncurrent on the consolidated balance sheet.
4.
Net Income Per Common Share
Basic
net income per common share is computed by dividing net income available to common stockholders by the weighted-average number
of common shares outstanding.
Diluted
net income per common share is computed by dividing net income by the sum of the weighted-average number of common shares and
dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental
common shares issuable upon the exercise of stock options.
The
table below reflects the calculation of weighted-average shares outstanding for each period presented as well as the computation
of basic and diluted net income per common share:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
29,
2018
|
|
|
September
30,
2017
|
|
|
September
29,
2018
|
|
|
September
30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,111
|
|
|
$
|
14,823
|
|
|
$
|
57,578
|
|
|
$
|
36,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share—weighted-average shares outstanding
|
|
|
24,325,754
|
|
|
|
23,946,360
|
|
|
|
24,233,266
|
|
|
|
23,875,749
|
|
Effect of dilution due to employee stock awards
|
|
|
393,302
|
|
|
|
363,233
|
|
|
|
401,880
|
|
|
|
374,991
|
|
Denominator for diluted net income per common share — weighted-average shares outstanding
|
|
|
24,719,056
|
|
|
|
24,309,593
|
|
|
|
24,635,146
|
|
|
|
24,250,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
1.24
|
|
|
$
|
0.62
|
|
|
$
|
2.38
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
1.22
|
|
|
$
|
0.61
|
|
|
$
|
2.34
|
|
|
$
|
1.51
|
|
At
September 29, 2018, 212,835 employee stock options have been excluded from the calculation of diluted earnings per share. At September
30, 2017, 171,500 employee stock options have been excluded from the calculation of diluted earnings per share. The inclusion
of these employee stock options would be anti-dilutive.
5.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Short-term
investments, if any, are comprised of equity securities and are measured at fair value by using quoted prices in active markets
and are classified as Level 1 of the valuation hierarchy.
6.
Inventory
Inventories
are stated at the lower of cost or net realizable value, using the first-in, first-out method, and are summarized below:
|
|
September
29,
2018
|
|
|
March
31,
2018
|
|
Raw materials
|
|
$
|
46,063
|
|
|
$
|
44,102
|
|
Work in process
|
|
|
88,010
|
|
|
|
77,890
|
|
Finished goods
|
|
|
190,165
|
|
|
|
184,132
|
|
|
|
$
|
324,238
|
|
|
$
|
306,124
|
|
7.
Goodwill and Intangible Assets
Goodwill
|
|
Roller
|
|
|
Plain
|
|
|
Ball
|
|
|
Engineered
Products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1,2018
|
|
$
|
16,007
|
|
|
$
|
79,597
|
|
|
$
|
5,623
|
|
|
$
|
166,897
|
|
|
$
|
268,124
|
|
Translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
September 29, 2018
|
|
$
|
16,007
|
|
|
$
|
79,597
|
|
|
$
|
5,623
|
|
|
$
|
166,896
|
|
|
$
|
268,123
|
|
Intangible
Assets
|
|
|
|
|
September
29, 2018
|
|
|
March
31, 2018
|
|
|
|
Weighted
Average
Useful
Lives
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Product approvals
|
|
|
24
|
|
|
$
|
50,878
|
|
|
$
|
9,410
|
|
|
$
|
50,878
|
|
|
$
|
8,351
|
|
Customer relationships and lists
|
|
|
24
|
|
|
|
106,583
|
|
|
|
18,630
|
|
|
|
106,583
|
|
|
|
16,499
|
|
Trade names
|
|
|
10
|
|
|
|
18,734
|
|
|
|
7,680
|
|
|
|
18,734
|
|
|
|
6,765
|
|
Distributor agreements
|
|
|
5
|
|
|
|
722
|
|
|
|
722
|
|
|
|
722
|
|
|
|
722
|
|
Patents and trademarks
|
|
|
16
|
|
|
|
10,059
|
|
|
|
5,153
|
|
|
|
9,657
|
|
|
|
4,810
|
|
Domain names
|
|
|
10
|
|
|
|
437
|
|
|
|
437
|
|
|
|
437
|
|
|
|
430
|
|
Other
|
|
|
6
|
|
|
|
2,304
|
|
|
|
1,780
|
|
|
|
1,433
|
|
|
|
1,303
|
|
|
|
|
|
|
|
|
189,717
|
|
|
|
43,812
|
|
|
|
188,444
|
|
|
|
38,880
|
|
Non-amortizable repair station certifications
|
|
|
n/a
|
|
|
|
34,200
|
|
|
|
—
|
|
|
|
34,200
|
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
223,917
|
|
|
$
|
43,812
|
|
|
$
|
222,644
|
|
|
$
|
38,880
|
|
Amortization
expense for definite-lived intangible assets for the three and six-month periods ended September 29, 2018 were $2,568 and $4,931,
respectively, compared to $2,385 and $4,738 for the three and six-month periods ended September 30, 2017, respectively. Estimated
amortization expense for the remaining six months of fiscal 2019, the five succeeding fiscal years and thereafter is as follows:
2019
|
|
$
|
4,484
|
|
2020
|
|
|
8,948
|
|
2021
|
|
|
8,896
|
|
2022
|
|
|
8,779
|
|
2023
|
|
|
8,695
|
|
2024
|
|
|
8,564
|
|
2025 and thereafter
|
|
|
97,539
|
|
8. Debt
The
balances payable under all borrowing facilities are as follows:
|
|
September 29,
2018
|
|
|
March 31,
2018
|
|
Revolver Facility
|
|
$
|
119,250
|
|
|
$
|
500
|
|
Term Loan Facility
|
|
|
—
|
|
|
|
168,750
|
|
Debt issuance costs
|
|
|
(1,426
|
)
|
|
|
(2,968
|
)
|
Other
|
|
|
6,634
|
|
|
|
7,073
|
|
Total debt
|
|
|
124,458
|
|
|
|
173,355
|
|
Less: current portion
|
|
|
474
|
|
|
|
19,238
|
|
Long-term debt
|
|
$
|
123,984
|
|
|
$
|
154,117
|
|
The
current portion of long-term debt as of September 29, 2018 includes the current portion of the Schaublin mortgage. The current
portion of long-term debt as of March 31, 2018 includes the current portion of the Schaublin mortgage and the current portion
of the Term Loan Facility.
Credit
Facility
In
connection with the Sargent Aerospace & Defense (“Sargent”) acquisition on April 24, 2015, the Company entered
into a 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 Company’s prior credit agreement with JP Morgan. The Credit Agreement
provides the Company with the Facilities consisting of the $200,000 Term Loan and the $350,000 Revolver. 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 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 loans.
On
May 31, 2018, the Company paid off the remaining balance of the Term Loan. $987 in unamortized debt issuance costs associated
with the Term Loan were written off at the time of payoff and were recorded within Other non-operating expense on the consolidated
statements of operations.
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 greater than 3.50 to 1; and (2) a consolidated interest
coverage ratio of at least 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 Credit Agreement. As of September 29, 2018, the Company was in compliance with all such covenants.
The
Company’s obligations under the Credit Agreement are secured by a pledge of substantially all of the Company’s domestic
assets. The Company’s domestic subsidiaries have also entered into a Guarantee to guarantee the Company’s obligations
under the Credit Agreement.
Approximately
$3,990 of the Revolver is being utilized to provide letters of credit to secure the Company’s obligations relating to certain
insurance programs. As of September 29, 2018, $1,426 in unamortized debt issuance costs remain. As of September 29, 2018, the
Company has the ability to borrow up to an additional $226,760 under the Revolver.
Other
Notes Payable
On
October 1, 2012, one of our foreign divisions, Schaublin, purchased the land and building, that it occupied and had been leasing
for 14,067 CHF (approximately $14,910). Schaublin obtained a 20-year fixed-rate mortgage of 9,300 CHF (approximately $9,857) at
an interest rate of 2.9%. The balance of the purchase price of 4,767 CHF (approximately $5,053) was paid from cash on hand. The
balance on this mortgage as of September 29, 2018 was 6,510 CHF, or $6,634.
9.
Pension Plan and Postretirement Health Care and Life Insurance Benefits
The
following tables set forth the net periodic benefit cost of the Company’s noncontributory defined benefit pension plan and
contributory defined benefit health care plans. The amounts for the three months ended September 29, 2018 are based on calculations
prepared by the Company's actuaries and represent the Company’s best estimate of the respective period’s proportionate
share of the amounts to be recorded for the year ending March 30, 2019. The amounts disclosed below for the three and six-month
periods ending September 30, 2017 were calculated based on the amounts disclosed within the Company’s fiscal 2018 Annual
Report on Form 10-K.
Pension
Plan:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September 29,
2018
|
|
|
September
30,
2017
|
|
|
September
29,
2018
|
|
|
September
30,
2017
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
64
|
|
|
$
|
58
|
|
|
$
|
128
|
|
|
$
|
116
|
|
Interest cost
|
|
|
221
|
|
|
|
226
|
|
|
|
442
|
|
|
|
452
|
|
Expected return on plan assets
|
|
|
(417
|
)
|
|
|
(403
|
)
|
|
|
(834
|
)
|
|
|
(806
|
)
|
Amortization of prior service cost
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
Amortization of losses
|
|
|
249
|
|
|
|
302
|
|
|
|
498
|
|
|
|
604
|
|
Net periodic benefit cost
|
|
$
|
126
|
|
|
$
|
192
|
|
|
$
|
252
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Health Care and Life Insurance Benefits:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 29,
2018
|
|
|
September 30,
2017
|
|
|
September 29,
2018
|
|
|
September 30,
2017
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
12
|
|
|
$
|
8
|
|
|
$
|
24
|
|
|
$
|
16
|
|
Interest cost
|
|
|
23
|
|
|
|
25
|
|
|
|
46
|
|
|
|
50
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Amortization of losses
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
(2
|
)
|
Net periodic benefit cost
|
|
$
|
29
|
|
|
$
|
33
|
|
|
$
|
58
|
|
|
$
|
66
|
|
The
components of net periodic benefit cost other than the service component are included in other non-operating expense on the consolidated
statements of operations.
10.
Income Taxes
The
Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions,
the Company is no longer subject to state or foreign income tax examinations by tax authorities for years ending before April
2, 2005. The Company is no longer subject to U.S. federal tax examination by the Internal Revenue Service for years ending before
March 29, 2015. A U.S. federal tax examination by the Internal Revenue Service for the year ended March 30, 2013 was effectively
settled in fiscal 2016.
The
effective income tax rates for the three-month periods ended September 29, 2018 and September 30, 2017, were 11.7% and 36.4%,
respectively. The reduction in the effective income tax rate for the three months ended September 29, 2018 as compared with the
prior year period reflects the net benefits of the Tax Cut and Jobs Act (TCJA or “the Act”), which reduced the U.S.
statutory rate for corporations from 35% to 21% for tax years beginning in 2018 and made other changes to the U.S. federal income
tax laws affecting both domestic and foreign income. The reduction in the effective income tax rate also reflects the impact of
increased benefit associated with share-based compensation during the three months ended September 29, 2018.
The
TCJA was signed into law on December 22, 2017 revising the U.S. corporate income tax. Changes included, but are not limited to,
the reduction of the U.S. federal corporate rate from 35% to 21%, the elimination of certain deductions and imposing a one-time
net charge related to the taxation of undistributed foreign earnings. Also on December 22, 2017, the SEC issued Staff Accounting
Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant does not have the necessary
information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of
the Act. In accordance with SAB 118, the accounting for the tax effects of the TCJA is not complete as of September 29, 2018;
however, reasonable estimates have been made.
Provisional
estimates of $9,166 for the one-time net charge related to the taxation of undistributed foreign earnings and $9,318 tax benefit
related to the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate were recognized as
components of income tax expense as of March 31, 2018. No changes have been made to these provisional estimates during the three
months ended September 29, 2018. Additional information and analysis of the Act is still needed to prepare a more detailed analysis
of the Company’s deferred tax assets and liabilities, as well as historical foreign earnings and profits and potential correlative
adjustments. Any subsequent adjustments to the Company’s provisional estimates will be recorded to current tax expense in
the quarter of fiscal year 2019 when further analysis is complete.
No
additional income tax provision has been made on any remaining undistributed foreign earnings not subject to the one-time net
charge related to the taxation of unremitted foreign earnings or any additional outside basis difference as these amounts continue
to be indefinitely reinvested in foreign operations.
One
of the international tax law changes provided for with the TCJA relates to the taxation of a corporation’s global intangible
low-taxed income (GILTI) for tax years beginning after December 31, 2017. The Company has evaluated this provision of the TCJA
and the application of ASC 740, and does not believe that GILTI will have a significant impact.
In
addition to discrete items, the effective income tax rates for these periods are different from the U.S. statutory rates due to
a special U.S. manufacturing deduction and the U.S. credit for increasing research activities, which decrease the rate, and state
income taxes, which increases the rate.
The
effective income tax rate for the three-month period ended September 29, 2018 of 11.7% includes $3,176 of tax benefits
associated with share-based compensation. The effective income tax rate without this benefit and other items for
the three-month period ended September 29, 2018 would have been 20.9%. The effective income tax rate for the three-month
period ended September 30, 2017 of 36.4% includes discrete items of $917 benefit associated with restructuring and
integration activities, $405 benefit associated with shared-based compensation and $134 benefit associated with state tax
filing positions. The effective income tax rate without discrete items for the three-month period ended September 30, 2017
would have been 42.6%. The Company believes it is reasonably possible that some of its unrecognized tax positions may
be effectively settled within the next twelve months due to the closing of audits and the statute of limitations expiring
in varying jurisdictions. The decrease in the Company’s unrecognized tax positions, pertaining primarily to
items associated with the consolidation and restructuring of the company’s U.K. manufacturing facility and to credits
and state tax, is estimated to be approximately $1,734.
11.
Reportable Segments
The
Company operates through operating segments for which separate financial information is available, and for which operating results
are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance.
Those operating segments are aggregated as reportable segment as they have similar economic characteristics, including nature
of the products and production processes, distribution patterns and classes of customers.
The
Company has four reportable business segments, Plain Bearings, Roller Bearings, Ball Bearings and Engineered Products, which are
described below.
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. The Company manufactures 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.
The Company manufactures 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.
Segment
performance is evaluated based on segment net sales and operating income. Items not allocated to segment operating income include
corporate administrative expenses and certain other amounts.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September 29,
2018
|
|
|
September 30,
2017
|
|
|
September 29,
2018
|
|
|
September 30,
2017
|
|
Net External Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
|
|
$
|
77,480
|
|
|
$
|
72,392
|
|
|
$
|
156,005
|
|
|
$
|
145,045
|
|
Roller
|
|
|
37,000
|
|
|
|
32,317
|
|
|
|
72,870
|
|
|
|
63,730
|
|
Ball
|
|
|
18,038
|
|
|
|
16,480
|
|
|
|
36,112
|
|
|
|
32,260
|
|
Engineered Products
|
|
|
40,398
|
|
|
|
43,128
|
|
|
|
83,914
|
|
|
|
87,179
|
|
|
|
$
|
172,916
|
|
|
$
|
164,317
|
|
|
$
|
348,901
|
|
|
$
|
328,214
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
|
|
$
|
30,867
|
|
|
$
|
27,802
|
|
|
$
|
61,483
|
|
|
$
|
56,252
|
|
Roller
|
|
|
16,270
|
|
|
|
12,930
|
|
|
|
31,227
|
|
|
|
25,718
|
|
Ball
|
|
|
7,408
|
|
|
|
6,740
|
|
|
|
14,687
|
|
|
|
12,915
|
|
Engineered Products
|
|
|
13,274
|
|
|
|
14,446
|
|
|
|
28,161
|
|
|
|
29,049
|
|
|
|
$
|
67,819
|
|
|
$
|
61,918
|
|
|
$
|
135,558
|
|
|
$
|
123,934
|
|
Selling, General & Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
|
|
$
|
6,160
|
|
|
$
|
6,323
|
|
|
$
|
12,522
|
|
|
$
|
12,772
|
|
Roller
|
|
|
1,556
|
|
|
|
1,641
|
|
|
|
3,180
|
|
|
|
3,212
|
|
Ball
|
|
|
1,609
|
|
|
|
1,680
|
|
|
|
3,211
|
|
|
|
3,295
|
|
Engineered Products
|
|
|
5,076
|
|
|
|
5,122
|
|
|
|
10,436
|
|
|
|
10,399
|
|
Corporate
|
|
|
14,925
|
|
|
|
12,829
|
|
|
|
29,552
|
|
|
|
25,695
|
|
|
|
$
|
29,326
|
|
|
$
|
27,595
|
|
|
$
|
58,901
|
|
|
$
|
55,373
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
|
|
$
|
19,660
|
|
|
$
|
20,736
|
|
|
$
|
41,347
|
|
|
$
|
41,971
|
|
Roller
|
|
|
14,702
|
|
|
|
11,269
|
|
|
|
28,034
|
|
|
|
22,485
|
|
Ball
|
|
|
5,750
|
|
|
|
5,020
|
|
|
|
11,368
|
|
|
|
9,515
|
|
Engineered Products
|
|
|
11,815
|
|
|
|
805
|
|
|
|
22,449
|
|
|
|
9,022
|
|
Corporate
|
|
|
(16,043
|
)
|
|
|
(12,393
|
)
|
|
|
(31,316
|
)
|
|
|
(25,597
|
)
|
|
|
$
|
35,884
|
|
|
$
|
25,437
|
|
|
$
|
71,882
|
|
|
$
|
57,396
|
|
Intersegment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain
|
|
$
|
1,643
|
|
|
$
|
1,397
|
|
|
$
|
3,240
|
|
|
$
|
2,553
|
|
Roller
|
|
|
3,074
|
|
|
|
2,884
|
|
|
|
7,169
|
|
|
|
6,293
|
|
Ball
|
|
|
762
|
|
|
|
624
|
|
|
|
1,562
|
|
|
|
1,152
|
|
Engineered Products
|
|
|
9,978
|
|
|
|
7,848
|
|
|
|
19,116
|
|
|
|
16,021
|
|
|
|
$
|
15,457
|
|
|
$
|
12,753
|
|
|
$
|
31,087
|
|
|
$
|
26,019
|
|
All
intersegment sales are eliminated in consolidation.
12.
Integration and Restructuring of Industrial 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 closed its RBC Canada location and consolidated certain residual assets into other
locations. As a result, the Company recorded an after-tax charge of $5,577 associated with the restructuring in the second quarter
of fiscal 2018 attributable to the Engineered Products segment. The $5,577 charge included a $1,337 impairment of fixed assets
and a $5,157 impairment of intangible assets offset by a $917 tax benefit. The impairment charges were recognized within other,
net 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 were 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 were comprised of customer relationships, product approvals, tradenames
and trademarks. These fair value measurements were classified as Level 3 in the valuation hierarchy. In the third and fourth quarters
of fiscal 2018, the Company incurred restructuring charges of $1,091 and $100, respectively, comprised primarily of employee termination
costs and building maintenance costs. These costs were recorded within other, net within the consolidated statement of operations
and are all attributable to the Engineered Products segment. The impact from restructuring in the first quarter of fiscal 2019
was immaterial. The total cumulative impact resulting from the restructuring was $6,743 in after-tax charges, all attributable
to the Engineered Products segment.