The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes. All references to "Notes" in this Item 7 refer to the "Notes to Consolidated Financial Statements" included in Item 8 of this Annual Report on Form 10-K.
The following discussion contains statements reflecting our beliefs about our future performance that constitute “forward-looking statements” within the meaning of the Safe Harbor
We have omitted our discussion of fiscal 2020 from this section as permitted by Regulation S-K. Discussion and analysis of our financial condition and results of operations for fiscal 2020 can be found within Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K filed with the
SECon May 21, 2021. Overview We are a well-known international manufacturer of highly engineered precision bearings, components and essential systems for the industrial, defense and aerospace industries. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission, and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on the higher end of the bearing market where we believe our value-added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. With 56 facilities in 10 countries, of which 37 are manufacturing facilities, we have been able to significantly broaden our end markets, products, customer base and geographic reach. We have a fiscal year consisting of 52 or 53 weeks, ending on the Saturday closest to March 31. Based on this policy, fiscal year 2022 had 52 weeks and fiscal year 2021 had 53 weeks. We currently operate under two reportable business segments - Aerospace/Defense and Industrial:
? Aerospace and Defense. This segment represents the end markets for the Company’s products
high-tech bearings and precision components used commercially
aerospace, defense aerospace and marine and land defense applications.
? Industrial. This sector represents the end markets for highly
engineering precision bearings, gears and components used in various
industrial applications including: power transmission; construction, mining,
energy and specialized equipment manufacturing; semiconductor production equipment manufacturing; agricultural machinery, commercial truck and automotive manufacturing; and tool holding. 25 The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into single and sole-source relationships and long-term purchase agreements, through diversification across multiple market segments within the Aerospace/Defense and Industrial segments, by increasing sales to the aftermarket, and by focusing on developing highly customized solutions.
Currently, our strategy revolves around maintaining our role as a leading manufacturer of high-tech bearings and precision components through the following efforts:
? Develop innovative solutions. Based on our design and manufacturing
expertise and our many relationships with our customers, we continue to develop new
products intended for markets where growth opportunities are significant.
? Expand customer base and penetrate end markets. We are continually looking for
opportunities to access new customers, geographies and rotations
platforms with existing products or profitable new product opportunities.
? Increase aftermarket sales. We believe that increasing our sales in the secondary market
of spare parts will further improve the continuity and predictability of
our revenues and improve our profitability. These sales include sales to third parties
third-party distributors and sales to OEMs for replacement products and the aftermarket
services. The acquisition of Dodge had a profound impact on our sales
volumes to distributors and other aftermarket customers. We go further
increase the percentage of our revenues coming from the replacement market by
continue to implement several initiatives.
? Continued selective acquisitions. Acquisition of complementary businesses
or expand our operations has been and continues to be an important part of
our business strategy. We believe there will continue to be consolidation
within the industry that may present us with acquisition opportunities. We have demonstrated expertise in acquiring and integrating bearing and precision engineered component manufacturers that have complementary products or distribution channels and have provided significant margin enhancement. We have consistently increased the profitability of acquired businesses through a process of methods and systems improvement coupled with the introduction of complementary and proprietary new products. Since 1992 we have completed 27 acquisitions, which have broadened our end markets, products, customer base
and geographic reach. Recent Significant Events Acquisition of Dodge On
November 1, 2021, the Company purchased 100% of the capital stock of Dodge Mechanical Power Transmission Company Inc.(now known as Dodge Industrial, Inc.), and certain other assets relating to ABB Asea Brown Boveri Ltd'smechanical power transmission business. Collectively, this acquired business is referred to as "Dodge." The purchase price was approximately $2,908.2 million, net of cash acquired and subject to certain adjustments. The purchase price was paid with a mix of financing and cash on hand. Financing for the Dodge acquisition is discussed further within the "Liquidity and Capital Resources" section below.
With offices in
Greenville, South Carolina, Dodge is a leading manufacturer of mounted bearings, gearings, motion control products and mechanical products with market-leading brand recognition. Dodge manufactures a complete line of mounted bearings, enclosed gearing and power transmission components across a diverse set of industrial end markets. Dodge primarily operates across the construction and mining aftermarket, and the food & beverage, warehousing and general machinery verticals, with sales predominately in the Americas. 26 Outlook Our net sales increased 54.8% year over year due to an increase of 163.9% in Industrial sales partially offset by a 3.7% decrease in aerospace and defense sales. Approximately $291.9 millionof the Industrial sales were from the Dodge business. Excluding those sales, Industrial sales increased 26.7% year over year, reflecting sustained growth across many different areas. Highlights included our mining business, which increased more than 50% year over year, oil and gas, semiconductor, and general industrial markets. Aerospace and defense decreased 3.7% year over year. Commercial aerospace decreased 1.5%, despite demonstrating early signs of recovery during the second half of the year. Defense sales, which represent approximately 39.0% of segment sales during the year, were down more than 7% for the year, driven by marine and aerospace markets. The recovery in the commercial aerospace industry has proven slower than anticipated, but the order rate in recent months signals a positive sign as we look toward fiscal 2023. For the twelve months ended April 2, 2022, approximately 60% of our net sales were attributable to the Industrial segment while the aerospace/defense segment contributed approximately 40% of our net sales. For the fourth quarter of fiscal 2022, approximately 71.0% of our net sales were attributable to the Industrial segment compared to approximately 29.0% for the aerospace/defense segment. This shift in mix is primarily due to $181.9 millionof sales attributable to the Dodge business in the fourth quarter. Approximately 66.0% of Industrial sales in the fourth quarter were to distribution and aftermarket while approximately 34.0% were made directly to OEM's. Approximately 36.0% of our aerospace/defense sales were to the defense market. The Company expects net sales to be approximately $355.0 millionto $365.0 millionin the first quarter of fiscal 2023, compared to $156.2 millionin the prior year, which represents a growth rate of 127.3% to 133.7%. We ended fiscal 2022 with a backlog of $603.1 millioncompared to $394.8 millionfor the same period last year, representing a 53% increase year over year. This increase reflects the benefits of the acquisition of the Dodge business, as well as an increase in aerospace orders during the period. We experienced solid operating cash flow generation during fiscal 2022 (as discussed in the section "Liquidity and Capital Resources" below). With the addition of Dodge, we expect this trend to continue during fiscal 2023 as customer demand continues to be significant. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future, including at least the next 12 months. For further discussion regarding the funding of the Dodge acquisition, refer to Part II, Item 8 - Notes 8, 11 and 15. As of April 2, 2022, we had cash and cash equivalents of $182.9 million, of which, approximately $34.9 millionwas cash held by our foreign operations. Sources of Revenue A contract with a customer exists when there is commitment and approval from both parties involved, the rights of the parties are identified, payment terms are defined, the contract has commercial substance and collectability of consideration is probable. The Company has determined that the contract with the customer is established when the customer purchase order is accepted or acknowledged. Long-term agreements (LTAs) are used by the Company and certain of its customers to reduce their supply uncertainty for a period of time, typically multiple years. While these LTAs define commercial terms including pricing, termination rights and other contractual requirements, they do not represent the contract with the customer for revenue recognition purposes. Approximately 97% and 96% of the Company's revenue was generated from the sale of products to customers in the industrial and aerospace/defense markets for each of the years ended April 2, 2022and April 3, 2021, respectively. During fiscal 2022, approximately 3% of the Company's revenue was derived from services performed for customers, which included repair and refurbishment work performed on customer-controlled assets as well as design and test work, compared to approximately 4% for fiscal 2021.
Refer to Note 2 – “Summary of significant accounting policies” for more details on the Company’s policy with respect to revenues.
Cost of Sales
Cost of sales includes employee compensation and benefits, raw materials, subcontracting, depreciation of manufacturing machinery and equipment, supplies and manufacturing overhead.
27 Less than half of our factory costs, depending on product mix, are attributable to raw materials, purchased components and outside processing. When we experience raw material inflation, we attempt to offset these cost increases by changing our buying patterns, expanding our vendor network and passing through price increases when possible. Although we experienced cost inflation on raw material for this fiscal year, we were able to mitigate it through pricing
and strategic sourcing efforts.
We monitor gross margin performance through a process of monthly operation reviews with all our divisions. We develop new products to target certain markets allied to our strategies by first understanding volume levels and product pricing and then constructing manufacturing strategies to achieve defined margin objectives. We only pursue product lines where we believe that the developed manufacturing process will yield the targeted margins. Management monitors gross margins of all product lines on a monthly basis to determine which manufacturing processes or prices should be adjusted.
Fiscal 2022 vs. Fiscal 2021
Results of Operations FY22 FY21 $ Change % Change Net sales
$ 942.9 $ 609.0 $ 333.954.8 % Net income available to common stockholders $ 53.1 $ 89.6 $ (36.5 )(40.8 )% Net income per common share available to common stockholders: Diluted $ 1.95 $ 3.58Weighted average common shares available to common stockholders: Diluted 27,214,232 25,048,451 Net sales for the twelve months ended April 2, 2022increased $333.9 million, or 54.8%, for fiscal 2022 compared to fiscal 2021. This increase in net sales was the result of a 163.9% increase in our Industrial segment, while sales in our Aerospace/Defense segment declined 3.7% year over year. Included in the increase in our Industrial segment was the impact of the Dodge acquisition, which contributed $291.9 millionof sales during the year. Excluding the impact of Dodge, total net sales increased 6.9%, and Industrial sales increased 26.7% year over year. The increase in industrial sales reflects a pattern of sustained growth during the year, led by results in semiconductor, mining, energy, and general industrial markets. Within Aerospace/Defense, total commercial aerospace decreased 1.5% and defense decreased 7.1% year over year. The decrease was mitigated during the second half of the year as conditions began to improve in the commercial aerospace business, driving increased sales. Net income available to common stockholders decreased by $36.5 millionto $53.1 millionfor fiscal 2022 compared to fiscal 2021. The net income available to common stockholders of $53.1 millionin fiscal 2022 was impacted by $13.8 millionof inventory purchase accounting adjustments associated with the Dodge acquisition, $30.6 millionof other costs associated with the Dodge acquisition, $41.5 millionof interest expense, $12.0 millionof preferred stock dividends and $22.7 millionof tax expense. The net income available to common stockholders of $89.6 millionin fiscal 2021 was impacted by $7.3 millionof pre-tax costs associated with restructuring, $1.5 millionof costs associated with the cyber event, $0.2 millionof losses on foreign exchange, and $20.4
million of tax expense. Gross Margin FY22 FY21 $ Change % Change Gross Margin
$ 357.1 $ 234.1 $ 123.052.5 % Gross Margin % 37.9 % 38.4 % Gross margin was 37.9% of sales for fiscal 2022 compared to 38.4% for the same period last year. Gross margin during fiscal 2022 included the unfavorable impact of $13.8 millionof purchase accounting adjustments associated with the Dodge acquisition and $0.9 millionof other inventory rationalization costs associated with consolidation efforts at one of our facilities. Gross margins in fiscal 2021 were impacted by $3.1 millionof inventory rationalization costs associated with the consolidation of certain manufacturing facilities and $0.8 millionof capacity inefficiencies driven by the decrease in volume.
Selling, general and administrative expenses
FY22 FY21 $ Change % Change SG&A
$ 158.6 $ 106.0 $ 52.649.7 % % of net sales 16.8 % 17.4 %
SG&A fees increased by
28 Other, Net FY22 FY21 $ Change % Change Other, net
$ 68.4 $ 16.7 $ 51.7310.7 % % of net sales 7.3 % 2.7 %
Other operating expenses for fiscal 2022 totaled
$68.4 millioncompared to $16.7 millionfor fiscal 2021. For fiscal 2022, other operating expenses were comprised of $30.6 millionof costs associated with the Dodge acquisition, $34.7 millionof amortization expense, $1.1 millionof plant consolidation and restructuring costs, $0.5 millionof bad debt expense, $0.3 millionof losses on disposal of assets, and $1.2 millionof other items. For fiscal 2021, other operating expenses were comprised of $10.2 millionof amortization of intangible assets, $2.9 millionof restructuring and consolidation costs, $1.5 millionof forensic specialist and remediation costs related to a cyber event, $1.3 millionloss on disposal of assets, $0.5 millionof bad debt expense, and $0.3 millionof other items. Interest Expense, Net FY22 FY21 $ Change % Change Interest expense $ 41.5 $ 1.4 $ 40.12,802.8 % % of net sales 4.4 % 0.2 % Interest expense, net, generally consists of interest charged on our debt and amortization of debt issuance costs offset by interest income (see "Liquidity and Capital Resources - Liquidity" below). Interest expense, net was $41.5 millionfor fiscal 2022 compared to $1.4 millionfor fiscal 2021. This included amortization of debt issuance costs of $18.9 millionfor fiscal 2022 and $0.5 millionfor fiscal 2021. Included in the debt issuance cost amortization in fiscal 2022 was $16.6 millionassociated with the fees for a $2,800.0 millionbridge commitment obtained in connection with the Dodge acquisition. The increase in interest expense is primarily attributable to the debt taken on by the Company to finance the acquisition of Dodge. Other Non-Operating Expense FY22 FY21 $ Change % Change Other non-operating expense $ 0.8 $ (0.0 ) $ 0.8(2,790.3 )% % of net sales 0.1 % (0.0 )%
Other non-operating expenses for fiscal year 2022 totaled
Income Taxes FY22 FY21 Income tax expense
$ 22.7 $ 20.4
Effective tax rate with separate items 25.8% 18.6% Effective tax rate without separate items 27.5% 20.6%
Income tax expense for fiscal 2022 was
$22.7 millioncompared to $20.4 millionfor fiscal 2021. Our effective income tax rate for fiscal 2022 was 25.8% compared to 18.6% for fiscal 2021. The effective income tax rates are different from the U.S.statutory rate due to the U.S.credits for increasing research activities and foreign-derived intangible income provision which decrease the rate and differences in foreign and state income taxes which increase the rate. Further, in fiscal 2022, the effective tax rate was negatively impacted by tax impacts associated with acquisition costs and increases in tax reserves associated with Section 162(m) of the Internal Revenue Code. The effective income tax rate for fiscal 2022 of 25.8% included discrete items of $1.5 millionbenefit which are comprised substantially of a benefit associated with share-based compensation and unrecognized tax benefits associated with the expiration of statutes of limitations partially offset by tax expense arising from an increase in the valuation allowance on a capital loss carryforward. The effective income tax rate for fiscal 2022 without these discrete items would have been 27.5%. The effective income tax rate for fiscal 2021 of 18.6% includes discrete items of $2.2 millionbenefit which are comprised substantially of a benefit associated with share-based compensation and unrecognized tax benefits associated with the expiration of statutes of limitations. The effective income tax rate for fiscal 2021 without these discrete items would have been 20.6%. 29 Segment Information
We previously reported our financial results under four operating segments (Plain Bearings, Roller Bearings, Ball Bearings, and Engineered Products), but the Dodge acquisition has resulted in a change in the internal organization of the Company and how our chief operating decision maker makes operating decisions, assesses the performance of the business, and allocates resources. Accordingly, we now report our financial results under two operating segments: Aerospace/Defense and Industrial. Financial information for fiscal 2021 has been recast to conform to the new segment presentation. We use gross margin as the primary measurement to assess the financial performance of each reportable segment. Aerospace/Defense Segment: FY22 FY21 $ Change % Change Net sales
$ 381.5 $ 396.2 $ (14.7 )(3.7 )% Gross margin $ 155.1 $ 161.2 $ (6.1 )(3.8 )% Gross margin % 40.7 % 40.7 % SG&A $ 29.0 $ 29.1 $ (0.1 )(0.5 )% % of segment net sales 7.6 % 7.4 % Net sales decreased $14.7 million, or 3.7%, for fiscal 2022 compared to fiscal 2021. Commercial aerospace decreased during the period 1.5% year over year. The commercial aerospace OEM component was flat while commercial distribution and aftermarket decreased approximately 6% year over year. The decrease was primarily experienced during the first half of fiscal 2022, with orders and shipments in the second half, demonstrating early signs of a recovery in the OEM markets. This was further evidenced by continuing expansion of our backlog during the period. Our defense markets, which represented about 39.0% of sales, decreased by approximately 7.1% during the period. Overall distribution and aftermarket sales, which represent a little less than 20.0% of segment sales, were down 13.5% year over year. Gross margin was $155.1 million, or 40.7% of sales, in fiscal 2022 compared to $161.2 million, or 40.7% of sales, for the same period in fiscal 2021. Gross margin for fiscal 2022 was impacted by approximately $0.9 millionof inventory rationalization costs associated with consolidation efforts at one of our facilities. Industrial Segment: FY22 FY21 $ Change % Change Net sales $ 561.4 $ 212.8 $ 348.6163.9 % Gross margin $ 202.0 $ 72.9 $ 129.1177.0 % Gross margin % 36.0 % 34.3 % SG&A $ 58.6 $ 18.0 $ 40.6225.9 % % of segment net sales 10.4 % 8.5 %
Net sales increased
$348.6 million, or 163.9%, during fiscal 2022 compared to the same period last year. The increase was primarily due to the inclusion of five months of Dodge sales in fiscal 2022, as well as sustained strong performance across the majority of our legacy industrial markets. Excluding Dodge sales of $291.9 million, net sales increased $56.7 million, or 26.7%, period over period. This increase was driven by performance in semiconductor, energy, mining, and the general industrial markets. Sales to distribution and the aftermarket reflected more than 57.0% of our industrial sales during the year, which is expected to increase as we move into fiscal 2023. These distribution and aftermarket sales increased 309.4% compared to the same period in the prior year, and 26.1% on an organic basis. Gross margin was $202.0 million, or 36.0% of sales, in fiscal 2022 compared to $72.9 million, or 34.3% of sales, for the same period in fiscal 2021. The gross margin for the fiscal 2022 included the unfavorable impact of $13.8 millionof inventory purchase accounting adjustments associated with the Dodge acquisition. Gross margin for the fiscal 2021 was impacted by approximately $3.1 millionof inventory rationalization costs associated with the consolidation of certain manufacturing facilities. 30 Corporate: FY22 FY21 $ Change % Change SG&A $ 71.0 $ 58.9 $ 12.120.6 % % of total net sales 7.5 % 9.7 %
Increase in general and administrative costs of the company
Cash 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, including the Dodge acquisition completed on
November 1, 2021. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the Revolving Credit Facility and Foreign Revolver will provide adequate resources to fund internal growth initiatives for the foreseeable future. For further discussion regarding the funding of the Dodge acquisition, refer to Part II, Item 8 - Notes 8, 11 and 15. Our ability to meet future working capital, capital expenditures and debt service requirements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, particularly interest rates, cyclical changes in our end markets and prices for steel and our ability to pass through price increases on a timely basis, many of which are outside of our control. In addition, future acquisitions could have a significant impact on our liquidity position and our need for additional funds. From time to time, we evaluate our existing facilities and operations and their strategic importance to us. If we determine that a given facility or operation does not have future strategic importance, we may sell, relocate, consolidate or otherwise dispose of those operations. Although we believe our operations would not be materially impaired by such dispositions, relocations or consolidations, we could incur significant cash or non-cash charges in connection with them. Liquidity
April 2, 2022, we had cash and cash equivalents of $182.9 million, of which, approximately $34.9 millionwas cash held by our foreign operations. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign subsidiaries. As discussed further below, we also have the ability to borrow up to approximately $512.7 millionfrom our existing credit agreements. Domestic Credit Facility
November 1, 2021 RBC Bearings Incorporated, our top holding company, and our Roller Bearing Company of America, Inc.subsidiary ("RBCA") entered into a Credit Agreement (the "New Credit Agreement") with Wells Fargo Bank, National Association("Wells Fargo"), 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, which was entered into with Wells Fargo in 2015 (the "2015 Credit Agreement"). The New Credit Agreement provides the Company with (a) a $1,300.0 millionterm loan facility (the "Term Loan Facility"), which was used to fund a portion of the cash purchase price for the acquisition of Dodge and to pay related fees and expenses, and (b) a $500.0 millionrevolving credit facility (the "Revolving Credit Facility" and together with the Term Loan Facility, the "Facilities"). Debt issuance costs associated with the New Credit Agreement totaled $14.9 millionand will be amortized over the life of the New Credit Agreement. When the 2015 Credit Agreement was terminated the Company wrote off $0.9 millionof previously unamortized debt issuance costs. Amounts outstanding under the Facilities generally bear interest at either, at the Company's option, (a) a base rate determined by reference to the higher of (i) Wells Fargo's prime lending rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the one-month LIBOR rate plus 1.00% or (b) the LIBOR rate plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA from time to time. Currently, the Company's margin is 0.75% for base rate loans and 1.75% for LIBOR rate loans. The Facilities are subject to a "LIBOR" floor of 0.00% and contain "hard-wired" LIBOR replacement provisions as set forth in the New Credit Agreement. As of April 2, 2022, the Company's commitment fee rate is 0.25% and the letter of credit fee rate is
1.75%. 31 The Term Loan Facility and the Revolving Credit Facility will mature on
November 2, 2026. The Company can elect to prepay some or all of the outstanding balance from time to time without penalty. Commencing one full fiscal quarter after the execution of the New Credit Agreement, the Term Loan Facility will amortize in quarterly installments as set forth in Part II, Item 8 - Note 11, with the balance payable on the Maturity Date unless otherwise extended in accordance with the terms of the Term Loan Facility. The New Credit Agreement requires the Company to comply with various covenants, including the following financial covenants beginning with the test period ending December 31, 2021: (a) a maximum Total Net Leverage Ratio of 5.50:1.00, which maximum Total Net Leverage Ratio shall decrease during certain subsequent test periods as set forth in the New Credit Agreement (provided that, no more than once during the term of the Facilities, such maximum ratio applicable at such time may be increased by the Borrower by 0.50:1.00 for a period of twelve (12) months after the consummation of a material acquisition), and (b) a minimum Interest Coverage Ratio of 2.00:1.00. The New Credit Agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the New Credit Agreement. The Company's domestic subsidiaries have guaranteed the Company's obligations under the New Credit Agreement, and the Company's obligations and the domestic subsidiaries' guaranty are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries. As of April 2, 2022, $1,200.0 millionwas outstanding under the Term Loan Facility and approximately $3.5 millionof the Revolving Credit Facility was being utilized to provide letters of credit to secure the Company's obligations relating to certain insurance programs, and the Company had the ability to borrow up to an additional $496.5 millionunder the Revolving Credit Facility. Senior Notes On October 7, 2021, RBCA issued $500.0 millionaggregate principal amount of 4.375% Senior Notes due 2029 (the "Senior Notes"). The net proceeds from the issuance of the Senior Notes were approximately $492.0 millionafter deducting initial purchasers' discounts and commissions and offering expenses. On November 1, 2021, the Company used the proceeds to fund a portion of the cash purchase price for the acquisition of Dodge. The Senior Notes were issued pursuant to an indenture with Wilmington Trust, National Association, as trustee (the "Indenture"). The Indenture contains covenants limiting the ability of the Company to (i) incur additional indebtedness or guarantee indebtedness, (ii) declare or pay dividends, redeem stock or make other distributions to stockholders, (iii) make investments, (iv) create liens or use assets as security in other transactions, (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets, (vi) enter into transactions with affiliates, and (vii) sell or transfer certain assets. These covenants contain various exceptions, limitations and qualifications. At any time that the Senior Notes are rated investment grade, certain of these covenants will be suspended.
The Senior Notes are jointly and severally secured on a senior unsecured basis by
Interest on the Senior Notes accrues at the rate of 4.375% and will be payable semi-annually in cash in arrears on
The Senior Notes will mature on
October 15, 2029. The Company may redeem some or all of the Senior Notes at any time on or after October 15, 2024at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The Company may also redeem up to 40% of the Senior Notes using the proceeds of certain equity offerings completed before October 15, 2024, at a redemption price equal to 104.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to October 15, 2024, the Company may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount, plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company sells certain of its assets or experiences specific kinds of changes in control, the Company must offer to purchase the Senior Notes.
Foreign term loan and revolving credit facility
August 15, 2019, one of our foreign subsidiaries, Schaublin SA("Schaublin"), entered into two separate credit agreements (the "Foreign Credit Agreements") with Credit Suisse (Switzerland) Ltd.to (i) finance the acquisition of Swiss Tool, and (ii) provide future working capital. The Foreign Credit Agreements provided Schaublin with a CHF 15.0 million(approximately $15.4 million) term loan (the "Foreign Term Loan"), which was extinguished in February 2022and a CHF 15.0 million(approximately $15.4 million) revolving credit facility (the "Foreign Revolver"), which continues in effect until terminated by either Schaublin or Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements totaled CHF 0.3 million(approximately $0.3 million). When the Foreign Term Loan was extinguished, Schaublin wrote off $0.1 millionof previously unamortized debt issuance costs. 32 Amounts outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable margin is based on Schaublin's ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin's margin is 1.00%. The Foreign Credit Agreements require Schaublin to comply with various covenants, which are tested annually on March 31. These covenants include, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 2.50 to 1 as of March 31, 2021and thereafter. Schaublin is also required to maintain an economic equity of CHF 20.0 millionat all times. The Foreign Credit Agreements allow Schaublin to, among other things, incur other debt or liens and acquire or dispose of assets provided that Schaublin complies with certain requirements and limitations of the Foreign Credit Agreements. As of April 2, 2022, Schaublin was in compliance with all such covenants. Schaublin's parent company, Schaublin Holding, has guaranteed Schaublin's obligations under the Foreign Credit Agreements. Schaublin Holding'sguaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the three operating companies in the Swiss Tool System group of companies.
Fiscal 2022 vs. Fiscal 2021
The following table summarizes our treasury activities:
FY22 FY21 $ Change Net cash provided by (used in): Operating activities
$ 180.3 $ 152.4 $ 27.9Investing activities (2,847.5 ) (101.5 ) (2,746.0 ) Financing activities 2,698.5 (3.4 ) 2,701.9
Effect of changes in exchange rates on cash 0.5 0.3
Increase in cash and cash equivalents
During fiscal 2022 we generated cash of
$180.3 millionfrom operating activities compared to $152.4 millionfor fiscal 2021. The increase of $27.9 millionfor fiscal 2022 was mainly the result of a $51.1 millionincrease in non-cash charges and a net favorable change in operating assets and liabilities of $1.4 million, partially offset by a $24.6 milliondecrease in net income. The favorable change in operating assets and liabilities is detailed in the table below. The change in non-cash charges was primarily driven by $32.8 millionmore depreciation and amortization, $18.5 millionmore amortization of deferred financing costs and debt discount, $2.6 millionmore share-based compensation, and $1.0 millionin debt extinguishment costs, partially offset by a $2.7 milliondecrease in deferred taxes, $1.0 milliondecrease in net loss on asset disposals, and $0.1 milliondecrease in consolidation and restructuring charges.
The following graph summarizes the favorable evolution of the operating assets and liabilities of
for fiscal year 2021 compared to fiscal year 2020.
FY22 FY21 Cash provided by (used in): Accounts receivable
$ (72.5 ) $ 15.7Inventory (17.1 ) 26.3 Prepaid expenses and other current assets (1.4 ) 3.5 Other noncurrent assets 8.5 (7.0 ) Accounts payable 67.2 (15.7 )
Accrued expenses and other current liabilities 19.5 2.6 Other non-current liabilities
(2.8 ) 5.7
Total change in operating assets and liabilities
33 During fiscal 2022, we used
$2,847.5 millionfor investing activities as compared to $101.5 millionfor fiscal 2021. This increase in cash used was attributable to $2,908.5 millionused for the acquisition of Dodge during fiscal 2022 and $18.0 millionincrease in capital expenditures. This was partially offset by a $110.4 millionincrease in proceeds received from the sale of marketable securities in the current year and $70.1 millionless cash used in the purchase of marketable securities in the current year. During fiscal 2022, we generated cash of $2,698.5 millionfrom financing activities compared to $3.4 millioncash used in fiscal 2021. This increase in cash generated was primarily attributable to fiscal 2022 proceeds received from term loans net of financing costs $1,285.8 million, fiscal 2022 proceeds received from issuance of common stock $605.5 million, fiscal 2022 proceeds received from senior notes net of financing costs $494.2 million, fiscal 2022 proceeds received from issuance of preferred stock $445.3 million, $6.7 millionmore exercises of stock options and warrants, and $3.0 millionless payments made on revolving credit facilities. These cash generating activities were primarily offset by $108.7 millionmore payments made on term loans, $19.5 millionmore financing fees paid in connection with credit facilities, $7.1 millioncash dividends paid to preferred shareholders in fiscal 2022, $1.7 millionmore treasury stock purchases, and $1.6 millionin principal repayments on finance lease obligations during fiscal 2022. Capital Expenditures Our capital expenditures in fiscal 2022 were $29.8 millioncompared to $11.8 millionin fiscal 2021. We expect to make capital expenditures of approximately 2.5% to 3.0% of net sales during fiscal 2023 in connection with our existing business. We funded our fiscal 2022 capital expenditures, and expect to fund fiscal 2023 capital expenditures, principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions.
Quarterly operating results
Quarter Ended (3) Apr. 2, Jan. 1, Oct. 2, Jul. 3, Apr. 3, Dec. 26, Sep. 26, Jun. 27, 2022 2022 2021 2021 2021 2020 2020 2020 (Unaudited) (in thousands, except per share data) Net sales
$ 358,879 $ 266,953 $ 160,900 $ 156,205 $ 160,295 $ 145,861 $ 146,335 $ 156,493Gross margin 137,486 93,345 62,464 63,773 62,469 55,588 56,596 59,453 Operating income 57,846 14,371 27,123 30,723 29,740 26,541 26,363 28,814 Net income/(loss) available to common stockholders $ 26,450 $ (5,814 ) $ 6,419 $ 25,999 $ 24,954 $ 21,569 $ 20,421 $ 22,689Net income/(loss) per common share available to common stockholders: Basic(1)(2) $ 0.92 $ (0.20 ) $ 0.25 $ 1.04 $ 1.00 $ 0.87 $ 0.82 $ 0.92Diluted(1)(2) $ 0.92 $ (0.20 ) $ 0.25 $ 1.03 $ 0.99 $ 0.86 $ 0.82 $ 0.91(1) See Note 2.
(2) Net earnings per common share is calculated independently for each of the
quarters presented. Therefore, the sum of quarterly earnings per share
may not necessarily equal the total for the year.
(3) Dodge was acquired on
April 2, 2022and January 1, 2022within the table above. 34
Significant Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with
U.S.generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, valuation of inventories, goodwill and intangible assets, depreciation and amortization, income taxes and tax reserves, the valuation of options and the valuation of business combinations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe our judgments related to these accounting estimates are appropriate. Actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition.The performance obligations for the majority of RBC's product sales are satisfied at the point in time in which the products are shipped, consistent with the pattern of revenue recognition under the previous accounting standard. The Company has determined that the customer obtains control upon shipment of the product based on the shipping terms (either when it ships from RBC's dock or when the product arrives at the customer's dock) and recognizes revenue accordingly. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Approximately 97% of the Company's revenue was recognized in this manner based on sales for the year ended April 2, 2022compared to approximately 96% for the year ended April 3, 2021. 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 3% of the Company's revenue was recognized in this manner based on sales for the year ended April 2, 2022compared to approximately 4% for the year ended April 3, 2021. Revenue recognition over time is appropriate for customer contracts with product sales in which the product sold has no alternative use to RBC without significant economic loss and an enforceable right to payment exists, including a normal profit margin from the customer, in the event of contract termination. These types of contracts comprised less than 1% of total sales for the year ended April 2, 2022and the year ended April 3, 2021. For both of these types of contracts, revenue is recognized over time based on the extent of progress towards completion of the performance obligation. The Company utilizes the cost-to-cost measure of progress for over-time revenue recognition contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts. Revenues, including profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, subcontractors' costs, and other direct and indirect costs. Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when (1) the cost-to-cost method is applied and (2) such revenue exceeds the amount invoiced to the customer. Contract assets are included within prepaid expenses and other current assets or other assets on the consolidated balance sheets. Accounts Receivable.We are required to estimate the collectability of our accounts receivable, which requires a considerable amount of judgment in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Changes in required reserves may occur in the future as conditions in the marketplace change. Inventory. Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. We account for inventory under a full absorption method. We record adjustments to the value of inventory based upon past sales history and forecasted plans to sell our inventories. The physical condition, including age and quality, of the inventories is also considered in establishing its valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations. 35
Goodwilland Indefinite-Lived Intangible Assets. Goodwill(representing the excess of the amount paid to acquire a company over the estimated fair value of the net assets acquired) and indefinite lived intangible assets are not amortized but instead are tested for impairment annually, or when events or circumstances indicate that the carrying value of such asset may not be recoverable. Separate tests are performed for goodwill and indefinite lived intangible assets. We completed a quantitative test of impairment on the indefinite lived intangible assets with no impairment noted in the current year. In addition, we also completed a quantitative test of impairment on goodwill as of November 1, 2021in connection with the allocation of existing goodwill amongst our newly defined business reporting segments. No impairment was noted as a result of that interim impairment test. The determination of any goodwill impairment is made at the reporting unit level. The Company determines the fair value of a reporting unit and compares it to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any amount by which the carrying amount exceeds the reporting unit's fair value up to the value of goodwill. The Company applies the income approach (discounted cash flow method) in testing goodwill for impairment. The key assumptions used in the discounted cash flow method used to estimate fair value include discount rates, revenue growth rates, terminal growth rates and cash flow projections. Discount rates, revenue growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital ("WACC"). The WACC considers market and industry data as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit for our fiscal 2022 test was 9.5% and is indicative of the return an investor would expect to receive for investing in such a business. Terminal growth rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and long-term growth rates. The terminal growth rate used for our fiscal 2022 test was 2.5%. The Company has determined that, to date, no impairment of goodwill exists and fair value of the reporting units exceeded the carrying value in total by approximately 53.9%. The fair value of the reporting units exceeds the carrying value by a minimum of 24.9% at each of the two reporting units. A decrease of 1.0% in our terminal growth rate would not result in impairment of goodwill for any of our reporting units. An increase of 1.0% in our discount rate would not result in impairment of goodwill for any of our reporting units. The Company performs the annual impairment testing during the fourth quarter of each fiscal year. Although no changes are expected, if the actual results of the Company are less favorable than the assumptions the Company makes regarding estimated cash flows, the Company may be required to record an impairment charge in the future. Valuation of Business Combinations. We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition, including identifiable intangible assets, which either arise from a contractual or legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations which are prepared with the assistance of a specialist and consider our best estimates of inputs and assumptions that a market participant would use. We utilize a specialist for these valuations due to the complexity and estimation uncertainty involved in determining the fair value given the significant assumptions involved. Significant assumptions utilized in the valuation models include discount rates, revenue growth rates and cash flow projections. We allocate to goodwill any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred through other, net on the consolidated statements
of operations. Income Taxes. As part of the process of preparing the consolidated financial statements, we are required to estimate the income taxes in each jurisdiction in which we operate. This process involves estimating the actual current tax liabilities together with assessing temporary differences resulting from the differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We must then assess the likelihood that the deferred tax assets will be recovered, and to the extent that we believe that recovery is not more than likely, we are required to establish a valuation allowance. If a valuation allowance is established or increased during any period, we are required to include this amount as an expense within the tax provision in the consolidated statements of operations. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, accrual for uncertain tax positions and any valuation allowance recognized against net deferred tax assets.
Stock-based compensation. We recognize compensation expense in the financial statements for all share-based payment transactions based on the grant date fair value of the instruments issued during the required service period.
36 The fair value for our options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Fiscal Year Ended April 2, April 3, March 28, 2022 2021 2020 Dividend yield 0.00 % 0.00 % 0.00 %
Expected weighted-average life (yrs.) 5.0 5.0
5.0 Risk-free interest rate 0.95 % 0.35 % 1.82 % Expected volatility 43.43 % 41.35 % 26.93 %
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of our options.
Recent accounting pronouncements
For a discussion of recent accounting pronouncements, see Note 2 – “Summary of Significant Accounting Policies – Recent Accounting Pronouncements”.
Impact of inflation, commodity price changes and interest rate fluctuations
In fiscal 2022, the economy experienced inflation. We purchase steel at market prices, which fluctuate as a result of supply and demand in the marketplace. To date, we have managed price increases by changing our buying patterns, expanding our vendor network, and passing increases on to our customers through price increases on our products, the assessment of steel surcharges on our customers, or entry into long-term agreements with our customers containing escalator provisions tied to our invoiced price of steel. However, even if we are able to pass these steel surcharges or price increases to our customers, there may be a time lag of several months between the time a price increase goes into effect and our ability to implement surcharges or price increases, particularly for orders already in our backlog. As a result, our gross margin percentage may decline. Competitive pressures and the terms of certain of our long-term contracts may require us to absorb at least part of these cost increases, particularly during periods of high inflation. Our principal raw materials are stainless and 52100 wire and rod steel (types of high alloy steel), which have historically been readily available. We have never experienced a work stoppage due to a supply shortage. We maintain multiple sources for raw materials including steel and have various supplier agreements. Through sole-source arrangements, supplier agreements and pricing, we have been able to minimize our exposure to fluctuations in raw material prices. Our suppliers and sources of raw materials are based in the
U.S., Europeand Asia. We believe that our sources are adequate for our needs in the foreseeable future, that there exist alternative suppliers for our raw materials and that in most cases readily available alternative materials can be used for most of
our raw materials.
Off-balance sheet arrangements
April 2, 2022, we had no significant off-balance sheet arrangements other than $3.5 millionof outstanding standby letters of credit, all of which were under the Revolver. 37
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