RBC BEARINGS INCORPORATED Cautionary Statement as to Forward-Looking Information
The information in this discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the "safe harbor" created by those sections. All statements, other than statements of historical facts, included in this quarterly report on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are "forward-looking statements" as the term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing and engineered products industries are highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer, or a material adverse change in a major customer's business, could result in a material reduction in our revenues, cash flows and profitability; (c) our results have been and are likely to continue to be impacted by the COVID-19 pandemic; (d) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers' businesses generally, could materially reduce our revenues, cash flows and profitability; (e) future reductions or changes inU.S. government spending could negatively affect our business; (f) fluctuating supply and costs of subcomponents, raw materials and energy resources, or the imposition of import tariffs, could materially reduce our revenues, cash flows and profitability; (g) our results could be impacted by governmental trade policies and tariffs relating to our supplies imported from foreign vendors or our finished goods exported to other countries; (h) our products are subject to certain approvals and government regulations and the loss of such approvals, or our failure to comply with such regulations, could materially reduce our revenues, cash flows and profitability; (i) the retirement of commercial aircraft could reduce our revenues, cash flows and profitability; (j) work stoppages and other labor problems could materially reduce our ability to operate our business; (k) unexpected equipment failures, catastrophic events or capacity constraints could increase our costs and reduce our sales due to production curtailments or shutdowns; (l) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (m) businesses that we have acquired or that we may acquire in the future may have liabilities that are not known to us; (n) goodwill and indefinite-lived intangibles comprise a significant portion of our total assets, and if we determine that goodwill and indefinite-lived intangibles have become impaired in the future, our results of operations and financial condition in such years may be materially and adversely affected; (o) we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (p) our international operations are subject to risks inherent in such activities; (q) currency translation risks may have a material impact on our results of operations; (r) we are subject to changes in legislative, regulatory and legal developments involving income and other taxes; (s) we may be required to make significant future contributions to our pension plan; (t) we may incur material losses for product liability and recall-related claims; (u) environmental and health and safety laws and regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (v) our intellectual property and proprietary information are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (w) cancellation of orders in our backlog could negatively impact our revenues, cash flows and profitability; (x) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (y) litigation could adversely affect our financial condition; (z) changes in accounting standards or changes in the interpretations of existing standards could affect our financial results; and (aa) risks associated with utilizing information technology systems could adversely affect our operations. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with theSEC , including, without limitation, the risks identified under the heading "Risk Factors" set forth in the Annual Report on Form 10-K for the year endedMarch 28, 2020 . Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report. 16 Overview We are a well-known international manufacturer and maker of highly engineered precision bearings and components. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission, and reduce damage and energy loss caused by friction. While we manufacture products in all major bearings categories, we focus primarily on the higher end of the bearing and engineered component markets where we believe our value-added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. With 43 facilities in seven countries, of which 31 are manufacturing facilities, we have been able to significantly broaden our end markets, products, customer base and geographic reach. We currently operate under four reportable business segments: Plain Bearings, Roller Bearings, Ball Bearings, and Engineered Products. The following further describes these reportable segments: Plain Bearings. Plain bearings are produced with either self-lubricating or metal-to-metal designs and consists of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components. Roller Bearings. Roller bearings are anti-friction bearings that use rollers instead of balls. We manufacture four basic types of roller bearings: heavy-duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings. Ball Bearings. We manufacture four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings, which are used in high-speed rotational applications.
Engineered Products. Engineered Products consists of highly engineered hydraulics, fasteners, collets and precision components used in aerospace, marine and industrial applications.
17
Purchasers of bearings and engineered products include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction, energy, mining, marine and specialized equipment manufacturers, marine products, automotive and commercial truck manufacturers. The markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into sole-source relationships and long-term purchase agreements, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.
Currently, our strategy is built around maintaining our role as a leading manufacturer of precision-engineered bearings and components through the following efforts:
? Developing innovative solutions. By leveraging our design and manufacturing
expertise and our extensive customer relationships, we continue to develop new
products for markets in which there are substantial growth opportunities.
? Expanding customer base and penetrating end markets. We continually seek
opportunities to access new customers, geographic locations and bearing
platforms with existing products or profitable new product opportunities.
? Increasing aftermarket sales. We believe that increasing our aftermarket sales
of replacement parts will further enhance the continuity and predictability of
our revenues and enhance our profitability. Such sales include sales to third
party distributors and sales to OEMs for replacement products and aftermarket
services. We will increase the percentage of our revenues derived from the
replacement market by continuing to implement several initiatives.
? Pursuing selective acquisitions. The acquisition of businesses that complement
or expand our operations has been and continues to be an important element of
our business strategy. We believe that there will continue to be consolidation
within the industry that may present us with acquisition opportunities. Outlook Our net sales for the three-month period endedDecember 26, 2020 decreased 17.6% compared to the same period last fiscal year. The decrease in net sales was a result of a 29.7% decrease in our aerospace markets offset by a 5.5% increase in our industrial markets. The decrease in aerospace sales was primarily due to the commercial markets, both OEM and aftermarket. The increase in industrial sales was driven by increases in the marine, wind, semiconductor and general industrial markets. Our backlog, as ofDecember 26, 2020 , was$393.9 million compared to$477.7 million as ofDecember 28, 2019 . The COVID-19 health crisis, which was declared a pandemic inMarch 2020 , has led to governments around the world implementing measures to reduce the spread. These measures include quarantines, "shelter in place" orders, travel restrictions, and other measures and have resulted in a slowdown of worldwide economic activity. Our business is operating as an essential business, and as such, our facilities have remained open, with the exception of a few temporary closures at some of our locations. The COVID-19 pandemic is impacting our commercial aerospace and industrial sales in fiscal 2021. Our commercial aerospace sales continue to face headwinds associated with build rate changes within the industry, while the general decline in global economic activity has had an impact on the industrial markets. 18 Our production and sales in the third quarter of fiscal 2021 have been negatively affected by the economic implications of the pandemic. We expect that commercial aerospace OEM and aftermarket will continue to be impacted by the year-over-year decline in air travel and changes in aircraft production rates. Although our sales to aerospace defense markets have grown 9.1% through the first nine months of the year, they were down 6.2% during the third quarter of fiscal 2021 as compared to the same period last year. Sales to industrial markets benefited from strong sales in our marine, wind and other general industrial business during the quarter, while we faced headwinds in mining and energy markets. We expect this trend to continue through the remainder of the fiscal year. Management is continuously evaluating the status of our orders and operations, and restructuring efforts are being implemented where necessary to align our cost structure to the new demand levels we experience in the marketplace. We experienced solid cash flow generation during the third quarter of fiscal 2021 (as discussed in the section "Liquidity and Capital Resources" below). Management believes that these operating cash flows and available credit under all credit agreements will provide adequate resources to fund internal and external growth initiatives for at least the next 12 months. As ofDecember 26, 2020 , we had cash, cash equivalents and highly liquid marketable securities of$201.7 million , of which, approximately$16.0 million was cash held by our foreign operations.
The Company expects net sales to be approximately
Results of Operations
(dollars in millions)
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 145.9 $ 177.0 $ (31.1 ) (17.6 )%
Net income $ 21.6 $ 30.5 $ (8.9 ) (29.3 )%
Net income per common share: diluted
Our net sales for the three-month period endedDecember 26, 2020 decreased 17.6% compared to the same period last fiscal year. The decrease in net sales was a result of a 29.7% decrease in our aerospace markets partially offset by a 5.5% increase in our industrial markets. The decrease in aerospace sales was primarily due to the commercial markets, both OEM and aftermarket, which were down 37.2% and 31.2%, respectively. Aerospace defense was also down 6.2% this quarter compared to the same period in the prior year with OEM sales down by 8.2% partially offset by a 15.9% increase in aftermarket sales. The increase in industrial sales was driven primarily by increases in the marine and certain general industrial markets. Compared to the second quarter of fiscal 2021, overall net sales have been consistent. Industrial sales have increased by 8.5% while aerospace sales have decreased by 13.3%. The increase in industrial sales was driven mostly by the marine and certain general industrial markets. The decrease in aerospace sales was attributable to the commercial and defense OEM markets offset by increases to the defense distribution markets. Net income for the third quarter of fiscal 2021 was$21.6 million compared to$30.5 million for the same period last year. Net income for the third quarter of fiscal 2021 was affected by$1.1 million of after-tax restructuring costs and related items primarily associated with the consolidation of certain manufacturing facilities, as well as$0.2 million of losses on foreign exchange, partially offset by$1.0 million of tax benefits associated with share-based compensation. Net income for the third quarter of fiscal 2020 was affected by$0.9 million of tax benefit associated with share-based compensation and$0.6 million of tax benefit associated with the decrease in the Company's unrecognized tax positions due to the statute of limitations expiration, partially offset by$0.2 million of inventory purchase accounting costs associated with the acquisition of Swiss Tool,$0.2 million of losses on foreign exchange, and$0.1 million of other items. 19 Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change Total net sales$ 448.7 $ 541.6 $ (92.9 ) (17.2 )% Net income$ 64.7 $ 92.3 $ (27.6 ) (29.9 )%
Net income per common share: diluted
Net sales decreased$92.9 million , or 17.2%, for the nine-month period endedDecember 26, 2020 over the same period last year. The decrease in net sales was mainly the result of a 23.5% decrease in aerospace sales and a 5.7% decrease in industrial sales. The decrease in aerospace sales was primarily due to the commercial markets, both OEM and aftermarket, which were down 32.2% and 28.1%, respectively, and was partially offset by defense OEM and aftermarket, which increased year over year by 8.4% and 17.1%, respectively. The decrease in industrial sales was primarily due to mining and energy, partially offset by increases in the semiconductor, military vehicles, wind, nuclear, and a few other industrial markets. Excluding$2.6 million of sales associated with Swiss Tool, overall net sales decreased 17.6% year over year. Net income for the nine months endedDecember 26, 2020 was$64.7 million compared to$92.3 million for the same period last year. Net income for the nine month period in fiscal 2021 was affected by$4.8 million of after-tax restructuring costs and related items, and$0.4 million of losses on foreign exchange, partially offset by$1.7 million of tax benefits associated with share-based compensation. The net income of$92.3 million for fiscal 2020 was impacted by$3.9 million of tax benefits associated with share-based compensation, and$0.7 million of discrete tax benefits, partially offset by$1.0 million of after-tax cost associated with the acquisition of Swiss Tool,$0.5 million of loss on foreign exchange, and$0.2 million of other items. Gross Margin Three Months Ended December 26, December 28, $ % 2020 2019 Change Change Gross Margin $ 55.6 $ 70.7$ (15.1 ) (21.4 )% Gross Margin % 38.1 % 39.9 % Gross margin was 38.1% of net sales for the third quarter of fiscal 2021 compared to 39.9% for the third quarter of fiscal 2020. Gross margin for the third quarter of fiscal 2021 was impacted by$0.8 million in inventory rationalization costs associated with the consolidation of certain manufacturing facilities. The year-over-year decrease in gross margin as a percentage of sales was driven by these additional rationalization costs and reduced sales volumes during the period. Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change Gross Margin$ 171.6 $ 212.5 $ (40.9 ) (19.2 )% Gross Margin % 38.3 % 39.2 % Gross margin was 38.3% of net sales for the first nine months of fiscal 2021 compared to 39.2% for the same period last year. Gross margin for the first nine months of fiscal 2021 was impacted by$0.8 million of capacity inefficiencies driven by the decrease in volume and$2.8 million in inventory rationalization costs associated with the consolidation of certain manufacturing facilities. 20
Selling, General and Administrative
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
SG&A $ 25.7 $ 30.7 $ (5.0 ) (16.2 )%
% of net sales 17.6 % 17.4 %
SG&A expenses for the third quarter of fiscal 2021 was $25.7 million , or 17.6%
of net sales, as compared to $30.7 million , or 17.4% of net sales, for the same
period of fiscal 2020. This reduction was due to decreases in personnel costs of
$4.4 million , professional fees of $0.1 million , and $0.5 million of other
items.
Nine Months Ended
December 26, December 28, $ %
2020 2019 Change Change
SG&A $ 78.6 $ 91.6 $ (13.0 ) (14.2 )%
% of net sales 17.5 % 16.9 %
SG&A expenses decreased by $13.0 million to $78.6 million for the first nine
months of fiscal 2021 compared to $91.6 million for the same period last year.
This decrease was primarily due to reductions of $13.1 million in personnel
costs, partially offset by $0.1 million of other items.
Other, Net
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Other, net $ 3.3 $ 2.5$ 0.8 31.0 % % of net sales 2.3 % 1.4 %
Other operating expenses for the third quarter of fiscal 2021 totaled$3.3 million compared to$2.5 million for the same period last year. For the third quarter of fiscal 2021, other operating expenses included$2.6 million of amortization of intangible assets,$0.5 million of restructuring costs and related items, and$0.2 million of other costs. Other operating expenses last year were comprised mainly of$2.5 million of amortization of intangible assets and$0.1 million of restructuring costs, partially offset by$0.1 million of other income. Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change Other, net $ 11.3 $ 7.7$ 3.6 47.6 % % of net sales 2.5 % 1.4 % Other operating expenses for the first nine months of fiscal 2021 totaled$11.3 million compared to$7.7 million for the same period last year. For the first nine months of fiscal 2021, other operating expenses were comprised mainly of$7.7 million in amortization of intangibles,$3.1 million of restructuring and related items,$0.4 million of additions to the allowance for doubtful accounts, and$0.1 million of other items. For the first nine months of fiscal 2020, other operating expenses were comprised mainly of$7.1 million of amortization of intangibles,$0.9 million of costs associated with the acquisition of Swiss Tool, and$0.2 million of restructuring costs, partially offset by$0.5 million of other income. 21 Interest Expense, Net Three Months Ended December 26, December 28, $ % 2020 2019 Change Change Interest expense, net $ 0.3 $ 0.5$ (0.2 ) (29.8 )% % of net sales 0.2 % 0.3 % Interest expense, net, generally consists of interest charged on the Company's debt agreements and amortization of deferred financing fees, offset by interest income (see "Liquidity and Capital Resources" below). Interest expense, net, was$0.3 million for the third quarter of fiscal 2021 compared to$0.5 million for the same period last year. Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change Interest expense, net $ 1.1 $ 1.5$ (0.4 ) (26.3 )% % of net sales 0.2 % 0.3 %
Interest expense, net, was
Other Non-Operating Expense (Income)
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Other non-operating expense (income) $ (0.1 ) $ 0.2
$ (0.3 ) (123.0 )% % of net sales 0.0 % 0.1 %
Other non-operating income was$0.1 million for the third quarter of fiscal 2021 compared to$0.2 million of expense for the same period in the prior year. For the third quarter of fiscal 2021, other non-operating income was comprised of$0.5 million of gains on marketable securities, partially offset by$0.2 million of foreign exchange loss and$0.2 million of other items. For the third quarter of fiscal 2020, other non-operating expenses were comprised of$0.2 million
of
foreign exchange loss.
Nine Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Other non-operating expense (income) $ 0.2 $ 0.6
$ (0.4 ) (65.1 )% % of net sales 0.0 % 0.1 % 22
Other non-operating expenses were$0.2 million for the first nine months of fiscal 2021 compared to$0.6 million for the same period in the prior year. For the first nine months of fiscal 2021, other non-operating expenses were comprised of$0.4 million of foreign exchange loss and$0.3 million of other items, partially offset by$0.5 million of gains on marketable securities. For the first nine months of fiscal 2020, other non-operating expenses were comprised of$0.6 million of foreign exchange loss. Income Taxes Three Months Ended December 26, December 28, 2020 2019 Income tax expense $ 4.7 $ 6.3 Effective tax rate 17.9 % 17.0 % Income tax expense for the three-month period endedDecember 26, 2020 was$4.7 million compared to$6.3 million for the three-month period endedDecember 28, 2019 . Our effective income tax rates for the three-month period endedDecember 26, 2020 was 17.9% compared to 17.0% for the three-month period endedDecember 28, 2019 . The effective income tax rate for the three-month period endedDecember 26, 2020 of 17.9% includes$1.0 million of tax benefit associated with share-based compensation. The effective income tax rate without these benefits and other items for the three-month period endedDecember 26, 2020 would have been 21.4%. The effective income tax rate for the three-month period endedDecember 28, 2019 of 17.0% includes$0.9 million of tax benefit associated with share-based compensation and$0.6 million of tax benefit associated with the decrease in the Company's unrecognized tax positions related to statute of limitations expiration. The effective income tax rate without this benefit and other items for the three-month period endedDecember 28, 2019 would have been 20.9%. Nine Months Ended December 26, December 28, 2020 2019 Income tax expense$ 15.7 $ 18.9 Effective tax rate 19.6 % 17.0 % Income tax expense for the nine-month period endedDecember 26, 2020 was$15.7 million compared to$18.9 million for the nine-month period endedDecember 28, 2019 . Our effective income tax rates for the nine-month period endedDecember 26, 2020 was 19.6% compared to 17.0% for the nine-month period endedDecember 28, 2019 . The effective income tax rate for the nine-month period endedDecember 26, 2020 of 19.6% includes$1.7 million of tax benefit associated with share-based compensation. The effective income tax rate without these benefits and other items for the nine-month period endedDecember 26, 2020 would have been 21.5%. The effective income tax rate for the nine-month period endedDecember 28, 2019 of 17.0% includes$3.9 million of tax benefit associated with share-based compensation and$0.5 million of tax benefit associated with the decrease in the Company's unrecognized tax positions related to statute of limitations expiration and$0.2 million of tax benefit associated with other permanent adjustments from filing the Company's fiscal 2018 foreign tax returns. The effective income tax rate without this benefit and other items for the nine-month period endedDecember 28, 2019 would have been 21.2%. Segment Information
We have four reportable product segments: Plain Bearings, Roller Bearings, Ball
Bearings and Engineered Products. We use gross margin as the primary measurement
to assess the financial performance of each reportable segment.
23
Plain Bearings Segment
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 69.3 $ 86.9 $ (17.6 ) (20.2 )%
Gross margin $ 27.8 $ 35.0 $ (7.2 ) (20.5 )%
Gross margin % 40.2 % 40.3 %
SG&A $ 5.4 $ 6.7 $ (1.3 ) (19.1 )%
% of segment net sales 7.9 % 7.7 %
Net sales decreased $17.6 million , or 20.2%, for the three months ended December
26, 2020 compared to the same period last year. The 20.2% decrease was primarily
driven by a decrease of 28.2% in our aerospace markets, partially offset by an
8.0% increase in the industrial markets. The decrease in aerospace net sales was
due to commercial aerospace OEM and aftermarket, partially offset by defense
OEM. The increase in industrial net sales was mostly driven by the wind and
general industrial markets.
Gross margin as a percentage of net sales was 40.2% for the third quarter of
fiscal 2021 compared to 40.3% for the same period last year. Gross margin for
the third quarter of fiscal 2021 was affected by $0.8 million of inventory
rationalization costs associated with the restructuring of certain manufacturing
facilities.
Nine Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 219.2 $ 264.4 $ (45.2 ) (17.1 )%
Gross margin $ 89.7 $ 104.8 $ (15.1 ) (14.5 )%
Gross margin % 40.9 % 39.7 %
SG&A $ 16.0 $ 19.8 $ (3.8 ) (19.1 )%
% of segment net sales 7.3 % 7.5 %
Net sales decreased $45.2 million , or 17.1%, for the nine months ended December
26, 2020 compared to the same period last year. The 17.1% decrease was primarily
driven by a decrease of 22.5% in our aerospace markets offset by a 2.0% increase
in the industrial markets. The decrease in aerospace was primarily due to
commercial OEM and aftermarket, partially offset by defense OEM aftermarket. The
increase in industrial sales was mostly driven by the wind and general
industrial markets.
Gross margin as a percentage of net sales increased to 40.9% for the first nine
months of fiscal 2021 compared to 39.7% for the same period last year. The
increase was a result of product mix during the period. Gross margin in the
first nine months of fiscal 2021 was affected by $0.8 million of inventory
rationalization costs associated with the restructuring of certain manufacturing
facilities during the period.
24
Roller Bearings Segment
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 22.4 $ 31.8 $ (9.4 ) (29.6 )%
Gross margin $ 7.6 $ 14.0 $ (6.4 ) (45.7 )%
Gross margin % 34.0 % 44.1 %
SG&A $ 1.1 $ 1.6 $ (0.5 ) (31.1 )%
% of segment net sales 5.0 % 5.1 %
Net sales decreased $9.4 million , or 29.6%, for the three months ended December
26, 2020 compared to the same period last year. Our aerospace markets decreased
41.6% while our industrial markets decreased by 15.3%. The decrease in aerospace
was driven by the commercial and defense OEM and aftermarket. The decrease in
industrial net sales was primarily due to mining and energy market activity.
Gross margin for the three months ended December 26, 2020 was 34.0% of net sales
compared to 44.1% for the comparable period in fiscal 2020. This decrease in
gross margin as a percentage of net sales was primarily due to decreased sales
volumes and product mix.
Nine Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 66.9 $ 101.3 $ (34.4 ) (34.0 )%
Gross margin $ 22.3 $ 42.0 $ (19.7 ) (46.9 )%
Gross margin % 33.3 % 41.4 %
SG&A $ 3.5 $ 4.9 $ (1.4 ) (27.9 )%
% of segment net sales 5.3 % 4.8 %
Net sales decreased $34.4 million , or 34.0%, for the nine months ended December
26, 2020 compared to the same period last year. Our industrial markets decreased
30.1% while our aerospace markets decreased by 37.3%. The decrease in industrial
sales was primarily due to mining, energy and general industrial market activity
while the decrease in aerospace was driven by the commercial and defense OEM
markets and commercial aftermarket.
Gross margin for the nine months ended December 26, 2020 was 33.3% of net sales
compared to 41.4% for the comparable period in fiscal 2020. This decrease in
gross margin as a percentage of net sales was driven by a reduction in sales
volume and product mix. Further, the first nine months of fiscal 2021 were
impacted by $2.0 million in inventory rationalization costs associated with the
consolidation of certain manufacturing facilities, as well as approximately $0.3
million of capacity inefficiencies driven by the impact of the COVID-19
pandemic.
25
Ball Bearings Segment
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 20.7 $ 18.5 $ 2.2 11.9 %
Gross margin $ 9.2 $ 8.2 $ 1.0 12.2 %
Gross margin % 44.4 % 44.3 %
SG&A $ 1.3 $ 1.6 $ (0.3 ) (19.1 )%
% of segment net sales 6.3 % 8.6 %
Net sales increased by $2.2 million for the third quarter of fiscal 2021
compared to the same period last year. Our aerospace markets increased 14.1%
while our industrial sales increased 10.8%. The increase in aerospace net sales
was primarily driven by the defense and space OEM market. The increase in
industrial was primarily due to the semiconductor and general industrial
markets.
Gross margin as a percentage of net sales was 44.4% for the third quarter of fiscal 2021 compared to 44.3% for the same period last year.
Nine Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 60.6 $ 53.6 $ 7.0 13.1 %
Gross margin $ 26.2 $ 23.5 $ 2.7 11.7 %
Gross margin % 43.3 % 43.8 %
SG&A $ 3.9 $ 4.8 $ (0.9 ) (18.3 )%
% of segment net sales 6.5 % 9.0 %
Net sales increased $7.0 million , or 13.1% for the nine months ended December
26, 2020 compared to the same period last year. Our aerospace market sales
increased 28.2% while sales to our industrial markets increased 6.3%. The
increase in industrial was primarily due to the semiconductor market. The
increase in aerospace net sales was primarily driven by the defense and space
markets.
Gross margin as a percentage of net sales decreased to 43.3% for the nine months
ended December 26, 2020 compared to 43.8% for the same period last year. The
decrease was primarily due to product mix during the period.
26
Engineered Products Segment
Three Months Ended
December 26, December 28, $ %
2020 2019 Change Change
Total net sales $ 33.5 $ 39.8 $ (6.3 ) (16.0 )%
Gross margin $ 10.9 $ 13.5 $ (2.6 ) (18.8 )%
Gross margin % 32.7 % 33.8 %
SG&A $ 3.8 $ 4.4 $ (0.6 ) (14.5 )%
% of segment net sales 11.3 % 11.1 %
Net sales decreased$6.3 million , or 16.0%, for the third quarter of fiscal 2021 compared to the same period last year. Our aerospace markets decreased 36.3% while our industrial markets increased 18.0%. The decrease in aerospace net sales was driven by the commercial and defense OEM and aftermarket. The increase in our industrial net sales was driven by the marine and general industrial markets. Gross margin as a percentage of net sales was 32.7% for the third quarter of fiscal 2021 compared to 33.8% for the same period last year. This decrease was primarily attributable to product mix and decreased sales volume compared to the same period in the prior year. Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change Total net sales$ 101.9 $ 122.4 $ (20.5 ) (16.7 )% Gross margin$ 33.5 $ 42.2 $ (8.7 ) (20.8 )% Gross margin % 32.8 % 34.5 % SG&A$ 11.4 $ 13.1 $ (1.7 ) (13.1 )% % of segment net sales 11.2 % 10.7 % Net sales decreased$20.5 million , or 16.7%, for the nine months endedDecember 26, 2020 compared to the same period last year. Our aerospace sales decreased 27.5% while industrial sales decreased 0.4%. Excluding$2.6 million of sales associated with the acquisition of Swiss Tool in fiscal 2020, overall sales decreased 18.8%. The decrease in aerospace sales was primarily driven by the commercial OEM market and commercial aftermarket. The decrease in industrial sales was driven by the general industrial markets offset by increased sales in the marine markets. Gross margin as a percentage of net sales decreased to 32.8% for the nine months endedDecember 26, 2020 compared to 34.5% for the same period last year. This decrease was primarily due to lower sales volume and product mix. During the first nine months of fiscal 2021, gross margin was also impacted by approximately$0.5 million of capacity inefficiencies driven by the impact of the COVID-19 pandemic. 27 Corporate Three Months Ended December 26, December 28, $ % 2020 2019 Change Change SG&A $ 14.1 $ 16.4$ (2.3 ) (13.7 )% % of total net sales 9.7 % 9.2 % Corporate SG&A decreased$2.3 million , or 13.7%, for the third quarter of fiscal 2021 compared to the same period last year. This was primarily due to a decrease of$2.0 million in personnel costs,$0.1 million in professional fees and$0.2 million of other items. Nine Months Ended December 26, December 28, $ % 2020 2019 Change Change SG&A $ 43.7 $ 49.0$ (5.3 ) (10.7 )% % of total net sales 9.7 % 9.0 % Corporate SG&A decreased$5.3 million for the nine months endedDecember 26, 2020 compared to the same period last year due to a decrease of$6.7 million in personnel costs and$0.3 million of other items, partially offset by$0.8 million of additional share-based compensation expenses and$0.9 million of additional professional costs.
Liquidity and Capital Resources
Our business is capital-intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth, in part, through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors. We believe that operating cash flows and available credit under the Revolver and Foreign Revolver (see below) will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. Our ability to meet future working capital, capital expenditures and debt service requirements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, particularly the COVID-19 pandemic, interest rates, cyclical changes in our end markets, and prices for steel and our ability to pass through price increases on a timely basis, many of which are outside of our control. In addition, future acquisitions could have a significant impact on our liquidity position and
our need for additional funds. From time to time, we evaluate our existing facilities and operations and their strategic importance to us. If we determine that a given facility or operation does not have future strategic importance, we may sell, partially or completely, relocate production lines, consolidate or otherwise dispose of those operations. Although we believe our operations would not be materially impaired by such dispositions, relocations or consolidations, we could incur significant cash or non-cash charges in connection with them. Liquidity As ofDecember 26, 2020 , we had cash, cash equivalents and highly liquid marketable securities of$201.7 million , of which, approximately$16.0 million was cash held by our foreign operations. We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions for and by our foreign subsidiaries. 28 Domestic Credit Facility
The Company's credit agreement withWells Fargo Bank, National Association , as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer, and the other lenders party thereto (the "Credit Agreement") provides the Company with a$250.0 million revolving credit facility (the "Revolver"), which expires onJanuary 31, 2024 . Debt issuance costs associated with the Credit Agreement totaled$0.9 million and will be amortized throughJanuary 31, 2024 along with the unamortized debt issuance costs remaining from the Company's prior credit agreement. As ofDecember 26, 2020 ,$1.2 million in unamortized debt issuance costs remain. Amounts outstanding under the Revolver generally bear interest at (a) a base rate determined by reference to the higher of (1) Wells Fargo's prime lending rate, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one-month LIBOR rate plus 1%, or (b) LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company's consolidated ratio of total net debt to consolidated EBITDA at each measurement date. Currently, the Company's margin is 0.00% for base rate loans and 0.75% for LIBOR loans.
The Credit Agreement requires the Company to comply with various covenants including, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 3.50 to 1. The Credit Agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the Credit Agreement. As ofDecember 26, 2020 , the Company was in compliance with all such covenants.
The Company's domestic subsidiaries have guaranteed the Company's obligations under the Credit Agreement, and the Company's obligations and the domestic subsidiaries' guarantee are secured by a pledge of substantially all of the domestic assets of the Company and its domestic subsidiaries.
Approximately
Foreign Term Loan and Revolving Credit Facility
OnAugust 15, 2019 , one of our foreign subsidiaries,Schaublin SA ("Schaublin"), entered into two separate credit agreements (the "Foreign Credit Agreements") withCredit Suisse (Switzerland) Ltd. to finance the acquisition of Swiss Tool and provide future working capital. The Foreign Credit Agreements provided Schaublin with aCHF 15.0 million (approximately$15.4 million ) term loan (the "Foreign Term Loan"), which expires onJuly 31, 2024 and aCHF 15.0 million (approximately$15.4 million ) revolving credit facility (the "Foreign Revolver"), which continues in effect until terminated by either Schaublin or Credit Suisse. Debt issuance costs associated with the Foreign Credit Agreements totaledCHF 0.3 million (approximately$0.3 million ) and will be amortized throughout the life of the Foreign Credit Agreements. As ofDecember 26, 2020 , approximately$0.1 million in unamortized debt issuance costs remain. Amounts outstanding under the Foreign Term Loan and the Foreign Revolver generally bear interest at LIBOR plus a specified margin. The applicable margin is based on Schaublin's ratio of total net debt to consolidated EBITDA at each measurement date. Currently, Schaublin's margin is 1.00%. The Foreign Credit Agreements require Schaublin to comply with various covenants, which are tested annually onMarch 31 . These covenants include, among other things, a financial covenant to maintain a ratio of consolidated net debt to adjusted EBITDA not greater than 3.00 to 1 as ofMarch 31, 2020 and not greater than 2.50 to 1 as ofMarch 31, 2021 and thereafter. Schaublin is also required to maintain an economic equity ofCHF 20.0 million at all times. The Foreign Credit Agreements allow Schaublin to, among other things, incur other debt or liens and acquire or dispose of assets provided that Schaublin complies with certain requirements and limitations of the Foreign Credit Agreements. As ofMarch 31, 2020 , Schaublin was in compliance with all such covenants. 29 Schaublin's parent company,Schaublin Holding , has guaranteed Schaublin's obligations under the Foreign Credit Agreements.Schaublin Holding's guaranty and the Foreign Credit Agreements are secured by a pledge of the capital stock of Schaublin. In addition, the Foreign Term Loan is secured with pledges of the capital stock of the top company and the three operating companies in the Swiss Tool group of companies. As ofDecember 26, 2020 , there was approximately$2.2 million outstanding under the Foreign Revolver and approximately$13.5 million outstanding under the Foreign Term Loan. These borrowings have been classified as Level 2 of the valuation hierarchy. Schaublin has the ability to borrow up to an additional$14.6 million under the Foreign Revolver as ofDecember 26, 2020 . Schaublin's required future annual principal payments are approximately$5.6 million for the next 12 months and approximately$3.4 million for each of the following three years. Other Notes Payable In 2012 Schaublin purchased the land and building that it occupies for approximately$14.9 million . Schaublin obtained a 20-year fixed-rate mortgage of approximately$9.9 million at an interest rate of 2.9%. The balance of the purchase price of approximately$5.1 million was paid from cash on hand. The balance on this mortgage as ofDecember 26, 2020 was approximately$6.1 million and has been classified as Level 2 of the valuation hierarchy.
The Company's required future annual principal payments are approximately
Cash Flows
Nine-month Period Ended
The following table summarizes our cash flow activities:
FY21 FY20 $ Change
Net cash provided by (used in):
Operating activities $ 110.6 $ 111.2 $ (0.6 )
Investing activities (83.6 ) (61.1 ) (22.5 )
Financing activities (4.6 ) (20.7 ) 16.1
Effect of exchange rate changes on cash 0.5 1.0 (0.5 )
Increase in cash and cash equivalents
During the first nine months of fiscal 2021, we generated cash of$110.6 million from operating activities compared to$111.2 million of cash generated during the same period of fiscal 2020. The decrease of$0.6 million for fiscal 2021 was mainly a result of a decrease in net income of$27.6 million offset by the favorable impact of a net change in operating assets and liabilities of$19.1 million and a favorable change in non-cash charges of$7.9 million . The favorable change in operating assets and liabilities is detailed in the table below. The increase in non-cash charges resulted from$0.6 million of amortization of intangible assets,$2.3 million in deferred taxes,$0.9 million of depreciation,$0.9 million of share-based compensation charges, and$3.2 million of other non-cash charges related to restructuring efforts. Excluded from the consolidated statements of cash flows are right of use assets obtained in exchange for new operating lease liabilities of$7.7 million during the
fiscal year.
30
The following chart summarizes the favorable change in operating assets and
liabilities of
FY21 FY20
Cash provided by (used in):
Accounts receivable $ 13.0 $ 13.4
Inventory 16.0 11.2
Prepaid expenses and other current assets 1.8 1.1
Other non-current assets (5.3 ) (4.1 )
Accounts payable (11.4 ) 0.4
Accrued expenses and other current liabilities (0.5 ) (1.0 ) Other non-current liabilities
5.5 5.3
Total change in operating assets and liabilities:
During the first nine months of fiscal 2021, we used$83.6 million for investing activities as compared to$61.1 million used during the first nine months of fiscal 2020. This increase in cash used was attributable to the purchase of$75.1 million of highly liquid marketable securities during the current period, offset by an$18.8 million decrease in capital expenditures and the use of$33.8 million in the prior year for the acquisition of Swiss Tool. During the first nine months of fiscal 2021, we used$4.5 million for financing activities compared to$20.7 million for the first nine months of fiscal 2020. This decrease in cash used was primarily attributable to$41.3 million less payments made on outstanding debt,$0.3 million less financing fees paid in connection with credit facilities, and$5.3 million less treasury stock purchases, partially offset by proceeds received from borrowings of$24.8 million for the acquisition of Swiss Tool in the prior year and$6.0 million less exercises of share-based awards. Capital Expenditures
Our capital expenditures were$2.8 million and$8.8 million for the three- and nine-month periods endedDecember 26, 2020 , respectively. We expect to make additional capital expenditures of$3.0 to$4.0 million during the remainder of fiscal 2021 in connection with our existing business. We expect to fund these capital expenditures principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions. Other Matters
Critical Accounting Policies and Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements in our fiscal 2020 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the first nine months of fiscal 2021 other than those described in Note 2 to the unaudited interim consolidated financial statements contained in this quarterly report.
Off-Balance Sheet Arrangements
As ofDecember 26, 2020 , we had no significant off-balance sheet arrangements other than$3.7 million of outstanding standby letters of credit, all of which were under the Revolver. 31
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