UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27,
2003, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____TO______
________________________
Commission File Number: 333-33085
ROLLER BEARING COMPANY OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3426227
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
60 Round Hill Road
Fairfield, CT 06824
(Address of principal executive offices, including zip code)
(203) 255-1511 (Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 10, 2003
---------------------------- ---------------------------------
Common stock, $01. par value 103
Roller Bearing Company of America, Inc.
INDEX
Page
Part I Financial Information
Item 1. Consolidated Balance Sheets -
At September 27, 2003 (unaudited) and March 29, 2003 3
Consolidated Statements of Operations - Three months and six
months ended September 27, 2003 (unaudited) and
September 28, 2002 (unaudited) 4
Consolidated Statements of Cash Flows - Six months ended
September 27, 2003 (unaudited)
and September 28, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure of Market Risk 24
Item 4. Controls and Procedures 25
Part II Other Information 26
Signatures 27
Exhibits 28
2
Part I
Item 1. Financial Information
Roller Bearing Company of America, Inc.
Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except share data)
September 27, March 29,
2003 2003
(Unaudited)
-------------------- ---------------
ASSETS
Current assets:
Cash $ 5,286 $ 3,552
Accounts receivable, net of allowance for doubtful accounts
of $590 at September 27, 2003 and $744 at March 29, 2003 34,775 39,691
Inventories 90,116 86,188
Prepaid expenses and other current assets 6,893 5,434
-------------------- ---------------
Total current assets 137,070 134,865
-------------------- ---------------
Property, plant and equipment, net accumulated depreciation of
$67,707 at September 27, 2003 and $62,962 at March 29, 2003 54,671 57,772
Restricted marketable securities 12 113
Goodwill 25,150 25,150
Intangible assets, net of accumulated amortization of $277 at September 27, 2003
and $105 at March 29, 2003 1,918 2,090
Deferred financing costs, net of accumulated amortization of $6,515 at
September 27, 2003 and $5,900 at March 29, 2003 4,951 5,515
Other assets 858 1,770
-------------------- ---------------
Total assets $ 224,630 $ 227,275
==================== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 13,344 $ 13,927
Accrued expenses and other current liabilities 10,758 12,817
Current portion of long-term debt 17,795 15,946
Obligations under capital leases, current portion 72 149
-------------------- ---------------
Total current liabilities 41,969 42,839
-------------------- ---------------
Long-term debt 155,413 157,324
Capital lease obligations, less current portion 60 75
Other non-current liabilities 24,777 23,630
-------------------- ---------------
Total liabilities 222,219 223,868
-------------------- ---------------
Commitments and contingencies
Stockholder's equity:
Common stock - $.01 par value; authorized: 1,000 shares;
issued and outstanding: 103 shares at September 27, 2003
and at March 29, 2003 - -
Additional paid-in capital 12,736 12,736
Accumulated other comprehensive income (loss) (5,944) (5,829)
Retained earnings (deficit) (4,381) (3,500)
-------------------- ---------------
Total stockholder's equity 2,411 3,407
-------------------- ---------------
Total liabilities and stockholder's equity $ 224,630 $ 227,275
==================== ===============
See notes to consolidated financial statements
3
Roller Bearing Company of America, Inc.
Consolidated Statements of Operations (Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
------------------ ----------------
September 27, September 28, September 27, September 28,
---------------------------------------- ----------------------------------------
2003 2002 2003 2002
---------------------------------------- ----------------------------------------
Net sales $ 42,449 $ 41,249 $ 82,186 $ 79,770
Cost of sales 30,741 29,837 59,512 56,902
---------------------------------------- ----------------------------------------
Gross margin 11,708 11,412 22,674 22,868
Operating expenses:
Selling, general and administrative 6,447 6,590 12,700 12,859
Other expense, net of other income 145 19 279 38
---------------------------------------- ----------------------------------------
6,592 6,609 12,979 12,897
Operating income 5,116 4,803 9,695 9,971
Interest expense, net 3,907 3,382 7,479 7,148
Minority interest 4 7 8 11
---------------------------------------- ----------------------------------------
Income before taxes 1,205 1,414 2,208 2,812
Provision for income taxes 168 580 579 1,153
---------------------------------------- ----------------------------------------
Net income $ 1,037 $ 834 $ 1,629 $ 1,659
======================================== ========================================
See notes to consolidated financial statements
4
Roller Bearing Company of America, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
For the Six Months Ended
September 27, September 28,
2003 2002
---------------------------------------
Cash flows from operating activities:
Net income $ 1,629 $ 1,659
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,800 4,435
Minority interest 8 11
Amortization of intangibles 172 -
Amortization of deferred financing costs 615 574
Changes in working capital:
(Increase) decrease in accounts receivable 4,916 4,154
(Increase) decrease in inventories (3,928) (5,747)
(Increase) decrease in prepaid expenses & other current assets (1,460) (618)
(Increase) decrease in other non-current assets 912 (24)
Increase (decrease) in accounts payable & accrued expenses (2,641) (1,050)
Increase (decrease) in other non-current liabilities 1,139 135
----------------- -----------------
Net cash provided by operating activities 6,162 3,529
Cash flows from investing activities:
Purchase of property, plant & equipment, net (1,700) (4,856)
Sale of restricted marketable securities 101 679
----------------- -----------------
Net cash used in investing activities (1,599) (4,177)
Cash flows from financing activities:
Net (decrease) increase in revolving credit facility 3,000 (28,500)
Proceeds from long term debt - 40,000
Dividends paid to parent (2,510) (5,700)
Financing fees paid in connection with new credit facility (50) (2,800)
Payments of bank term loan (3,062) (2,315)
Principal payments on capital lease obligations (92) (255)
----------------- -----------------
Net cash (used in) provided by financing activities (2,714) 430
Effect of exchange rate changes (115) 521
----------------- -----------------
Cash and Cash Equivalents:
Increase during the period 1,734 303
Cash, at beginning of period 3,552 7,178
----------------- -----------------
Cash, at end of period $ 5,286 $ 7,481
================= =================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 7,189 $ 6,684
================= =================
Income taxes $ 193 $ 159
================= =================
See notes to consolidated financial statements
5
Roller Bearing Company of America, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(currencies in thousands, except per share data)
The consolidated financial statements included herein have been prepared by
Roller Bearing Company of America, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. The
fiscal year end balance sheet data have been derived from the Company's audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles in the United States. The interim financial
statements furnished with this report have been prepared on a consistent basis
with the Company's audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended March 29,
2003 (the "Form 10-K"). These statements reflect all adjustments, consisting
only of items of a normal recurring nature, which are, in the opinion of
management, necessary for the fair presentation of the consolidated financial
condition and consolidated results of operations for the interim periods
presented. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto included in the Form
10-K.
Roller Bearing Company of America, Inc., ("RBC" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Roller Bearing Holding Company,
Inc. ("Holdings"). On March 31, 1992, Holdings acquired all of the outstanding
shares of RBC pursuant to an Agreement and Plan of Reorganization. The
acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price ($20,100) over the fair market value of the
tangible net assets acquired by Holdings has been pushed down and recorded as
goodwill by the Company.
The Company operates in one business segment in which it manufactures roller
bearing components and assembled parts and designs and manufactures
high-precision roller and ball bearings. The Company sells to a wide variety of
original equipment manufacturers ("OEMs") and distributors who are primarily
domestic but widely dispersed geographically.
On June 23, 1997, pursuant to a Redemption and Warrant Purchase Agreement dated
May 20, 1997, Holdings effected a recapitalization of its outstanding capital
stock (including the financing and other transactions consummated by Holdings,
the Company and its subsidiaries in connection therewith, the
"Recapitalization"). In connection with the Recapitalization, the Company issued
the Senior Subordinated Notes and incurred the Term Loan described in Note 3.
The proceeds therefrom were utilized to pay a dividend to Holdings to finance
the redemption of a substantial portion of its common stock, all of its
preferred stock and certain outstanding warrants to purchase common stock, and
to pay certain Recapitalization fees and expenses. This transaction was further
financed from the proceeds of certain debt issued directly by Holdings. In
addition, a new group of investors (who were not previously stockholders of
Holdings) purchased shares of common stock and warrants to purchase common stock
of Holdings, directly from certain stockholders of Holdings. The redemption of
shares and warrants was treated by Holdings as a recapitalization transaction.
6
During fiscal 2001, Whitney Acquisition II, Corp. ("Whitney"), an affiliate of
the private equity firm Whitney & Co., purchased 23,682.65 shares of Holdings
Class A common Stock (the "Whitney Shares") at a price of $3,018.33 per share.
The Whitney Shares were acquired from various stockholders of Holdings, but none
were purchased from Holdings itself. As Whitney wished to acquire only issued
and outstanding shares, many stockholders exercised options and warrants and
sold the underlying shares to Whitney upon exercise. The Whitney Shares
represented, in the aggregate, 65.25% of the outstanding capital stock of
Holdings on a fully diluted basis on March 29, 2003.
During July 2002, Whitney made an additional investment in Holdings which is
further discussed in Note 5.
The results of operations for the three month and six month periods ended
September 27, 2003 are not necessarily indicative of the operating results for
the full year.
The consolidated financial statements include the accounts of RBC and its wholly
owned subsidiaries, Industrial Tectonics Bearings Corporation ("ITB"), RBC
Linear Precision Products, Inc. ("LPP"), RBC Nice Bearings, Inc. ("Nice"),
Bremen Bearings, Inc. ("Bremen"), Miller Bearing Company Inc. ("Miller"), Tyson
Bearing Company, Inc. ("Tyson"), Schaublin Holding S.A. ("Schaublin"), RBC de
Mexico ("Mexico"), and RBC Oklahoma, Inc. ("RBC Oklahoma") as well as its
Transport Dynamics ("TDC"), Heim ("Heim") and Engineered Components ("ECD")
divisions. All material intercompany balances and transactions have been
eliminated in consolidation.
1. Acquisitions by Wholly Owned Subsidiaries
In a transaction effective in December 2002, the Company, through its indirect
wholly-owned subsidiary, Schaublin, SA, purchased all of the outstanding capital
stock of myonic SAS ("Myonic"). The capital stock of Myonic was purchased from
myonic AG, a Swiss corporation. Myonic is engaged in the sale of bearings
manufactured by Schaublin S.A. and third parties. The total cash consideration
paid for the purchased assets by the Company was $2,822, of which $1,722 was
allocated to intangibles. The corporate name of Myonic has since been changed to
RBC France SAS.
2. Inventory
Inventories are stated at the lower of cost or market, using the first-in,
first-out method, and are summarized as follows:
September 27, 2003 March 29, 2003
------------------ --------------
Raw material $ 3,129 $ 2,707
Work in process 18,765 17,745
Finished goods 68,222 65,736
------- --------
Total inventories $90,116 $86,188
======= ========
The Company accounts for inventory under a full absorption method and
capitalizes variances above its product cost standards over an estimated
production period to arrive at actual cost. Actual costs are evaluated and do
not exceed the lower of cost or market. Inventoried costs on long-term contracts
include certain preproduction costs, consisting primarily of tooling and design
costs and production costs, including applicable overhead. The costs attributed
to units
7
delivered under long-term commercial contracts are based on the estimated
average cost of all units expected to be produced.
3. Debt
In connection with the financing of the Recapitalization disclosed above, the
Company issued $110,000 aggregate principal amount of 9 5/8% Senior Subordinated
Notes due 2007 (the "Notes"). The Notes pay interest semi-annually and mature on
June 15, 2007 but may be redeemed at the Company's option earlier under certain
conditions specified in the indenture (the "Indenture") pursuant to which the
Notes were issued. The Notes are unsecured and subordinate to all existing and
future Senior Indebtedness (as defined in the Indenture) of the Company. The
Notes are fully, unconditionally and irrevocably guaranteed jointly and
severally, on a senior subordinated basis by each of the domestic wholly owned
subsidiaries of the Company.
The Company and its domestic subsidiaries entered into a $94 million senior
Secured Credit Facility, dated May 30, 2002, amended June 19, 2003 and expiring
May 30, 2007, with General Electric Capital Corporation, as agent and lender,
Congress Financial Corporation (Western), as lender, GECC Capital Markets Group,
as lead arranger, and other lenders signatory thereto from time to time,
consisting of a $40 million term loan (the "Term Loan") and a $54 million
Revolving Credit Facility. In connection with this credit facility the Company
and its domestic subsidiaries granted liens and mortgages on substantially all
of their existing and after-acquired personal and real property. In addition,
the Company pledged all of its capital stock in its domestic subsidiaries and a
portion of the capital stock in its directly owned foreign subsidiaries. The
Company incurred approximately $3,226 of fees primarily related to costs
associated with entering into the Senior Credit Facility. These costs have been
capitalized as deferred financing costs and are being amortized over the term of
the Term Loan.
The proceeds of the Term Loan were used to pay off the Company's Senior Credit
Facility, dated June 23, 1997, by and between the Company, Credit Suisse First
Boston, as administrative agent and the lenders thereto, to pay fees and
expenses with respect to the new credit facility and for other corporate
purposes. The revolving credit facility is available for issuances of letters of
credit and for loans in connection with acquisitions, working capital needs or
other general corporate purposes.
On June 19, 2003, the Company further amended and restated its senior credit
facility in order, among other things, to establish a structure under which the
Company now may include certain of its foreign assets within its "borrowing
base" which sets forth the amounts that the Company can borrow under the
revolving credit facility. In addition, this will simplify the process under
which the Company can fund its foreign operations. As part of this amendment,
the Company has created inter-company loan and asset pledge arrangements,
including pledges of certain foreign assets, that are all ultimately assigned to
the lenders as further collateral to secure the borrowings under its new senior
credit facility.
In connection with the purchase of Schaublin, the Company entered into a bank
credit facility (the "Swiss Credit Facility") with Credit Suisse providing for
10,000 Swiss Francs, or approximately $5,734 of term loans (the "Swiss Term
Loans") and up to 1,000 Swiss Francs, or approximately $573, of revolving credit
loans and letters of credit (the "Swiss Revolving Credit Facility"). The balance
of this debt was repaid in full during fiscal 2003.
Consolidated financial information regarding the Company, guarantor subsidiaries
and non-guarantor subsidiaries as of September 27, 2003 and March 29, 2003 is
presented below for purposes of complying with the reporting requirements of the
guarantor subsidiaries.
8
Consolidated Balance Sheets NON CORPORATE
As of September 27, 2003: (unaudited) SUBSIDIARY GUARANTOR AND TOTAL
GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Assets
Cash $ (259) $ 1,464 $ 4,081 $ 5,286
Accounts receivable, net 3,090 5,473 26,212 34,775
Raw material 817 589 1,723 3,129
Work in process 9,294 3,387 6,084 18,765
Finished goods 27,217 9,653 31,352 68,222
--------------------------------------------------------------------------
Inventories 37,328 13,629 39,159 90,116
Prepaid expense other current assets 835 180 5,878 6,893
--------------------------------------------------------------------------
Total current assets 40,994 20,746 75,330 137,070
Property, plant and equipment, net 30,154 3,604 20,913 54,671
Restricted marketable securities 12 - - 12
Intangible Assets - 1,445 473 1,918
Goodwill 8,054 - 17,096 25,150
Deferred financing costs, net - - 4,951 4,951
Other assets - 168 690 858
--------------------------------------------------------------------------
Total assets $ 79,214 $ 25,963 $ 119,453 $ 224,630
==========================================================================
Liabilities and Stockholder's Equity
Accounts payable $ 4,745 $ 2,855 $ 5,744 $ 13,344
Intercompany payable (receivables) 62,490 3,308 (65,798) -
Intercompany loans - 9,327 (9,327) -
Current portion of long-term debt 230 368 17,197 17,795
Current portion of obligations under capital leases 11 - 61 72
Accrued expenses and other current liabilities 4,086 1,689 4,983 10,758
--------------------------------------------------------------------------
Total current liabilities 71,562 17,547 (47,140) 41,969
Long term debt 1,342 - 154,071 155,413
Capital lease obligations, less current portion - - 60 60
Other noncurrent liabilities 1,289 493 22,995 24,777
--------------------------------------------------------------------------
Total liabilities 74,193 18,040 129,986 222,219
Stockholder's equity (deficit):
Common stock - 63 (63) -
Additional paid in capital - - 12,736 12,736
Accumulated other comprehensive income (loss) - (1,482) (4,462) (5,944)
Total retained earnings 5,021 9,342 (18,744) (4,381)
--------------------------------------------------------------------------
Total stockholder's equity 5,021 7,923 (10,533) 2,411
--------------------------------------------------------------------------
Total liabilities & stockholder's equity $ 79,214 $ 25,963 $ 119,453 $ 224,630
==========================================================================
9
NON CORPORATE
As of March 29, 2003 SUBSIDIARY GUARANTOR AND TOTAL
GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Assets
Cash $ (310) $ 1,078 $ 2,784 $ 3,552
Accounts receivable, net 3,826 5,529 30,336 39,691
Raw material 742 586 1,379 2,707
Work in process 9,659 3,456 4,630 17,745
Finished goods 25,176 10,004 30,556 65,736
--------------------------------------------------------------------------
Inventories 35,577 14,046 36,565 86,188
Prepaid expense other current assets 866 128 4,440 5,434
--------------------------------------------------------------------------
Total current assets 39,959 20,781 74,125 134,865
Property, plant and equipment, net 32,081 3,983 21,708 57,772
Restricted marketable securities 38 - 75 113
Goodwill 8,054 - 17,096 25,150
Intangible assets - 1,617 473 2,090
Deferred financing costs, net - - 5,515 5,515
Other assets - 1,093 677 1,770
--------------------------------------------------------------------------
Total assets $ 80,132 $ 27,474 $ 119,669 $ 227,275
==========================================================================
Liabilities and Stockholder's Equity
Accounts payable $ 5,862 $ 2,901 $ 5,164 $ 13,927
Intercompany payable (receivable) 53,115 12,898 (66,013) -
Current portion of long-term debt 221 - 15,725 15,946
Obligations under capital leases 51 - 98 149
Accrued expenses and other current liabilities 5,829 3,772 3,216 12,817
--------------------------------------------------------------------------
Total current liabilities 65,078 19,571 (41,810) 42,839
Long term debt 1,459 365 155,500 157,324
Capital lease obligations, less current portion - - 75 75
Other noncurrent liabilities 1,384 546 21,700 23,630
--------------------------------------------------------------------------
Total liabilities 67,921 20,482 135,465 223,868
Stockholder's equity (deficit):
Common stock - 63 (63) -
Additional paid in capital - - 12,736 12,736
Accumulated other comprehensive income (loss) - (1,367) (4,462) (5,829)
Total retained earnings 12,211 8,296 (24,007) (3,500)
--------------------------------------------------------------------------
Total stockholder's equity 12,211 6,992 (15,796) 3,407
--------------------------------------------------------------------------
Total liabilities & stockholder's equity $ 80,132 $ 27,474 $ 119,669 $ 227,275
==========================================================================
10
Consolidating Statements of Operations NON CORPORATE
SUBSIDIARY GUARANTOR AND TOTAL
Three months ended September 27, 2003 (Unaudited) GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Net sales $ 19,282 $ 5,630 $ 17,537 $ 42,449
Cost of sales 15,287 4,005 11,449 30,741
--------------------------------------------------------------------
Gross margin 3,995 1,625 6,088 11,708
Selling, general and administrative 1,347 1,099 4,001 6,447
Other expense, net of other income 29 - 116 145
--------------------------------------------------------------------
Operating income 2,619 526 1,971 5,116
Interest expense, net 9 108 3,790 3,907
Minority interest - 4 - 4
--------------------------------------------------------------------
Income (loss) before taxes 2,610 414 (1,819) 1,205
Provision for (benefit from) income taxes 1,069 (166) (735) 168
--------------------------------------------------------------------
Net income (loss) $ 1,541 $ 580 $ (1,084) $ 1,037
====================================================================
Consolidating Statements of Operations NON CORPORATE
SUBSIDIARY GUARANTOR AND TOTAL
Three months ended September 28, 2002 (Unaudited) GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Net sales $ 20,671 $ 4,746 $ 15,832 $ 41,249
Cost of sales 16,750 3,813 9,274 29,837
--------------------------------------------------------------------
Gross margin 3,921 933 6,558 11,412
Selling, general and administrative 1,392 862 4,336 6,590
Other expense, net of other income 17 15 (13) 19
--------------------------------------------------------------------
Operating income 2,512 56 2,235 4,803
Interest expense, net 13 141 3,228 3,382
Minority interest - 7 - 7
--------------------------------------------------------------------
Income (loss) before taxes 2,499 (92) (993) 1,414
Provision for income taxes - - 580 580
--------------------------------------------------------------------
Net income (loss) $ 2,499 $ (92) $ (1,573) $ 834
====================================================================
11
Consolidating Statements of Operations NON
SUBSIDIARY GUARANTOR CORPORATE TOTAL
Six months ended September 27, 2003 (Unaudited) GUARANTORS SUBSIDIARIES AND DIVISIONS COMPANY
Net sales $ 35,027 $ 12,172 $ 34,987 $ 82,186
Cost of sales 27,980 8,499 23,033 59,512
--------------------------------------------------------------------
Gross margin 7,047 3,673 11,954 22,674
Selling, general and administrative 2,648 2,255 7,797 12,700
Other expense, net of other income 29 - 250 279
--------------------------------------------------------------------
Operating income 4,370 1,418 3,907 9,695
Interest expense, net 21 201 7,257 7,479
Minority interest - 8 - 8
--------------------------------------------------------------------
Income (loss) before taxes 4,349 1,209 (3,350) 2,208
Provision for (benefit from) income taxes 1,783 169 (1,373) 579
--------------------------------------------------------------------
Net income (loss) $ 2,566 $ 1,040 $ (1,977) $ 1,629
====================================================================
Consolidating Statements of Operations NON
SUBSIDIARY GUARANTOR CORPORATE TOTAL
Six months ended September 28, 2002 (Unaudited) GUARANTORS SUBSIDIARIES AND DIVISIONS COMPANY
Net sales $ 38,218 $ 8,400 $ 33,152 $ 79,770
Cost of sales 30,133 6,277 20,492 56,902
--------------------------------------------------------------------
Gross margin 8,085 2,123 12,660 22,868
Selling, general and administrative 2,808 1,701 8,350 12,859
Other expense, net of other income 23 31 (16) 38
--------------------------------------------------------------------
Operating income 5,254 391 4,326 9,971
Interest expense, net 13 141 6,994 7,148
Minority interest - 11 - 11
--------------------------------------------------------------------
Income (loss) before taxes 5,241 239 (2,668) 2,812
Provision for income taxes - - 1,153 1,153
--------------------------------------------------------------------
Net income (loss) $ 5,241 $ 239 $ (3,821) $ 1,659
====================================================================
12
Consolidated Statements of Cash Flows
NON CORPORATE
SUBSIDIARY GUARANTOR AND TOTAL
Six Months Ended September 27, 2003 (Unaudited) GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Cash flows from operating activities:
Net income (loss) $ 2,566 $ 1,040 $ (1,977) $ 1,629
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 2,003 443 2,354 4,800
Minority interest - 8 - 8
Amortization of intangibles - 172 - 172
Amortization of deferred financing costs - - 615 615
Changes in working capital, net of acquisitions: -
(Increase) decrease in current assets (984) 421 91 (472)
(Increase) decrease in non-current assets - 925 (13) 912
Increase (decrease) in current liabilities (2,568) (2,423) 2,350 (2,641)
Increase (decrease) in non-current liabilities (95) (53) 1,287 1,139
--------------------------------------------------------------------------
Net cash provided by operating activities 922 533 4,707 6,162
Cash flows from investing activities:
Purchase of property, plant & equipment, net (749) (32) (919) (1,700)
Sale of restricted marketable securities 26 - 75 101
--------------------------------------------------------------------------
Net cash used in investing activities (723) (32) (844) (1,599)
Cash flows from financing activities:
Net increase in revolving credit facility - - 3,000 3,000
Dividend paid to parent - - (2,510) (2,510)
Deferred financing costs - - (50) (50)
Payments on bank term loan (108) - (2,954) (3,062)
Principal payments on capital lease obligations (40) - (52) (92)
--------------------------------------------------------------------------
Net cash used in financing activities (148) - (2,566) (2,714)
Cash and cash equivalents:
Effect of exchange rate changes - (115) - (115)
--------------------------------------------------------------------------
Increase during the period 51 386 1,297 1,734
Cash, at beginning of year (310) 1,078 2,784 3,552
--------------------------------------------------------------------------
Cash, at end of period $ (259) $ 1,464 $ 4,081 $ 5,286
==========================================================================
13
Consolidating Statements of Cash Flows
NON CORPORATE
SUBSIDIARY GUARANTOR AND TOTAL
Six Months Ended September 28, 2002 (Unaudited) GUARANTORS SUBSIDIARIES DIVISIONS COMPANY
Cash flows from operating activities:
Net income (loss) $ 5,241 $ 239 $ (3,821) $ 1,659
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 2,464 310 1,661 4,435
Minority interest - 11 - 11
Amortization of deferred financing costs - - 574 574
Changes in working capital, net of acquisitions:
(Increase) decrease in current assets (1,687) (1,180) 656 (2,211)
(Increase) decrease in non-current assets - - (24) (24)
Increase (decrease) in current liabilities (4,334) 753 2,531 (1,050)
Increase (decrease) in non-current liabilities - - 135 135
--------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,684 133 1,712 3,529
Cash flows from investing activities:
Purchase of property, plant & equipment, net (2,143) (471) (2,242) (4,856)
Sale of restricted marketable securities 679 - - 679
--------------------------------------------------------------------------
Net cash used in investing activities (1,464) (471) (2,242) (4,177)
Cash flows from financing activities:
Net increase (decrease)in revolving credit facility - - (28,500) (28,500)
Proceeds from long term debt - - 40,000 40,000
Dividend paid to parent - - (5,700) (5,700)
Financing fees paid in connection with the credit facility - - (2,800) (2,800)
Payments on bank term loan (99) (841) (1,375) (2,315)
Principal payments on capital lease obligations (73) (29) (153) (255)
--------------------------------------------------------------------------
Net cash provided by (used in) financing activities (172) (870) 1,472 430
Cash and cash equivalents:
Effect of exchange rate changes - 521 - 521
--------------------------------------------------------------------------
Increase (decrease) during the year 48 (687) 942 303
Cash, at beginning of year (240) 1,134 6,284 7,178
--------------------------------------------------------------------------
Cash, at end of period $ (192) $ 447 $ 7,226 $ 7,481
==========================================================================
Approximately $16,900 of the Revolving Credit Facility is being utilized to
provide letters of credit to secure the Company's obligations relating to
certain Industrial Development Revenue Bonds. As of September 27, 2003, the
Company had the ability to borrow up to an additional $4,758 under the Revolving
Credit Facility.
14
The balances payable under all borrowing facilities are as follows:
September 27, March 29,
2003 2003
------------------------------
Senior Subordinated Notes Payable $110,000 $110,000
- ---------------------------------
Credit Facility
- ---------------
Term Loan, payable in quarterly installments of $1,428, commencing September 30,
2002, with final payment of $12,857 due May 30, 2007; bears interest at variable
rates, payable monthly and upon
maturity for prime and LIBOR-based elections, respectively 34,285 37,143
Revolving Credit Facility borrowings outstanding 11,482 8,582
Other Loans 786 890
- ----------
Industrial Development Revenue Bonds
- ------------------------------------
Series 1994 A due in annual installments of $180 beginning September 1, 2006,
graduating to $815 on September 1, 2014 with final payment due on
September 1, 2017; bears interest at a variable rate, interest payable 7,700 7,700
monthly through December 2017
Series 1994 B bears interest at a variable rate, interest payable
monthly through December 2017 3,000 3,000
Series 1998 tax-exempt industrial development bonds; bearing interest
at variable rates, interest payable monthly through December 2021 1,155 1,155
Series 1999 tax-exempt industrial development bonds; bearing
interest at variable rates, interest payable monthly through April 2024 4,800 4,800
--------- --------
Total Debt 173,208 173,270
Less: Current Portion 17,795 15,946
--------- --------
Long-Term Debt $155,413 $157,324
========= ========
The current portion of long-term debt as of September 27, 2003 and March 29,
2003 includes $11,482 and $8,582, respectively, of borrowings under the
Revolving Credit Facility.
Long-term debt does not include Holdings' discount debentures. Holdings relies
on the Company for the capital necessary to make its payments under the discount
debentures. The balance outstanding on these debentures as of September 27, 2003
and March 29, 2003 was approximately $37.8 million. The discount debentures
accrue interest at the rate of 13% per annum, with semi-annual interest payments
of approximately $2.5 million, and fully mature on June 15, 2009. Holdings has
pledged the stock of the Company as security for the discount debentures.
15
4. Comprehensive income
The components of comprehensive income (loss) that relate to the Company are net
income, foreign currency translation adjustments and pension plan additional
minimum liability. Total comprehensive income is as follows:
Fiscal Quarter Ended Six Months Ended
-------------------- ----------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
---- ----- ----- -----
Net income $ 1,037 834 $ 1,629 $ 1,659
Foreign currency translation adjustments (70) (186) (115) (136)
------- ------- ------- -------
Total comprehensive income $ 967 $ 648 $ 1,514 $ 1,523
======= ======= ======= ========
5. Whitney Transaction
During July 2002, two investors in Holdings purchased an aggregate of 240,000
shares of its Class B Exchangeable Convertible Participating Preferred Stock in
exchange for gross proceeds of $24,000. In connection with the purchase,
Holdings paid a fee of $750 to one of the investors and amended the terms of its
existing management services agreement with an affiliate of the investors.
Following the closing of the sale, Holdings utilized the proceeds of the sale
and certain of the Company's cash on hand to repurchase approximately $30,400 in
principal amount at maturity of Holdings' Discount Debentures issued in
connection with the Recapitalization (Note 1). This repurchase satisfied
Holdings' obligation to make a scheduled redemption payment relating to such
debt in December 2002. Holdings recognized a pretax gain on the extinguishment
of this debt obligation of approximately $780, net of transaction expenses of
$406.
The holders of Holdings' Class B Preferred Stock are entitled to an 8% per annum
accumulating dividend and are further entitled to participate in any dividends
paid to the holders of shares of Holdings' Common Stock. The Class B Preferred
Stock is subject to conversion by Holdings or exchange by the holders thereof.
In either situation, each share of Class B Preferred would yield a number of
shares of Holdings' Class A Common Stock determined by reference to a formula
set forth in Holdings' Amended and Restated Certificate of Incorporation (which
includes anti-dilution protections), a number of shares of Holdings' Class C
Redeemable Preferred Stock also determined by reference to a formula set forth
in Holdings' Amended and Restated Certificate of Incorporation and one share of
Class D Preferred Stock. Any holders of Class C Preferred Stock would be
entitled to an 8% per annum accumulating dividend. The Class C Preferred Stock
is subject to redemption by Holdings at its option but is not subject to
mandatory redemption. The Class D Preferred Stock entitles the holders thereof,
upon liquidation, to a payment determined by reference to a formula set forth in
Holdings' Amended and Restated Certificate of Incorporation.
6. Stock Compensation
Management participates in Holdings' stock option compensation plan. The Company
accounts for these options and warrants using the intrinsic value method
pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," under which no compensation cost has been recognized since
all grants were issued at the fair market value of Holding's common stock at the
date of the grant. Had compensation cost for these plans been determined based
on the fair value at the grant dates consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income would have been reduced
to the following pro forma amounts:
16
Fiscal Quarter Ended Six Months Ended
-------------------- ----------------
Net Income September 27, 2003 September 28, 2002 September 27, 2003 September 28, 2002
As Reported $1,037 $ 834 $ 1,629 $ 1,659
Pro Forma $1,037 $ 750 $ 1,611 $ 1,490
The fair value for the Holdings warrants was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate used was 3.5% for fiscal 2003 and 5.7% for
fiscal 2001; dividend yields of 0%, volatility factors of expected market price
of Holdings common stock of .1% and a weighted-average expected life of the
warrants of three years. There were no issuances during fiscal 2002 that
qualified for measurement as compensatory options or warrants.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded warrants which have no vesting restrictions and are fully
transferable. In addition, warrant valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Holdings warrants have characteristics significantly different from those of
traded warrants, and because changes in the subjective input assumptions can
materially affect the fair value, estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its warrants.
7. Commitments and Contingencies
The Company enters into government contracts and subcontracts that are subject
to audit by the government. In the opinion of the Company's management, the
results of such audits are not expected to have a material impact on the
financial position and results of operations of the Company.
Certain types of property transactions in Connecticut and New Jersey may trigger
investigation and cleanup obligations under the Connecticut Transfer Act (the
"CTA") or the New Jersey Industrial Site Recovery Act (the "ISRA"),
respectively. In connection with the purchase of its Fairfield, Connecticut
facility in 1996, the Company was required by the CTA to submit an investigation
and remediation plan for known environmental contamination at that facility.
Although this known contamination had been the result of operations conducted by
the facility's prior owner, the Company agreed to assume responsibility for
completing cleanup efforts previously initiated by that owner. In 1996, the
Company submitted and obtained regulatory approval for its investigation and
remediation plan as required by the CTA. The results of this investigation
revealed the continued presence of certain low level soil and groundwater
contamination, the remediation of which had been commenced by the previous owner
of the facility. In March 1998, the Company submitted these findings to
Connecticut Department of Environmental Protection ("CTDEP"). In April 1999,
CTDEP responded to this submission and requested that the Company develop a
workplan for additional investigation, analysis and possible remediation to
address the isolated, low level residual contamination at this facility. Since
then, the Company has been working with CTDEP in an effort to develop data
showing that no further remedial action is necessary. The Company submitted data
to CTDEP in November and December 2001 intended to show that contamination has
not migrated off the property. CTDEP has requested additional information, which
the Company is in the process of developing. While the Company believes that its
total investigation and cleanup costs will not exceed $0.2 million, Connecticut
regulators may require additional cleanup or monitoring of the residual
contamination at this facility. If such activities are required, there can be no
assurance
17
that the Company's total investigation and remediation costs will not exceed its
$0.2 million estimate.
The Company's Recapitalization in 1997 also triggered ISRA obligations at its
West Trenton facility, obligating the Company to investigate all possible past
hazardous substances releases, and to cleanup any resulting contamination, at
that facility. Under ISRA, investigation requirements for facilities that are
currently being remediated pursuant to an earlier ISRA-triggering transaction
may be merged into that ongoing ISRA investigation. In this case, the West
Trenton facility has been the subject of an ongoing ISRA (and its predecessor
statute) groundwater investigation and remediation by the facility's prior owner
since the Company's acquisition of the facility in 1987. Accordingly, the New
Jersey regulatory authorities have informed the Company that its ISRA
obligations triggered by the 1997 Recapitalization are being satisfied by the
prior owner's ongoing ISRA investigation and remediation. That investigation has
not found any additional contamination that would require remediation beyond
that which continues to be performed by the facility's prior owner.
There are various claims and legal proceedings against the Company relating to
its operations in the normal course of business, none of which the Company
believes is material to its financial position or results of operations. The
Company currently maintains insurance coverage for product liability claims. The
Company is subject to various federal, state and local environmental laws,
ordinances and regulations. State agencies are currently overseeing
investigation and/or remediation activities at various Company facilities. In
addition, the previous owners of certain facilities are undertaking cleanup and
limited remediation in each case in fulfillment of certain indemnification
obligations. The Company believes it is currently in material compliance with
all applicable requirements of environmental laws.
8. Related Party Transactions
In connection with a management services agreement with Whitney, the company
incurred fees of $225 and $74 in the six month periods ended September 27, 2003
and September 28, 2002, respectively.
9. Income Taxes
The Company is included in the consolidated tax return of Holdings and
calculates its provision for income taxes on a separate entity basis. The
difference between the statutory and effective tax rates is primarily due to the
state tax benefit on domestic losses and lower international tax rates on income
from foreign operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information and current statements contained in this
Quarterly Report on Form 10-Q, certain matters discussed herein, including,
without limitation, in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contain forward looking statements
that involve risks and uncertainties which could cause actual results to differ
materially from those contemplated by the forward looking statements. These
risks and uncertainties include: our business is capital intensive and may
consume cash in excess of cash flow from our operations and borrowings; we
depend heavily on our senior management; unexpected equipment failures may
increase our costs and reduce our sales due to production curtailments or
shutdowns; we may not be able to continue to make the acquisitions
18
necessary for us to realize our growth strategy; the costs and difficulties of
integrating acquired business could impede our future growth; the loss of a
major customer could have a material adverse effect on our business and
operations; the bearing industry is highly competitive and this competition
could reduce our profitability or limit our ability to grow; the demand for our
products is cyclical, which could adversely impact our revenues; we will require
a significant amount of cash to service our debt; our ability to generate cash
depends on many factors, some of which are beyond our control; covenant
restrictions in our senior credit facility, the Notes indenture and the Discount
Debenture indenture may limit our ability to operate our business; our failure
to comply with the covenants contained in our senior credit facility, the notes
indenture, including due to events beyond our control, could result in an event
of default, which could materially and adversely affect our operating results
and financial condition; the interests of certain controlling stockholders could
conflict with those of other holders of our securities; and Holdings is
dependant upon RBCA to provide all of the funding necessary to meet its
obligations under the Discount Debentures.
The following discussion addresses the financial condition of the Company as of
September 27, 2003 and the results of its operations for the three month and six
month periods ended September 27, 2003, compared to the comparable period last
year. The discussion should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations for the fiscal
year ended March 29, 2003 included in the Form 10-K.
Critical Accounting Policies
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 accounting principles generally accepted in the United
States. 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. On an on-going basis, we evaluate our estimates, including those
related to product returns, bad debts, inventories, investments, intangible
assets, income taxes, financing operations, warranty obligations, long-term
service contracts, pensions and other post-retirement benefits, and
contingencies and litigation. 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. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o Revenue Recognition
For revenues not recognized under the contract method of accounting, as
described below, we recognize revenues from the sale of products at the point of
passage of title, which is at the time of shipment.
We also have sales under long-term, fixed-priced contracts, many of which
contain escalation clauses, requiring delivery of products over several years
and frequently providing the buyer with option pricing on follow-on orders.
Sales and profits on each contract are recognized in accordance with the
percentage-of-completion method of accounting, using the units-of-delivery
method. We follow the guidelines of Statement of Position, or SOP, 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (the contract method of accounting).
19
o Accounts Receivable
We are required to estimate the collect ability 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.
o Inventory
Inventories are stated at the lower of cost or market value. Cost is principally
determined by the first-in, first-out 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.
Inventoried costs on long-term contracts include certain preproduction costs,
consisting primarily of tooling and design costs and production costs, including
applicable overhead. The costs attributed to units delivered under long-term
commercial contracts are based on the estimated average cost of all units
expected to be produced, which anticipates a predictable decrease in unit costs
as tasks and production techniques become more efficient through repetition.
This usually results in an increase in inventory during the early years of a
contract.
If in-process inventory plus estimated costs to complete a specific contract
exceeds the anticipated remaining sales value of such contract, such excess is
charged to current earnings, thus reducing inventory to estimated realizable
value.
o Goodwill and Intangible Assets
We have significant amounts of goodwill and intangible assets. The determination
of whether or not goodwill or intangible assets has become impaired involves a
significant amount of judgment. Changes in strategy and/or market conditions
could significantly impact these judgments and require adjustments to recorded
amounts.
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended September 27, 2003 Compared to Three Months Ended September
- --------------------------------------------------------------------------------
28, 2002
- --------
Net sales for the quarter ended September 27, 2003 were $42.4 million, an
increase of $1.2 million or 2.9% over the quarter ended September 28, 2002. The
increase in net sales is primarily attributed to stronger sales to the defense
and industrial aftermarket industries.
Gross margin increased by $0.3 million or 2.6% to $11.7 million for the quarter
ended September 27, 2003, as compared to the second quarter of last year. Gross
margin as a percentage of net sales decreased 0.1%, from 27.7% for the second
quarter of fiscal 2003, to 27.6% for the second quarter of fiscal 2004. This
decrease is primarily the result of changes in our product volume/mix.
Selling, general and administrative ("SG&A") expense decreased $0.2 million in
the second quarter of fiscal 2004 to $6.4 million from $6.6 for the second
quarter of fiscal 2003.
20
Operating income increased $0.3 million to $5.1 million for the quarter ended
September 27, 2003 as compared to $4.8 million for the quarter ended September
28, 2002. The increase primarily resulted from higher gross margin.
Interest expense for the second quarter of fiscal 2004 was $3.9 million and $3.4
million in the second quarter of fiscal 2003.
Income before taxes decreased $0.2 million for the quarter ended September 27,
2003 to $1.2 million from $1.4 million for the quarter ended September 28, 2002,
as a result of higher interest expense in the second quarter of fiscal 2004.
Net income for the quarter ended September 27, 2003 reflects a tax provision of
$0.2 million compared to $0.6 million for the quarter ended September 28, 2002.
Net income increased by $0.2 million to $1.0 million from $0.8 million for last
year, as a result of the international and domestic tax rates. The difference
between the statutory and effective tax rates is primarily due to the state tax
benefit on domestic losses and lower international tax rates on income from
foreign operations.
Six Months Ended September 27, 2003 Compared to Six Months Ended September 28,
- --------------------------------------------------------------------------------
2002
- ----
Net sales for the first half ended September 27, 2003 were $82.2 million, an
increase of $2.4 million or 3.0% over the first half ended September 28, 2002.
The increase in net sales is primarily attributed to stronger sales to the
defense and industrial aftermarket industries.
Gross margin decreased by $0.2 million or 0.9% to $22.7 million for the first
half ended September 27, 2003, as compared to the first half of last year. Gross
margin as a percentage of net sales decreased 1.1%, from 28.6% for the first
half of fiscal 2003, to 27.6% for the first half of fiscal 2004. This decrease
is primarily the result of changes in our product volume/mix.
Selling, general and administrative ("SG&A") expense decreased $0.2 million in
the first half of fiscal 2004 to $12.7 million from $12.9 for the first half of
fiscal 2003.
Operating income decreased $0.3 million to $9.7 million for the first half ended
September 27, 2003 as compared to $10.0 million for the first half ended
September 28, 2002. The decrease primarily resulted from higher operating
expenses in the first half of fiscal 2004.
Interest expense for the first half of fiscal 2004 was $7.5 million and $7.1
million in the first half of fiscal 2003.
Income before taxes decreased $0.6 million for the first half ended September
27, 2003 to $2.2 million from $2.8 million for the first half ended September
28, 2002, as a result of higher interest expense in the first half of fiscal
2004.
Net income for the first half ended September 27, 2003 reflects a tax provision
of $0.6 million compared to $1.2 million for the first half ended September 28,
2002. Net income was $1.6 million for the first six months of both fiscal 2004
and fiscal 2003. . The difference between the statutory and effective tax rates
is primarily due to the state tax benefit on domestic losses and lower
international tax rates on income from foreign operations.
21
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Cashflow
--------
For the six months ended September 27, 2003, the Company generated cash of $6.2
million from operating activities compared to $3.5 million for the comparable
period last year.
Cash used for investing activities for the six months ended September 27, 2003
consisted of $1.7 million relating to capital expenditures compared to $4.9
million for the six months ended September 28, 2002.
For the six months ended September 27, 2003, the Company had net cash used in
financing activities of $2.7 million resulting from dividend payments to
Holdings of $2.5 million, payments on bank debt of $3.1 million, an increase in
amounts outstanding on the revolving credit facility of $3.0 million and
payments on capital lease obligations of $0.1 million. In the first six months
of fiscal 2003, the Company had net cash provided by financing activities of
$0.4 million, consisting of an issuance of a new bank term loan of $40.0
million, dividend payments to Holdings of $5.7 million, an increase in non
current assets associated with deferred finance fees in connection with the new
credit facility of $2.8 million, a net decrease in the revolving credit facility
of $28.5 million, payments of bank debt of $2.3 million and capital lease
obligations of $0.3 million.
Liquidity
---------
Our business is capital intensive. Our capital requirements include
manufacturing equipment purchases, materials and acquisitions. We have
historically financed, and plan to continue to finance, our capital needs with
cash provided from operations and borrowings under our senior credit facility.
We believe that the foregoing sources together with cash on hand will provide
adequate funds for our ongoing operations and planned capital expenditures.
In May 2002, we terminated our previous senior credit facility and together with
our domestic subsidiaries entered into a $94.0 million senior secured credit
facility with General Electric Capital Corporation as agent and lender, Congress
Financial Corporation (now known as Central) as lender, GECC Capital Markets
Group as lead arranger, and other lenders, consisting of a $40.0 million term
loan and a $54.0 million revolving credit facility. In connection with this new
senior credit facility, we together with our domestic subsidiaries granted
lenders liens and mortgages on substantially all of our existing and
after-acquired personal and real property. In addition, to secure the loans, we
pledged all of our capital stock in our domestic subsidiaries and a portion of
our capital stock in our directly owned foreign subsidiaries to the lenders.
The proceeds of the term loan were used to pay off our previous senior credit
facility, with Credit Suisse First Boston, as administrative agent and the
lenders thereto, to pay fees and expenses with respect to the new senior credit
facility and for other corporate purposes. In addition, we have secured the
letters of credit issued in connection with our previous senior credit facility
pursuant to the new senior credit facility. The revolving credit facility is
available for issuances of letters of credit and for loans in connection with
acquisitions, working capital needs or other general corporate purposes. The
revolving credit facility bears interest at a floating rate of either the higher
of the base rate on corporate loans and the federal funds rate plus 50 basis
points, plus 1.25%; or LIBOR plus 2.25%. We have the right to elect the
applicable interest rate on the revolving credit facility. As of September 27,
2003, letters of credit in a total amount of $20.0 million were issued and $11.5
million has been drawn under the revolving credit facility.
22
Principal and interest payments under our senior credit facility, interest
payments on the Notes, and the funding of acquisitions represent significant
liquidity requirements for us. Holdings is also dependant upon us to make
semi-annual interest payments of approximately $2.5 million on Holdings'
discount debentures, which accrue interest at the rate of 13% per annum and
mature on June 15, 2009. The balance outstanding on these debentures as of
September 27, 2003 and March 29, 2003 was approximately $37.7 million. We began
making our required quarterly scheduled principal payments under the term loan
on September 30, 2002. The term loan bears interest at a floating rate of either
the higher of the base rate on corporate loans and the federal funds rate plus
50 basis points, plus 1.25%; or LIBOR plus 2.25%. We have the right to elect the
applicable interest rate on the term loan. As of September 27, 2003 the blended
interest rate on the term loan was 3.66%.
On June 19, 2003, we further amended and restated our senior credit facility in
order, among other things, to establish a structure under which we now may
include certain of our foreign assets within our "borrowing base" which sets
forth the amounts that we can borrow under the revolving credit facility. In
addition, this will simplify the process under which we can fund our foreign
operations. As part of this amendment, we have created inter-company loan and
asset pledge arrangements, including pledges of certain foreign assets, that are
all ultimately assigned to the lenders as further collateral to secure the
borrowings under our new senior credit facility.
In connection with the financing of Holdings' 1997 recapitalization, we issued
$110.0 million aggregate principal amount of 9 5/8% Senior Subordinated Notes
due 2007. The Notes pay interest semi-annually and mature on June 15, 2007 but
may be redeemed at our option earlier under certain conditions specified in the
indenture pursuant to which the Notes were issued. The Notes are unsecured and
subordinate to all of our existing and future senior indebtedness. The Notes are
fully, unconditionally and irrevocably guaranteed jointly and severally, on a
senior subordinated basis by each of our domestic wholly-owned subsidiaries.
Our senior credit facility, the indenture for the Notes and the indenture for
the Discount Debentures contain affirmative and negative covenants and other
terms customary to such financings, including requirements that we maintain
specified financial ratios, including the following:
o Consolidated Coverage Ratio - Pursuant to the terms of
the indenture for the Notes, we may not incur additional
indebtedness if, after giving retroactive effect to such
incurrence, our consolidated EBITDA to consolidated
interest expense ratio will be less than 2.25 to 1.00
for the prior four fiscal quarters. Pursuant to the
indenture for the Discount Debentures, Holdings and its
subsidiaries (including us) may not incur additional
indebtedness, if as a result our consolidated coverage
ratio will be less than 2.00 to 1.00.
o Fixed Charge Coverage Ratio - Pursuant to the terms of
our senior credit facility, Holdings' ratio (on a
consolidated basis) of EBITDA less capital expenditures
and income taxes to fixed charges, at the end of each
fiscal quarter, shall not be less than 1.10 to 1.00.
As of September 27, 2003, our consolidated coverage ratio was 2.28 to 1.00 and
our fixed charge coverage ratio was 1.23 to 1.00.
We believe that cash flow from operations and borrowings under the revolving
loan portion of our senior credit facility will provide adequate cash to fund
our working capital, capital expenditure, debt service and other cash
requirements for the foreseeable future. Our ability to meet future working
capital, capital expenditure and debt service requirements to provide financial
assurance, as requested or required, and to fund capital amounts required for
the expansion of our existing business will depend on our future financial
performance, which will be
23
affected by a range of economic, competitive and business factors, many of which
are outside of our control.
Obligations and Commitments
---------------------------
The following tables outline what we regard as our significant contractual
obligations and commercial commitments as of September 27, 2003. The tables do
not represent all of our contractual obligations and commercial commitments that
we have entered into.
Payments Due By Period
(in thousands)
Less Than More than
Significant Contractual Obligations Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years
------------------------------------------------------------------
Long-term debt(1) $173,208 $17,795 $11,614 $127,144 $16,655
Capital Lease Obligations 132 69 63 - -
Operating leases (2)......................... 11,913 2,159 3,093 2,542 4,119
------------------------------------------------------------------
Total significant contractual cash obligations $185,253 $20,023 $14,770 $129,686 $20,774
=====================================================================================================================
(1) Long-term debt obligations include (i) $110.0 million aggregate
principal amount of our Notes, (ii) $11.5 million outstanding under
the revolving loan portion of our senior credit facility, (iii)
$34.3 million outstanding under the term loan portion of our senior
credit facility, (iv) $16.7 million aggregate principal amount of
our industrial revenue bonds, and (v) other debt of $0.7 million.
(2) Operating leases are primarily real estate leases and are estimated
as unchanged from fiscal year end 2003.
o Capital Expenditures
We made capital expenditures of $1.7 million during the first half of fiscal
2004 as compared to $4.9 million during the first half of fiscal 2003. We made
capital expenditures of $6.6 million during fiscal 2003 and expect to make
capital expenditures of approximately $3.5 to $5.0 million during fiscal 2004 in
connection with our existing business. We intend to fund our planned fiscal 2004
capital expenditures principally through existing cash, internally generated
funds and borrowings under our revolving credit facility.
In addition, we may make substantial additional capital expenditures in
acquiring complementary bearing companies. We cannot currently determine the
amount of these expenditures because they will depend on the number, nature,
condition and permitted status of any acquired target.
From time to time we evaluate our existing operations and their strategic
importance to us. If we determine that a given operating unit does not have
future strategic importance, we may sell or otherwise dispose of those
operations. Although we believe our operations would not be impaired by such
dispositions, we could incur losses on them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's Swiss operations utilize the Swiss franc as the functional
currency. Foreign currency transaction gains and losses are included in
earnings. Foreign currency transaction exposure arises primarily from the
transfer of foreign currency from one subsidiary to another within the group,
and to foreign currency denominated trade receivables. Currency transaction and
translation exposures are not hedged as the Company does not use any derivative
financial instruments, and transaction gains and losses have not been
significant. Unrealized currency
24
translation gains and losses are recognized upon translation of the foreign
subsidiaries' balance sheets to U.S. dollars.
Borrowings of the Company are denominated in U.S. dollars. Management believes
that the carrying amount of the Company's borrowings approximates fair value
because the interest rates are variable and reset frequently or are reasonable
to the quoted market prices of similar debt instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the direction of its Chief Executive Officer and Chief
Financial Officer, has reviewed its disclosure controls and procedures and has
concluded, based on its review for the quarterly period ended September 27,
2003, that the Company's disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
There are various claims and legal proceedings against the Company relating to
its operations in the normal course of business, none of which the Company
believes is material. The Company currently maintains insurance coverage for
product liability claims.
ITEMS 2, 3, 4, and 5 are not applicable and have been omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer (Section 302 of
the Sarbanes-Oxley Act of 2002)
31.2 Certification of Chief Financial Officer (Section 302 of
the Sarbanes-Oxley Act of 2002)
32.1 Certification of Chief Executive Officer (Section 906 of
the Sarbanes-Oxley Act of 2002)
32.2 Certification of Chief Financial Officer (Section 906 of
the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K
Current Report on Form 8-K, filed August 5, 2003
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROLLER BEARING COMPANY OF AMERICA, INC.
November 10, 2003 /s/ Dr. Michael J. Hartnett
---------------------------
By: Dr. Michael J. Hartnett
President & Chief Executive Officer
Principal Executive Officer
November 10, 2003 /s/ Daniel A. Bergeron
------------------------------------------
By: Daniel A. Bergeron
Vice President & Chief Financial Officer
Principal Financial and Accounting Officer
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EXHIBIT INDEX
Exhibit
Number Document Name
-------- ----------------
31.1 Certification of Chief Executive Officer (pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002)
31.2 Certification of Chief Financial Officer (pursuant to
Section 302 of the Sarbanes- Oxley Act of 2002)
32.1 Certification of Chief Executive Officer (pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002)
32.2 Certification of Chief Financial Officer (pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002)
28