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
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QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES |
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Commission File Number: 333-33085
ROLLER BEARING COMPANY OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
13-3426227 |
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(State of other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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60
Round Hill Road |
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(Address of principal executive offices, including zip code) |
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(203) 255-1511 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at August 8, 2003 |
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Common stock, $01. par value |
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103 |
Roller Bearing Company of America, Inc.
INDEX
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Three months ended June 28, 2003 (unaudited) and June 29, 2002 (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Part I
Item 1. Financial Information
Roller Bearing Company of America, Inc.
(dollars in thousands, except share data)
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June 28, |
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March 29, |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash |
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$ |
4,006 |
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$ |
3,552 |
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Accounts receivable, net of allowance for doubtful accounts of $634 at June 28, 2003 and $744 at March 29, 2003 |
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33,224 |
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39,691 |
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Inventories |
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88,233 |
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86,188 |
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Prepaid expenses and other current assets |
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6,706 |
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5,434 |
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Total current assets |
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132,169 |
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134,865 |
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Property, plant
and equipment, net accumulated depreciation of $65,393 at |
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56,018 |
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57,772 |
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Restricted marketable securities |
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113 |
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113 |
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Goodwill |
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25,150 |
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25,150 |
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Intangible assets, net of accumulated amortization of $194 at June 28, 2003 and $105 at March 29, 2003 |
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2,001 |
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2,090 |
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Deferred financing costs, net of accumulated amortization of $6,191 at June 28, 2003 and $5,900 at March 29, 2003 |
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5,224 |
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5,515 |
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Other assets |
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1,627 |
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1,770 |
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Total assets |
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$ |
222,302 |
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$ |
227,275 |
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LIABILITIES AND STOCKHOLDER’S EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
14,293 |
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$ |
13,927 |
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Accrued expenses and other current liabilities |
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8,439 |
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12,817 |
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Current portion of long-term debt |
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19,226 |
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15,946 |
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Obligations under capital leases, current portion |
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55 |
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149 |
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Total current liabilities |
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42,013 |
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42,839 |
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Long-term debt |
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155,473 |
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157,324 |
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Capital lease obligations, less current portion |
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112 |
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75 |
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Other non-current liabilities |
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23,260 |
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23,630 |
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Total liabilities |
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220,858 |
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223,868 |
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Commitments and contingencies |
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Stockholder’s equity: |
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Common stock - $.01 par value; authorized: 1,000 shares; issued and outstanding: 103 shares at June 28, 2003 and at March 29, 2003 |
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— |
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— |
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Additional paid-in capital |
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12,736 |
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12,736 |
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Accumulated other comprehensive income (loss) |
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(5,874 |
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(5,829 |
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Retained earnings (deficit) |
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(5,418 |
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(3,500 |
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Total stockholder’s equity |
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1,444 |
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3,407 |
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Total liabilities and stockholder’s equity |
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$ |
222,302 |
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$ |
227,275 |
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See notes to consolidated financial statements
3
Roller Bearing Company of America, Inc.
Consolidated Statements of Operations (Unaudited)
(dollars in thousands)
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Three Months Ended |
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June 28, |
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June 29, |
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Net sales |
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$ |
39,737 |
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$ |
38,521 |
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Cost of sales |
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28,771 |
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27,065 |
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Gross margin |
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10,966 |
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11,456 |
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Operating expenses: |
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Selling, general and administrative |
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6,253 |
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6,269 |
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Other expense, net of other income |
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134 |
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19 |
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6,387 |
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6,288 |
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Operating income |
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4,579 |
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5,168 |
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Interest expense, net |
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3,572 |
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3,766 |
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Minority interest |
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4 |
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4 |
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Income before taxes |
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1,003 |
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1,398 |
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Provision for income taxes |
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411 |
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573 |
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Net income |
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$ |
592 |
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$ |
825 |
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See notes to consolidated financial statements
4
Roller Bearing Company of America, Inc.
Consolidated Statements of Cash Flows(Unaudited)
(dollars in thousands)
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For the Three Months Ended |
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June 28, |
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June 29, |
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Cash flows from operating activities: |
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Net income |
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$ |
592 |
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$ |
825 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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2,428 |
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2,246 |
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Minority interest |
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4 |
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4 |
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Amortization of intangibles |
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89 |
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— |
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Amortization of deferred financing costs |
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291 |
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293 |
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Changes in working capital: |
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(Increase) decrease in accounts receivable |
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6,468 |
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7,076 |
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(Increase) decrease in inventories |
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(2,046 |
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(4,503 |
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(Increase) decrease in prepaid expenses & other current assets |
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(1,272 |
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287 |
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(Increase) decrease in other non-current assets |
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146 |
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(24 |
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Increase (decrease) in accounts payable & accrued expenses |
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(4,354 |
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(2,702 |
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Increase (decrease) in other non-current liabilities |
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(37 |
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45 |
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Net cash provided by operating activities |
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2,309 |
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3,547 |
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Cash flows from investing activities: |
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Purchase of property, plant & equipment, net |
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(670 |
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(1,610 |
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Net cash used in investing activities |
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(670 |
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(1,610 |
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Cash flows from financing activities: |
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Net (decrease) increase in revolving credit facility |
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3,000 |
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(28,500 |
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Proceeds from long term debt |
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— |
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40,000 |
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Dividends paid to parent |
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(2,510 |
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— |
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Financing fees paid in connection with new credit facility |
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— |
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(2,800 |
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Payments of bank term loan |
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(1,572 |
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(1,841 |
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Principal payments on capital lease obligations |
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(58 |
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(132 |
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Net cash (used in) provided by financing activities |
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(1,140 |
) |
6,727 |
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Effect of exchange rate changes |
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(45 |
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630 |
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Cash and Cash Equivalents: |
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Increase during the period |
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454 |
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9,294 |
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Cash, at beginning of period |
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3,552 |
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7,178 |
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Cash, at end of period |
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$ |
4,006 |
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$ |
16,472 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
5,903 |
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$ |
6,099 |
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Income taxes |
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$ |
62 |
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$ |
99 |
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See notes to consolidated financial statements
5
Roller Bearing Company of America, Inc.
(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 period ended June 28, 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 $1,722 was allocated to intangibles. The corporate name of Myonic has since been changed to RBC France SAS.
2. Inventory
Inventories are stated at the lower of cost or market, using the first-in, first-out method, and are summarized as follows:
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June 28, 2003 |
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March 29, 2003 |
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Raw material |
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$ |
2,995 |
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$ |
2,707 |
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Work in process |
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19,074 |
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17,745 |
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Finished goods |
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66,164 |
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65,736 |
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Total inventories |
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$ |
88,233 |
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$ |
86,188 |
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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
7
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.
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, 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 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 $573, of revolving credit loans and letters of credit (the “Swiss Revolving Credit Facility”). The balance of this debt was repaid in full during fiscal 2003.
8
Consolidated financial information regarding the Company, guarantor subsidiaries and non-guarantor subsidiaries as of June 28, 2003 and March 29, 2003 is presented below for purposes of complying with the reporting requirements of the guarantor subsidiaries.
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Consolidated Balance Sheets |
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SUBSIDIARY |
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NON |
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CORPORATE |
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TOTAL |
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Assets |
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Cash |
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$ |
(125 |
) |
$ |
1,347 |
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$ |
2,784 |
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$ |
4,006 |
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Accounts receivable, net |
|
4,443 |
|
5,777 |
|
23,004 |
|
33,224 |
|
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Raw material |
|
1,016 |
|
578 |
|
1,401 |
|
2,995 |
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Work in process |
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9,612 |
|
3,538 |
|
5,924 |
|
19,074 |
|
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Finished goods |
|
25,371 |
|
9,477 |
|
31,316 |
|
66,164 |
|
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Inventories |
|
35,999 |
|
13,593 |
|
38,641 |
|
88,233 |
|
||||
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Prepaid expense other current assets |
|
818 |
|
243 |
|
5,645 |
|
6,706 |
|
||||
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Total current assets |
|
41,135 |
|
20,960 |
|
70,074 |
|
132,169 |
|
||||
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Property, plant and equipment, net |
|
31,118 |
|
3,599 |
|
21,301 |
|
56,018 |
|
||||
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|
|
|
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|
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|
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|
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Restricted marketable securities |
|
38 |
|
— |
|
75 |
|
113 |
|
||||
|
Intangible Assets |
|
— |
|
1,528 |
|
473 |
|
2,001 |
|
||||
|
Goodwill, net |
|
8,054 |
|
— |
|
17,096 |
|
25,150 |
|
||||
|
Deferred financing costs, net |
|
— |
|
— |
|
5,224 |
|
5,224 |
|
||||
|
Other assets |
|
— |
|
947 |
|
680 |
|
1,627 |
|
||||
|
Total assets |
|
$ |
80,345 |
|
$ |
27,034 |
|
$ |
114,923 |
|
$ |
222,302 |
|
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|
||||
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Liabilities and Stockholder’s Equity |
|
|
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|
||||
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Accounts payable |
|
$ |
5,626 |
|
$ |
2,881 |
|
$ |
5,786 |
|
$ |
14,293 |
|
|
Intercompany payable (receivables) |
|
66,701 |
|
2,411 |
|
(69,112 |
) |
— |
|
||||
|
Intercompany loans |
|
— |
|
9,656 |
|
(9,656 |
) |
— |
|
||||
|
Current portion of long-term debt |
|
225 |
|
376 |
|
18,625 |
|
19,226 |
|
||||
|
Current portion of obligations under capital leases |
|
27 |
|
— |
|
28 |
|
55 |
|
||||
|
Accrued expenses and other current liabilities |
|
1,920 |
|
2,147 |
|
4,372 |
|
8,439 |
|
||||
|
Total current liabilities |
|
74,499 |
|
17,471 |
|
(49,957 |
) |
42,013 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Long term debt |
|
1,401 |
|
— |
|
154,072 |
|
155,473 |
|
||||
|
Capital lease obligations, less current portion |
|
— |
|
— |
|
112 |
|
112 |
|
||||
|
Other noncurrent liabilities |
|
1,370 |
|
431 |
|
21,459 |
|
23,260 |
|
||||
|
Total liabilities |
|
77,270 |
|
17,902 |
|
125,686 |
|
220,858 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stockholder’s equity (deficit): |
|
|
|
|
|
|
|
|
|
||||
|
Common stock |
|
— |
|
63 |
|
(63 |
) |
— |
|
||||
|
Additional paid in capital |
|
— |
|
— |
|
12,736 |
|
12,736 |
|
||||
|
Accumulated other comprehensive income (loss) |
|
— |
|
(1,412 |
) |
(4,462 |
) |
(5,874 |
) |
||||
|
Total retained earnings |
|
3,075 |
|
10,481 |
|
(18,974 |
) |
(5,418 |
) |
||||
|
Total stockholder’s equity |
|
3,075 |
|
9,132 |
|
(10,763 |
) |
1,444 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total liabilities & stockholder’s equity |
|
$ |
80,345 |
|
$ |
27,034 |
|
$ |
114,923 |
|
$ |
222,302 |
|
9
|
As of March 29, 2003 |
|
SUBTOTAL |
|
NON |
|
CORPORATE |
|
TOTAL |
|
||||
|
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 |
|
Consolidating Statements of Operations
|
Three months ended June 28, 2003 (Unaudited) |
|
SUBSIDIARY |
|
NON |
|
CORPORATE |
|
TOTAL |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net sales |
|
$ |
15,745 |
|
$ |
6,542 |
|
$ |
17,450 |
|
$ |
39,737 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of sales |
|
12,693 |
|
4,494 |
|
11,584 |
|
28,771 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross margin |
|
3,052 |
|
2,048 |
|
5,866 |
|
10,966 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Selling, general and administrative |
|
1,301 |
|
1,156 |
|
3,796 |
|
6,253 |
|
||||
|
Other expense, net of other income |
|
— |
|
— |
|
134 |
|
134 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income |
|
1,751 |
|
892 |
|
1,936 |
|
4,579 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, net |
|
12 |
|
93 |
|
3,467 |
|
3,572 |
|
||||
|
Minority interest |
|
— |
|
4 |
|
— |
|
4 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income before taxes |
|
1,739 |
|
795 |
|
(1,531 |
) |
1,003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Provision for income taxes |
|
714 |
|
335 |
|
(638 |
) |
411 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
1,025 |
|
$ |
460 |
|
$ |
(893 |
) |
$ |
592 |
|
10
Consolidating Statements of Operations
|
Three months ended June 29, 2002 (Unaudited) |
|
SUBSIDIARY |
|
NON |
|
CORPORATE |
|
TOTAL |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net sales |
|
$ |
17,547 |
|
$ |
3,654 |
|
$ |
17,320 |
|
$ |
38,521 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of sales |
|
13,383 |
|
2,464 |
|
11,218 |
|
27,065 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross margin |
|
4,164 |
|
1,190 |
|
6,102 |
|
11,456 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Selling, general and administrative |
|
1,416 |
|
839 |
|
4,000 |
|
6,255 |
|
||||
|
Other expense, net of other income |
|
6 |
|
16 |
|
11 |
|
33 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income |
|
2,742 |
|
335 |
|
2,091 |
|
5,168 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, net |
|
12 |
|
43 |
|
3,711 |
|
3,766 |
|
||||
|
Minority interest |
|
— |
|
4 |
|
— |
|
4 |
|
||||
|
Income before taxes |
|
2,730 |
|
288 |
|
(1,620 |
) |
1,398 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Provision for income taxes |
|
1,119 |
|
118 |
|
(664 |
) |
573 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
1,611 |
|
$ |
170 |
|
$ |
(956 |
) |
$ |
825 |
|
Consolidated Statements of Cash Flows
|
Three Months Ended June 28, 2003 (Unaudited) |
|
SUBSIDIARY |
|
NON |
|
CORPORATE |
|
TOTAL |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
1,025 |
|
$ |
460 |
|
$ |
(893 |
) |
$ |
592 |
|
|
Adjustments to reconcile net income to net cash provided by operations: |
|
|
|
|
|
|
|
|
|
||||
|
Depreciation |
|
1,020 |
|
297 |
|
1,111 |
|
2,428 |
|
||||
|
Minority interest |
|
— |
|
4 |
|
— |
|
4 |
|
||||
|
Amortization of intangibles |
|
— |
|
89 |
|
— |
|
89 |
|
||||
|
Amortization of deferred financing costs |
|
— |
|
— |
|
291 |
|
291 |
|
||||
|
Changes in working capital, net of acquisitions: |
|
|
|
|
|
|
|
|
|
||||
|
(Increase) decrease in current assets |
|
(991 |
) |
205 |
|
3,936 |
|
3,150 |
|
||||
|
(Increase) decrease in non-current assets |
|
— |
|
146 |
|
— |
|
146 |
|
||||
|
Increase (decrease) in current liabilities |
|
(293 |
) |
(408 |
) |
(3,653 |
) |
(4,354 |
) |
||||
|
Increase (decrease) in non-current liabilities |
|
(14 |
) |
(480 |
) |
457 |
|
(37 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash provided by operating activities |
|
747 |
|
313 |
|
1,249 |
|
2,309 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Purchase of property, plant & equipment, net |
|
(484 |
) |
(19 |
) |
(167 |
) |
(670 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash used in investing activities |
|
(484 |
) |
(19 |
) |
(167 |
) |
(670 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Net increase (decrease) in revolving credit facility |
|
— |
|
— |
|
3,000 |
|
3,000 |
|
||||
|
Dividend paid to parent |
|
— |
|
— |
|
(2,510 |
) |
(2,510 |
) |
||||
|
Payments on bank term loan |
|
(54 |
) |
— |
|
(1,518 |
) |
(1,572 |
) |
||||
|
Principal payments on capital lease obligations |
|
(24 |
) |
— |
|
(34 |
) |
(58 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash used in financing activities |
|
(78 |
) |
— |
|
(1,062 |
) |
(1,140 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
||||
|
Effect of exchange rate changes |
|
— |
|
(25 |
) |
(20 |
) |
(45 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Increase (decrease) during the period |
|
185 |
|
269 |
|
— |
|
454 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash, at beginning of year |
|
(310 |
) |
1,078 |
|
2,784 |
|
3,552 |
|
||||
|
Cash, at end of period |
|
$ |
(125 |
) |
$ |
1,347 |
|
$ |
2,784 |
|
$ |
4,006 |
|
11
Consolidating Statements of Cash Flows
|
Three Months Ended June 29, 2002 (Unaudited) |
|
SUBSIDIARY |
|
NON |
|
CORPORATE |
|
TOTAL |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
1,611 |
|
$ |
170 |
|
$ |
(956 |
) |
$ |
825 |
|
|
Adjustments to reconcile net income to net cash provided by operations: |
|
|
|
|
|
|
|
|
|
||||
|
Depreciation |
|
919 |
|
177 |
|
1,150 |
|
2,246 |
|
||||
|
Minority interest |
|
— |
|
4 |
|
— |
|
4 |
|
||||
|
Amortization of deferred financing costs |
|
— |
|
— |
|
293 |
|
293 |
|
||||
|
Changes in working capital, net of acquisitions: |
|
|
|
|
|
|
|
|
|
||||
|
(Increase) decrease in current assets |
|
(411 |
) |
20 |
|
3,251 |
|
2,860 |
|
||||
|
(Increase) decrease in non-current assets |
|
— |
|
— |
|
(454 |
) |
(454 |
) |
||||
|
Increase (decrease) in current liabilities |
|
(1,266 |
) |
(620 |
) |
(386 |
) |
(2,272 |
) |
||||
|
Increase (decrease) in non-current liabilities |
|
— |
|
— |
|
45 |
|
45 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash provided by (used in) operating activities |
|
853 |
|
(249 |
) |
2,943 |
|
3,547 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Purchase of property, plant & equipment, net |
|
(659 |
) |
(143 |
) |
(808 |
) |
(1,610 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash used in investing activities |
|
(659 |
) |
(143 |
) |
(808 |
) |
(1,610 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
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 |
|
||||
|
Financing fees paid in connection with the credit facility |
|
— |
|
— |
|
(2,800 |
) |
(2,800 |
) |
||||
|
Payments on bank term loan |
|
(59 |
) |
(457 |
) |
(1,325 |
) |
(1,841 |
) |
||||
|
Principal payments on capital lease obligations |
|
(68 |
) |
— |
|
(64 |
) |
(132 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net cash used in financing activities |
|
(127 |
) |
(457 |
) |
7,311 |
|
6,727 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
||||
|
Effect of exchange rate changes |
|
— |
|
630 |
|
— |
|
630 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Increase (decrease) during the year |
|
67 |
|
(219 |
) |
9,446 |
|
9,294 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash, at beginning of year |
|
(240 |
) |
1,134 |
|
6,284 |
|
7,178 |
|
||||
|
Cash, at end of period |
|
$ |
(173 |
) |
$ |
915 |
|
$ |
15,730 |
|
$ |
16,472 |
|
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 June 28, 2003, the Company had the ability to borrow up to an additional $6,497 under the Revolving Credit Facility.
12
The balances payable under all borrowing facilities are as follows:
|
|
|
June 28, |
|
March 29, |
|
||
|
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 |
|
35,714 |
|
37,143 |
|
||
|
|
|
|
|
|
|
||
|
Revolving Credit Facility borrowings outstanding |
|
11,482 |
|
8,582 |
|
||
|
|
|
|
|
|
|
||
|
Other Loans |
|
848 |
|
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, payable monthly through December 2017 |
|
7,700 |
|
7,700 |
|
||
|
|
|
|
|
|
|
||
|
Series 1994 B bears interest at a variable rate, payable monthly through December 2017 |
|
3,000 |
|
3,000 |
|
||
|
|
|
|
|
|
|
||
|
Series 1998 tax-exempt industrial development bonds; bearing interest at variable rates, payable monthly through December 2021 |
|
1,155 |
|
1,155 |
|
||
|
|
|
|
|
|
|
||
|
Series 1999 tax-exempt industrial development bonds; bearing interest at variable rates, payable monthly through April 2024 |
|
4,800 |
|
4,800 |
|
||
|
|
|
|
|
|
|
||
|
Total Debt |
|
174,699 |
|
173,270 |
|
||
|
|
|
|
|
|
|
||
|
Less: Current Portion |
|
19,226 |
|
15,946 |
|
||
|
|
|
|
|
|
|
||
|
Long-Term Debt |
|
$ |
155,473 |
|
$ |
157,324 |
|
The current portion of long-term debt as of June 28, 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 June 28, 2003 and March 29, 2003 was approximately $37.7 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.
13
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:
|
|
|
Three months ended |
|
||||
|
|
|
June 28, |
|
June 29, |
|
||
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
592 |
|
$ |
825 |
|
|
Foreign currency translation adjustments |
|
(45 |
) |
51 |
|
||
|
Minimum pension liability |
|
— |
|
— |
|
||
|
Total comprehensive income |
|
$ |
547 |
|
$ |
876 |
|
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:
14
|
|
|
Three Months Ended |
|
||||
|
Net Income |
|
June 28, 2003 |
|
June 29, 2002 |
|
||
|
As Reported |
|
$ |
592 |
|
$ |
825 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
$ |
570 |
|
$ |
739 |
|
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.
15
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 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 $112 and $37 in the quarters ended June 28, 2003 and June 29, 2002, respectively.
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 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
16
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 June 28, 2003 and the results of its operations for the three month period ended June 28, 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.
• 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).
17
• Accounts Receivable
We are required to estimate the collectability of our accounts receivable, which requires a considerable amount of judgment in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Changes in required reserves may occur in the future as conditions in the marketplace change.
• Inventory
Inventories are stated at the lower of cost or 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.
• 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.
Net sales for the quarter ended June 28, 2003 were $39.7 million, an increase of $1.2 million or 3.2% over the quarter ended June 29, 2002. The increase in net sales is primarily attributed to stronger sales to the defense and industrial aftermarket industries.
Gross margin decreased by $0.5 million or 4.3% to $11.0 million for the quarter ended June 28, 2003, as compared to the first quarter of last year. Gross margin as a percentage of net sales decreased 2.1%, from 29.7% for the first quarter of fiscal 2003, to 27.6% for the first quarter of fiscal 2003. This decrease is primarily the result of changes in our product volume/mix.
Selling, general and administrative (“SG&A”) expenses were comparable in the first quarter of each year at $6.3 million.
18
Interest expense for the first quarter of fiscal 2004 was $3.6 million and $3.8 million in the first quarter of fiscal 2003.
Income before taxes decreased $0.4 million for the quarter ended June 28, 2003 to $1.0 million from $1.4 million for the quarter ended June 29, 2002, as a result lower operating income in the first quarter of fiscal 2004.
Net income for the quarter ended June 28, 2003 reflects a tax provision of $0.4 million compared to $0.6 million for the quarter ended June 29, 2002. Net income decreased by $0.2 million to $0.6 million from $0.8 million for last year, as a result of the lower income before taxes.
FINANCIAL CONDITION
Cashflow
For the three months ended June 28, 2003, the Company generated cash of $2.3 million from operating activities compared to $3.5 million for the comparable period last year.
Cash used for investing activities for the three months ended June 28, 2003 consisted of $0.7 million relating to capital expenditures compared to $1.6 million for the three months ended June 29, 2002.
For the three months ended June 28, 2003, the Company had net cash used in financing activities of $1.1 million resulting from dividend payments to Holdings of $2.5 million, payments on bank debt of $1.5 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 three months of fiscal 2003, the Company had net cash provided by financing activities of $6.7 million, consisting of an issuance of a new bank term loan of $40.0 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 $1.9 million and capital lease obligations of $0.1 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
19
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 June 28, 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.
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 June 28, 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 June 28, 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:
• 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
20
(including us) may not incur additional indebtedness, if as a result our consolidated coverage ratio will be less than 2.00 to 1.00.
• 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 June 28, 2003, our consolidated coverage ratio was 2.27 to 1.00 and our fixed charge coverage ratio was 1.13 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 affected by a range of economic, competitive and business factors, many of which are outside of our control. We cannot assure you that our business will generate sufficient cash flow from operations, that we will meet the financial covenants in our debt agreement to permit us to make any payments or investments, that future financings will be available to us in amounts sufficient to enable us to service our debt or to make necessary capital expenditures, or that any refinancing would be available on commercially reasonable terms, if at all. Further, depending on the timing, amount and structure of any possible future acquisitions and the availability of funds under, and compliance with certain other covenants in, our senior credit facility, we may need to raise additional capital. We cannot assure you that we will be able to secure such funding, if necessary, on favorable terms, if at all.
Obligations and Commitments
The following tables outline what we regard as our significant contractual obligations and commercial commitments as of June 28, 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 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Long-term debt(1) |
|
$ |
174,699 |
|
$ |
17,793 |
|
$ |
11,679 |
|
$ |
128,572 |
|
$ |
16,655 |
|
|
Capital Lease Obligations |
|
167 |
|
98 |
|
69 |
|
— |
|
— |
|
|||||
|
Operating leases (2) |
|
11,913 |
|
2,159 |
|
3,093 |
|
2,542 |
|
4,119 |
|
|||||
|
Total significant contractual cash obligations |
|
$ |
186,779 |
|
$ |
20,050 |
|
$ |
14,841 |
|
$ |
131,114 |
|
$ |
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) $35.7 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 $0.8 million.
(2) Operating leases are estimated as unchanged from fiscal year end 2003.
21
• Capital Expenditures
We made capital expenditures of $6.6 million during fiscal 2003. We expect to make capital expenditures of approximately $5.0 to $7.0 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 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.
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 June 28, 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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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.
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(a) |
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Exhibits |
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31.1 Certification of Chief Executive Officer (Section 302 of the Sarbanes-Oxley Act of 2002) |
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31.2 Certification of Chief Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002) |
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32.1 Certification of Chief Executive Officer (Section 906 of the Sarbanes-Oxley Act of 2002) |
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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
Current Report on Form 8-K, filed April 28, 2003
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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.
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ROLLER BEARING COMPANY OF AMERICA, INC. |
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August 12, 2003 |
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/s/ Michael J. Hartnett |
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By: Michael J. Hartnett |
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President & Chief Executive Officer |
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Principal Executive Officer |
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/s/ Daniel A. Bergeron |
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August 12, 2003 |
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By: Daniel A. Bergeron |
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Vice President & Chief Financial Officer |
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Principal Financial and Accounting Officer |
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Exhibit |
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Document Name |
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31.1 |
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Certification of Chief Executive Officer (pursuant to Section 302 of the Sarbanes- Oxley Act of 2002) |
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31.2 |
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Certification of Chief Financial Officer (pursuant to Section 302 of the Sarbanes- Oxley Act of 2002) |
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32.1 |
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Certification of Chief Executive Officer (pursuant to Section 906 of the Sarbanes- Oxley Act of 2002) |
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32.2 |
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Certification of Chief Financial Officer (pursuant to Section 906 of the Sarbanes- Oxley Act of 2002) |
25