UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2007
 
OR
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            .
 
Commission File Number: 333-124824
 
RBC Bearings Incorporated
(Exact name of registrant as specified in its charter)
 
Delaware
 (State or other jurisdiction of incorporation or organization)
95-4372080
(I.R.S. Employer Identification No.)
 
One Tribology Center
Oxford, CT 06478
(Address of principal executive offices)
 
06478
(Zip Code)
 
(203) 267-7001
(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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated filer      oAccelerated filer  x     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of January 25, 2008, RBC Bearings Incorporated had 21,732,936 shares of Common Stock outstanding.


TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION
 3
   
ITEM 1.
Unaudited Consolidated Financial Statements
3
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
21
ITEM 4.
Controls and Procedures
22
 
Changes in Internal Control over Financial Reporting
22
 
Limitation of Effectiveness of Controls
22
 
 
 
Part II - OTHER INFORMATION
23
 
  
ITEM 1.
Legal Proceedings
23
ITEM 1A.
Risk Factors
23
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
ITEM 3.
Defaults Upon Senior Securities
24
ITEM 4.
Submission of Matters to a Vote of Security Holders
24
ITEM 5.
Other Information
24
ITEM 6.
Exhibits
24

 
2
 
Part I. FINANCIAL INFORMATION

ITEM 1. Financial Statements
 
RBC Bearings Incorporated
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)
 
   
December 29, 2007
  
March 31, 2007
  
ASSETS
  
(Unaudited)
      
Current assets:
         
Cash
  
$
9,194
  
$
5,184
  
Accounts receivable, net of allowance for doubtful accounts of $936 at December 29, 2007 and $867 at March 31, 2007
    
57,697
    
54,636
  
Inventory
    
117,946
    
103,022
  
Deferred income taxes
    
6,645
    
7,115
  
Prepaid expenses and other current assets
    
3,921
    
2,914
  
Total current assets
    
195,403
    
172,871
  
Property, plant and equipment, net
    
70,280
    
61,209
  
Goodwill
    
29,847
    
29,631
  
Intangible assets, net of accumulated amortization of $3,221 at December 29, 2007 and $2,329 at March 31, 2007
    
9,165
    
5,793
  
Deferred financing costs, net of accumulated amortization of $560 at December 29, 2007 and $409 at March 31, 2007
    
1,025
    
1,207
  
Other assets
    
3,055
    
3,002
  
Total assets
  
$
308,775
  
$
273,713
  
            
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
          
Accounts payable
  
$
25,329
  
$
21,299
  
Accrued expenses and other current liabilities
    
11,123
    
11,683
  
Current portion of long-term debt
    
750
    
750
  
Capital lease obligations
    
170
    
169
  
Total current liabilities
    
37,372
    
33,901
  
Long-term debt, less current portion
    
50,500
    
58,655
  
Capital lease obligations, less current portion
    
426
    
456
  
Deferred income taxes
    
4,793
    
6,479
  
Other non-current liabilities
    
7,606
    
6,051
  
Total liabilities
    
100,697
    
105,542
  
               
Stockholders' equity:
             
Preferred stock, $.01 par value; authorized shares: 10,000,000 at December 29, 2007 and March 31, 2007; none issued and outstanding
    
—
    
—
  
Common stock, $.01 par value; authorized shares: 60,000,000 at December 29, 2007 and March 31, 2007; issued and outstanding shares: 21,571,686 at December 29, 2007 and 21,408,994 at March 31, 2007
    
216
    
214
  
Additional paid-in capital
    
180,800
    
169,489
  
Accumulated other comprehensive loss
    
(786
)
  
(2,206
)
Retained earnings
    
29,649
    
1,724
  
Treasury stock, at cost, 57,955 shares at December 29, 2007 and 37,356 shares at March 31, 2007
    
(1,801
)
  
(1,050
)
Total stockholders' equity
    
208,078
    
168,171
  
Total liabilities and stockholders' equity
  
$
308,775
  
$
273,713
  
See accompanying notes.

3


RBC Bearings Incorporated
Consolidated Statements of Operations
(dollars in thousands, except share and per share data)
(Unaudited)

   
Three Months Ended
  
Nine Months Ended
  
   
December 29,
2007
  
December 30,
2006
  
December 29,
2007
  
December 30,
2006
  
Net sales
  
$
80,407
  
$
76,544
  
$
238,462
  
$
225,023
  
Cost of sales
    
52,853
    
52,001
    
157,226
    
153,468
  
Gross margin
    
27,554
    
24,543
    
81,236
    
71,555
  
Operating expenses:
                         
Selling, general and administrative 
    
12,042
    
10,762
    
35,232
    
30,999
  
Other, net
    
401
    
(552
)
  
1,117
    
115
  
Total operating expenses
    
12,443
    
10,210
    
36,349
    
31,114
  
Operating income
    
15,111
    
14,333
    
44,887
    
40,441
  
Interest expense, net
    
744
    
1,225
    
2,291
    
4,590
  
Loss on early extinguishment of debt
    
—
    
—
    
27
    
3,576
  
Other non-operating expense (income)
    
(255
)
  
(1,227
)
  
(255
)
  
(1,227
)
Income before income taxes
    
14,622
    
14,335
    
42,824
    
33,502
  
Provision for income taxes
    
5,041
    
4,976
    
14,669
    
11,741
  
Net income
  
$
9,581
  
$
9,359
  
$
28,155
  
$
21,761
  
Net income per common share:
                         
Basic
  
$
0.45
  
$
0.45
  
$
1.31
  
$
1.07
  
Diluted
  
$
0.44
  
$
0.44
  
$
1.29
  
$
1.03
  
Weighted average common shares:
                         
Basic
    
21,458,764
    
20,573,670
    
21,422,581
    
20,319,173
  
Diluted
    
21,833,870
    
21,439,491
    
21,811,793
    
21,149,868
  

See accompanying notes.

4

RBC Bearings Incorporated
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
   
Nine Months Ended
  
   
December 29, 2007
  
December 30,
2006
  
Cash flows from operating activities: 
          
Net income
  
$
28,155
  
$
21,761
  
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation
    
6,725
    
6,994
  
Excess tax benefits from stock-based compensation
    
(8,789
)
  
(4,406
)
Deferred income taxes
    
(1,238
)
  
7,173
  
Amortization of intangible assets
    
891
    
537
  
Amortization of deferred financing costs and debt discount
    
168
    
511
  
Stock-based compensation
    
770
    
292
  
Loss (gain) on disposition of assets
    
25
    
(658
)
Loss on early extinguishment of debt (non-cash portion)
    
27
    
3,576
  
Other
    
—
    
16
  
Changes in operating assets and liabilities, net of acquisitions:
             
Accounts receivable
    
(403
)
  
1,565
  
Inventory
    
(11,124
)
  
2,179
  
Prepaid expenses and other current assets
    
(993
)
  
(404
)
Other non-current assets
    
1,671
    
(1,830
)
Accounts payable
    
2,712
    
292
  
Accrued expenses and other current liabilities
    
6,726
    
4,758
  
Other non-current liabilities
    
(717
)
  
(156
)
Net cash provided by operating activities
    
24,606
    
42,200
  
               
Cash flows from investing activities: 
              
Purchase of property, plant and equipment
    
(14,288
)
  
(8,031
)
Acquisition of businesses, net of cash acquired
    
(7,947
)
  
(8,753
)
Proceeds from sale of assets
    
14
    
3,517
  
Net cash used in investing activities
    
(22,221
)
  
(13,267
)
               
Cash flows from financing activities: 
              
Net increase (decrease) in revolving credit facility
    
(7,000
)
  
52,000
  
Net proceeds from issuance of common stock
    
—
    
57,824
  
Repurchase of common stock
    
(750
)
  
—
  
Exercise of stock options and warrants
    
1,753
    
1,144
  
Excess tax benefits from stock-based compensation
    
8,789
    
4,406
  
Payments on term loans
    
—
    
(1,422
)
Retirement of debt
    
(1,155
)
  
(144,875
)
Principal payments on capital lease obligations
    
(141
)
  
(235
)
Financing fees paid in connection with senior credit facility
    
(53
)
  
(889
)
Net cash provided by (used in) financing activities
    
1,443
    
(32,047
)
               
Effect of exchange rate changes on cash
    
182
    
444
  
               
Cash and cash equivalents: 
              
Increase (decrease) during the period
    
4,010
    
(2,670
)
Cash, at beginning of period
    
5,184
    
16,126
  
Cash, at end of period
  
$
9,194
  
$
13,456
  
               
Supplemental disclosures of cash flow information: 
              
Cash paid during the period for:
             
Interest
  
$
2,464
  
$
5,234
  
Income taxes (refunds)
    
5,727
    
(79
)

See accompanying notes.

5

RBC Bearings Incorporated
Notes to Unaudited Interim Consolidated Financial Statements
(dollars in thousands, except share and per share data)


The consolidated financial statements included herein have been prepared by RBC Bearings Incorporated, a Delaware corporation (collectively with its subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The March 31, 2007 fiscal year end balance sheet data have been derived from the Company’s audited financial statements, but do not include all disclosures required by generally accepted accounting principles in the United States. The interim financial statements included with this report have been prepared on a consistent basis with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

The consolidated financial statements include the accounts of RBC Bearings Incorporated, Roller Bearing Company of America, Inc. (“RBCA”) and its wholly-owned subsidiaries, Industrial Tectonics Bearings Corporation (“ITB”), RBC Linear Precision Products, Inc. (“LPP”), RBC Nice Bearings, Inc. (“Nice”), RBC Precision Products - Bremen, Inc. (“Bremen (MBC)”), RBC Precision Products - Plymouth, Inc. (“Plymouth”), Tyson Bearings, Inc. (“Tyson”), Schaublin Holdings S.A. and its wholly-owned subsidiaries (“Schaublin”), RBC de Mexico S DE RL DE CV (“Mexico”), RBC Oklahoma, Inc. (“RBC Oklahoma”), RBC Aircraft Products, Inc. (“API”), Shanghai Representative office of Roller Bearing Company of America, Inc. (“RBC Shanghai”), RBC Southwest Products, Inc. (“SWP”), All Power Manufacturing Co. (“All Power”), RBC Bearings U.K. Limited and its wholly-owned subsidiary Phoenix Bearings Limited (“Phoenix”) and RBC CBS Coastal Bearing Services LLC (“CBS”), as well as its Transport Dynamics (“TDC”), Heim (“Heim”) and Engineered Components (“ECD”) divisions. U.S. Bearings (“USB”) is a division of SWP and Schaublin USA is a division of Nice. All material intercompany balances and transactions have been eliminated in consolidation.

These statements reflect all adjustments, accruals and estimates 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 Annual Report on Form 10-K.

Certain reclassifications have been made to prior year’s financial statements to conform with current year presentation.

The Company operates in four reportable business segments—roller bearings, plain bearings, ball bearings, other and corporate—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 widely dispersed geographically.

The results of operations for the three month and nine month periods ended December 29, 2007 are not necessarily indicative of the operating results for the full year. The nine month periods ended December 29, 2007 and December 30, 2006 each include 39 weeks. The dollar amounts are in thousands, unless otherwise indicated.

Recent Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109,” (“FIN 48”), as of the beginning of its 2008 fiscal year. This interpretation clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. Under FIN 48, the Company first assesses whether it is more likely than not that an individual tax position will be sustained upon examination based on its technical merits. If the tax position is more likely than not to be sustained, under the presumption the taxing authority has all relevant information, it is recognized. The recognized tax position is measured as the largest benefit that is greater than 50% likely of being realized upon ultimate settlement. Previously recognized tax positions that no longer meet the more likely than not recognition threshold are derecognized in the period in which that threshold is no longer met. Accordingly, the unit of account under FIN 48 is the individual tax position and not a higher level such as the aggregate of the various positions that are encompassed by the total tax return filing. As a result of the adoption of FIN 48, the Company recognized a $230 increase in its income tax liabilities and a reduction to the April 1, 2007 beginning balance of retained earnings of $230 (see Note 7).

6
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”). This statement is effective as of the beginning of fiscal 2009. SFAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how fair value measurements were developed. SFAS 157 clarifies the principal that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. The Company is currently assessing the impact that SFAS 157 will have on its results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115,” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective as of the beginning of fiscal 2009. The Company has not yet assessed the effect, if any, that adoption of SFAS 159 will have on its results of operations and financial position.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” (“SFAS 160”). These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements.

In comparison to current practice in U.S. GAAP, the most significant changes to business combination accounting pursuant to SFAS 141(R) include requirements to:

 
·
Recognize, with certain exceptions, 100 percent of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100 percent controlling interest when the acquisition constitutes a change in control of the acquired entity.
 
·
Measure acquirer shares issued in consideration for a business combination at fair value on the acquisition date.
 
·
Recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings.
 
·
With certain exceptions, recognize preacquisition loss and gain contingencies at their acquisition-date fair values.
 
·
Capitalize in-process research and development (IPR&D) assets acquired.
 
·
Expense, as incurred, acquisition-related transaction costs.
 
·
Capitalize acquisition-related restructuring costs only if the criteria in SFAS 146 are met as of the acquisition date.
 
·
Recognize changes that result from a business combination transaction in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals as adjustments to income tax expense.

The premise of SFAS 160 is based on the economic entity concept of consolidated financial statements. Under the economic entity concept, all residual economic interest holders in an entity have an equity interest in the consolidated entity, even if the residual interest is relative to only a portion of the entity (i.e., a residual interest in a subsidiary). Therefore, SFAS 160 requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity because the noncontrolling interests meet the definition of equity of the consolidated entity.

7
SFAS 141 (R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for the Company is fiscal 2010. Early adoption is prohibited.

1. Acquisition

On May 22, 2007, the Company acquired the capital stock of Phoenix for $4,360 in cash. As a result of the acquisition, the Company recorded amortizable intangible assets of $2,379, fixed assets of $852, other long-term liabilities of $82, and $1,211 of working capital. No goodwill resulted. Phoenix, located in Gloucestershire, England, manufactures bearings for the steel and mining industries as well as other general industrial applications with bore sizes ranging from 100 millimeters to one meter. Phoenix is included in the Roller Bearings segment.

On July 25, 2007, the Company acquired the assets of CBS for $3,587 in cash. As a result of the acquisition, the Company recorded amortizable intangible assets of $1,464, goodwill of $216, fixed assets of $825, and $1,082 of working capital. CBS, located in Houston, Texas, manufactures, inspects and refurbishes large bearings for the oil and mining industries, as well as other general industrial applications with sizes ranging up to 124 inches in diameter. CBS is included in the Ball Bearings segment.

Proforma net sales and net income inclusive of Phoenix and CBS are not materially different from those reported. 

2. Secondary Offering

On April 18, 2006, pursuant to a purchase agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, KeyBanc Capital Markets and Robert W. Baird & Co., the Company, along with certain of its stockholders, sold 8,989,550 shares of its common stock (5,995,529 sold by certain of the Company’s stockholders). The offering yielded the Company aggregate net proceeds of $57,824 after payment of the underwriting discount, commissions and offering expenses. The full amount of the net proceeds was used to prepay outstanding balances under the previous credit agreement.

3. Net Income Per Common Share

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding.

Diluted net income per common share is computed by dividing net income by the sum of the weighted-average number of common shares, dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and warrants.

The table below reflects the calculation of weighted-average shares outstanding for each period presented as well as the computation of basic and diluted net income per common share:

8
 
 
  
Three Months Ended
  
Nine Months Ended
  
   
December 29,
2007
  
December 30,
2006
  
December 29,
2007
  
December 30,
2006
  
                   
Net income  
  
$
9,581
  
$
9,359
  
$
28,155
  
$
21,761
  
                           
Denominator for basic net income per common share—weighted-average shares 
    
21,458,764
    
20,573,670
    
21,422,581
    
20,319,173
  
Effect of dilution due to employee stock options and warrants 
    
375,106
    
865,821
    
389,212
    
830,695
  
Denominator for diluted net income per common share — weighted-average shares 
    
21,833,870
    
21,439,491
    
21,811,793
    
21,149,868
  
                           
Basic net income per common share 
  
$
0.45
  
$
0.45
  
$
1.31
  
$
1.07
  
                           
Diluted net income per common share 
  
$
0.44
  
$
0.44
  
$
1.29
  
$
1.03
  

4. Inventory

Inventories are stated at the lower of cost or market, using the first-in, first-out method, and are summarized below:
   
December 29,
2007
  
March 31,
2007
  
Raw materials
  
$
10,257
  
$
8,133
  
Work in process
    
36,583
    
32,457
  
Finished goods
    
71,106
    
62,432
  
   
$
117,946
  
$
103,022
  

5. Comprehensive Income

Total comprehensive income is as follows:
   
Three Months Ended
  
Nine Months Ended
  
   
December 29,
2007
  
December 30,
2006
  
December 29,
2007
  
December 30,
2006
  
Net income
  
$
9,581
  
$
9,359
  
$
28,155
  
$
21,761
  
Amortization of pension prior service cost and actuarial losses, net of taxes of $8 and $26, respectively
    
15
    
—
    
43
    
—
  
Foreign currency translation adjustments
    
474
    
431
   
1,377
    
833
 
Total comprehensive income
  
$
10,070
  
$
9,790
  
$
29,575
  
$
22,594
  

6. Debt

On June 26, 2006, the Company and RBCA terminated the previous credit agreement and the related credit, security and ancillary agreements, and entered into a credit agreement (the “KeyBank Credit Agreement”) and related security and guaranty agreements with certain banks, KeyBank National Association, as Administrative Agent, and J.P. Morgan Chase Bank, N.A. as Co-Lead Arrangers and Joint Lead Book Runners. The KeyBank Credit Agreement provides RBCA, as borrower, with a $150,000 five-year senior secured revolving credit facility which can be increased by up to $75,000, in increments of $25,000, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).

  On June 26, 2006, the Company borrowed approximately $79,000 under the KeyBank Credit Agreement and used such funds to (i) pay fees and expenses associated with the KeyBank Credit Agreement and (ii) repay the approximately $78,000 balance outstanding under the Amended Credit Agreement. As of December 29, 2007, $35,000 was outstanding under the KeyBank Credit Agreement. The Company recorded a non-cash pre-tax charge of approximately $3,576 in fiscal 2007 to write off deferred debt issuance costs associated with the early termination of the previous credit agreement.
 
9
On September 10, 2007, the Company and RBCA entered into an amendment of the KeyBank Credit Agreement. Pursuant to the terms of the amendment, the commitment fees payable under the KeyBank Credit Agreement were decreased from a range of 10 to 27.5 basis points, based on the Company’s leverage ratio (as defined under the KeyBank Credit Agreement) to a range of 7.5 to 20 basis points. Further, the margin payable under the KeyBank Credit Agreement for revolving loans that are base rate loans, based on the Company’s leverage ratio, was decreased from a range of 0 to 75 basis points to a range of 0 to 25 basis points. The margin payable under the KeyBank Credit Agreement for revolving loans that are fixed rate loans, based on the Company’s leverage ratio (as defined under the agreement) was decreased from a range of 62.5 to 165 basis points to a range of 37.5 to 115 basis points. Also, the covenant requiring the Company to limit capital expenditures (excluding acquisitions) in any fiscal year to an amount not to exceed $20,000 was amended to increase the limit to an amount not to exceed $30,000.

Approximately $21,638 of the KeyBank Credit Agreement is being utilized to provide letters of credit to secure RBCA’s obligations relating to certain Industrial Development Revenue Bonds (the “IRB’s”) and insurance programs. As of December 29, 2007, RBCA had the ability to borrow up to an additional $93,362 under the KeyBank Credit Agreement.

On September 4, 2007, the Company voluntarily paid off the Series 1998 IRB, the principal amount of which was $1,155.

On December 8, 2003, Schaublin entered into a bank credit facility (the “Swiss Credit Facility”) with Credit Suisse providing for 10,000 Swiss francs, or approximately $8,811, of term loan (the “Swiss Term Loan”) and up to 2,000 Swiss francs, or approximately $1,762, of revolving credit loans and letters of credit (the “Swiss Revolving Credit Facility”). RBCA pledged 99.4% of the present and future share capital of Schaublin S.A. (1,366 shares) against this facility. On November 8, 2004, Schaublin amended the Swiss Credit Facility to increase the Swiss Revolving Credit Facility to 4,000 Swiss francs, or approximately $3,525. Borrowings under the Swiss Credit Facility bear interest at a floating rate of LIBOR plus 2.25%. As of December 29, 2007, there were no borrowings outstanding under the Swiss Credit Facility.

The balances payable under all borrowing facilities are as follows:
   
December 29,
2007
  
March 31,
2007
  
KeyBank Credit Agreement
          
Five-year senior secured revolving credit facility; amounts outstanding bear interest at the prime rate or LIBOR, plus a specified margin, depending on the type of borrowing being made (5.5% at December 29, 2007 and 6.1% at March 31, 2007)
  
$
35,000
  
$
42,000
  
Note Payable
    
750
    
750
  
Industrial Development Revenue Bonds 
              
Series 1994 A, bears interest at a variable rate, payable monthly through September 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, bears interest at variable rates, payable monthly through December 2021.
    
—
    
1,155
  
Series 1999, bearing interest at variable rates, payable monthly through April 2024
    
4,800
    
4,800
  
Total Debt
    
51,250
    
59,405
  
Less: Current Portion
    
750
    
750
  
Long-Term Debt
  
$
50,500
  
$
58,655
  

10
The current portion of long-term debt as of December 29, 2007 and March 31, 2007 consists of a $750 note payable related to the All Power acquisition.

7. Income Taxes

The Company adopted the provisions of FIN 48 on April 1, 2007. As a result of its implementation, the Company recognized an increase in the liability for unrecognized tax benefits of approximately $230 and a reduction to the April 1, 2007 balance of retained earnings. The total amount of unrecognized tax benefits as of April 1, 2007, including the cumulative effect of the adoption of FIN 48, was $3,210, substantially all of which represents liabilities that, if recognized, would impact the effective tax rate. Unrecognized tax benefits have not materially changed since April 1, 2007 and the Company does not anticipate any material changes within the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to state or foreign income tax examinations by tax authorities for years ending before March 31, 2001. The Company is no longer subject to U.S. federal tax examination by the Internal Revenue Service for years ending before March 31, 2003.

The Company recognizes the interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company had approximately $72 of accrued interest and penalties at April 1, 2007 with no material change through December 29, 2007.

The effective income tax rates for the three and nine month periods ended December 29, 2007 and December 30, 2006 were 34.5% and 34.7% and 34.3% and 35.0%, respectively. The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

8. Pension and Postretirement Plans 

The Company has noncontributory defined benefit pension plans covering union employees in its Heim division plant in Fairfield, Connecticut and its Plymouth subsidiary plant in Plymouth, Indiana.

Effective March 31, 2007, the pension plan for the Tyson subsidiary in Glasgow, Kentucky was frozen pursuant to the terms of the Shutdown Agreement between Tyson Bearings Company, Inc. and the United Steelworkers of America (AFL-CIO) Local 7461-01 dated February 6, 2007. No further benefits will accrue under this plan, and no new employees will become eligible for participation in the plan. However, the Company will continue to maintain the plan.

Effective May 1, 2006, the pension plan for the Nice subsidiary in Kulpsville, Pennsylvania was frozen in accordance with the terms of the Shutdown Agreement between RBC Nice Bearings, Inc. and the United Steelworkers of America (AFL-CIO) Local 6816-12 dated February 15, 2006. No further benefits will accrue under this plan, and no new employees will become eligible for participation in the plan. However, the Company will continue to maintain the plan. Net periodic benefit cost in the nine month period ended December 30, 2006 included $77 related to the impact of the curtailment of this plan.

The following table illustrates the components of net periodic benefit cost for the Company’s pension benefits:

11
 
   
Pension Benefits
Three Months Ended
  
Pension Benefits
Nine Months Ended
  
   
December 29,
2007
  
December 30,
2006
  
December 29,
2007
  
December 30,
2006
  
Components of net periodic benefit cost:
                  
Service cost
  
$
69
  
$
114
  
$
207
  
$
371
  
Interest cost
    
262
    
258
    
786
    
774
  
Expected return on plan assets
    
(340
)
  
(327
)
  
(1,020
)
  
(981
)
Amortization of prior service cost
    
2
    
10
    
6
    
19
  
Amortization of losses
    
18
   
35
   
54
   
130
 
Curtailment loss
    
—
    
—
    
—
    
77
  
Total net periodic benefit cost
  
$
11
  
$
90
  
$
33
  
$
390
  

The postretirement medical and life insurance benefits for the Tyson subsidiary in Glasgow, Kentucky were curtailed pursuant to the terms of the Shutdown Agreement between Tyson Bearing Company, Inc. and the United Steelworkers of America (AFL-CIO) Local 7461-01 dated February 6, 2007.

Effective May 1, 2006, the postretirement medical and life insurance benefits for the Nice subsidiary in Kulpsville, Pennsylvania were curtailed pursuant to the terms of the Shutdown Agreement between RBC Nice Bearings, Inc. and the United Steelworkers of America (AFL-CIO) Local 6816-12 dated February 15, 2006. No further benefits will accrue under this plan, and no new employees will become eligible for participation in the plan. Life insurance benefits terminated July 31, 2006. Postretirement medical benefits will be available until the contract expires on January 31, 2008. Net periodic benefit cost in the nine month period ended December 30, 2006 included a gain of $132 related to the impact of the curtailment of this plan.

The following table illustrates the components of net periodic benefit cost for the Company’s other postretirement benefits:
   
Other Postretirement Benefits
Three Months Ended
  
Other Postretirement Benefits
Nine Months Ended
  
   
December 29,
2007
  
December 30,
2006
  
December 29,
2007
  
December 30,
2006
  
Components of net periodic benefit cost:
                  
Service cost
  
$
11
  
$
31
  
$
35
  
$
95
  
Interest cost
    
39
    
50
    
115
    
150
  
Prior service cost amortization
    
(8
)
  
(4
)
  
(22
)
  
(39
)
Amount of loss recognized
    
11
    
11
    
31
    
38
  
Curtailment (gain)
    
—
    
—
    
—
    
(132
)
Total net periodic benefit cost
  
$
53
  
$
88
  
$
159
  
$
112
  

9. Reportable Segments

The Company operates through operating segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Those operating segments with similar economic characteristics and that meet all other required criteria, including nature of the products and production processes, distribution patterns and classes of customers, are aggregated as reportable segments. Certain other operating segments do not exhibit the common attributes mentioned above and do not meet the quantitative thresholds for separate disclosure, and their information is combined and disclosed as “Other.” There is also a segment reflecting corporate charges.

The Company has four reportable business segments engaged in the manufacture and sale of the following:
 
12
Roller Bearings. Roller bearings are anti-friction bearings that use rollers instead of balls. The Company manufactures four basic types of roller bearings: heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers and aircraft roller bearings.
 
Plain Bearings. Plain bearings are produced with either self-lubricating or metal-to-metal designs and consist of several sub-classes, including rod end bearings, spherical plain bearings and journal bearings. Unlike ball bearings, which are used in high-speed rotational applications, plain bearings are primarily used to rectify inevitable misalignments in various mechanical components.

Ball Bearings. The Company manufactures four basic types of ball bearings: high precision aerospace, airframe control, thin section and commercial ball bearings which are used in high-speed rotational applications.

Other. Other consists of two minor operating locations that do not fall into the above segmented categories. The Company produces precision ground ball bearing screws at its LPP plant that offer repeatable positioning accuracy in machine tools, transfer lines, robotic handling and semiconductor equipment. The Company's Schaublin location produces precision machine tool collets that provide effective part holding and accurate part location during machining operations.

Corporate. Corporate consists of expenses incurred at the corporate office.

Segment performance is evaluated based on segment net sales and operating income. Items not allocated to segment operating income include corporate administrative expenses and certain other amounts.

   
Three Months Ended
  
Nine Months Ended
  
   
December 29, 2007
  
December 30, 2006
  
December 29, 2007
  
December 30, 2006
  
Net External Sales
                  
Roller
  
$
22,832
  
$
21,348
  
$
69,582
  
$
68,945
  
Plain
    
38,653
    
37,166
    
112,548
    
104,250
  
Ball
    
13,004
    
13,382
    
40,257
    
37,722
  
Other
    
5,918
    
4,648
    
16,075
    
14,106
  
   
$
80,407
  
$
76,544
  
$
238,462
  
$
225,023
  
Operating Income
                          
Roller
  
$
6,813
  
$
5,524
  
$
20,698
  
$
17,611
  
Plain
    
10,504
    
9,823
    
30,115
    
27,957
  
Ball
    
2,794
    
4,500
    
9,455
    
10,420
  
Other
    
744
    
330
    
1,753
    
1,820
  
Corporate
    
(5,744
)
  
(5,844
)
  
(17,134
)
  
(17,367
)
   
$
15,111
  
$
14,333
  
$
44,887
  
$
40,441
  
Geographic External Sales
                          
Domestic
  
$
67,330
  
$
66,453
  
$
202,291
  
$
195,951
  
Foreign
    
13,077
    
10,091
    
36,171
    
29,072
  
   
$
80,407
  
$
76,544
  
$
238,462
  
$
225,023
  
Intersegment Sales
                          
Roller
  
$
2,378
  
$
2,203
  
$
6,659
  
$
6,206
  
Plain
    
373
    
240
    
875
    
771
  
Ball
    
1,948
    
1,268
    
5,381
    
3,457
  
Other
    
4,352
    
3,803
    
12,923
    
10,934
  
   
$
9,051
  
$
7,514
  
$
25,838
  
$
21,368
  

All intersegment sales are eliminated in consolidation.

13
 
10. Restructuring of Operations

In January 2007, the Company began the consolidation of its tapered bearing manufacturing capacity. The Company has discontinued manufacturing tapered bearings in its Glasgow, Kentucky facility and has consolidated the remaining manufacturing into other Company manufacturing facilities. At March 31, 2007, a balance of $893 was included in accrued liabilities related to this activity. This balance was paid during the nine months ended December 29, 2007.
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement As To Forward-Looking Information 
 
The information in this discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the “safe harbor” created by those sections. All statements other than statements of historical facts, included in this quarterly report on Form 10-Q and in statements made by employees in oral discussion regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are “forward-looking statements” as the term is defined in the Private Securities Litigation Reform Act of 1995.

 The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation: (a) the bearing industry is highly competitive, and this competition could reduce our profitability or limit our ability to grow; (b) the loss of a major customer could result in a material reduction in our revenues and profitability; (c) weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers’ businesses generally, could materially reduce our revenues and profitability; (d) future reductions or changes in U.S. government spending could negatively affect our business; (e) fluctuating supply and costs of raw materials and energy resources could materially reduce our revenues, cash flow from operations and profitability; (f) we may not be able to address technological advances or maintain customer relationships which are necessary to remain competitive within our businesses; (g) our products are subject to certain approvals, and the loss of such approvals could materially reduce our revenues and profitability; (h) under certain circumstances, the U.S. government has the right to debar or suspend us from acting as a U.S. government contractor or subcontractor, and if we are suspended or debarred from acting as a government supplier for any reason, such an action would materially reduce our revenues and profitability; (i) we have outstanding debt, and may incur additional debt in the future for acquisitions or other purposes, which could materially impact our business; (j) restrictions in our indebtedness agreements could limit our growth and our ability to respond to changing conditions; (k) work stoppages and other labor problems could materially reduce our ability to operate our business; (l) our business is capital intensive and may consume cash in excess of cash flow from our operations; (m) unexpected equipment failures, catastrophic events or capacity constraints may increase our costs and reduce our sales due to production curtailments or shutdowns; (n) the occurrence of extraordinary events, such as a major terrorist attack, may adversely affect our business, resulting in a decrease in our revenues; (o) we may not be able to continue to make the acquisitions necessary for us to realize our growth strategy; (p) the costs and difficulties of integrating acquired businesses could impede our future growth; we depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects; (q) our international operations are subject to risks inherent in such activities; (r) currency translation risks may have a material impact on our results of operations; (s) our pension plans are underfunded, and we may be required to make significant future contributions to the plans; (t) we may incur material losses for product liability and recall related claims; (u) environmental regulations impose substantial costs and limitations on our operations, and environmental compliance may be more costly than we expect; (v) our intellectual property and other proprietary rights are valuable, and any inability to protect them could adversely affect our business and results of operations; in addition, we may be subject to infringement claims by third parties; (w) cancellation of orders in our backlog of orders could negatively impact our revenues; (x) if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; (y) any reduction of Continued Dumping and Subsidy Offset Act (CDSOA) distributions in the future would reduce our earnings and cash flows; (z) provisions in our charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us and if there are substantial sales of our common stock, our stock price could decline. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC, including, without limitation, the risks identified under the heading “Risk Factors” set forth in the Annual Report on Form 10-K for the year ended March 31, 2007. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not intend, and undertake no obligation, to update or alter any forward-looking statement. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.
 
14
Overview

We are a well known international manufacturer of highly engineered precision plain, roller and ball bearings. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on the higher end of the bearing market where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We have been providing bearing solutions to our customers since 1919. Over the past ten years, under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 20 manufacturing facilities in four countries.

Demand for bearings generally follows the market for products in which bearings are incorporated and the economy as a whole. Purchasers of bearings include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and general market conditions could negatively impact our operating results. We have endeavored to mitigate the cyclicality of our product markets by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.

Outlook

Backlog, as of December 29, 2007, was $192.7 million versus $178.1 million as of December 30, 2006. We continue to see positive momentum from our core diversified industrial, aerospace and defense markets. Management believes that operating cash flows and available credit under the credit facility will provide adequate resources to fund internal and external growth initiatives for the foreseeable future.

Results of Operations

The following table sets forth the various components of our consolidated statements of operations, expressed as a percentage of net sales, for the periods indicated that are used in connection with the discussion herein.

15

   
Three Months Ended
  
Nine Months Ended
  
   
December 29, 2007
  
December 30, 2006
  
December 29, 2007
  
December 30, 2006
  
Statement of Operations Data: 
                  
Net sales
    
100.0
%
  
100.0
%
  
100.0
%
  
100.0
%
Gross margin
    
34.3
    
32.1
    
34.1
    
31.8
  
Selling, general and administrative
    
15.0
    
14.1
    
14.8
    
13.8
  
Other, net
    
0.5
    
(0.7
)
  
0.5
    
—
  
Operating income
    
18.8
    
18.7
    
18.8
    
18.0
  
Interest expense, net
    
0.9
    
1.6
    
1.0
    
2.0
  
Loss on early extinguishment of debt
    
—
    
—
    
—
    
1.6
  
Other non-operating expense (income)
    
(0.3
)
  
(1.6
)
  
(0.1
)
  
(0.5
)
Income before income taxes
    
18.2
    
18.7
    
17.9
    
14.9
  
Provision for income taxes
    
6.3
    
6.5
    
6.1
    
5.2
  
Net income
    
11.9
%
  
12.2
%
  
11.8
%
  
9.7
%

For purposes of this quarterly report on Form 10-Q, unless otherwise defined, capitalized terms used herein shall have the meanings assigned to them in the Financial Statements.
 
Three Month Period Ended December 29, 2007 Compared to Three Month Period Ended December 30, 2006

Net Sales. Net sales for the three month period ended December 29, 2007 were $80.4 million, an increase of $3.9 million, or 5.0%, compared to $76.5 million for the same period in the prior year. This includes the impact of a decrease in sales to the class 8 heavy truck market of $2.4 million, or 40.3% from the prior year. During the three month period ended December 29, 2007, we experienced net sales growth in three of our four segments, driven by demand across our end markets as well as our continued efforts to supply new products to existing and new customers. Net sales to aerospace and defense customers grew 4.3% in the third quarter of fiscal 2008 compared to the same period last year, driven mainly by commercial aerospace aftermarket and OEM demand, tempered by the relocation of one of our aircraft plants. Our net sales to our diversified industrial customers increased 5.9% in the third quarter of fiscal 2008 compared to the same period last year. Reflected in this change, our core markets of construction, mining and general industrial distribution grew 14.7%, partially offset by a decrease in year-over-year volume in our class 8 truck business.

The Plain Bearings segment achieved net sales of $38.7 million for the three month period ended December 29, 2007, an increase of $1.5 million, or 4.0%, compared to $37.2 million for the same period in the prior year. The commercial and military aerospace market grew $2.2 million due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers and continued demand for aftermarket product. This was offset by a $0.7 million decline in net sales to our diversified industrial customers. This decline was mainly due to a shift in manufacturing capacity in response to growing aerospace demand and lower industrial OEM volume.

The Roller Bearings segment achieved net sales of $22.8 million for the three month period ended December 29, 2007, an increase of $1.5 million, or 7.0%, compared to $21.3 million for the same period in the prior year. Net sales to the class 8 truck OEM and aftermarket declined by $2.4 million, offset by an increase of $2.2 million in aerospace applications, general industrial demand and the inclusion of Phoenix, which accounted for $1.7 million of net sales for the period ended December 29, 2007.

The Ball Bearings segment achieved net sales of $13.0 million for the three month period ended December 29, 2007, a decrease of $0.4 million, or 2.8%, compared to $13.4 million for the same period in the prior year. Of this decrease, $1.3 million was due to timing of aerospace and defense-related shipments. Sales to our customers in the industrial market increased $0.9 million compared to the same period last fiscal year. The inclusion of CBS accounted for $1.0 million of the net sales increase for the period ended December 29, 2007, offset by a decrease of $0.1 million in sales to other general industrial customers.

16
The Other segment, which is focused mainly on the sale of precision ball screws and machine tool collets, achieved net sales of $5.9 million for the three month period ended December 29, 2007, an increase of $1.3 million, or 27.3%, compared to $4.6 million for the same period last year. This increase was primarily due to increased sales of machine tool collets in Europe.

Gross Margin. Gross margin was $27.6 million, or 34.3% of net sales, for the three month period ended December 29, 2007, versus $24.5 million, or 32.1% of net sales, for the comparable period in fiscal 2007. The increase in our gross margin as a percentage of net sales was primarily the result of an overall increase in volume, a shift in mix toward higher margin products and the benefit of cost reduction programs.

Selling, General and Administrative. SG&A expenses increased by $1.2 million, or 11.9%, to $12.0 million for the three month period ended December 29, 2007 compared to $10.8 million for the same period in fiscal 2007. As a percentage of net sales, SG&A increased to 15.0% for the three month period ended December 29, 2007 compared to 14.1% for the same period in fiscal 2007. The increase of $1.2 million was due to additional personnel necessary to support our increased volume and the inclusion of our new acquisitions, Phoenix and CBS.

Other, net. Other, net for the three month period ended December 29, 2007 increased by $1.0 million to an expense of $0.4 million compared to income of $0.6 million for the same period in fiscal 2007. For the three month period ended December 29, 2007, other, net consisted of $0.3 million of amortization of intangibles and $0.1 million of moving expenses related to the relocation of our aircraft products manufacturing facility. For the three month period ended December 30, 2006, other, net included a $0.8 million gain on the sale of our Nice facility offset by $0.2 million of amortization of intangibles.

Operating Income. Operating income was $15.1 million, or 18.8% of net sales, for the three month period ended December 29, 2007 compared to $14.3 million, or 18.7% of net sales, for the three month period ended December 30, 2006. Operating income for our Plain Bearings segment was $10.5 million for the three month period ended December 29, 2007, or 27.2% of net sales, compared to $9.8 million for the same period last year, or 26.4% of net sales. Our Roller Bearings segment achieved an operating income for the three month period ended December 29, 2007 of $6.8 million, or 29.8% of net sales, compared to $5.5 million, or 25.9% of net sales, for the three month period ended December 30, 2006. Our Ball Bearings segment achieved an operating income of $2.8 million, or 21.5% of net sales, for the three month period ended December 29, 2007, compared to $4.5 million, or 33.6% of net sales, for the same period in fiscal 2007. Our Other segment achieved an operating income of $0.7 million, or 12.6% of net sales, for the three month period ended December 29, 2007, compared to $0.3 million, or 7.1% of net sales, for the same period in fiscal 2007. The increase in operating income in three of our four segments was driven primarily by a shift in mix toward higher margin products and increased manufacturing efficiency resulting from facility consolidations.

Other Non-Operating Expense (Income). We received approximately $0.3 million and $1.2 million in the three month periods ended December 29, 2007 and December 30, 2006, respectively, in payments under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) for 2007 and 2006. The CDSOA distributes antidumping duties paid by overseas companies to domestic firms hurt by unfair trade.
 
Interest Expense, net. Interest expense, net decreased by $0.5 million to $0.7 million in the three month period ended December 29, 2007, compared to $1.2 million in the same period last fiscal year mainly driven by debt reduction. Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expenses included in interest expense, net were $0.1 million for the three month periods ended December 29, 2007 and December 30, 2006, respectively.

Income Before Income Taxes. Income before taxes increased by $0.3 million, to $14.6 million for the three month period ended December 29, 2007 compared to $14.3 million for the three month period ended December 30, 2006.

17
Income Taxes. Income tax expense was $5.0 million for the three month periods ended December 29, 2007 and December 30, 2006, respectively. Our effective income tax rate for the three month period ended December 29, 2007 was 34.5% compared to 34.7% for the three month period ended December 30, 2006. The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

Net Income. Net income increased by $0.2 million to $9.6 million for the three month period ended December 29, 2007 compared to $9.4 million for the three month period ended December 30, 2006.

Nine Month Period Ended December 29, 2007 Compared to Nine Month Period Ended December 30, 2006

Net Sales. Net sales for the nine month period ended December 29, 2007 were $238.5 million, an increase of $13.5 million, or 6.0%, compared to $225.0 million for the same period in the prior year. This includes the impact of a decrease in sales to the class 8 heavy truck market of $8.0 million, or 38.5% from the prior year. During the nine month period ended December 29, 2007, we experienced net sales growth in all our four segments, driven by demand across our end markets as well as our continued efforts to supply new products to existing and new customers. Net sales to aerospace and defense customers grew 12.3% in the nine month period of fiscal 2008 compared to the same period last year, driven mainly by commercial and military aerospace aftermarket and OEM demand. Our net sales to our diversified industrial customers declined 0.1% in the nine month period of fiscal 2008 compared to the same period last year. Reflected in this change, our core markets of construction, mining and general industrial distribution grew 8.3%, offset by a decrease in year-over-year volume in our class 8 truck aftermarket business.

The Plain Bearings segment achieved net sales of $112.5 million for the nine month period ended December 29, 2007, an increase of $8.2 million, or 8.0%, compared to $104.3 million for the same period in the prior year. The commercial and military aerospace market grew $12.2 million due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers and continued demand for aftermarket product. This was offset by a $4.0 million decline in net sales to our diversified industrial customers. This decline was mainly due to a shift in manufacturing capacity in response to growing aerospace demand and lower industrial OEM volume.

The Roller Bearings segment achieved net sales of $69.6 million for the nine month period ended December 29, 2007, an increase of $0.7 million, or 0.9%, compared to $68.9 million for the same period in the prior year. Net sales to the class 8 truck OEM and aftermarket declined by $8.0 million, offset by an increase of $4.8 million in aerospace applications, general industrial demand and the inclusion of Phoenix, which accounted for $3.9 million of net sales for the nine month period ended December 29, 2007.

The Ball Bearings segment achieved net sales of $40.3 million for the nine month period ended December 29, 2007, an increase of $2.6 million, or 6.7%, compared to $37.7 million for the same period in the prior year. Of this increase, $0.3 million was driven principally by increased aerospace and defense-related demand. Sales to our customers in the industrial market increased $2.3 million compared to the same period last fiscal year. The inclusion of CBS accounted for $1.9 million of the net sales increase for the nine month period ended December 29, 2007.

The Other segment, which is focused mainly on the sale of precision ball screws and machine tool collets, achieved net sales of $16.1 million for the nine month period ended December 29, 2007, an increase of $2.0 million, or 14.0%, compared to $14.1 million for the same period last year. This increase was primarily due to increased sales of machine tool collets in Europe.

Gross Margin. Gross margin was $81.2 million, or 34.1% of net sales, for the nine month period ended December 29, 2007, versus $71.6 million, or 31.8% of net sales, for the comparable period in fiscal 2007. The increase in our gross margin as a percentage of net sales was primarily the result of an overall increase in volume and a shift in mix toward higher margin products combined with the corresponding effects of efficiency improvements, offset by $0.3 million underabsorption related to the relocation of our aircraft products manufacturing facility during the nine month period ended December 29, 2007.

18
Selling, General and Administrative. SG&A expenses increased by $4.2 million, or 13.7%, to $35.2 million for the nine month period ended December 29, 2007 compared to $31.0 million for the same period in fiscal 2007. As a percentage of net sales, SG&A increased to 14.8% for the nine month period ended December 29, 2007 compared to 13.8% for the same period in fiscal 2007. The increase of $4.2 million was due to additional personnel necessary to support our increased volume and the inclusion of Phoenix and CBS. 

Other, net. Other, net for the nine month period ended December 29, 2007 was $1.1 million compared to $0.1 million for the same period in fiscal 2007. For the nine month period ended December 29, 2007, other, net consisted of $0.9 million of amortization of intangibles and $0.2 million of moving expenses related to the relocation of our aircraft products manufacturing facility. For the nine month period ended December 30, 2006, other, net included $0.4 million of plant shutdown expenses related to our RBC Nice Bearings, Inc. plant consolidation and $0.5 million of amortization of intangibles offset by a $0.8 million gain related to the sale of the Nice facility.

Operating Income. Operating income was $44.9 million, or 18.8% of net sales, for the nine month period ended December 29, 2007 compared to $40.4 million, or 18.0% of net sales, for the nine month period ended December 30, 2006. Operating income for our Plain Bearings segment was $30.1 million for the nine month period ended December 29, 2007, or 26.8% of net sales, compared to $28.0 million for the same period last year, or 26.8% of net sales. Our Roller Bearings segment achieved an operating income for the nine month period ended December 29, 2007 of $20.7 million, or 29.7% of net sales, compared to $17.6 million, or 25.5% of net sales, for the nine month period ended December 30, 2006. Our Ball Bearings segment achieved an operating income of $9.5 million, or 23.5% of net sales, for the nine month period ended December 29, 2007, compared to $10.4 million, or 27.6% of net sales, for the same period in fiscal 2007. Our Other segment achieved an operating income of $1.8 million, or 10.9% of net sales, for the nine month period ended December 29, 2007, compared to $1.8 million, or 12.9% of net sales, for the same period in fiscal 2007. The increase in operating income in two of our four segments was driven primarily by a shift in mix toward higher margin products offset by $0.3 million underabsorption related to the relocation of our aircraft products manufacturing facility during the nine month period ended December 29, 2007.

Interest Expense, net. Interest expense, net decreased by $2.3 million to $2.3 million in the nine month period ended December 29, 2007, compared to $4.6 million in the same period last fiscal year mainly driven by debt reduction. Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expenses included in interest expense, net were $0.2 million for the nine month period ended December 29, 2007 compared to $0.3 million for the nine month period ended December 30, 2006.

Loss on Early Extinguishment of Debt. For the nine month period ended December 30, 2006, loss on extinguishment of debt was $3.6 million for the non-cash write-off of deferred debt issuance costs associated with the early termination of the previous senior credit facility.

Other Non-Operating Expense (Income). We received approximately $0.3 million and $1.2 million in the nine month periods ended December 29, 2007 and December 30, 2006, respectively, in payments under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA). The CDSOA distributes antidumping duties paid by overseas companies to domestic firms hurt by unfair trade.
 
Income Before Income Taxes. Income before taxes increased by $9.3 million, to $42.8 million for the nine month period ended December 29, 2007 compared to $33.5 million for the nine month period ended December 30, 2006.

Income Taxes. Income tax expense for the nine month period ended December 29, 2007 was $14.7 million compared to $11.7 million for the nine month period ended December 30, 2006. Our effective income tax rate for the nine month period ended December 29, 2007 was 34.3% compared to 35.0% for the nine month period ended December 30, 2006. The effective income tax rates are below the U.S. statutory rate due to foreign income taxed at lower rates and a special manufacturing deduction in the U.S.

19
Net Income. Net income increased by $6.4 million to $28.2 million for the nine month period ended December 29, 2007 compared to $21.8 million for the nine month period ended December 30, 2006.

Liquidity and Capital Resources

Liquidity

On June 15, 2007, our board of directors authorized us to repurchase up to $10.0 million of our common stock from time to time on the open market, through block trades, or in privately negotiated transactions depending on market conditions, alternative uses of capital and other factors. Purchases may be commenced, suspended or discontinued at any time without prior notice. The new program, which does not have an expiration date, replaces a $7.5 million program that expired on March 31, 2007. As of December 29, 2007, 20,599 shares of stock have been repurchased under the new program for an aggregate cost of $0.8 million.

On April 18, 2006, pursuant to a purchase agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, KeyBanc Capital Markets and Robert W. Baird & Co., we, along with certain of our stockholders, sold 8,989,550 shares of our common stock (5,995,529 sold by certain of our stockholders). The offering yielded us aggregate net proceeds of approximately $57.8 million after payment of the underwriting discount, commissions and offering expenses. The full amount of the net proceeds was used to prepay outstanding balances under the previous credit agreement.

On June 26, 2006, the Company and RBCA terminated its previous credit agreement, and the related credit, security and ancillary agreements, and entered into a credit agreement (the “KeyBank Credit Agreement”) and related security and guaranty agreements with certain banks, KeyBank National Association, as Administrative Agent, and J.P. Morgan Chase Bank, N.A. as Co-Lead Arrangers and Joint Lead Book Runners. The KeyBank Credit Agreement provides us with a $150.0 million five-year senior secured revolving credit facility which can be increased by up to $75.0 million, in increments of $25.0 million, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment).

On September 10, 2007, the Company and RBCA entered into an amendment of the KeyBank Credit Agreement. Pursuant to the terms of the amendment, the commitment fees payable under the KeyBank Credit Agreement were decreased from a range of 10 to 27.5 basis points, based on the Company’s leverage ratio (as defined under the KeyBank Credit Agreement) to a range of 7.5 to 20 basis points. Further, the margin payable under the KeyBank Credit Agreement for revolving loans that are base rate loans, based on the Company’s leverage ratio, was decreased from a range of 0 to 75 basis points to a range of 0 to 25 basis points. The margin payable under the KeyBank Credit Agreement for revolving loans that are fixed rate loans, based on the Company’s leverage ratio (as defined under the agreement) was decreased from a range of 62.5 to 165 basis points to a range of 37.5 to 115 basis points. Also, the covenant requiring the Company to limit capital expenditures (excluding acquisitions) in any fiscal year to an amount not to exceed $20.0 million was amended to increase the limit to an amount not to exceed $30.0 million.

Amounts outstanding under the KeyBank Credit Agreement are due and payable on its expiration date (June 24, 2011). We may elect to prepay some or all of the outstanding balance from time to time without penalty.

Since our net operating losses will be fully utilized during fiscal 2008, we expect an increase in our cash disbursements during the fourth quarter of the fiscal year to satisfy our income tax obligations.

On December 8, 2003, Schaublin entered into a bank credit facility (the “Swiss Credit Facility”) with Credit Suisse providing for 10.0 million Swiss francs, or approximately $8.8 million, of term loan (the “Swiss Term Loan”) and up to 2.0 million Swiss francs, or approximately $1.8 million, of revolving credit loans and letters of credit (the “Swiss Revolving Credit Facility”). RBCA pledged 99.4% of the present and future share capital of Schaublin S.A. (1,366 shares) against this facility. On November 8, 2004, Schaublin amended the Swiss Credit Facility to increase the Swiss Revolving Credit Facility to 4.0 million Swiss francs, or approximately $3.5 million. Borrowings under the Swiss Credit Facility bear interest at a floating rate of LIBOR plus 2.25%. As of December 29, 2007, there were no borrowings outstanding under the Swiss Credit Facility.
 
20
Cash Flows

Nine month Period Ended December 29, 2007 Compared to the Nine month Period Ended December 30, 2006

 For the nine months ended December 29, 2007, we used cash from operations of $24.6 million, excess tax benefits from stock-based compensation of $8.8 million and proceeds from the exercise of stock options of $1.8 million to fund capital expenditures of $14.3 million, fund the acquisitions of Phoenix and CBS for $7.9 million, pay down the revolving credit facility by $7.0 million, pay off an IRB for $1.2 million, repurchase common stock for $0.8 million and increase cash balances by $4.0 million.

For the nine months ended December 30, 2006, we used cash from operations of $42.2 million, net proceeds of $57.8 million from our secondary offering, excess tax benefits from stock-based compensation of $4.4 million, proceeds from the exercise of stock options of $1.1 million and proceeds of $3.5 million related to the disposal of assets and cash on hand of $2.7 million to fund capital expenditures of $8.0 million and the acquisition of All Power for $8.8 million. The balance was used to refinance the credit agreement, thereby reducing borrowings under the new agreement by $94.3 million in addition to funding other activity totaling $0.6 million.
 
Capital Expenditures

Our capital expenditures were $14.3 million for the nine month period ended December 29, 2007. We expect to make capital expenditures of approximately $18.0 to $21.0 million during fiscal 2008 in connection with our existing business. We intend to fund our fiscal 2008 capital expenditures principally through existing cash, internally generated funds and borrowings under our bank facilities. We may also make substantial additional expenditures in connection with acquisitions.

Obligations and Commitments
 
As of December 29, 2007, there was no material change in debt and interest, capital lease, operating lease or pension and postretirement obligations as compared to such obligations and liabilities as of March 31, 2007.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign currency exchange rates.

Interest Rates. We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding indebtedness. Outstanding balances under our KeyBank Credit Agreement generally bear interest at the prime rate or LIBOR (the London inter-bank offered rate for deposits in U.S. dollars for the applicable LIBOR period) plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. As of December 29, 2007, our margin is 0.0% for prime rate loans (prime rate at December 29, 2007 was 7.25%) and 0.625% for LIBOR rate loans (one month LIBOR rate at December 29, 2007 was 4.88%). As of December 29, 2007, based on the aggregate amount of $35.0 million outstanding under our KeyBank Credit Agreement, a 100 basis point change in interest rates would have changed our interest expense by approximately $0.4 million per year.

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Foreign Currency Exchange Rates. As a result of increased sales in Europe, our exposure to risk associated with fluctuating currency exchange rates between the U.S. dollar, the Euro, the Swiss Franc and the British Pound has increased. Our Swiss operations utilize the Swiss Franc as the functional currency, our French operations utilize the Euro as the functional currency and our English operations utilize the British Pound as the functional currency. Foreign currency transaction gains and losses are included in earnings. Approximately 15% of our net sales were denominated in foreign currencies in the first nine months of fiscal 2008. We expect that this proportion is likely to increase as we seek to increase our penetration of foreign markets, particularly within the aerospace and defense markets. 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. Unrealized currency translation gains and losses are recognized upon translation of the foreign subsidiaries’ balance sheets to U.S. dollars. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our earnings. We currently do not have exchange rate hedges in place to reduce the risk of an adverse currency exchange movement. Although currency fluctuations have not had a material impact on our financial performance in the past, such fluctuations may materially affect our financial performance in the future. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

ITEM 4. Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 29, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 29, 2007, our disclosure controls and procedures were (1) designed to ensure that information relating to our Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported to our Chief Executive Officer and Chief Financial Officer within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, and (2) effective, in that they provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting occurred during the nine month period ended December 29, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
 
Limitation on Effectiveness of Controls  
 
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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Part II - OTHER INFORMATION

ITEM 1. Legal Proceedings
 
From time to time, we are involved in litigation and administrative proceedings which arise in the ordinary course of our business. We do not believe that any litigation or proceeding in which we are currently involved, either individually or in the aggregate, is likely to have a material adverse effect on our business, financial condition, operating results, cash flow or prospects.

ITEM 1A. Risk Factors
 
There have been no material changes to our risk factors and uncertainties during the nine month period ended December 29, 2007. For a discussion of the Risk Factors, refer to Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the period ended March 31, 2007.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Unregistered Sales of Equity Securities
 
None.
 
Use of Proceeds 
 
Not applicable.

Issuer Purchases of Equity Securities

Total share repurchases for the three months ended December 29, 2007 are as follows:

 
 
 
 
 
 
 
Period
  
 
 
 
 
Total number
of shares
Purchased
  
 
 
 
 
 
Average
price paid
per share
  
 
Number of
shares
purchased
as part of the
publicly
announced
program
  
Approximate
dollar value
of shares still
available to be
purchased
under the
program
(000’s)
  
09/30/2007-10/27/2007
    
—
    
—
    
—
  
$
9,766
  
10/28/2007-11/24/2007
    
—
    
—
    
—
  
$
9,766
  
11/25/2007-12/29/2007
    
15,000
  
$
34.34
    
15,000
  
$
9,250
  
Total
    
15,000
  
$
34.34
    
15,000
  
$
9,250
  

On June 15, 2007, our board of directors authorized us to repurchase up to $10.0 million of our common stock from time to time on the open market, through block trades, or in privately negotiated transactions depending on market conditions, alternative uses of capital and other factors. Purchases may be commenced, suspended or discontinued at any time without prior notice. The new program, which does not have an expiration date, replaces a $7.5 million program that expired on March 31, 2007.

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ITEM 3. Defaults Upon Senior Securities
 
Not applicable.
 
ITEM 4. Submission of Matters to a Vote of Security Holders
 
Not applicable.
 
ITEM 5. Other Information
 
Not applicable.
 
ITEM 6. Exhibits
 
 
 
 
Exhibit
Number
  
Exhibit Description
10.1
  
Credit Agreement, dated as of June 26, 2006 by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.1 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.2
  
Parent Guaranty, dated June 26, 2006, by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.2 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.3
  
Security Agreement, dated June 26, 2006, by and between Roller Bearing Company of America, Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.3 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.4
  
Amendment No. 2 to Credit Agreement, dated as of September 10, 2007 by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 10.1 on Form 8-K dated September 10, 2007 is hereby incorporated by reference herein.
10.5
  
Agreement between RBC Heim Bearings and Local No. 376 International Union, United Automobile, Aerospace and Agricultural Implement Workers of America effective February 1, 2008. Filed herewith.
31.01
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). Filed herewith.
31.02
 
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). Filed herewith.
32.01
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* Filed herewith.
32.02
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* Filed herewith.
 
*           This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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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.

 
RBC BEARINGS INCORPORATED
   
(Registrant)
     
 
By:
/s/ Dr. Michael J. Hartnett
   
Name:
Dr. Michael J. Hartnett
   
Title:
Chief Executive Officer
   
Date:
February 7, 2008
       
 
By:
/s/ Daniel A. Bergeron 
   
Name:
Daniel A. Bergeron
   
Title:
Chief Financial Officer
   
Date:
February 7, 2008


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EXHIBIT INDEX

 
 
 
Exhibit
Number
  
Exhibit Description
10.1
  
Credit Agreement, dated as of June 26, 2006 by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.1 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.2
  
Parent Guaranty, dated June 26, 2006, by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.2 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.3
  
Security Agreement, dated June 26, 2006, by and between Roller Bearing Company of America, Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 99.3 on Form 8-K dated July 18, 2006 is hereby incorporated by reference herein.
10.4
  
Amendment No. 2 to Credit Agreement, dated as of September 10, 2007 by and between RBC Bearings Incorporated and KeyBank National Association, as Administrative Agent and Lender filed as Exhibit 10.1 on Form 8-K dated September 10, 2007 is hereby incorporated by reference herein.
10.5
  
Agreement between RBC Heim Bearings and Local No. 376 International Union, United Automobile, Aerospace and Agricultural Implement Workers of America effective February 1, 2008. Filed herewith.
31.01
 
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a). Filed herewith.
31.02
 
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a). Filed herewith.
32.01
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* Filed herewith.
32.02
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).* Filed herewith.

*           This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

26