UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

 

OR

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                          .

 

Commission File Number:  333-124824

 

RBC Bearings Incorporated

(Exact name of registrant as specified in its charter)

 

 

(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  o  Accelerated 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 November 1, 2006, RBC Bearings Incorporated had 20,631,550 shares of Class A Common Stock outstanding.

TABLE OF CONTENTS

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

 

 

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Part I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements

RBC Bearings Incorporated
Consolidated Balance Sheets
(dollars in thousands, except share and per share data)

		September 30, 2006			April 1, 2006
		(Unaudited)
ASSETS
Current assets:
Cash		$	7,930		$	16,126
Accounts receivable, net of allowance for doubtful accounts of $760 at September 30, 2006 and $838 at April 1, 2006		52,212			50,935
Inventory		103,517			103,148
Deferred income taxes		5,716			5,412
Prepaid expenses and other current assets		2,669			2,453
Total current assets		172,044			178,074
Property, plant and equipment, net		59,684			58,028
Goodwill		29,839			25,150
Intangible assets, net of accumulated amortization of $1,962 at September 30, 2006 and $1,616 at April 1, 2006		7,308			3,981
Deferred financing costs, net of accumulated amortization of $289 at September 30, 2006 and $1,269 at April 1, 2006		1,297			4,233
Deferred income taxes		150			4,616
Other assets		1,783			1,841
Total assets		$	272,105		$	275,923
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	18,372		$	19,436
Accrued expenses and other current liabilities		9,494			8,572
Current portion of long-term debt		2,530			3,217
Capital lease obligations		232			237
Total current liabilities		30,628			31,462
Long-term debt, less current portion		84,075			162,530
Capital lease obligations, less current portion		413			170
Other non-current liabilities		7,899			8,421
Total liabilities		123,015			202,583
Stockholders’ equity:
Common Stock, $.01 par value; authorized shares: 60,000,000; issued and outstanding shares: 20,631,550 at September 30, 2006 and 16,976,381 at April 1, 2006		206			170
Additional paid-in capital		166,227			103,317
Accumulated other comprehensive loss		(2,990		)	(3,392		)
Accumulated deficit		(14,353		)	(26,755		)
Total stockholders’ equity		149,090			73,340
Total liabilities and stockholders’ equity		$	272,105		$	275,923

 

See accompanying notes.

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

		Three Months Ended						Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net sales		$	73,248		$	65,367		$	148,479		$	131,368
Cost of sales		49,745			45,380			101,467			92,105
Gross margin		23,503			19,987			47,012			39,263
Operating expenses:
Selling, general and administrative		10,610			14,628			20,237			23,122
Other, net		283			266			667			650
Total operating expenses		10,893			14,894			20,904			23,772
Operating income		12,610			5,093			26,108			15,491
Interest expense, net		1,203			4,475			3,365			9,604
Loss on early extinguishment of debt		—			3,771			3,576			3,771
Income (loss) before income taxes		11,407			(3,153		)	19,167			2,116
Provision for (benefit from) income taxes		4,029			(1,193		)	6,765			731
Net income (loss)		7,378			(1,960		)	12,402			1,385
Preferred stock dividends		—			(294		)	—			(893		)
Participation rights of preferred stock in undistributed earnings		—			—			—			(630		)
Net income (loss) available to common stockholders		$	7,378		$	(2,254	)	$	12,402		$	(138	)
Net income (loss) per common share:
Basic		$	0.36		$	(0.18	)	$	0.61		$	(0.01	)
Diluted		$	0.35		$	(0.18	)	$	0.59		$	(0.01	)
Weighted average common shares:
Basic		20,502,251			12,197,773			20,295,367			9,200,270
Diluted		21,280,571			12,197,773			21,096,895			9,200,270

 

See accompanying notes.

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RBC Bearings Incorporated
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)

		Six Months Ended
		September 30, 2006			October 1, 2005
Cash flows from operating activities:
Net income		$	12,402		$	1,385
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,602			4,497
Deferred income taxes		8,035			731
Amortization of intangible assets		346			284
Non-cash stock-based compensation		252			142
Amortization of deferred financing costs and debt discount		233			456
Loss on disposition of assets		116			30
Loss on early extinguishment of debt (non-cash portion)		3,576			1,536
Other		12			6
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		875			5,459
Inventory		1,602			(8,256		)
Prepaid expenses and other current assets		(158		)	(1,003		)
Other non-current assets		(1,794		)	253
Accounts payable		(1,814		)	(2,333		)
Accrued expenses and other current liabilities		(342		)	(414		)
Other non-current liabilities		(532		)	495
Net cash provided by operating activities		27,411			3,268
Cash flows from investing activities:
Purchase of property, plant and equipment		(4,583		)	(5,859		)
Acquisition of business		(8,753		)	(2,602		)
Proceeds from sale of equipment		9			27
Net cash used in investing activities		(13,327		)	(8,434		)
Cash flows from financing activities:
Increase (decrease) in revolving credit facility		66,000			(5,000		)
Proceeds from sale of stock		57,824			92,128
Redemption of Class C redeemable preferred stock		—			(30,630		)
Redemption of Class D preferred stock		—			(4,000		)
Exercise of stock options and warrants		986			59
Proceeds from term loans		—			41,100
Retirement of debt		—			(83,562		)
Payments on term loans		(146,296		)	(1,338		)
Principal payments on capital lease obligations		(153		)	(91		)
Financing fees paid in connection with senior credit facility		(873		)	(1,312		)
Net cash (used in) provided by financing activities		(22,512		)	7,354
Effect of exchange rate changes on cash		232			(302		)
Cash and cash equivalents:
Increase (decrease) during the period		(8,196		)	1,886
Cash, at beginning of period		16,126			2,635
Cash, at end of period		$	7,930		$	4,521
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	4,063		$	10,552
Income taxes (refunds)		$	(636	)	$	874

 

See accompanying notes.

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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 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 April 1, 2006.

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. (“Miller”), RBC Precision Products - Plymouth Inc. (“Bremen”), Tyson Bearings, Inc. (“Tyson”), Schaublin Holding, 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”) and All Power Manufacturing Co. (“All Power”) 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, 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.

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 six month periods ended September 30, 2006 are not necessarily indicative of the operating results for the full year. The amounts shown are in thousands, unless otherwise indicated.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158 requires the employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  This statement is effective for fiscal years ending after December 15, 2006.  The Company is currently evaluating the impact this statement will have on its financial statements upon adoption.

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1.  Acquisition

On September 12, 2006, the Company acquired All Power, a manufacturer of highly-engineered precision plain, roller and ball bearings for the industrial, defense and aerospace industries, for approximately $9,926. The purchase price included approximately $8,753 in cash, a $750 note payable and approximately $423 in transaction expenses.  As a result of the acquisition, the Company recorded intangible assets of approximately $3,672 and goodwill of approximately $2,958.

The products associated with the acquisition are complementary with products already provided by other Company businesses. All Power, which is located in Santa Fe Spring, California, is included in the plain bearings reportable segment.

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 were used to prepay outstanding balances under the Amended Term Loan.

3.  Net Income (Loss) Per Common Share

Basic net income per common share is computed by dividing net income available to common stockholders (both Class A and Class B common stockholders shared equally in net income) by the weighted-average number of common shares outstanding. Prior to August 15, 2005, the Company also had outstanding Class B convertible participating preferred stock (the Class B preferred stock participated in all undistributed earnings with the common stock). The Company allocated earnings to the common stockholders and the Class B convertible participating preferred stockholders under the two-class method as required by Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under SFAS Statement No. 128.” The two-class method is an earnings allocation method under which basic net income per share is calculated for the Company’s common stock and its Class B convertible participating preferred stock considering both accrued preferred stock dividends and participation rights in undistributed earnings as if all such earnings had been distributed during the year. Since the Company’s Class B convertible participating preferred stock was not contractually responsible to share in the Company’s losses, in applying the two-class method to compute basic net income per common share, no allocation was made to the Class B preferred stock if a net loss existed or if an undistributed net loss resulted from reducing net income by the accrued preferred stock dividends.

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 and, prior to August 15, 2005, the assumed conversion of the Class B convertible participating preferred stock to common shares (if-converted method). If the if-converted method was anti-dilutive (that is, the if-converted method resulted in a higher net income per common share amount than basic net income per share calculated under the two-class method), then the two-class method was used to compute diluted net income per common share, including the effect of common share equivalents. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and warrants.

If the above calculations resulted in a net loss available to common stockholders (due to a net loss for the period or the effect of accrued preferred stock dividends) and if the effect of including common share

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equivalents and the assumed conversion of preferred stock, or use of the two-class method, was anti-dilutive, then diluted net loss per common share would equal basic net loss per common share.

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:

		Three Months Ended						Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Numerator:
Net income (loss)		$	7,378		$	(1,960	)	$	12,402		$	1,385
Preferred stock dividends		—			(294		)	—			(893		)
Participation rights of preferred stock in undistributed earnings		—			—			—			(630		)
Numerator for basic and diluted net income (loss) per common share—income (loss) available to common stockholders under the two-class method		7,378			(2,254		)	12,402			(138		)
Preferred stock dividends and participation rights of preferred stock		—			294			—			1,523
Numerator for diluted net income (loss) per common share—income (loss) available to common stockholders after assumed conversion of preferred stock		$	7,378		$	(1,960	)	$	12,402		$	1,385
Denominator:
Denominator for basic net income (loss) per common share—weighted-average shares		20,502,251			12,197,773			20,295,367			9,200,270
Effect of dilution due to employee stock options and warrants		778,320			1,994,169			801,528			1,943,765
Effect of dilution due to convertible preferred stock		—			771,022			—			1,308,709
Denominator for diluted net income (loss) per common share—adjusted weighted-average shares		21,280,571			14,962,964			21,096,895			12,452,744
Basic net income (loss) per common share		$	0.36		$	(0.18	)	$	0.61		$	(0.01	)
Diluted net income (loss) per common share		$	0.35		$	(0.18	)	$	0.59		$	(0.01	)

 

4.  Inventory

Inventories are stated at the lower of cost or market, using the first-in, first-out method, and are summarized below:

		September 30, 2006			April 1, 2006
Raw materials		$	9,098		$	7,845
Work in process		30,152			30,147
Finished goods		64,267			65,156
		$	103,517		$	103,148

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has adopted SFAS No. 151 in fiscal 2007. This adoption did not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

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5.  Comprehensive Income (Loss)

The components of comprehensive income (loss) that relate to the Company are net income (loss), foreign currency translation adjustments and minimum pension liability.  Total comprehensive income (loss) is as follows:

		Three Months Ended						Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net income (loss)		$	7,378		$	(1,960	)	$	12,402		$	1,385
Foreign currency translation adjustments		(190		)	(20		)	402			(637		)
Minimum pension liability		—			—			—			(412		)
Total comprehensive income (loss)		$	7,188		$	(1,980	)	$	12,804		$	336

 

6.  Stock-Based Compensation

1998 Stock Option Plan

Effective February 18, 1998, the Company adopted the RBC Bearings Incorporated (f/k/a Roller Bearing Holding Company, Inc.) 1998 Stock Option Plan. The terms of the 1998 option plan provide for the grant of options to purchase up to 8,413,900 shares of common stock to officers and employees of, and consultants (including members of the board of directors) to, the Company and its subsidiaries. Options granted may be either incentive stock options (under Section 422 of the Internal Revenue Code) or non-qualified stock options. The 1998 option plan, which expires on December 31, 2008, is to be governed by the Company’s board of directors or a committee to which the board delegates its responsibilities. As of September 30, 2006, there were outstanding options to purchase 160,600 shares of common stock granted under the 1998 option plan, all of which were exercisable. As of August 15, 2005, the 1998 Stock Option Plan has been frozen and no additional stock options will be awarded pursuant to the plan.

2001 Stock Option Plan

The RBC Bearings Incorporated (f/k/a Roller Bearing Holding Company, Inc.) 2001 Stock Option Plan was adopted in fiscal 2002 and amended and restated on October 24, 2003. The terms of the 2001 option plan provide for the grant of options to purchase up to 1,008,553 shares of common stock to officers and employees of, and consultants (including members of the board of directors) to, the Company and its subsidiaries selected by the CEO to participate in the plan. Options granted may be either incentive stock options (under Section 422 of the Internal Revenue Code) or non-qualified stock options. The 2001 option plan, which expires in July 2011, is to be governed by the Company’s board of directors or a committee to which the board of directors delegates its responsibilities. As of September 30, 2006, there were outstanding options to purchase 368,242 shares of common stock granted under the 2001 option plan, all of which were exercisable. As of August 15, 2005, the 2001 Stock Option Plan has been frozen and no additional stock options will be awarded pursuant to the plan.

2005 Long-Term Incentive Plan

The Company adopted the 2005 Long-Term Incentive Plan effective upon the completion of its initial public offering in August 2005. The plan provides for grants of stock options, stock appreciation rights, restricted stock and performance awards. Directors, officers and other employees and persons who engage in services for the Company are eligible for grants under the plan. The purpose of the plan is to provide these individuals with incentives to maximize stockholder value and otherwise contribute to the

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Company’s success and to enable the Company to attract, retain and reward the best available persons for positions of responsibility.

As of September 30, 2006, 1,639,170 shares of common stock were authorized for issuance under the plan, subject to adjustment in the event of a reorganization, stock split, merger or similar change in the Company’s corporate structure or in the outstanding shares of common stock. Of this amount, 683,502 options were awarded to the Company’s CEO at the time of the Company’s initial public offering in August 2005 at the offering price of $14.50 per share and the remainder has been reserved for grants to the Company’s employees at the discretion of the Company’s compensation committee. The Company may grant shares of restricted stock to its employees and directors in the future under the plan. The Company’s compensation committee administers the plan. The Company’s board of directors also has the authority to administer the plan and to take all actions that the compensation committee is otherwise authorized to take under the plan. The terms and conditions of each award made under the plan, including vesting requirements, is set forth in a written agreement with the grantee.

Stock Options.  Under the 2005 Long-Term Incentive Plan, the compensation committee or the board may approve the award of grants of incentive stock options and other non-qualified stock options. The compensation committee also has the authority to approve the grant of options that will become fully vested and exercisable automatically upon a change in control. The compensation committee may not, however, approve an award to any one person in any calendar year options to purchase common stock equal to more than 10% of the total number of shares authorized under the plan (other than the initial award to the Company’s CEO discussed above), and it may not approve an award of incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000 determined at the time of grant.  As of September 30, 2006, there were outstanding options to purchase 1,031,502 shares of common stock granted under the 2005 plan, of which 696,002 were exercisable.

The compensation committee will approve the exercise price and term of any option in its discretion; however, the exercise price may not be less than 100% of the fair market value of a share of common stock on the date of grant. In the case of any incentive stock option, the option must be exercised within 10 years of the date of grant. The exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our voting power may not be less than 110% of such fair market value on such date and the option must be exercised within five years of the date of grant.

Restricted Stock.  Under the 2005 Long-Term Incentive Plan, the compensation committee may approve the award of restricted stock subject to the conditions and restrictions, and for the duration that it determines in its discretion. As of September 30, 2006, there were outstanding restricted stock awards of 75,175 shares of common stock granted under the 2005 plan, none of which are vested.

Stock Appreciation Rights.  The compensation committee may approve the grant of stock appreciation rights, or SARs, subject to the terms and conditions contained in the plan. Under the 2005 Long-Term Incentive Plan, the exercise price of a SAR must equal the fair market value of a share of the Company’s common stock on the date the SAR was granted. Upon exercise of a SAR, the grantee will receive an amount in shares of our common stock equal to the difference between the fair market value of a share of common stock on the date of exercise and the exercise price of the SAR, multiplied by the number of shares as to which the SAR is exercised.

Performance Awards.  The compensation committee may approve the grant of performance awards contingent upon achievement by the grantee or by the Company, of set goals and objectives regarding specified performance criteria, over a specified performance cycle. Awards may include specific dollar-value target awards, performance units, the value of which is established at the time of grant, and/or performance shares, the value of which is equal to the fair market value of a share of common stock on the

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date of grant. The value of a performance award may be fixed or fluctuate on the basis of specified performance criteria. A performance award may be paid out in cash and/or shares of common stock or other securities.

Amendment and Termination of the Plan.  The board may amend or terminate the 2005 Long-Term Incentive Plan at its discretion, except that no amendment will become effective without prior approval of the Company’s stockholders if such approval is necessary for continued compliance with the performance-based compensation exception of Section 162(m) of the Internal Revenue Code or any stock exchange listing requirements. If not previously terminated by the board, the plan will terminate on the tenth anniversary of its adoption. At the annual stockholders meeting on September 26, 2006, the plan was amended to provide for an increase in the number of authorized shares to be issued under the plan from 1,139,170 to 1,639,170. Of the additional 500,000 shares, a maximum of one-third can be used for restricted stock awards.

A summary of the status of the Company’s warrants and stock options outstanding as of September 30, 2006 and changes during the six months then ended, is presented below. All cashless exercises of options and warrants are handled through an independent broker.

		Number Of  Common Stock Warrants/Options		Weighted- Average Exercise Price			Intrinsic Value
Outstanding, April 1, 2006		2,324,236		$	6.78		$	31,890
Exercised first quarter fiscal 2007		(482,352	)	1.77
Outstanding, July 1, 2006		1,841,884		8.09			26,909
Granted second quarter fiscal 2007		335,500		22.59
Exercised second quarter fiscal 2007		(103,621	)	1.26
Outstanding, September 30, 2006		2,073,763		$	10.78		$	27,732

 

Included in the total outstanding of 2,073,763 are 513,419 warrants, all of which are exercisable. There were 335,500 options awarded during the second quarter of fiscal 2007. The vesting period ranges from 3 to 5 years with a contractual life term of 7 years.  The intrinsic value of the options exercised during the first and second quarters of fiscal 2007 was approximately $9,511 and $2,089, respectively.

As of September 30, 2006, there was $2,670 of unrecognized compensation costs related to options which is expected to be recognized over a weighted average period of 4.1 years.

The following table summarizes information about stock options and warrants outstanding at September 30, 2006:

Exercise Price		Options/Warrants Outstanding		Options/Warrants Exercisable		Weighted-Average Contractual Life		Intrinsic Value as of September 30, 2006
$0.40		200,919		200,919		0.9 years		$	4,772
$2.06		473,100		473,100		1.4 years		10,451
$12.00		177,742		177,742		6.0 years		2,160
$8.00		181,500		181,500		7.0 years		2,931
$3.20		9,000		9,000		7.0 years		188
$14.50		683,502		683,502		9.0 years		6,596
$15.33		12,500		12,500		9.0 years		110
$22.66		320,500		—		7.0 years		477
$21.03		15,000		—		7.0 years		47
		2,073,763		1,738,263				$	27,732

 

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As of September 30, 2006, the weighted-average exercise price of the outstanding exercisable options was $8.50.

Of the total awards outstanding at September 30, 2006, 2,063,698 shares are either fully vested or are expected to vest. These shares have a weighted-average exercise price of $10.72, an intrinsic value of $27,717, and a weighted-average remaining contractual term of 5.7 years.

Effective April 2, 2006, the first day of the Company’s fiscal year, the Company adopted SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires that the compensation cost relating to all share-based payment transactions be recognized in the financial statements. That cost is measured based upon the grant-date fair value of the instruments issued recognized over the requisite service period. The Company has elected to use the “modified prospective” method in adopting SFAS No. 123(R). Accordingly, after the effective date, compensation cost is recognized based on the requirements of SFAS No. 123(R) (all awards granted to employees prior to the effective date of SFAS No. 123(R) were accelerated in fiscal 2006 and have no compensation cost impact after the effective date). Results for periods prior to fiscal 2007 have not been restated.

As a result of adopting SFAS No. 123(R) in fiscal 2007, the Company’s income from continuing operations and income before income taxes for both the three month and six month periods ended September 30, 2006 reflected a charge of $105 (net of income taxes of $58) for stock option grants.  There was no impact on basic or diluted earnings per share for the three and six months ended September 30, 2006.  In addition, prior to the adoption of SFAS No. 123(R), the Company presented the tax benefit of stock option exercises as operating cash flows in the Consolidated Statements of Cash Flows. Upon the adoption of SFAS No. 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash inflows.  Stock compensation costs for option and restricted stock awards are being amortized under the straight-line method over the requisite service period.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes pricing model.  The Company used an outside valuation firm to assist in estimating the fair value of stock option grants made during the six months ended September 30, 2006.

The following weighted-average assumptions were used to estimate the fair value of the stock option grants for fiscal 2007 and fiscal 2006:

		Six Months Ended September 30, 2006		Six Months Ended October 1, 2005
Dividend yield		0.0	%	0.0	%
Expected weighted-average life		4.9		7.0
Risk-free interest rate		5.0	%	3.5	%
Expected volatility		34.4	%	40.0	%

 

The weighted-average grant-date fair value of option awards granted during fiscal 2007 and fiscal 2006 was $8.70 and $6.00, respectively.

The volatility assumption uses actual historical changes in the market value of the Company’s stock over a weighted-average of periods ranging from one year to the expected term of the options. The volatility assumption is redeveloped quarterly. The forfeiture assumption is based on the Company’s historical employee behavior over the last nine years to which standard actuarial probabilities have been applied. Expected life assumption weighs the contractual term of the awards with the historical exercise

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patterns of the employees.  The change in the assumptions used from year to year was due to several factors.  The change in the expected weighted-average life was primarily due to the contractual life of the current awards.  In addition, the use of an outside valuation firm allowed the Company to refine its assumptions regarding interest rates and volatility.  The presence of more history as a public company was also a factor in the current year expected volatility assumption.

Prior to April 2, 2006, the Company accounted for options and warrants granted to employees using the intrinsic value method pursuant to APB No. 25, “Accounting for Stock Issued to Employees,” under which compensation cost is recognized only if the exercise price of grants issued is below the fair market value of the Company’s common stock at the date of grant. Had compensation cost for these grants 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 (loss) would have been reduced to the following pro forma amounts:

		Three Months Ended October 1, 2005			Six Months Ended October 1, 2005
Net income (loss), as reported		$	(1,960	)	$	1,385
Plus: stock-based compensation expense included in reported net income, net of tax		37			93
Less: stock-based compensation expense determined under fair value method, net of tax		(1,145		)	(1,236		)
Pro forma net income (loss)		$	(3,068	)	$	242
Net income (loss) per common share, as reported:
Basic		$	(0.18	)	$	(0.01	)
Diluted		$	(0.18	)	$	(0.01	)
Net income (loss) per common share, pro forma:
Basic		$	(0.28	)	$	(0.14	)
Diluted		$	(0.28	)	$	(0.14	)

 

The fair value for the Company’s options and warrants was estimated at the date of grant using the Black-Scholes option pricing model.

The Company also recorded $58 (net of taxes of $31) in unearned compensation based on restricted stock awards.  These awards were recorded at the fair market value of the Company’s common stock on the date of issuance and will be amortized as expense over the applicable vesting period.

A summary of the status of the Company’s restricted stock outstanding as of September 30, 2006 and changes during the six months then ended, is presented below.

		Number Of  Restricted Stock Shares		Weighted- Average Grant Date Fair Value
Outstanding, April 1, 2006		—		$	—
Granted		75,175		22.61
Vested		—		—
Forfeited		—		—
Outstanding, September 30, 2006		75,175		$	22.61

 

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7.  Debt

On June 26, 2006, RBCA terminated its August 15, 2005 Amended 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).

Amounts outstanding under the KeyBank Credit Agreement generally bear interest at the prime rate, or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, the Company’s margin is 0.0% for prime rate loans and 1.0% for LIBOR rate loans. Amounts outstanding under the KeyBank Credit Agreement are due and payable on the expiration date of the credit agreement (June 24, 2011). The Company can elect to prepay some or all of the outstanding balance from time to time without penalty.

The KeyBank Credit Agreement requires the Company to comply with various covenants, including among other things, financial covenants to maintain the following:

·  From the closing date through March 31, 2007, a ratio of consolidated net debt to adjusted EBITDA not to exceed 3.5 to 1, and from June 30, 2007, a ratio of consolidated net debt to adjusted EBITDA not to exceed 3.25 to 1.

·  A consolidated fixed charge coverage ratio not to exceed 1.5 to 1.

As of September 30, 2006, the Company was in compliance with all such covenants.

The KeyBank Credit Agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations of the credit agreement. The Company’s obligations under the KeyBank Credit Agreement are secured by a pledge of substantially all of the Company’s and RBCA’s assets and a guaranty by the Company of RBCA’s obligations.

 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 September 30, 2006, $66,000 was outstanding under the KeyBank Credit Agreement. The Company recorded a non-cash pre-tax charge of approximately $3,576 in the first quarter of fiscal 2007 to write off deferred debt issuance costs associated with the early termination of the Amended Credit Agreement. Deferred financing fees of $873 associated with the KeyBank Credit Agreement were also recorded in the first six months of fiscal 2007.

Approximately $21,410 of the KeyBank Credit Facility 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 September 30, 2006, RBCA had the ability to borrow up to an additional $62,590 under the KeyBank Credit Agreement.

The balances payable under all borrowing facilities are as follows:

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		September 30, 2006			April 1, 2006
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 (6.313% at September 30, 2006)		$	66,000		$	—
Amended Credit Agreement
Amended Term Loan, payable in quarterly installments of $375, commencing December 31, 2005, with final payment of $137,750 due July 1, 2011; bears interest at variable rates, payable monthly and upon maturity at prime or LIBOR, plus an applicable margin, at the Company’s election		—			145,250
Swiss Credit Facility
Term Loan, payable in semi-annual installments of approximately $1,000 in March and September, with final payment due March 31, 2009; bears interest at variable rates, plus an applicable margin, payable quarterly		3,200			3,842
Note Payable		750			—
Industrial Development Revenue Bonds
Series 1994 A, due in annual installments of $180 beginning September 1, 2007, graduating to $815 on September 1, 2014, with final payment due on September 1, 2017; 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			1,155
Series 1999, bears interest at variable rates, payable monthly through April 2024		4,800			4,800
Total Debt		86,605			165,747
Less: Current Portion		2,530			3,217
Long-Term Debt		$	84,075		$	162,530

 

The current portion of long-term debt as of September 30, 2006 includes $1,600 of borrowings under the Swiss Credit Facility, $750 note payable related to the All Power acquisition and $180 payable under the IRB’s.  As of April 1, 2006, the current portion of long-term debt includes $1,537 of borrowings under the Swiss Credit Facility, $1,500 payable under the Amended Term Loan and $180 payable under the IRB’s.

8.  Income Taxes

The effective income tax rates for the three month periods ended September 30, 2006 and October 1, 2005 were 35.3% and 37.8%, respectively. The effective income tax rates for the six month periods ended September 30, 2006 and October 1, 2005 were 35.3% and 34.5%, respectively.

The change in the effective income tax rates from period to period is mostly due to the application of the new manufacturing deduction and the elimination of franchise taxes in certain states.

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9.  Pension and Post-retirement Plans

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

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 against this plan and no new employees will become eligible for participation in the plan. However, the Company will continue to maintain the plan.

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

		Pension Benefits Three Months Ended						Pension Benefits Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Components of net periodic benefit cost:
Service cost		$	120		$	144		$	257		$	288
Interest cost		260			246			516			492
Expected return on plan assets		(330		)	(283		)	(654		)	(566		)
Amortization of prior service cost		7			—			9			—
Amortization of losses		42			62			95			124
Additional amount recognized due to settlement or curtailment.		(23		)	—			77			—
Total net periodic benefit cost		$	76		$	169		$	300		$	338

 

The Company, for the benefit of employees at its Heim, West Trenton, Nice, Tyson and Bremen facilities, sponsors contributory defined benefit health care plans that provide post-retirement medical and life insurance benefits to union employees who have attained certain age and/or service requirements while employed by the Company. The plans are unfunded and costs are paid as incurred.

Effective May 1, 2006, the post-retirement medical and life insurance benefits for the Nice subsidiary in Kulpsville, Pennsylvania have been addressed in 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 new employees will become eligible for participation in the plan. Life insurance benefits terminated July 31, 2006. Post-retirement medical benefits will be available until the contract expires on January 31, 2008.

The following tables illustrate the components of net periodic benefit cost for the Company’s other post-retirement benefits:

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		Other Post-Retirement Benefits Three Months Ended						Other Post-Retirement Benefits Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Components of net periodic benefit cost:
Service cost		$	31		$	56		$	64		$	112
Interest cost		46			62			100			124
Prior service cost amortization		(4		)	(105		)	(35		)	(210		)
Amount of loss recognized		11			41			27			82
Additional amount recognized due to settlement or curtailment.		(314		)	—			(132		)	—
		$	(230	)	$	54		$	24		$	108

 

10.  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:

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 Linear Precision Products (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.

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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						Six Months Ended
		September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net External Sales
Roller		$	23,356		$	23,396		$	47,597		$	47,820
Plain		33,055			27,132			67,084			53,577
Ball		12,178			11,208			24,340			21,824
Other		4,659			3,631			9,458			8,147
		$	73,248		$	65,367		$	148,479		$	131,368
Operating Income
Roller		$	5,939		$	5,916		$	12,087		$	11,195
Plain		9,035			7,519			18,134			14,173
Ball		2,989			2,411			5,920			4,896
Other		679			264			1,490			815
Corporate		(6,032		)	(11,017		)	(11,523		)	(15,588		)
		$	12,610		$	5,093		$	26,108		$	15,491
Geographic External Sales
Domestic		$	64,067		$	58,753		$	129,498		$	117,575
Foreign		9,181			6,614			18,981			13,793
		$	73,248		$	65,367		$	148,479		$	131,368
Intersegment Sales
Roller		$	1,979		$	2,341		$	4,003		$	4,402
Plain		261			211			531			427
Ball		1,187			1,593			2,189			2,659
Other		3,585			3,326			7,131			6,397
		$	7,012		$	7,471		$	13,854		$	13,885

 

All intersegment sales are eliminated in consolidation.

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 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

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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, the risks identified under the heading “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended April 1, 2006 and other filings made with the Securities and Exchange Commission. 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.

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 16 manufacturing facilities in three 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 September 30, 2006 was $175.0 million versus $152.6 million for the same period last year. We continue to see momentum from the diversified industrial, aerospace and defense markets and a slowdown in the class 8 truck aftermarket and OEM market. Management believes that operating cash flows and available credit under the new 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.

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		Three Months Ended				Six Months Ended
		September 30, 2006		October 1, 2005		September 30, 2006		October 1, 2005
Statement of Operations Data:
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Gross margin		32.1		30.6		31.7		29.9
Selling, general and administrative		14.5		22.4		13.6		17.6
Other, net		0.4		0.4		0.4		0.5
Operating income		17.2		7.8		17.7		11.8
Interest expense, net		1.6		6.8		2.3		7.3
Loss on early extinguishment of debt		—		5.8		2.4		2.9
Income (loss) before income taxes		15.6		(4.8	)	13.0		1.6
Provision for (benefit from) income taxes		5.5		(1.8	)	4.6		0.5
Net income (loss)		10.1		(3.0	)	8.4		1.1

 

Three Month Period Ended September 30, 2006 Compared to Three Month Period Ended October 1, 2005

Net Sales.  Net sales for the three month period ended September 30, 2006 were $73.2 million, an increase of $7.9 million, or 12.1%, compared to $65.4 million for the same period in fiscal 2006. During the three month period ended September 30, 2006, 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 and from the acquisition of All Power. Net sales to aerospace and defense customers grew 17.2% in the second quarter of fiscal 2007 compared to the same period last year, driven mainly by commercial and military aerospace aftermarket and OEM demand and the acquisition of All Power.  Net sales to diversified industrial customers grew 7.8% in the second quarter of fiscal 2007 compared to the same period last year.  Reflected in this change, our core markets of construction, mining, semiconductor capital equipment and general industrial distribution grew 10.0%, offset by a decrease in year-over-year volume in our class 8 truck aftermarket.

The Plain Bearing segment achieved net sales of $33.1 million for the three month period ended September 30, 2006, an increase of $5.9 million, or 21.8%, compared to $27.1 million for the same period in the prior year. Net sales to our diversified industrial customers accounted for $1.5 million of the increase, driven primarily by demand in the construction and mining heavy equipment sectors, general industrial business, and aftermarket demand. The commercial and military aerospace market accounted for $4.4 million of the increase due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers and continued demand for aftermarket product, and the acquisition of All Power which accounted for $1.3 million of the $4.4 million increase.

The Roller Bearing segment achieved net sales of $23.4 million for the three month period ended September 30, 2006, which was flat compared to $23.4 million for the same period in the prior year. Net sales to the class 8 truck aftermarket declined by $0.3 million, offset by an increase in class 8 truck OEM, aerospace applications and general industrial demand.

The Ball Bearing segment achieved net sales of $12.2 million for the three month period ended September 30, 2006, an increase of $1.0 million, or 8.7%, compared to $11.2 million for the same period in the prior year.  Of this increase, $0.6 million was driven principally by increased demand from airframe applications, and semiconductor capital equipment. Sales to our customers in the industrial market increased $0.4 million compared to the same period last fiscal year.

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The Other segment, which is focused mainly on the sale of precision ball screws and machine tool collets, achieved net sales of $4.7 million for the three month period ended September 30, 2006, an increase of $1.1 million, or 28.3%, compared to $3.6 million for the same period last year. This increase was primarily due to increased sales of machine tool collets and ball screws for industrial applications.

Gross Margin.  Gross margin was $23.5 million, or 32.1% of net sales, for the three month period ended September 30, 2006, versus $20.0 million, or 30.6% of net sales, for the comparable period in fiscal 2006. 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 increased manufacturing efficiency.

Selling, General and Administrative.  SG&A expenses decreased by $4.0 million, or 27.5%, to $10.6 million for the three month period ended September 30, 2006 compared to $14.6 million for the same period in fiscal 2006. As a percentage of net sales, SG&A declined to 14.5% for the three month period ended September 30, 2006 compared to 22.4% for the same period in fiscal 2006. SG&A expenses, excluding stock compensation expense of $0.3 million, were $10.4 million for the three month period ended September 30, 2006, or 14.1% of net sales. This compares to $9.4 million, or 14.3% of net sales for the same period last year, excluding stock compensation expense of $0.1 million and non-recurring compensation expense of $5.2 million.  Excluding these charges, SG&A increased $1.0 million due to an increase in personnel necessary to support our increased volume, higher professional service fees, additional costs associated with being a public company and the inclusion of All Power.

Other, net.  Other, net for the three month period ended September 30, 2006 was $0.3 million compared to $0.3 million for the same period in fiscal 2006. For the three month period ended September 30, 2006, other, net included $0.1 million of plant shutdown expenses related to our RBC Nice Bearings, Inc. plant consolidation, $0.1 million of fixed asset disposals and $0.2 million of amortization of intangibles. For the three month period ended October 1, 2005, other, net consisted of an expense of $0.1 million of non-recurring management fees, $0.1 million of bad debt expense and $0.1 million of amortization of intangibles.

Operating Income.  Operating income was $12.6 million, or 17.2% of net sales, for the three month period ended September 30, 2006 compared to $5.1 million, or 7.8% of net sales, for the three month period ended October 1, 2005. Operating income for the Plain Bearing segment was $9.0 million for the three month period ended September 30, 2006, or 27.3% of net sales, compared to $7.5 million for the same period last year, or 27.7% of net sales. The Roller Bearing segment achieved an operating income for the three month period ended September 30, 2006 of $5.9 million, or 25.4% of net sales, compared to $5.9 million, or 25.3% of net sales, for the three month period ended October 1, 2005.  The Ball Bearing segment achieved an operating income of $3.0 million, or 24.5% of net sales, for the three month period ended September 30, 2006, compared to $2.4 million, or 21.5% of net sales, for the same period in fiscal 2006. The Other segment achieved an operating income of $0.7 million, or 14.6% of net sales, for the three month period ended September 30, 2006, compared to $0.3 million, or 7.3% of net sales, for the same period in fiscal 2006. The increase in operating income in each of the segments was driven primarily by an increase in net sales. In addition, our operating income as a percentage of net sales increased for each of our segments primarily as a result of leveraging our fixed cost base over higher net sales.

Interest Expense, net.  Interest expense, net decreased by $3.3 million, or 73.1%, to $1.2 million in the three month period ended September 30, 2006, compared to $4.5 million in the same period last fiscal year.  Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expense included in interest expense, net was $0.1 million for the three

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