# RBC Bearings INC (RBC) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RBC Bearings INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1324948/000121390024044761/ea0205268-10k_rbcbear.htm
Accession: 0001213900-24-044761
Filing date: 2024-05-17
Report date: 2024-03-30
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/RBC/
All MD&A years: /company/RBC/mda/
Previous year: /company/RBC/mda/fy2023/ (FY 2023)
Next year: /company/RBC/mda/fy2025/ (FY 2025)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
financial and business analysis below provides information that we believe is relevant to an assessment and understanding of our consolidated
financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the
consolidated financial statements and related notes. All references to “Notes” in this Item 7 refer to the “Notes to
Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.

The
following discussion contains statements reflecting our views about our future performance that constitute “forward-looking statements”
within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. See the information provided
in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K under the heading “Cautionary Statement as to
Forward-Looking Information.”

20

General

We
are a well-known international manufacturer of highly engineered precision bearings, components and essential systems for the industrial,
defense and aerospace industries. 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 believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete.
With 54 facilities in 11 countries, of which 38 are manufacturing facilities, we have been able to significantly broaden our end markets,
products, customer base and geographic reach. We have a fiscal year consisting of 52 or 53 weeks, ending on the Saturday closest to March 31.
Based on this policy, fiscal 2024 had 52 weeks and fiscal 2023 had 52 weeks. We currently operate under two reportable business segments
– Aerospace/Defense and Industrial:

[[GREPCENT_TABLE]]
[["","\u25cf","Aerospace/Defense. This segment represents the end markets for the Company\u2019s highly engineered bearings and precision components used in commercial aerospace, defense aerospace, and marine and ground defense applications."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Industrial. This segment represents the end markets for the Company\u2019s highly engineered bearings, gearings and precision components used in various industrial applications including: power transmission; construction, mining, energy and specialized equipment manufacturing; semiconductor production equipment manufacturing; agricultural machinery, commercial truck and automotive manufacturing; and tool holding."]]
[[/GREPCENT_TABLE]]

The
markets for our products are cyclical, and we have endeavored to mitigate this cyclicality by entering into single and sole-source relationships
and long-term purchase agreements, through diversification across multiple market segments within the Aerospace/Defense and Industrial
segments, by increasing sales to the aftermarket, and by focusing on developing highly customized solutions.

Currently,
our strategy is built around maintaining our role as a leading manufacturer of highly engineered bearings and precision components through
the following efforts:

[[GREPCENT_TABLE]]
[["","\u25cf","Developing innovative solutions. By leveraging our design and manufacturing expertise and our extensive customer relationships, we continue to develop new products for markets in which there are substantial growth opportunities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Expanding customer base and penetrating end markets. We continually seek opportunities to access new customers, geographic locations and bearing platforms with existing products or profitable new product opportunities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Increasing aftermarket sales. We believe that increasing our aftermarket sales of replacement parts will further enhance the continuity and predictability of our revenues and enhance our profitability. Such sales include sales to third party distributors, and sales to OEMs for replacement products and aftermarket services. We will further increase the percentage of our revenues derived from the replacement market by continuing to implement several initiatives."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Pursuing selective acquisitions. The acquisition of businesses that complement or expand our operations has been and continues to be an important element of our business strategy. We believe that there will continue to be consolidation within the industry that may present us with acquisition opportunities."]]
[[/GREPCENT_TABLE]]

We
have demonstrated expertise in acquiring and integrating bearing and precision engineered component manufacturers that have complementary
products or distribution channels and have provided significant margin enhancement. We have consistently increased the profitability
of acquired businesses through a process of methods and systems improvement coupled with the introduction of complementary and proprietary
new products. Since 1992 we have completed 29 acquisitions, which have broadened our end markets, products, customer base and geographic
reach.

Outlook

Our
net sales increased 6.2% year over year due to an increase of 20.7% in Aerospace and Defense segment sales and a 0.2% increase in Industrial
segment sales.

Aerospace
and Defense segment sales increased 20.7% year over year. Commercial aerospace increased 20.3%, demonstrating the continued recovery
and early stages of a growth cycle. Defense sales, which represent approximately 31.9% of segment sales during the year, were up more
than 21.6% for the year. Our backlog in this end market is significant and deliveries are expected to continue to accelerate in the coming
years.

21

For
the fiscal year ended March 30, 2024, approximately 66.7% of our net sales were attributable to the Industrial segment while the
Aerospace/Defense segment contributed approximately 33.3% of our net sales. For the fourth quarter of fiscal 2024, approximately
65.6% of our net sales were attributable to the Industrial segment compared to approximately 34.4% for the Aerospace/Defense
segment. Approximately $186.8 of Industrial segment sales in the fourth quarter of fiscal 2024 were to distribution and aftermarket
compared to $185.7 in the prior year while approximately $84.5 were made directly to OEMs in the fourth quarter of fiscal 2024
compared to $86.9 in the prior year. Net sales in the Aerospace/Defense segment increased $20.6, or 16.8%, for the fourth quarter of
fiscal 2024 compared to the same period last fiscal year. Commercial aerospace, which consisted of $78.2 of OEM and $19.7 of
distribution and aftermarket, increased by 12.0% compared to the fourth quarter of fiscal 2023 when OEM net sales were $68.8 and
distribution and aftermarket net sales were $18.5. This was driven by a continuing recovery as build rates and orders escalate in
the OEM markets and the aftermarket begins to pick up. Our defense markets, which consisted of $34.2 of OEM and $10.3 of
distribution and aftermarket, increased by 29.0% compared to the fourth quarter of fiscal 2023 when OEM net sales were $28.2 and
distribution and aftermarket net sales were $6.3.

The
Company forecasts net sales to be approximately $415.0 to $420.0 in the first quarter of fiscal 2025, compared to $387.1 in the first
quarter of fiscal 2024, which represents a growth rate of 7.2% to 8.5%. 

Our
order backlog, as of March 30, 2024, was $726.1 compared to $663.8 as of April 1, 2023. These figures exclude orders from our Sargent
marine and Sargent aerospace businesses that are expected to be fulfilled more than 12 months after the balance sheet dates. Including
all orders from our Sargent marine and Sargent aerospace businesses, our backlog as of March 30, 2024 was $821.5 compared to $759.4 as
of April 1, 2023. This increase reflects continued growth, most notably in our commercial aerospace and marine defense end markets. Beginning
in fiscal year 2025, we will disclose our full backlog for periods presented.

We
experienced solid operating cash flow generation during fiscal 2024 (as discussed in the “Liquidity and Capital Resources”
section below). We believe that operating cash flows and available credit under our revolving bank credit facilities will provide adequate
resources to fund internal growth initiatives for the foreseeable future, including at least the next 12 months. As of March 30, 2024,
we had cash and cash equivalents of $63.5, of which, $25.9 was cash held by our foreign operations.

Sources
of Revenue

A
contract with a customer exists when there is commitment and approval from both parties involved, the rights of the parties are identified,
payment terms are defined, the contract has commercial substance and collectability of consideration is probable. The Company has determined
that the contract with the customer is established when the customer purchase order is accepted or acknowledged. Long-term agreements
(“LTAs”) are used by the Company and certain of its customers to reduce their supply uncertainty for a period of time, typically multiple
years. While these LTAs define commercial terms including pricing, termination rights and other contractual requirements, they do not
represent the contract with the customer for revenue recognition purposes.

Approximately
98% of the Company’s revenue was generated from the sale of products to customers in the Industrial and Aerospace/Defense markets
for each of the years ended March 30, 2024 and April 1, 2023. The remaining 2% of the Company’s revenue for each of the last two
fiscal years was derived from services performed for customers, which included repair and refurbishment work performed on customer-controlled
assets as well as design and test work.

Refer
to Note 2 for further discussion regarding the Company’s revenue policy.

Cost
of Sales

Cost
of sales includes employee compensation and benefits, raw materials, outside processing, depreciation of manufacturing machinery and
equipment, supplies and manufacturing overhead.

Less
than half of our factory costs, depending on product mix, are attributable to raw materials, purchased components and outside processing.
When we experience raw material inflation, we attempt to offset these cost increases by changing our buying patterns, expanding our vendor
network and passing through price increases when possible. Although we experienced cost inflation on raw material, labor and overhead
for this fiscal year, we were able to mitigate it through pricing and strategic sourcing efforts.

We
monitor gross margin performance through a process of monthly operation reviews with all our divisions. We develop new products to target
certain markets allied to our strategies by first understanding volume levels and product pricing and then constructing manufacturing
strategies to achieve defined margin objectives. We only pursue product lines where we believe that the developed manufacturing process
will yield the targeted margins. Management monitors gross margins of all product lines on a monthly basis to determine which manufacturing
processes or prices should be adjusted.

22

Fiscal
2024 Compared to Fiscal 2023

Results
of Operations

(amounts
in millions, except share and per share data)

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[[/GREPCENT_TABLE]]

Net
sales for the fiscal year ended March 30, 2024 increased $91.0, or 6.2%, for fiscal 2024 compared to fiscal 2023. This increase in net
sales was the result of an 0.2% increase in our Industrial segment, while sales in our Aerospace/Defense segment increased 20.7% year
over year. Industrial segment sales remain very strong, most notably, in the mining, energy, and general industrial markets. Within Aerospace/Defense,
total commercial aerospace increased 20.3% and defense increased 21.6% year over year. The commercial aerospace increase reflects the
continued recovery in the market over the last year, and what we believe is the start of a growth cycle as aircraft build rates at large
OEMs are expected to escalate in coming years.

Net
income attributable to common stockholders increased by $43.1 to $186.9 for fiscal 2024 compared to fiscal 2023. The net income attributable
to common stockholders of $186.9 in fiscal 2024 was impacted by $3.0 of restructuring and consolidation charges incurred, $78.7 of interest
expense, $23.0 of preferred stock dividends and $51.9 of income tax expense. The net income attributable to common stockholders of $143.8
in fiscal 2023 was impacted by $8.8 of transition service agreement (TSA) costs associated with the Dodge acquisition, $2.7 of restructuring
and consolidation charges incurred at some of our plants located in South Carolina, $76.7 of interest expense, $22.9 of preferred stock
dividends and $43.0 of income tax expense.

Gross
Margin

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["Gross Margin","","$","670.5","","","$","604.8","","","$","65.7","","","","10.9","%"],["Gross Margin %","","","43.0","%","","","41.2","%"]]
[[/GREPCENT_TABLE]]

Gross
margin was 43.0% of sales for fiscal 2024 compared to 41.2% for the same period last year. Gross margin during fiscal 2024 included $0.3
of inventory rationalization costs associated with consolidation efforts at one of our facilities located in California. Gross margin
in fiscal 2023 included $0.2 of inventory rationalization costs associated with consolidation efforts at one of our facilities located
in South Carolina. The expansion in margin during fiscal 2024 reflects the combination of continued cost efficiencies achieved through
integration, product mix, pricing and the ability to maintain appropriate pricing levels while facing an inflationary environment both
as it relates to manufacturing costs and human capital.

Selling,
General and Administrative

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["SG&A","","$","253.5","","","$","229.7","","","$","23.8","","","","10.4","%"],["% of net sales","","","16.2","%","","","15.6","%"]]
[[/GREPCENT_TABLE]]

SG&A
expenses increased by $23.8 to $253.5 for fiscal 2024 compared to fiscal 2023. The increase in SG&A was primarily driven by personnel
costs, IT costs and other professional fees.

Other,
Net

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["Other, net","","$","74.8","","","$","82.1","","","$","(7.3",")","","","(8.9",")%"],["% of net sales","","","4.8","%","","","5.6","%"]]
[[/GREPCENT_TABLE]]

23

Other
operating expenses for fiscal 2024 totaled $74.8 compared to $82.1 for fiscal 2023. For fiscal 2024, other operating costs consisted
primarily of $70.4 of amortization expense, $2.7 of plant consolidation and restructuring costs, $0.2 of bad debt expense, $0.3 of acquisition
costs, $0.6 of losses on disposal of assets, and $0.6 of other items. For fiscal 2023, other operating expenses were comprised of $8.9
of TSA costs and other costs associated with the Dodge acquisition, $69.1 of amortization expense, $2.5 of plant consolidation and restructuring
costs, $0.8 of bad debt expense, $0.3 of asset impairments, $0.3 of losses on disposal of assets, and $0.2 of other items.

Interest
Expense, Net

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["Interest expense","","$","78.7","","","$","76.7","","","$","2.0","","","","2.6","%"],["% of net sales","","","5.0","%","","","5.2","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net, consists
of interest charged on the Company’s debt agreements and amortization of deferred financing fees, offset by interest income. Interest
expense, net was $78.7 for fiscal 2024 compared to $76.7 for fiscal 2023 as a result of additional interest on our variable rate debt.
Though interest rates have steadily increased since the beginning of fiscal 2023, the interest rate swap that we entered into that year
(see “Liquidity and Capital Resources” below) has enabled us to manage interest costs as approximately 75% of our debt bears
interest at a fixed rate, after giving effect to the interest rate swap agreement in place.

Other
Non-Operating Expense

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["Other non-operating expense","","$","1.7","","","$","6.6","","","$","(4.9",")","","","(74.0",")%"],["% of net sales","","","0.1","%","","","0.4","%"]]
[[/GREPCENT_TABLE]]

Other
non-operating expense for fiscal 2024 totaled $1.7, consisting primarily of post-retirement benefit costs. Non-operating costs incurred
during fiscal 2023 were $6.6, consisting primarily of costs associated with post-retirement benefit plans led by a $4.3 settlement loss
related to the derecognition of $15.6 of pension liabilities and $15.6 of pension assets resulting from an annuity contract executed
in March 2023.

Income
Taxes

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23"],["Income tax expense","","$","51.9","","","$","43.0"],["Effective tax rate with discrete items","","","19.8","%","","","20.5","%"],["Effective tax rate without discrete items","","","22.9","%","","","22.9","%"]]
[[/GREPCENT_TABLE]]

Income
tax expense for fiscal 2024 was $51.9 compared to $43.0 for fiscal 2023. Our effective income tax rate for fiscal 2024 was 19.8% compared
to 20.5% for fiscal 2023. The effective income tax rates are different from the U.S. statutory rate due to the U.S. credits for increasing
research activities and foreign-derived intangible income provision which decrease the rate and differences in foreign and state income
taxes which increase the rate. The effective income tax rate for fiscal 2024 of 19.8% included discrete items totaling a benefit of $8.2
which is substantially related to a benefit associated with stock-based compensation, a reduction in unrecognized tax benefits due to
the expiration of the statute of limitations, and the accrual of deferred tax assets related to state tax modifications. The effective
income tax rate for fiscal 2024 without these discrete items would have been 22.9%. The effective income tax rate for fiscal 2023 of
20.5% included discrete items of $5.1 of benefit comprised substantially of a benefit associated with stock-based compensation and a
reduction in unrecognized tax benefits partially due to the expiration of the statute of limitations. The effective income tax rate for
fiscal 2023 without these discrete items would have been 22.9%.

Global
Minimum Tax

In
October 2021, the Organisation for Economic Co-operation and Development (“OECD”) announced an Inclusive Framework on Base
Erosion and Profit Shifting including Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large multinational
corporations at a minimum rate of 15%. Subsequently multiple sets of administrative guidance have been issued. Many non-US tax jurisdictions
have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 with the adoption
of additional components in later years or announced their plans to enact legislation in future years. We are continuing to evaluate
the impacts of enacted legislation and pending legislation to enact Pillar Two Model Rules in the non-US tax jurisdictions in which we
operate.

24

Segment
Information

We
report our financial results under two operating segments: Aerospace/Defense and Industrial. We use gross margin as the primary measurement
to assess the financial performance of each reportable segment.

Aerospace/Defense
Segment:

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change","","","% Change"],["Net sales","","$","519.4","","","$","430.3","","","$","89.1","","","","20.7","%"],["Gross margin","","$","208.8","","","$","171.0","","","$","37.8","","","","22.2","%"],["Gross margin %","","","40.2","%","","","39.7","%"],["SG&A","","$","37.8","","","$","31.1","","","$","6.7","","","","21.7","%"],["% of segment net sales","","","7.3","%","","","7.2","%"]]
[[/GREPCENT_TABLE]]

Net sales increased $89.1,
or 20.7%, for fiscal 2024 compared to fiscal 2023. Commercial aerospace, which consisted of $278.5 of OEM and $75.3 of distribution and
aftermarket, increased by 20.3% compared to fiscal 2023 when OEM net sales were $234.4 and distribution and aftermarket net sales were
$59.7. This was driven by a continuing recovery as build rates and orders escalated in the OEM markets and the aftermarket began to pick
up. Our defense markets, which consisted of $135.3 of OEM and $30.3 of distribution and aftermarket, increased by 21.6% compared to fiscal
2023 when OEM net sales were $110.3 and distribution and aftermarket net sales were $25.9.

During the year, we saw
improvement in the sales and order volume to our commercial aerospace customers as aircraft build rates continued to grow. Our
backlog and recent results reflect the early stages of this process which we expect to continue to see in upcoming quarters. Our
defense markets, which represented about 31.9% of sales, increased by approximately 21.6% during the period, driven by increased
sales and order volume in the marine and helicopter end markets. Overall distribution and aftermarket sales, which represent 20.3%
of segment sales, were up 23.4% year over year.

Gross
margin was $208.8, or 40.2% of net sales, in fiscal 2024 compared to $171.0, or 39.7% of sales, for the same period in fiscal 2023. We
anticipate margin expansion in the next year as the increasing orders on commercial products add volume through our plants driving cost
efficiencies.

Industrial
Segment:

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[[/GREPCENT_TABLE]]

Net sales increased $1.9,
or 0.2%, during fiscal 2024 compared to the same period last year. The continued strong performance was driven by the energy, mining,
and general industrial markets. Sales to distribution and the aftermarket were $707.6 in fiscal 2024 compared to $691.7 in the prior year,
a 2.3% year over year increase. OEM sales were $333.3 for fiscal 2024 compared to $347.3 in the prior year. The 4.0% decrease in OEM sales
compared to the prior year was primarily due to some softness in the semicon end market.

Gross
margin was $461.7, or 44.4% of net sales, in fiscal 2024 compared to $433.8, or 41.8% of sales, for the same period in fiscal 2023. The
gross margin for the fiscal 2023 included the unfavorable impact of $0.2 associated with inventory rationalization costs at one of our
plants in South Carolina. The expansion in margin year over year was led by cost efficiencies achieved through synergy, product mix,
and maintenance of appropriate pricing levels to offset the inflationary environment primarily driven by the cost of materials, energy
and human capital.

25

Corporate:

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[[/GREPCENT_TABLE]]

Corporate
SG&A increased $6.8 or 9.0% for fiscal 2024 compared to fiscal 2023 due to increased spend in IT and personnel-related costs. As
a percentage of net sales, Corporate SG&A was relatively flat year over year.

Liquidity
and Capital Resources

Our
business is capital-intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically
fueled our growth, in part, through acquisitions. We have historically met our working capital, capital expenditure requirements and
acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to investors.
We believe that operating cash flows and available credit under our revolving bank credit facilities will provide adequate resources
to fund internal growth initiatives for the foreseeable future.

Our
ability to meet future working capital, capital expenditures and debt service requirements will depend on our future financial performance,
which will be affected by a range of economic, competitive and business factors, particularly interest rates, cyclical changes in our
end markets and prices for steel and our ability to pass through price increases on a timely basis, many of which are outside of our
control. In addition, future acquisitions could have a significant impact on our liquidity position and our need for additional funds.

From
time to time, we evaluate our existing facilities and operations and their strategic importance to us. If we determine that a given facility
or operation does not have future strategic importance, we may sell, relocate, consolidate or otherwise dispose of those operations.
Although we believe our operations would not be materially impaired by such dispositions, relocations or consolidations, we could incur
significant cash or non-cash charges in connection with them.

Liquidity

As
of March 30, 2024, we had cash and cash equivalents of $63.5, of which, approximately $25.9 was cash held by our foreign operations.
We expect that our undistributed foreign earnings will be re-invested indefinitely for working capital, internal growth and acquisitions
for and by our foreign subsidiaries. As discussed in further detail below, we also have the ability to borrow money from our existing
credit facilities.

Domestic
Credit Facility

In
fiscal 2022, RBC Bearings Incorporated, our top holding company, and our Roller Bearing Company of America, Inc. subsidiary (“RBCA”)
entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”),
as Administrative Agent, Collateral Agent, Swingline Lender and Letter of Credit Issuer and the other lenders party thereto. The Credit
Agreement provides the Company with (a) a $1,300.0 term loan (the “Term Loan”), which was used to fund a portion of the cash
purchase price for the acquisition of Dodge Industrial, Inc. (“Dodge”) and to pay related fees and expenses, and (b) a $500.0
revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan, the “Facilities”).
Debt issuance costs associated with the Credit Agreement totaled $14.9 and are being amortized over the life of the Credit Agreement.

Initially,
amounts outstanding under the Facilities generally bore interest at either, at the Company’s option, (a) a base rate determined
by reference to the higher of (i) Wells Fargo’s prime lending rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and
(iii) the one-month LIBOR rate plus 1.00% or (b) the LIBOR rate plus a specified margin, depending on the type of borrowing being made.
The applicable margin was based on the Company’s consolidated ratio of total net debt to consolidated EBITDA (as defined within
the Credit Agreement) from time to time. In December 2022, the Credit Agreement was amended to replace LIBOR with the secured overnight
financing rate administered by the Federal Reserve Bank of New York (“SOFR”) so that borrowings under the Facilities denominated
in U.S. dollars bear interest at a rate per annum equal to Term SOFR (as defined in the Credit Agreement) plus a credit spread adjustment
of 0.10% plus a margin ranging from 0.75% to 2.00% depending on the Company’s consolidated ratio of total net debt to consolidated
EBITDA. The Facilities are subject to a SOFR floor of 0.00%. As of March 30, 2024, the Company’s margin was 1.25% for SOFR loans,
the commitment fee rate was 0.20%, and the letter of credit fee rate was 1.25%. A portion of the Term Loan is subject to a fixed-rate
interest swap as discussed in Note 13.

The
Term Loan matures in November 2026 and amortizes in quarterly installments with the balance payable on the maturity date. The Company
can elect to prepay some or all of the outstanding balance from time to time without penalty, which will offset future quarterly amortization
installments. Due to prepayments previously made, the required future principal payments on the Term Loan are $0 for fiscal 2025, $0
for fiscal 2026, and $675.0 for fiscal 2027. The Revolving Credit Facility expires in November 2026, at which time all amounts outstanding
under the Revolving Credit Facility will be payable.

The
Credit Agreement requires the Company to comply with various covenants, including the following financial covenants: (a) a maximum Total
Net Leverage Ratio (as defined within the Credit Agreement) of 5.00:1.00, which maximum Total Net Leverage Ratio shall decrease during
certain subsequent test periods as set forth in the Credit Agreement (provided that, no more than once during the term of the Facilities,
such maximum ratio applicable at such time may be increased by the Company by 0.50:1.00 for a period of twelve (12) months after the
consummation of a material acquisition); and (b) a minimum Interest Coverage Ratio of 2.00:1.00. As of March 30, 2024 the Company was
in compliance with all debt covenants.

The
Credit Agreement allows the Company to, among other things, make distributions to stockholders, 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.

26

The
Company’s domestic subsidiaries have guaranteed the Company’s obligations under
the Credit Agreement, and the Company’s obligations and the domestic subsidiaries’
guaranty are secured by a pledge of substantially all of the assets of the Company and its
domestic subsidiaries.

As
of March 30, 2024, $675.0 was outstanding under the Term Loan, $3.7 of the Revolving Credit Facility was being utilized to provide letters
of credit to secure the Company’s obligations relating to certain insurance programs, and $18.0 of the Revolving Credit Facility
had been used to fund the purchase of the business assets of Specline, Inc. which is discussed in Note 9. The Company had the ability
to borrow up to an additional $478.3 under the Revolving Credit Facility as of March 30, 2024.

Senior
Notes

In
fiscal 2022, RBCA issued $500.0 aggregate principal amount of 4.375% Senior Notes due 2029 (the “Senior Notes”). The net
proceeds from the issuance of the Senior Notes were approximately $492.0, after deducting initial purchasers’ discounts and commissions
and offering expenses, and were used to fund a portion of the purchase price for the acquisition of Dodge.

The
Senior Notes were issued pursuant to an indenture with Wilmington Trust, National Association, as trustee (the “Indenture”).
The Indenture contains covenants limiting the ability of the Company to (i) incur additional indebtedness or guarantee indebtedness,
(ii) declare or pay dividends, redeem stock or make other distributions to stockholders, (iii) make investments, (iv) create liens or
use assets as security in other transactions, (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its
assets, (vi) enter into transactions with affiliates, and (vii) sell or transfer certain assets. These covenants contain various exceptions,
limitations and qualifications. At any time that the Senior Notes are rated investment grade, certain of these covenants will be suspended.

The
Senior Notes are guaranteed jointly and severally on a senior unsecured basis by RBC Bearings and certain of RBCA’s existing and
future wholly-owned domestic subsidiaries that also guarantee the Credit Agreement.

Interest
on the Senior Notes accrues at a rate of 4.375% and is payable semi–annually in cash in arrears on April 15 and October 15 of each
year.

The
Senior Notes will mature on October 15, 2029. The Company may redeem some or all of the Senior Notes at any time on or after October
15, 2024 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption
date. The Company may also redeem up to 40% of the Senior Notes using the proceeds of certain equity offerings completed before October
15, 2024, at a redemption price equal to 104.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but
excluding, the redemption date. In addition, at any time prior to October 15, 2024, the Company may redeem some or all of the Senior
Notes at a price equal to 100% of the principal amount, plus a “make–whole” premium, plus accrued and unpaid interest,
if any, to, but excluding, the redemption date. If the Company sells certain of its assets or experiences specific kinds of changes in
control, the Company must offer to purchase the Senior Notes.

27

Foreign
Borrowing Arrangements

One
of our foreign subsidiaries, Schaublin SA, has a CHF 5.0 (approximately $5.8 USD) credit line (the “Foreign Credit Line”)
with Credit Suisse (Switzerland) Ltd. to provide future working capital, if necessary. As of March 30, 2024, $2.2 had been borrowed from
the Foreign Credit Line and $0.1 was being utilized to provide a bank guarantee. Fees associated with the Foreign Credit Line are nominal.

Interest
Rate Swap

In
fiscal 2023, the Company entered into a three-year USD-denominated interest rate swap (“the Swap”) from a third-party financial
counterparty under the Credit Agreement. The Swap was executed to protect the Company from interest rate volatility on our variable-rate
Term Loan Facility. The Swap became effective December 30, 2022 and is comprised of a $600.0 notional with a maturity of three years.
We receive a variable rate based on one-month Term SOFR and pay a fixed rate of 4.455%. As of March 30, 2024, approximately 75% of our
debt bore interest at a fixed rate after giving effect to the Swap in place. The notional on the Swap will amortize as follows:

Year
1: $600.0

Year
2: $400.0

Year
3: $100.0

The
Swap has been designated as a cash flow hedge of the variability of the first unhedged interest payments (the hedged transactions) paid
over the hedging relationship’s specified time period of three years attributable to the borrowing’s contractually specified
interest index on the hedged principal of its general borrowing program or replacement or refinancing thereof.

Cash
Flows

Fiscal
2024 Compared to Fiscal 2023

The
following table summarizes our cash flow activities:

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23","","","$ Change"],["Net cash provided by (used in):"],["Operating activities","","$","274.7","","","$","220.6","","","$","54.1"],["Investing activities","","","(52.2",")","","","(14.0",")","","","(38.2",")"],["Financing activities","","","(223.5",")","","","(322.8",")","","","99.3"],["Effect of exchange rate changes on cash","","","(0.9",")","","","(1.3",")","","","0.4"],["(Decrease)/increase in cash and cash equivalents","","$","(1.9",")","","$","(117.5",")","","$","115.6"]]
[[/GREPCENT_TABLE]]

During
fiscal 2024, we generated cash of $274.7 from operating activities compared to $220.6 for fiscal 2023. The increase of $54.1 was mainly
the result of a $43.2 increase in net income and a $12.4 favorable change in non-cash activity partially offset by a net unfavorable
change in operating assets and liabilities of $1.5. The unfavorable change in operating assets and liabilities is detailed in the table
below. The change in non-cash activity was primarily driven by $3.9 more depreciation and amortization, $3.4 more stock-based compensation
and a favorable change in deferred taxes of $9.1, partially offset by $4.2 less amortization of deferred financing costs.

28

The
following chart summarizes the impact on cash flow from operating assets and liabilities for fiscal 2024 versus fiscal 2023.

[[GREPCENT_TABLE]]
[["","","FY24","","","FY23"],["Cash provided by (used in):"],["Accounts receivable","","$","(13.4",")","","$","7.8"],["Inventory","","","(31.6",")","","","(71.7",")"],["Prepaid expenses and other current assets","","","(2.4",")","","","(5.8",")"],["Other noncurrent assets","","","(3.0",")","","","(0.8",")"],["Accounts payable","","","(30.7",")","","","(11.1",")"],["Accrued expenses and other current liabilities","","","9.0","","","","6.0"],["Other noncurrent liabilities","","","(0.5",")","","","4.5"],["Total change in operating assets and liabilities","","$","(72.6",")","","$","(71.1",")"]]
[[/GREPCENT_TABLE]]

During
fiscal 2024, we used $52.2 for investing activities as compared to $14.0 for fiscal 2023. This increase in cash used was primarily attributable
to $19.3 of cash used for acquisitions in fiscal 2024 compared to a favorable purchase price adjustment of $27.5 in fiscal 2023. This
was partially offset by $8.8 fewer capital expenditures in fiscal 2024 compared to fiscal 2023.

During
fiscal 2024, we used cash of $223.5 for financing activities compared to $322.8 in fiscal 2023. This favorable change was primarily due
to $8.8 more proceeds from exercises of employee stock options, $20.3 of proceeds received from our revolving credit facilities and $75.0
less repayment of debt compared to the prior year.

Capital
Expenditures

Our
capital expenditures in fiscal 2024 were $33.2 compared to $42.0 in fiscal 2023. We expect to make capital expenditures of approximately
3.0% to 3.5% of net sales during fiscal 2025 in connection with our existing business. We funded our fiscal 2024 capital expenditures,
and expect to fund fiscal 2025 capital expenditures, principally through existing cash and internally generated funds. We may also make
substantial additional capital expenditures in connection with acquisitions.

Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities. We evaluate our estimates on an on-going basis. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts, valuation of inventories, goodwill and intangible assets, depreciation and amortization,
income taxes and tax reserves, the valuation of options and the valuation of business combinations. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe
our judgments related to these accounting estimates are appropriate. Actual results may differ from these estimates under different assumptions
or conditions.

Revenue
Recognition. The performance obligations for the majority of RBC’s product sales are satisfied at the point in time in which
the products are shipped. The Company has determined that the customer obtains control upon shipment of the product based on the shipping
terms (i.e. when it ships from RBC’s dock or when the product arrives at the customer’s dock) and recognizes revenue when
control has transferred to the customer. Once a customer has obtained control, the customer is able to direct the use of, and obtain
substantially all of the remaining benefits from, the asset. Approximately 98% of the Company’s revenue was recognized in this
manner based on sales for the fiscal years ended March 30, 2024 and April 1, 2023.

The
Company has determined performance obligations are satisfied over time for customer contracts where RBC provides services to customers
and also for a limited number of product sales. RBC has determined revenue recognition over time is appropriate for our service revenue
contracts as they create or enhance an asset that the customer controls throughout the duration of the contract. Approximately 2% of
the Company’s revenue was recognized in this manner based on sales for the fiscal years ended March 30, 2024 and April 1, 2023.
Revenue recognition over time is appropriate for customer contracts with product sales in which the product sold has no alternative use
to RBC without significant economic loss and an enforceable right to payment exists, including a normal profit margin from the customer,
in the event of contract termination. These types of contracts comprised less than 1% of total sales for the fiscal years ended March
30, 2024 and April 1, 2023. For both of these types of contracts, revenue is recognized over time based on the extent of progress towards
completion of the performance obligation. The Company utilizes the cost-to-cost measure of progress for over-time revenue recognition
contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts.
Revenues, including profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, subcontractors’
costs, and other direct and indirect costs.

29

Pursuant
to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is
recorded to reflect revenue that is recognized when (1) the cost-to-cost method is applied and (2) such revenue exceeds the amount invoiced
to the customer. Contract assets are included within prepaid expenses and other current assets or other noncurrent assets on the consolidated
balance sheets.

Inventory.
Inventory is stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. We account
for inventory under a full absorption method. We record adjustments to the value of inventory based upon past sales history and forecasted
plans to sell our inventories. The physical condition, including age and quality, of the inventories is also considered in establishing
its valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements
if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.

Goodwill and Indefinite-Lived
Intangible Assets. Goodwill (representing the excess of the amount paid to acquire a company over the estimated fair value of the
net assets acquired) and indefinite-lived intangible assets are not amortized but instead are tested for impairment annually, or when
events or circumstances indicate that the carrying value of such asset may not be recoverable. Separate tests are performed for goodwill
and indefinite lived intangible assets. We completed a quantitative test of impairment on the indefinite lived intangible assets with
no impairment noted in fiscal year 2024. The determination of any goodwill impairment is made at the reporting unit level. The Company
determines the fair value of a reporting unit and compares it to its carrying amount. If the carrying amount of the reporting unit exceeds
its fair value, an impairment loss is recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value.
The Company applies the income approach (discounted cash flow method) in testing goodwill for impairment. The key assumptions used in
the discounted cash flow method used to estimate fair value include the discount rates, revenue growth rates and EBITDA margin which
are affected by expectations about future market or economic conditions. Discount rates, revenue growth rates and EBITDA margin are the
most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted
average cost of capital (“WACC”). The WACC considers market and industry data as well as Company-specific risk factors for
each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit for our
fiscal 2024 test was 10.0% and is indicative of the return an investor would expect to receive for investing in such a business. Terminal
growth rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last
projected period assuming a constant WACC and long-term growth rates. The terminal growth rate used for our fiscal 2024 test was 2.5%.
The Company has determined that, to date, no impairment of goodwill exists and fair value of the reporting units exceeded the carrying
value in total by approximately 53.5%. The fair value of the reporting units exceeds the carrying value by a minimum of 18.8% at each
of the two reporting units. A decrease of 1.0% in our terminal growth rate would not result in impairment of goodwill for any of our
reporting units. An increase of 1.0% in our discount rate would not result in impairment of goodwill for any of our reporting units.
Assuming no growth in EBITDA margin within the model would not result in impairment of goodwill for any of our reporting units. The Company
performs the annual impairment testing during the fourth quarter of each fiscal year. Although no changes are expected, if the actual
results of the Company are less favorable than the assumptions the Company makes regarding estimated cash flows, the Company may be required
to record an impairment charge in the future.

Valuation of Business
Combinations. We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their
estimated fair values at the date of acquisition, including identifiable intangible assets, which either arise from a contractual or
legal right or are separable from goodwill. We base the fair value of identifiable intangible assets acquired in a business combination
on detailed valuations which are prepared with the assistance of a specialist and consider our best estimates of inputs and assumptions
that a market participant would use. We utilize a specialist for these valuations due to the complexity and estimation uncertainty involved
in determining the fair value given the significant assumptions involved. Significant assumptions utilized in the valuation models include
discount rates, revenue growth rates and EBITDA margins. We allocate to goodwill any excess purchase price over the fair value of the
net tangible and identifiable intangible assets acquired. Transaction costs associated with these acquisitions are expensed as incurred
through other, net on the consolidated statements of operations.

Income
Taxes. As part of the process of preparing the consolidated financial statements, we are required to estimate the income taxes in
each jurisdiction in which we operate. This process involves estimating the actual current tax liabilities together with assessing temporary
differences resulting from the differing treatment of items for tax and financial reporting purposes. These differences result in deferred
tax assets and liabilities, which are included in the consolidated balance sheets. We must then assess the likelihood that the deferred
tax assets will be recovered, and to the extent that we believe that recovery is not more than likely, we are required to establish a
valuation allowance. If a valuation allowance is established or increased during any period, we are required to include this amount as
an expense within the tax provision in the consolidated statements of operations. Significant judgment is required in determining our
provision for income taxes, deferred tax assets and liabilities, accrual for uncertain tax positions and any valuation allowance recognized
against net deferred tax assets.

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Recent
Accounting Pronouncements

For a discussion of recent
accounting pronouncements, refer to Note 2.

Impact
of Inflation and Changes in Prices of Raw Materials

In fiscal 2024, the economy
experienced inflation. We purchase steel at market prices, which fluctuate as a result of supply and demand in the marketplace. To date,
we have managed price increases by changing our buying patterns, expanding our vendor network, and passing increases on to our customers
through price increases on our products, the assessment of steel surcharges on our customers, or entry into LTAs with our customers containing
escalator provisions tied to our invoiced price of steel. However, even if we are able to pass these cost increases to our customers,
there may be a time lag of several months between the time we experience a cost increase and when we implement surcharges or price
increases, particularly for orders already in our backlog. As a result, our gross margin percentage may decline.

Competitive
pressures and the terms of certain of our long-term contracts may require us to absorb at least part of these cost increases, particularly
during periods of high inflation. Our principal raw materials are stainless and 52100 wire and rod steel (types of high alloy steel),
which have historically been readily available. We have never experienced a work stoppage due to a supply shortage. We maintain multiple
sources for raw materials including steel and have various supplier agreements. Through sole-source arrangements, supplier agreements
and pricing, we have been able to minimize our exposure to fluctuations in raw material prices.

Our suppliers and sources
of raw materials are based in the U.S., Europe and Asia. We believe that our sources are adequate for our needs in the foreseeable
future, that there exist alternative suppliers for our raw materials, and that in most cases readily available alternative materials
can be used for most of our raw materials.

Off-Balance
Sheet Arrangements

The Company has $3.7 of outstanding
standby letters of credit, all of which are under the Revolving Credit Facility. We also have a contractual obligation for licenses related
to the implementation and upgrade of an enterprise resource planning (“ERP”) system. The remaining contractual obligation
related to these ERP license costs of $7.6 will end in June of 2026.

Other
than the items noted above, we had no significant off-balance sheet arrangements as of March 30, 2024.

31