| Summary of Significant Accounting Policies | 2.
Summary of Significant Accounting Policies General The consolidated financial
statements include the accounts of RBC Bearings Incorporated, Roller Bearing Company of America, Inc. (“RBCA”)
and its wholly-owned subsidiaries, Industrial Tectonics Bearings Corporation (“ITB”), RBC Linear Precision Products, Inc.
(“LPP”), RBC Nice Bearings, Inc. (“Nice”), RBC Precision Products - Bremen, Inc. (“Bremen
(MBC)”), RBC Precision Products - Plymouth, Inc. (“Plymouth”), RBC Lubron Bearing Systems, Inc. (“Lubron”),
RBC Oklahoma, Inc. (“RBC Oklahoma”), RBC Aircraft Products, Inc. (“API”), RBC Southwest Products,
Inc. (“SWP”), All Power Manufacturing Co. (“All Power”), RBC Aerostructures LLC (“RAS”), Western
Precision Aero LLC (“WPA”), Climax Metal Products Company (“CMP”), RBC Turbine Components LLC (“TCI”),
Sonic Industries, Inc. (“Sonic”), Sargent Aerospace and Defense LLC (“Sargent”), Avborne Accessory Group,
Inc. (“AMS”), Schaublin Holdings S.A. and its wholly-owned subsidiaries Schaublin SA, RBC Bearings Polska sp. Z.o.o.,
RBC France SAS and Schaublin GmbH (“Schaublin”), RBC de Mexico S DE RL DE CV (“Mexico”), RBC Bearings U.K.
Limited and its wholly-owned subsidiary Phoenix Bearings Limited (“Phoenix”), Allpower de Mexico S DE RL DE CV (“Tecate”)
and RBC Bearings Canada, Inc. Divisions of RBCA include: RBC Corporate, RBC E-Shop, RBC Aerospace sales office and warehouse, Transport
Dynamics (“TDC”), Heim (“Heim Bearings Company”), Engineered Components (“ECD”), RBC Aerocomponents
(“RAC”), PIC Design (“PIC Design”), RBC Hartsville, RBC West Trenton, RBC Bishopsville, RBC Eastern Distribution
Center, Shanghai Representative office of Roller Bearing Company of America, Inc. (“RBC Shanghai”) and RBC Grand Prarie
TX location. U.S. Bearings (“USB”) is a division of SWP and Schaublin USA is a division of Nice. All intercompany balances
and transactions have been eliminated in consolidation. The Company has a fiscal
year consisting of 52 or 53 weeks, ending on the Saturday closest to March 31. Based on this policy, fiscal year 2018 contained
52 weeks, 2017 contained 52 weeks and 2016 contained 53 weeks. The amounts are shown in thousands, unless otherwise indicated. Use of Estimates The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, valuation
of inventories, accrued expenses, depreciation and amortization, income taxes and tax reserves, pension and postretirement obligations
and the valuation of options. Cash and Cash Equivalents The Company considers all
highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts primarily with Bank of America, N.A and Wells Fargo & Company. The balances are insured by the Federal Deposit
Insurance Company up to $250. The Company has not experienced any losses in such accounts. Inventory Inventories are stated
at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. The Company accounts for inventory
under a full absorption method, and records 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. Shipping and Handling The sales price billed
to customers includes shipping and handling, which is included in net sales. The costs to the Company for shipping and handling
are included in cost of sales. Property, Plant and Equipment Property, plant and equipment
are recorded at cost. Depreciation and amortization of property, plant and equipment, including equipment under capital leases,
is provided for by the straight-line method over the estimated useful lives of the respective assets or the lease term, if shorter.
Depreciation of assets under capital leases is reported within depreciation and amortization. The cost of equipment under capital
leases is equal to the lower of the net present value of the minimum lease payments or the fair market value of the leased equipment
at the inception of the lease. Expenditures for normal maintenance and repairs are charged to expense as incurred. The estimated useful lives
of the Company’s property, plant and equipment follows:
Buildings and improvements 20-30 years
Machinery and equipment 3-15 years
Leasehold improvements Shorter of the term of lease or estimated useful life Recognition of Revenue and Accounts Receivable
and Concentration of Credit Risk The Company recognizes
revenue only after the following four basic criteria are met:
● Persuasive evidence of an arrangement exists;
● Delivery has occurred or services have been rendered;
● The seller’s price to the buyer is fixed or determinable; and
● Collectability is reasonably assured. Revenue is recognized upon
the passage of title, which generally is at the time of shipment, except for certain customers for which it occurs when the products
reach their destination. Accounts receivable, net of applicable allowances, is recorded when revenue is recorded. We also recognize revenue
on a Ship-In-Place basis for three customers who have required that we hold the product after final production is complete. In
this case, a written agreement has been executed (at the customer’s request) whereby the customer accepts the risk of loss
for product that is invoiced under the Ship-In-Place arrangement. For each transaction for which revenue is recognized
under a Ship-In-Place arrangement, all final manufacturing inspections have been completed and customer acceptance has been obtained.
In fiscal 2018, 2.9% of our total net sales were recognized under Ship-In-Place transactions compared to 2.6% in fiscal 2017. We also on occasion record
deferred revenue on our balance sheet as a liability. Deferred revenue represents progress payments received, primarily from one
customer, to cover purchases of raw materials per the terms of multi-year long term contracts. Revenue associated with these agreements
is recognized in accordance with the criteria discussed above. The Company sells to a
large number of OEMs and distributors who service the aftermarket. The Company’s credit risk associated with accounts
receivable is minimized due to its customer base and wide geographic dispersion. The Company performs ongoing credit evaluations
of its customers’ financial condition and generally does not require collateral or charge interest on outstanding amounts.
The Company had no concentrations of credit risk with any one customer greater than approximately 6% of accounts receivables at
March 31, 2018 and 8% at April 1, 2017. Allowance for Doubtful Accounts The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The
Company reviews the collectability of its receivables on an ongoing basis taking into account a combination of factors. The Company
reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition,
to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally
due. If a customer’s situation changes, such as a bankruptcy or creditworthiness, or there is a change in the current economic
climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write-off accounts receivable
after reasonable collection efforts have been made and the accounts are deemed uncollectible. 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 value may have declined. Separate tests are performed for goodwill and indefinite lived
intangible assets. We apply a qualitative test of impairment on the indefinite lived intangible assets. This is done by
assessing the existence of events or circumstances which would make it more likely than not that impairment is present. No
such factors were identified during our current year analysis. The determination of any goodwill impairment is made at the
reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares
it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit’s goodwill over the goodwill’s implied
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 discount rates, revenue growth rates,
terminal growth rates and cash flow projections. Discount rates, growth rates and cash flow projections 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 2018 test was 11.0% 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 2018 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 74.1%. The fair value of the reporting units exceeds the carrying value by a minimum of 24.8% at each of the
four 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. 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. Deferred Financing Costs Deferred financing costs
are amortized on a straight line basis over the lives of the related credit agreements. Income Taxes The Company accounts for
income taxes using the liability method, which requires it to recognize a current tax liability or asset for current taxes payable
or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial
statement and tax reporting bases of assets and liabilities to the extent that they are realizable. Deferred tax expense (benefit)
results from the net change in deferred tax assets and liabilities during the year. A valuation allowance is recorded to reduce
deferred tax assets to the amount that is more likely than not to be realized. Temporary differences relate
primarily to the timing of deductions for depreciation, stock-based compensation, goodwill amortization relating to the acquisition
of operating divisions, basis differences arising from acquisition accounting, pension and retirement benefits, and various accrued
and prepaid expenses. Deferred tax assets and liabilities are recorded at the rates expected to be in effect when the temporary
differences are expected to reverse. Net Income Per Common Share Basic net income per common
share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted net income per
common share is computed by dividing net income by the sum of the weighted-average number of common shares and dilutive common
share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common
shares issuable upon the exercise of stock options. The table below reflects
the calculation of weighted-average shares outstanding for each year presented as well as the computation of basic and diluted
net income per common share:
Fiscal Year Ended
March 31, 2018
April 1, 2017
April 2, 2016
Net income $ 87,141 $ 70,623 $ 63,894
Denominator:
Denominator for basic net income per common share—weighted-average shares 23,948,565 23,521,615 23,208,686
Effect of dilution due to employee stock options 415,224 263,021 299,732
Denominator for diluted net income per common share—adjusted 24,363,789 23,784,636 23,508,418
Basic net income per common share $ 3.64 $ 3.00 $ 2.75
Diluted net income per common share $ 3.58 $ 2.97 $ 2.72 At March 31, 2018, 217,280
employee stock options and 53,073 restricted shares have been excluded from the calculation of diluted earnings per share. At April
1, 2017, 459,500 employee stock options and 3,000 restricted shares have been excluded from the calculation of diluted earnings
per share. At April 2, 2016, 443,250 employee stock options and no restricted shares have been excluded from the calculation of
diluted earnings per share. The inclusion of these employee stock options and restricted shares would be anti-dilutive. Impairment of Long-Lived Assets The Company assesses the
net realizable value of its long-lived assets and evaluates such assets for impairment whenever indicators of impairment are present.
For amortizable long-lived assets to be held and used, if indicators of impairment are present, management determines whether the
sum of the estimated undiscounted future cash flows is less than the carrying amount. The amount of asset impairment, if any, is
based on the excess of the carrying amount over its fair value, which is estimated based on projected discounted future operating
cash flows using a discount rate reflecting the Company’s average cost of funds. To date, no indicators of impairment exist
other than those resulting in the restructuring charges already recorded. Long-lived assets to be
disposed of by sale or other means are reported at the lower of carrying amount or fair value, less costs to sell. Foreign Currency Translation and Transactions Assets and liabilities
of the Company’s foreign operations are translated into U.S. dollars using the exchange rate in effect at the balance sheet
date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of exchange
rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in accumulated other comprehensive
income (loss), while gains and losses resulting from foreign currency transactions are included in other non-operating expense
(income). Net income of the Company’s foreign operations for fiscal 2018, 2017 and 2016 amounted to $776, $7,414 and $8,660,
respectively. Total assets of the Company’s foreign operations were $135,801 and $125,164 at March 31, 2018 and April 1,
2017, respectively. Fair Value of Measurements Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date (exit price). Inputs used to measure fair value are within a hierarchy consisting of three levels. Level 1
inputs represent unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs represent unadjusted
quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets
or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 inputs represent unobservable inputs for the asset or liability. Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts reported
in the balance sheet for cash and cash equivalents, short-term investments, accounts receivable, prepaids and other current assets,
and accounts payable and accruals, and other current liabilities approximate their fair value due to their short-term nature. The carrying amounts of
the Company’s borrowings under its Wells Fargo Credit Agreement and Swiss Credit Facility approximate fair value, as these
obligations have interest rates which vary in conjunction with current market conditions. The carrying value of the mortgage on
our Schaublin building approximates fair value as the rates since entering into the mortgage in fiscal 2013 have not significantly
changed. Accumulated Other Comprehensive Income (Loss)
The components of comprehensive
income (loss) that relate to the Company are net income, foreign currency translation adjustments and pension plan and postretirement
benefits, all of which are presented in the consolidated statements of stockholders’ equity and comprehensive income (loss). The following summarizes
the activity within each component of accumulated other comprehensive income (loss), net of taxes:
Currency
Pension and Postretirement Total
Balance at April 1, 2017 $ (3,942 ) $ (5,881 ) $ (9,823 )
Other comprehensive income before reclassifications 6,155 429 6,584
Amounts reclassified from accumulated other comprehensive loss — 954 954
Net current period other comprehensive income 6,155 1,383 7,538
Balance at March 31, 2018 $ 2,213 $ (4,498 ) $ (2,285 ) Stock-Based Compensation The Company recognizes
compensation cost relating to all share-based payment transactions in the financial statements based upon the grant-date fair value
of the instruments issued 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. Recent Accounting Pronouncements In February 2018, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “ Income
Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income In May 2017, the FASB issued
ASU No. 2017-09, “ Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting In March 2017, the FASB
issued ASU No. 2017-07, “ Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost In January 2017, the FASB
issued ASU No. 2017-04, “ Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment In October 2016, the FASB
issued ASU No. 2016-16, “ Income Taxes (Topic 740):Intra-Entity Transfers of Assets Other Than Inventory In August 2016, the FASB
issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments In March 2016, the FASB
issued ASU No. 2016-09, “ Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting In addition, the Company
will prospectively classify all tax-related cash flows resulting from share-based payments, including the excess tax benefits related
to the settlement of stock-based awards, as cash flows from operating activities in the statement of cash flows. Prior to the adoption
of this standard, these were shown as cash inflows from financing activities and cash outflows from operating activities. The adoption of the ASU
also resulted in the Company removing the excess tax benefits from the assumed proceeds available to repurchase shares when calculating
diluted earnings per share on a prospective basis. The revised calculation increased the diluted weighted average common shares
outstanding by approximately 111 thousand shares in the period of adoption. The Company also made an accounting policy election
to continue to estimate forfeitures as it did prior to adoption. In February 2016, the FASB
issued ASU No. 2016-02, “ Leases (Topic 842) In July 2015, the FASB
issued ASU No. 2015-11, “ Inventory (Topic 330): Simplifying the Measurement of Inventory In May 2014, the FASB issued
ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606) The guidance permits use
of either a retrospective or cumulative effect transition method. Based upon the FASB’s decision to approve a one-year delay
in implementation, the new standard is now effective for the Company in fiscal 2019, with early adoption permitted, but not earlier
than fiscal 2018. The Company has concluded it will utilize the modified retrospective method upon adopting this standard. The Company has completed
their assessment of the impact of ASU No. 2014-09 on its business which has identified certain differences from the application
of the new standard. The Company’s performance obligations under the new standard are not materially different from the existing
standard. The majority of the Company’s contracts involve the sale of parts to customers and will continue to transfer control
of assets at a point in time because the criteria in the new standard for over-time recognition have not been met. For a limited
number of contracts, primarily related to services performed, the Company will now recognize revenue over time in proportion to
costs incurred. For these contracts, the Company has concluded that the cost-to-cost measure of progress most accurately depicts
the transfer of control of assets to the customer. Based upon the results
of our assessment, the Company does not expect the new revenue standard to have a material impact on the Company’s pattern
of revenue recognition, operating revenue, results of operations, or financial position; however, we will expand certain disclosures
as required. In reaching this conclusion, the Company evaluated its different contracting practices including Master Agreements
and Purchase Orders. The assessment included analyzing the standard’s impact on the Company’s revenue streams and above
mentioned contracting practices. The Company has substantially
completed the process of updating accounting policies, evaluating new disclosure requirements and implementing changes to its business
processes, systems and controls to support revenue recognition and disclosure under the new guidance and will adopt the requirements
of the new standard in the first quarter of fiscal 2019. The Company has determined that as a result of applying the modified retrospective
method, the cumulative effect adjustment to retained earnings as of April 1, 2018 will be immaterial. Other new pronouncements
issued but not effective until after March 31, 2018 are not expected to have a material impact on our financial position, results
of operations or liquidity. |
