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RBC Bearings on a roll
Defense Market Report
Exclusively for InvestorIdeas.com
By James Smith
July 04, 2006
Just as one doesn’t have to be a combatant to be in the army, a company does not have to manufacture weapons to be a defense contractor.
I have written in this space about IT companies, battery manufacturers and other companies that provide goods and services to the defense and homeland security sectors. These companies are legitimate defense contractors.
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Let’s look at the bearings market.
Call me old fashioned. But when I look at a company, I have to look further than balance sheet, income statement and share price.
When information is available, I want to see what the banks think. Aside from market makers, those banks that offer research reports on companies in which they sell shares, I want as much information as I can get on the pricing of debt, that is, how much a company has to pay in interest for the money it is borrowing.
I also want to know what the company is doing with the money, whether it is making shareholder distributions or is on the acquisition trail or is paying down high-priced existing debt. I also want to know the names of the lenders.
A recent example is Nasdaq-traded RBC Bearings Inc.
RBC Bearings provides plain, roller and ball bearings to the industrial, defense and aerospace industries.
The company on 27 June entered into a new US$150 million five-year revolving credit facility
The new facility provides more favorable terms and conditions, better pricing and improves the company's liquidity.
The deal includes an option to borrow an additional US$75 million under certain circumstances.
The facility pricing is grid based, with initial pricing that is approximately 175bp (basis points) (1.75 per cent) lower than the company's prior credit facility. The new credit facility will be used to fund working capital and potential acquisitions.
A reduction of 175bp in a new loan agreement is a big deal and indicates that lenders have expectations that the company is on the right track.
As for the use of funds, the company allocated US$78 million under the new facility to retire the same amount of outstanding term loan debt, and a further US$21 million to take out outstanding letters of credit.
Lead arrangers and joint bookrunners for the transaction were KeyBanc Capital Markets and JP Morgan Securities, both well-known in financial circles.
After-tax cash interest savings from the deal, assuming an average borrowing under the new facility of US$78 million and outstanding letters of credit of US$21 million, will be approximately US$1.1 million or $0.05 per share in fiscal 2007. As of June 27, the company had approximately 21.0 million fully diluted shares outstanding.
RBC also launched a secondary offering of nine million shares, including the greenshoe option, in April at US$20.50 per share.
The company sold approximately three million shares in the offering and selling stockholders sold approximately six million shares. The company's proceeds, after deducting underwriting discounts and commissions and expenses of the offering, were approximately US$57.0 million all of which was used to pay down debt
Let’s look at the company’s performance before making a rash investment decisions.
Net sales for the fiscal year ended April 1 were US$274.5 million, an increase of 13.0 per cent from US$243.0 million in the same period last year. Gross margin rose 21.2 per cent to US$82.9 million, compared to US$68.4 million for the comparable period last year. Gross margin, as a percentage of net sales, improved to 30.2 per cent for fiscal year 2006, compared to 28.2 per cent for the same period last year.
For the same fiscal year, the company reported operating income of US$38.6 million, compared to US$32.1 million for the comparable period last year. Adjusted operating income, excluding non-recurring compensation expense and management fees, stock option compensation expense, and plant consolidation costs, increased 29.5 per cent to US$45.4 million for fiscal year 2006, compared to US$35.0 million for the comparable period last year.
Operating income, as a percentage of sales, excluding these charges, was 16.5 per cent for fiscal year 2006, compared to 14.4 per cent for the same period last year.
For the fiscal year, the company reported net income of US$12.4 million, compared to net income of us$7.3 million in the same period last year, a 71.3 per cent increase year-over-year.
Keep your eye on RBC Bearings!
Disclaimer
James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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