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VIA FACSIMILE
June 7, 2005
Dr. Michael J. Hartnett
Chief Executive Officer
RBC Bearings, Inc.
One Tribology Center
Oxford, CT 06478
Re: RBC Bearings, Inc.
Form S-1
File Nos. 333-124824
Filed May 11, 2005
Dear Dr. Hartnett:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. Please provide all information required except that allowed to
be
excluded by Rule 430A of the Securities Act of 1933. This
information impacts disclosure throughout your filing and will
require time to review. Note that we may have additional comments
on
your filing once you provide the information.
2. Please supplementally provide the staff with any pictures or
graphics you intend to use for the prospectus. We may have
comments.
3. Please discuss on a supplemental basis, whether Delaware law
requires an agent for service to reside within the State. We note
the address for your agent of service is in Oxford, Connecticut.
4. Please disclose the number of holders of common stock as
required
by Item 201(b) of Regulation S-K.
Prospectus Cover Page
5. Please include a price range as soon as practicable and allow
us
adequate time to review the filing with the price range before
requesting effectiveness. Also, please indicate the number of
shares
offered and other information left blank in your prospectus. You
may
include in brackets information that could change prior to
effectiveness. See Instruction 1 to Item 501(b)(3) of Regulation
S-
K.
Prospectus Summary, page 1
6. Tell us supplementally of the basis for your statement that you
have garnered leading positions in most markets in which you
compete.
The Offering, page 4
7. We note that you intend to use the proceeds from your initial
public offering of your equity securities to repay certain
indebtedness, which will materially change your capital structure.
As such, please include pro forma financial statements in
accordance
with Article 11 of Regulation S-X to reflect the change in your
capital structure, including the impact of pre-offering
transaction.
Summary of Financial Data, page 5
8. We note from footnote 4 that your pro forma financial
statements
are to reflect the exercise of options and warrants by some of the
selling stockholders. Please provide us with additional
information
regarding this adjustment, including how you determined this
adjustment is factually supportable.
9. We note that you are presenting EBITDA as an operating
performance
measure. It also appears that you are presenting EBITDA as a
liquidity measure from your statement that it is also used as a
measure of operating cash capacity. As such, please revise your
disclosure to provide the following information, as required by
Item
10(e) of Regulation S-K and Questions 8 and 12 of the SEC
"Frequently
Asked Questions Regarding the Use of Non-GAAP Financial Measures:"
* Performance measure: State the economic substance behind your
decision to use such a measure.
* Performance measure: Expand your discussion of the limitations
of
EBITDA to address how the exclusion of each item materially limits
the usefulness of EBITDA. For instance you might expand your
disclosures, in part, to address the limitations of EBITDA as a
performance measure by providing the following information:
* It does not include interest expense and related financing
costs.
Because we have borrowed money in order to finance our operations,
interest expense and other financing costs are a necessary element
of
our costs and ability to generate revenue. Therefore any measure
that excludes interest expense has material limitations;
* It does not include depreciation and amortization expense.
Because
we use capital assets, depreciation and amortization expense is a
necessary element of our costs and ability to generate revenue.
Therefore any measure that excludes depreciation and amortization
expense has material limitations;
* It does not include taxes. Because the payment of taxes is a
necessary element of our operations, any measure that excludes tax
expense has material limitations.
* Performance measure: State how you compensate for the material
limitations of using EBITDA.
* Performance measure: Please provide substantive reasons why
management believes EBITDA provides useful information to
investors.
* Liquidity measure: Reconcile EBITDA to cash flows from
operating
activities, as the most comparable liquidity GAAP financial
measure,
in addition to reconciling to net income.
* Liquidity measure: Present operating, investing and financing
cash
flows determined on a GAAP basis with equal or greater prominence.
Risk Factors, page 8
10. Please avoid language in risk factors like "adversely affect,"
or
"material adverse effect." Instead, please state what the specific
impact will be on your financial condition or results of
operations.
If we fail to maintain an effective system of internal controls,
page
17
11. Please clarify with respect to "instituting changes" to your
internal procedures whether you or your auditors have detected any
material weaknesses and/or significant deficiencies in your
internal
control over financial reporting. If so, please provide the
following:
* a comprehensive discussion of each material weakness and/or
significant deficiency, including whether any of the issues had a
material impact to your consolidated financial statements and the
dates of detection.
* a sufficiently detailed discussion of the steps you are taking
to
correct any material weaknesses and/or significant deficiencies in
you internal control over financial reporting.
The loss of a major customer could have a material adverse effect
on
our business and operations, page 8
12. We note your statement that consolidation and combination of
defense or other manufacturers may eliminate customers from the
industry and/or put downward pricing pressures on sales of
component
parts sold by you. Please clarify why this risk is currently
material to you. For instance, briefly discuss any consolidation
affecting any of your major customers and its affect on you.
Future reductions or changes in U.S. government spending could
negatively affect our business, page 9
13. In order to enhance understanding of this risk factor, please
quantify the portion of your sales that are made directly or
indirectly to the U.S. government to support military or other
government projects.
Work stoppages and other labor problems could materially adversely
affect us, page 12
14. Please disclose whether you have experienced work stoppages or
other labor disruptions and describe their affect on you.
The occurrence of extraordinary events, such as a major terrorist
attack in the U.S., may adversely affect our business, resulting
in a
decrease in our revenues, page 13
15. This risk factor appears to be generic and applicable to any
industry and the economy as a whole. Please provide more
specificity
as to the potential impact such events would have on your
operations
or remove the risk factor.
Our international operations are subject to risks inherent in such
activities, page 14
16. In order to enhance the current relevancy of the risks
described,
provide brief examples of how you have been affected by the
circumstances listed here, such as foreign regulation, unsettled
political conditions, currency devaluations, logistical and
communications challenges.
Our intellectual property and other proprietary rights are
valuable..., page 16
17. Please disclose with more specificity the risks posed here.
For
instance, please disclose whether you have been or are in any
intellectual property disputes and describe the impact an adverse
outcome has had or would have on you. Additionally, please
disclose
when your patents are to expire.
Forward-Looking Statements, page 20
18. Please remove "will" from the list of words in the third
sentence
in this section.
Use of Proceeds, page 22
19. Please disclose the interest rate and maturity for each form
of
indebtedness you will repay from proceeds pursuant to Instruction
4
to Item 504 of Regulation S-K.
Industry and Market Data; page 23
20. Please remove the statement that some of the information in
the
prospectus may not be reliable. You are responsible for the
accuracy
of all of the disclosure in the prospectus. If specific
information
is based on your belief, we will not object to a statement to that
effect where the information appears.
21. Please clarify which data or statistics that you cite are made
from independent industry publications, reports by market research
firms or other published independent sources.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 30
Sources of Revenue, page 31
22. We note that out of the 31% of net sales generated by your top
ten customers during the nine-month period, 16% was generated by
our
top three customers. Please explain your statement that no single
customer was responsible for generating more than 4% of your net
sales for the same period in light of the fact that at least three
customers accounted for 16% of net sales.
Results of Operations, page 33
23. For each period discussed, please provide more detail about
the
reasons for changes from period to period rather than a mere
narrative recitation of the financial statements. For instance,
we
note that for the nine months ended January 1, 2005 compared to
the
same period ended December 27, 2003, you roller bearing segment
experienced an increase in net sales to due to strong demand
across
all markets especially mining, construction, defense, and
aerospace.
Briefly specify and quantify how each of these industries
contributed
to this increase. Another example would be the increase in
operating
income for the nine months ended January 1, 2005 compared to the
same
period ended December 27, 2003.
24. Please disclose what your Corporate & Other reporting segment
is
comprised of and disclose the reason for its 23.7% increase for
the
nine months ended January 1, 2005 compared to the same period
ended
December 27, 2003.
25. Please expand/revise the discussion of your results of
operations
for each period presented to address the following items:
* Provide more analysis of the factors that impact the areas
comprising of your income from continuing operations, including a
complete discussion of known trends or anticipated trends that are
and/or may continue to have on net sales, operating income, and
income from continuing operations, including management`s outlook
as
to the future impact. Your discussion and analysis is to provide
investors with sufficient information to understand the historical
trends and the expectations for the future as seen through the
eyes
of management. Examples include the following:
* You state the decline in SG&A as a percentage of sales is due to
the increase in net sales without any further analysis. It is
unclear from the discussion why the increase in net sales results
in
a decrease in SG&A. Furthermore, there is no analysis to discuss
whether an investor can continue to expect SG&A as a percentage of
sales to decline as net sales continues to increase.
* Your segment operating income discussion provides investors with
information that is readily determinable from the segment footnote
disclosure in note 20. As the profit and loss measure used by
your
CODM to evaluate your reportable segments` performance, this is a
key
indicator of your operating performance that should have a
comprehensive analysis for each reportable segment for each period
presented.
* Your income taxes discussion does not appear to sufficiently
address the movement in the various components which contribute to
the overall effective tax rate, as set forth in the reconciliation
in
note 15 to the consolidated financial statements, or the
volatility
of your effective tax rate between comparable periods. Please
also
clarify whether your net operating loss carryforwards expire in
various periods through 2024 (as disclosed on page F-29) or 2004
(as
disclosed on page 37).
Quantify the impact of each factor you identify when multiple and
offsetting factors contribute to fluctuations. For example, your
nine months gross profit as a percentage of net sales discussion
attributes the increase to (a) changes in your product volume, (b)
product mix variation, (c) increase raw material costs, and (d)
increased labor costs without quantification of the impact.
Please note that this is not meant to represent an all-inclusive
list
of where your MD&A could be improved. We encourage you to provide
further analysis throughout your discussion. Refer to Item 303 of
Regulation S-K and SEC Interpretive Release No. 33-8350 dated
December 19, 2003 for additional guidance.
Fiscal 2004 Compared to Fiscal 2003, page 36
26. We note that you experienced an increase in net sales in your
ball bearing segment due to strength in certain aerospace and
defense
applications. Please briefly elaborate on which applications
contributed to this increase.
Liquidity and Capital Resources
27. Please expand your liquidity discussion to also include a
comprehensive comparison between each period presented regarding
the
three major categories of the statements of cash flows, using
year-
to-year comparisons. Refer to Instruction 1 to paragraph 303(a)
of
Regulation S-K.
Obligations and Commitments
28. Please expand your contractual obligations table to include
purchase obligations and other long-term liabilities under GAAP
(e.g., pension and other postretirement obligations). Please also
include a footnote for conditions that may create additional
obligations like the amount of interest payments (assuming long-
term
debt remains outstanding). Refer to Item 303(a)(5) of Regulation
S-K
and Release No. 33-8182 for guidance.
Critical Accounting Policies
29. Please expand this section to include the following
information:
* Goodwill and Intangible Assets: Provide a more detailed
description of the valuation method used to determine if goodwill
is
impaired and how you calculated cash flows for your impairment
test,
including the assumptions used to support recoverability. State
the
impact on your results of operations and financial position if
actual
results differ from your estimates and the types of events that
could
result in an impairment to your goodwill balance.
* Stock Based Compensation:
* A comprehensive discussion of the significant factors and
assumptions underlying your market approach to estimate your
enterprise value and used in determining fair value of your Class
A
common stock. Please supplementally tell us the companies used to
arrive at the appropriate market multiple.
* State whether the determination of the fair value of your Class
A
common stock was performed contemporaneously or retrospectively.
* If the valuation specialist was a related party, a statement
indicating that fact. Please supplementally tell us who your
valuation specialist was, including a brief description of the
firm`s
credentials.
* Once you have determined your estimated IPO price, expand your
discussion to address each significant factor contributing to the
difference between the fair value of the Class A common stock and
the
estimated IPO price.
Refer to SEC Interpretive Release No. 33-8350, SEC Other Release
No.
33-8040 and SEC Proposed Release No. 33-8098 for guidance.
30. We note that your pension plans are underfunded and may
require
significant future contributions. Please tell us what
consideration
you gave to including your provisions for pension benefits as a
critical accounting policy. Also, we note that you have a
significant amount of net operating loss carryforwards with pre-
tax
losses reported for fiscal years 2003 and 2004 for your domestic
operations. Please also tell us what consideration you gave to
include income taxes as a critical accounting policy. If you
ultimately determine that income taxes is not a critical
accounting
policy, please include within MD&A an analysis regarding the
realizability of your deferred tax assets, specifically your net
operating loss carryforwards and why you do not believe you need a
valuation allowance. Please also quantify the amount of taxable
income you must generate to fully realize your deferred tax
assets.
Business, page 46
31. Ensure that the information you include in your Business
section
is balanced. For example, you cite your leading market position
for
certain products, as a competitive strength, but you omit any
substantive discussion here about the competitive environment in
which you operate. To the extent that you continue to cite
competitive strengths, please review each one and revise as
necessary
to provide balancing information.
RBC Bearings Incorporated
32. Please disclose the markets in which you are the only
manufacturer of bearing solutions as well as the percentage of
your
revenue generated from these exclusive markets.
The Bearing Industry, page 46
33. Tell us supplementally what industry source your bearings
demand
statement is based upon.
Customers and Markets, page 48
34. Please place your competitive position in each of the markets
discussed in context by comparing the percentage of the market
that
you have versus that of your principal competitors. Please refer
to
Item 101(c)(x) of Regulation S-K.
35. Please disclose the nature of the contracts between you and
your
largest customers. For instance, are your contracts long-term or
terminable at-will?
Intellectual Property, page 54
36. Please disclose how many patents you own and have pending.
Also,
we note your statement that no individual item of intellectual
property is material to your business; however, please disclose
the
importance these patents and other items of intellectual property
have on your business. Please refer to Item 101(c)(iv) of
Regulation
S-K.
37. Please disclose the amount of money spent on research and
development in past three years. Please refer to Item 101(c)(xi)
of
Regulation S-K.
Regulation, page 54
38. Quantify to the extent possible the impact that government
regulation and approval processes have on your operations and
profitability. What is the cost of compliance and are these costs
that you can pass on to customers?
39. We note your statement that new laws or changes to existing
laws
could subject you to significant additional costs of compliance
and
could result in material reductions to your results of operations,
cash flow or revenues. To the extent know, disclose any pending
regulatory changes that would have a material impact on you.
Related Party Transactions, page 68
Amended and Restated Management Services Agreement, page 70
40. Please describe the types of services Whitney provides under
the
agreement. We note from page 3 that Whitney provides financial
consulting and management advisory services. Please briefly
describe
what types of financial consulting Whitney provides. Disclose
when
you paid Whitney the one time fee of $800,000 and what the fee was
for. Confirm that the management services agreement is the only
agreement governing your relationship with Whitney.
Principal and Selling Stockholders, page 72
41. For selling stockholders that are affiliates of broker-
dealers,
the prospectus must state that: (1) the sellers purchased in the
ordinary course of business; and (2) at the time of purchase of
the
securities you are registering for resale, the seller had no
agreements or understandings, directly or indirectly, with any
person, to distribute the securities. If you are unable to make
these statements in the prospectus, the disclosure must state that
the sellers are also underwriters.
42. To the extent that any successor(s) to the named selling
stockholder wish to sell under this prospectus, please be advised
that you must file a prospectus supplement identifying such
successors as selling stockholders. Please revise your disclosure
to
state that a prospectus supplement will be filed in these
circumstances.
43. Please disclose how your selling stockholders acquired their
securities.
Underwriting, page 85
44. We note that Merrill Lynch & Co. will be facilitating Internet
distribution of this offering. Please tell us whether KeyBanc
Capital Markets., Jefferies & Company, Inc., or any members of the
underwriting syndicate will engage in any electronic offer, sale
or
distribution of the shares. If you become aware of any additional
members of the underwriting syndicate that may engage in
electronic
offers, sales or distributions after you respond to this comment,
promptly supplement your response to identify those members and
provide us with a description of their procedures. Briefly
describe
any electronic distribution in the filing, and confirm, if true,
that
the procedures you will follow with respect to any electronic
distribution will be consistent with those previously described to
and cleared by the Office of Chief Counsel of the Division of
Corporation Finance.
45. We note that Merrill Lynch & Co. will be facilitating Internet
distribution of this offering by placing your prospectus on its
web
site. Please tell us whether you or the underwriters have any
arrangements with a third party to host or access your
registration
statement on the Internet. If so, identify the party and the
website, describe the material terms of your agreement, and
provide
us with a copy of any written agreement. Provide us also with
copies
of all information concerning your company or registration
statement
that has appeared on their website. Again, if you subsequently
enter
into any such arrangements, promptly supplement your response.
46. If the company or the underwriters intend to engage in a
directed
share program in conjunction with this offering, please describe
to
us the mechanics of how and when these shares were or will be
offered
and sold to investors in the directed share program for this
offering. For example, tell us how the prospective recipients and
number of reserved shares is determined. Tell us how and when the
company and underwriter notified or will notify the directed share
investors, including the types of communications used. Discuss
the
procedures these investors must follow in order to purchase the
offered securities, including how and when any communications are
sent or received or funds are received by the underwriters or you.
How do the procedures for the directed share program differ from
the
procedures for the general offering to the public? Provide us
with
copies of all written communications with prospective purchasers
about the directed share program.
RBC Bearings Incorporated financial statements for the year ended
April 3, 2004
Consolidated Statements of Operations
47. Please revise to present preferred stock dividends and net
income/(losses) available to common shareholders on the face of
your
consolidated statements of operations. Refer to SAB Topic 6.B.
Please also include net income/(losses) available to common
shareholders in your summary financial data and selected
consolidated
historical financial data sections.
2.Summary of Significant Accounting Policies, Recognition of
Revenue
and Accounts Receivable and Concentration of Credit Risk
48. We note that you have long-term aerospace contracts for which
you
use the units-of-delivery method in accordance with SOP 81-1 for
revenue recognition. Please provide us with additional
information
regarding the terms of these contracts and the appropriateness of
recognizing revenue for these contracts in accordance with SOP 81-
1.
Please also revise your disclosure to include information about
the
following:
* The percentage of net sales recognized in accordance with SAB
Topic
13 and the percentage recognized in accordance with SOP 81-1;
* The general nature and terms of your long-term contracts;
* The principle components of contract costs; and
* Your policy for recognizing contract losses and claims.
2. Summary of Significant Accounting Policies, Net Income (Loss)
Per
Common Share
49. In light of the fact that you currently have shares of both
Class
A common stock and Class B common stock outstanding and
convertible
preferred stock that is entitled to participate in dividends paid
to
the holders of shares of common stock, please address for us how
your
earnings per share presentation complies with the guidance set
forth
in EITF Issue No. 03-6 - Participating Securities and the Two-
Class
Method under FASB Statement No. 128. Also refer to paragraph 60
of
SFAS 128. Please also tell us if the convertible preferred stock
is
contractually responsible to share in your losses on a basis that
is
objectively determinable. Please refer to Issue 5 of EITF 03-6
for
guidance.
3. Acquisitions
50. Please provide us with your significance tests for your
acquisition of Timken Corp. acquired on December 22, 2003. Refer
to
Rule 3-05 of Regulation S-X for guidance.
10. Debt
51. Please revise your disclosure to include a description of the
interest rate for each debt instrument, including the weighted
average interest rates for each period presented.
15. Income Taxes
52. Please revise your disclosure to provide the information
required
by paragraph 44.c. of SFAS 109.
20. Reportable Segments
53. Please tell us how you determined it was appropriate to
combine
other operating segments with corporate, which appears to
represent
reconciling and unallocated items.
Part II
Item 13. Other Expenses of Issuance and Distribution, page II-1
54. We note that you maintain officer and director insurance.
Please
include as a separate item any premium paid on any policy obtained
in
connection with the offering and sale of the securities being
registered which insures or indemnifies directors or officers
against
any liabilities they may incur in connection with the
registration,
offering, or sale of such securities. Please refer to the
instruction
to Item 511 of Regulation S-K.
Item 15.Recent Sales of Unregistered Securities
55. We note your disclosure in this section that there have been
no
recent sales of unregistered securities; however, in light of the
disclosure on pages 68 -69 of the prospectus that you raised
capital
through the sale of your Class A and B preferred stock in 2002 and
2003, please provide the information required by Item 701 of
Regulation S-K.
Item 16. Exhibits and Financial Statement Schedules, page II-2
56. Please file the underwriting agreement with sufficient time
for
us to review it prior to requesting effectiveness of the
registration
statement.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter that is filed on EDGAR with your amendment that keys
your responses to our comments and provides any requested
supplemental information. Detailed cover letters greatly
facilitate
our review. Please understand that we may have additional
comments
after reviewing your amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Tracey Houser, Staff Accountant, at (202)
551-
3736 or in her absence Jeanne Baker at (202) 551-3691, who
supervised
the accounting review, if you have questions regarding comments on
the financial statements and related matters. Please contact
Craig
Slivka, Staff Attorney, at (202) 551-3729 or, in his absence, me
at
(202) 551-3767 with any other questions.
Sincerely,
Jennifer Hardy
Branch Chief
cc: Joshua N. Korff, Esq.
(212)446-4900
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0404
DIVISION OF
CORPORATION FINANCE