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RBC BEARINGS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 28, 2014

The financial and business analysis below provides information which 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 the Annual Report on Form 10-K. 18 The following discussion and certain other sections of this Annual Report on Form 10-K contain statements reflecting our views about our future performance that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and our beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect that we or our management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth, or incorporated by reference, below under the heading "Cautionary Statements." We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Overview We are a well known international manufacturer of highly engineered precision plain, roller and ball bearings. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on the higher end of the bearing market where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We estimate that approximately two-thirds of our net sales during fiscal 2014 were generated by products for which we hold the number one or two market position. We have been providing bearing solutions to our customers since 1919. Over the past ten years, under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 29 facilities of which 26 are manufacturing facilities in five countries. Demand for bearings generally follows the market for products in which bearings are incorporated and the economy as a whole. Purchasers of bearings include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction, energy, mining and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and general market conditions could negatively impact our operating results. We have endeavored to mitigate the cyclicality of our product markets by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.



During fiscal 2014, the world economy experienced anemic growth with contractions in the international markets offset by slow growth in the U.S. markets. Our net sales to the aerospace and defense markets increased 14.6% year over year offset by a decline of 7.8% to the diversified industrial markets.

Approximately 12% to 25% of our costs, depending on product mix, are attributable to raw materials and purchased components, a majority of which are related to steel and related products. During fiscal 2014, steel prices remained flat with slight variances up and down throughout the fiscal year. When we do experience raw material inflation, we offset these cost increases by changing our buying patterns, expanding our vendor network and passing through price increases when possible. The overall impact on raw material costs for this fiscal year was not material as a percent change on a year over year basis. We have demonstrated expertise in acquiring and integrating bearing and precision engineered component manufacturers that have complementary products or distribution channels and provide significant potential for 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 October 1992 we have completed 23 acquisitions, including the current year acquisitions of Turbine Components, Inc. and Climax Metal Products Company, which have broadened our end markets, products, customer base and geographic reach. Outlook We ended fiscal 2014 with a backlog of $218.4 million compared to $216.5 million for the same period last fiscal year. Our net sales increased 3.9% year over year due to growth in the aerospace and defense markets and two acquisitions offset by a decline in the diversified industrial markets. We expect to see strength in the diversified industrial markets resulting from recovery growth in the energy, construction, rail, machine tools and industrial distribution sectors as well as from the overall economic improvement of the general industrial markets. Our internal goal is to grow our diversified industrial business at a pace of 2.0 to 2.5 times Gross Domestic Product ("GDP") on a

compounded basis. 19

In the fourth quarter of fiscal 2013, we reached a decision to consolidate and restructure our large bearing manufacturing facilities and capacity. This decision was based on our intent to better align manufacturing abilities and product development. The consolidation of the Texas facility into the South Carolina operation will strengthen and bring critical engineering and manufacturing mass to the large bearing product line. The consolidation and restructuring includes (1) consolidation of the machinery and equipment from Texas into South Carolina resulting in a certain portion being impaired and the remaining portion used to service the large bearing product offering; (2) sale or lease of the Texas building; and (3) a reduction in workforce in Texas due to the realignment. The majority of the expense associated with the consolidation and restructuring was incurred in fiscal 2013 and with continued effort to sell the equipment and sell or lease the building incurred in fiscal 2014 and to be completed in fiscal 2015. As a result, we recorded a pre-tax charge of $6.7 million under operating expenses in the Other, net category of the income statement for fiscal 2013 associated with this consolidation and restructuring. This charge included $0.4 million in employee related costs, $0.1 million in moving and relocation costs, and $6.2 million impairment to fair value of certain equipment used in the manufacturing of large bearings all attributable to the Ball Bearings segment. We determined that the market approach was the most appropriate method to estimate the fair value for the equipment and building using comparable sales data and actual quotes from potential buyers in the market place. These assets continue to be classified in fixed assets on the March 29, 2014 balance sheet. We incurred period costs of $1.8 million in fiscal 2014, bringing the total incurred due to the restructuring and consolidation to $8.5 million. We will continue to incur operational costs such as depreciation, utilities and maintenance until the building is sold or leased. During fiscal 2014, we experienced the favorable impact of increased activity from the worldwide commercial aircraft industry. Monthly build rates were up approximately 8% for Boeing and approximately 7% for Airbus in calendar year 2013, and they are both forecasting these levels to continue and grow as new ship models are introduced. This activity is expected to have a favorable impact on our business over the next twelve months. As a result of these trends, we have continued to increase our workforce and to expand and tool our plants to absorb additional volume and to design new products for new platforms. Sources of Revenue Revenue is generated primarily from sales of bearings to the diversified industrial market and the aerospace and defense markets. Sales are often made pursuant to sole-source relationships, long-term agreements and purchase orders with our customers. We recognize revenues principally from the sale of products at the point of passage of title, which is at the time of shipment, except for certain customers for which it occurs when the products reach their destination. Sales to the diversified industrial market accounted for 42% of our net sales for the fiscal year ended March 29, 2014. Sales to the aerospace and defense markets accounted for 58% of our net sales for the same period. Aftermarket sales of replacement parts for existing equipment platforms represented approximately 49.3% of our net sales for fiscal 2014. We continue to develop our OEM relationships which have established us as a leading supplier on many important aerospace and defense platforms. Over the past several years, we have experienced increased demand from the replacement parts market, particularly within the aerospace and defense sectors; one of our business strategies has been to increase the proportion of sales derived from this sector. We believe these activities increase the stability of our revenue base, strengthen our brand identity and provide multiple paths for revenue growth. Approximately 16% of our net sales were generated by our international facilities for fiscal 2014, compared to 14% for fiscal 2013. We expect that this proportion will increase as we seek to increase our penetration of foreign markets. Our top ten customers generated 30% and 29% of our net sales in fiscal 2014 and fiscal 2013, respectively. Out of the 30% of net sales generated by our top ten customers during the fiscal year ended March 29, 2014, 16% of net sales were generated by our top four customers compared to 15% for the comparable

period last fiscal year. Cost of Revenues



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

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. 20



Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses relate primarily to the compensation and associated costs of selling, general and administrative personnel, professional fees, insurance, incentive stock compensation, facility costs and information technology. We increased SG&A expenses by $6.2 million in fiscal 2014 compared to fiscal 2013. The increase of $6.2 million was primarily attributable to an increase of $2.5 million associated with the addition of three acquisitions, $2.2 million in personnel-related costs as a result of headcount, salary and welfare increases, $0.5 million in legal and professional fees and $1.1 million in other miscellaneous expenses offset by the impact of favorable foreign exchange rates of $0.1 million. Results of Operations



The following table sets forth the various components of our consolidated statements of operations, expressed as a percentage of net sales, for the periods indicated that are used in connection with the discussion herein:

Fiscal Year Ended March 29, March 30, March 31, 2014 2013 2012 Statement of Operations Data: Net sales 100.0 % 100.0 % 100.0 % Gross margin 39.3 37.9 35.4 Selling, general and administrative 17.2 16.3 15.4 Other, net 0.9 2.2 0.4 Operating income 21.2 19.4 19.6 Interest expense, net 0.3 0.2 0.3 Other non-operating expense (income) - (0.7 ) 0.2 Income before income taxes 20.9 19.9 19.1 Provision for income taxes 6.5 5.9 6.5 Net income 14.4 % 14.0 % 12.6 %



We have a fiscal year consisting of 52 or 53 weeks, ending on the Saturday closest to March 31. Based on this policy, fiscal years 2014, 2013 and 2012 contained 52 weeks.

Segment Information We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Other. Other consists of three operating locations that do not fall into the above segmented categories, primarily machine tool collets, machining for integrated bearing assemblies and aircraft components and tight-tolerance, precision mechanical components. Within the Plain Bearings, Roller Bearings and Ball Bearings segments, we have not aggregated any operating segments. Within the Other reportable segment, we have aggregated operating segments because they do not meet the quantitative threshold for separate disclosure.



Fiscal 2014 Compared to Fiscal 2013

Net Sales. FY14 FY13 $ Change % Change Plain Bearings $ 223.1$ 216.0$ 7.1 3.3 % Roller Bearings 115.8 115.0 0.8 0.7 % Ball Bearings 49.6 41.4 8.2 19.8 % Other 30.4 30.7 (0.3 ) (0.9 )% Total $ 418.9$ 403.1$ 15.8 3.9 % 21 Net sales for fiscal 2014 were $418.9 million, an increase of $15.8 million, or 3.9%, compared to $403.1 million for the same period in fiscal 2013. The increase of $15.8 million was primarily attributable to $15.6 million of sales from new acquisitions, $6.0 million of increased volume, $3.7 million of product mix/pricing and $1.3 million of favorable foreign exchange rates offset by a $10.8 million decrease in sales for military vehicles. Net sales to aerospace and defense customers increased 14.6% in fiscal 2014 compared to the same period last fiscal year, mainly driven by increased build rates by commercial aircraft builders and the aerospace aftermarket. This increase included $3.8 million attributable to WPA and $2.3 million attributable to TCI, which were acquired in March 2013 and October 2013, respectively. This performance was offset by a decline of 7.8% from the diversified industrial markets, resulting primarily from slow OEM activity in mining, military vehicles and heavy construction. Our industrial distribution business was up by 14.9% mainly due to $7.6 million attributable to CMP which was acquired in August 2013 and improving general industrial activity. The Plain Bearings segment achieved net sales of $223.1 million in fiscal 2014, an increase of $7.1 million, or 3.3%, compared to $216.0 million for the same period in the prior fiscal year. This segment was favorably impacted by $6.2 million of volume, $6.1 million of sales from new acquisitions, $3.7 million of product mix/pricing and $0.9 million of favorable foreign exchange rates offset by a $9.8 million decrease in sales for military vehicles. Net sales to aerospace and defense customers increased $21.1 million offset by a decline of $14.0 million in net sales to diversified industrial customers compared with the same period in the prior fiscal year. This increase included $3.8 million attributable to WPA and $2.3 million attributable to TCI, which were acquired in March 2013 and October 2013, respectively. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket and the general industrial aftermarket.

The Roller Bearings segment achieved net sales of $115.8 million in fiscal 2014, an increase of $0.8 million, or 0.7%, compared to $115.0 million for the same period in the prior fiscal year. This segment was favorably impacted by volume of $1.8 million offset by a $1.0 million decrease in sales for military vehicles. Of this increase, net sales to aerospace and defense customers contributed $8.4 million offset by a decrease of $7.6 million in net sales to the industrial sector. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket. The Ball Bearings segment achieved net sales of $49.6 million in fiscal 2014, an increase of $8.2 million, or 19.8%, compared to $41.4 million for the same period in the prior fiscal year. Of this increase, approximately $9.5 million was attributable to sales from CMP which was acquired in August 2013 offset by a decrease in volume of $1.3 million. Net sales were favorably impacted by the general industrial markets. The Other segment, which is focused mainly on the sale of machine tool collets and precision components, achieved net sales of $30.4 million in fiscal 2014, a decrease of $0.3 million, or 0.9%, compared to $30.7 million for the same period last fiscal year. The decrease in net sales was attributable to $0.7 million decrease in volume offset by $0.4 million of favorable foreign exchange rates. Of this decline, $1.2 million is attributable to decreased demand for mechanical components mainly in the U.S. market, offset by $0.5 million of higher net sales of machine tool collets mainly in Europe and Asia and $0.4 million to favorable foreign exchange rates. Gross Margin. FY14 FY13 $ Change % Change Plain Bearings $ 85.2$ 85.4$ (0.2 ) (0.3 )% Roller Bearings 48.8 45.1 3.7 8.2 % Ball Bearings 18.1 9.4 8.7 92.3 % Other 12.7 13.0 (0.3 ) (1.9 )% Total $ 164.8$ 152.9$ 11.9 7.8 % Gross margin was $164.8 million, or 39.3% of net sales, in fiscal 2014, versus $152.9 million, or 37.9% of net sales, for the comparable period in fiscal 2013. The increase of $11.9 million in gross margin dollars was driven by approximately $10.1 million in cost reduction and manufacturing efficiencies, $5.1 million from new acquisitions, $1.3 million in product mix/pricing, $0.4 million of favorable foreign exchange rates and $0.1 million in higher volume offset by $5.1 million related to the decrease in military vehicles activity. Gross margin for the Plain Bearings segment was $85.2 million, or 38.2%, in fiscal 2014 versus $85.4 million, or 39.6% in fiscal 2013. Of this decrease, approximately $4.6 million was related to a decrease in military vehicles activity offset by $1.7 million from new acquisitions, $1.3 million in product mix/pricing, $1.1 million was attributable to volume and $0.3 million to favorable foreign exchange rates. 22 The Roller Bearings segment reported gross margin of $48.8 million, or 42.1%, in fiscal 2014 compared to $45.1 million, or 39.2%, in the prior fiscal year. This segment was favorably impacted by approximately $4.1 million in cost reduction and manufacturing efficiencies and $0.1 million of higher volume offset by $0.5 million related to the decrease in military vehicle activity. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket. The Ball Bearings segment reported gross margin of $18.1 million, or 36.6%, in fiscal 2014 versus $9.4 million, or 22.8%, in fiscal 2013. Of this improvement, approximately $6.1 million was attributable to cost reduction and manufacturing efficiencies and $3.4 million to new acquisitions offset by a decrease of $0.8 million attributable to volume. During fiscal 2014, the Other segment reported gross margin of $12.7 million, or 41.8%, compared to $13.0 million, or 42.3%, in the prior fiscal year. This decline in gross margin was primarily driven by approximately $0.3 million of volume and $0.1 million of cost increases offset by $0.1 million from favorable foreign exchange rates. Of this decline, $0.7 million was attributable to lower demand for mechanical components mainly in the U.S. market offset by an increase of $0.3 million in machine tool collets activity mainly in Europe and Asia and $0.1 million to favorable foreign exchange rates.



Selling, General and Administrative.

FY14 FY13 $ Change % Change Plain Bearings $ 17.9$ 15.4$ 2.5 16.9 % Roller Bearings 6.9 6.8 0.1 2.2 % Ball Bearings 4.5 3.0 1.5 48.8 % Other 4.0 3.7 0.3 7.3 % Corporate 38.7 36.9 1.8 4.7 % Total $ 72.0$ 65.8$ 6.2 9.5 % SG&A expenses increased by $6.2 million, or 9.5%, to $72.0 million in fiscal 2014 compared to $65.8 million for the same period in fiscal 2013. The increase of $6.2 million was primarily attributable to an increase of $2.5 million associated with the addition of three acquisitions, $2.2 million in personnel-related costs as a result of headcount and salary increases, $0.5 million in legal and professional fees, $0.5 million in incentive stock compensation and $0.6 million in other miscellaneous expenses offset by the impact of favorable foreign exchange rates of $0.1 million. As a percentage of net sales, SG&A was 17.2% in fiscal 2014 compared to 16.3% for the same period in fiscal 2013. While SG&A expenses increased $6.2 million in fiscal 2014, net sales during the 2014 fiscal period increased by $15.8 million, contributing to the higher SG&A percentage to net sales of 17.2%. Other, Net. Other, net in fiscal 2014 was $4.2 million compared to $9.1 million for the same period in fiscal 2013. In fiscal 2014, other, net consisted of $1.9 million of amortization of intangibles, $1.9 million related primarily to consolidations and restructuring and $0.5 million of acquisition costs offset by $0.1 million of other miscellaneous income. In fiscal 2013, other, net consisted of $6.9 million related primarily to the consolidation and restructuring of large bearing facilities, $1.6 million of amortization of intangibles, $0.2 million of bad debt expense, $0.2 million related to the disposal of fixed assets and $0.2 million of other miscellaneous costs. Operating Income. FY14 FY13 $ Change % Change Plain Bearings $ 66.4$ 69.0$ (2.6 ) (3.9 )% Roller Bearings 41.6 37.6 4.0 10.7 % Ball Bearings 11.7 (0.2 ) 11.9 N/M Other 9.0 9.0 (0.0 ) (0.3 )% Corporate (40.0 ) (37.3 ) (2.7 ) (7.2 )% Total $ 88.7$ 78.1$ 10.6 13.5 % Operating income was $88.7 million, or 21.2% of net sales, in fiscal 2014 compared to $78.1 million, or 19.4% of net sales, in fiscal 2013. The increase of $10.6 million in operating income dollars was driven primarily by approximately $10.1 million attributable to cost reduction and manufacturing efficiencies, $2.3 million from new acquisitions, $4.9 million from the impact of consolidating the large bearing facility in fiscal 2013, $1.3 million in product mix/pricing, $0.2 million from favorable foreign exchange rates and $0.1 million from volume offset by $3.2 million related to higher SG&A expenses and $5.1 million from the decrease in military vehicle activity. 23

The Plain Bearings segment achieved an operating income of $66.4 million in fiscal 2014 compared to $69.0 million for the same period last year. This segment's performance resulted from approximately $4.6 million related to a decrease in military vehicle activity and $1.4 million of higher costs offset by $0.9 million from new acquisitions, $1.3 million in product mix/pricing, $1.1 million attributable to volume and $0.1 million to favorable foreign exchange rates. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket and the general industrial aftermarket. The Roller Bearings segment achieved an operating income of $41.6 million in fiscal 2014 compared to $37.6 million in fiscal 2013. The increase of $4.0 million in operating income year over year was mainly the result of approximately $4.4 million in cost reduction and manufacturing efficiencies and $0.1 million of higher volume offset by $0.5 million related to the decrease in military vehicle activity. This segment was favorably impacted by the general industrial markets offset by slowing OEM activity in mining, oil and gas, and heavy construction.

The Ball Bearings segment achieved an operating income of $11.7 million in fiscal 2014 compared to an operating expense of $0.2 million for the same period last fiscal year. This segment's performance was favorably impacted by approximately $11.3 million attributable to cost reduction and manufacturing efficiencies and $1.4 million to a new acquisition offset by a decrease of $0.8 million attributable to volume. This segment was favorably impacted by the general industrial markets. The Other segment achieved operating income of $9.0 million in both fiscal 2014 and 2013, respectively. This performance was favorably impacted by $0.2 million attributable to cost reduction and manufacturing efficiencies and $0.1 million from favorable foreign exchange rates offset by a $0.3 million decrease in volume.



Interest Expense, Net. Interest expense, net was $1.0 million in fiscal 2014 and $0.9 million in fiscal 2013, respectively.

Other Non-Operating Expense (Income). Other non-operating income was $0.1 million in fiscal 2014 compared to income of $3.0 million in fiscal 2013. The change of $2.9 million was primarily due to a $3.6 million receipt of a CDSOA distribution payment not received in 2014, offset by $0.7 million attributable to favorable foreign exchange rates.



Income Before Income Taxes. Income before taxes was $87.8 million in fiscal 2014 compared to income before taxes of $80.2 million in fiscal 2013.

Income Taxes.Income tax expense in fiscal 2014 was $27.5 million compared to $23.8 million in fiscal 2013. The effective income tax rate in fiscal 2014 was 31.4% compared to 29.7% in fiscal 2013. In addition to discrete items, the effective income tax rates are different from the U.S. statutory rate due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and state income taxes and an officers' compensation adjustment which increase the rate. For fiscal 2014 and 2013, there were discrete items of $1.7 million and $4.0 million comprised primarily of the release of certain unrecognized tax benefits associated with federal and state income tax audits closing and statute of limitations expiring. For fiscal 2013, on 1/2/2013, in the Company's fourth quarter, the American Taxpayer Relief Act of 2012 retroactively reinstated the research and development tax credit which had previously expired. The benefit of the discrete items, along with the benefit from the reinstatement of the research and development tax credit in fiscal 2013, have caused a decrease in the Company's fiscal 2013 and 2014 annual effective income tax rates.



Net Income.Net income was $60.2 million in fiscal 2014 compared to net income of $56.3 million in fiscal 2013.

Fiscal 2013 Compared to Fiscal 2012

Net Sales. FY13 FY12 $ Change % Change Plain Bearings $ 216.0$ 200.2$ 15.8 7.9 % Roller Bearings 115.0 123.8 (8.8 ) (7.1 )% Ball Bearings 41.4 42.3 (0.9 ) (2.3 )% Other 30.7 31.2 (0.5 ) (1.7 )% Total $ 403.1$ 397.5$ 5.6 1.4 % 24

Net sales for fiscal 2013 were $403.1 million, an increase of $5.6 million, or 1.4%, compared to $397.5 million for the same period in fiscal 2012. The increase of $5.6 million was primarily attributable to $8.1 million of volume and $0.5 million of product mix/pricing offset by $3.0 million of unfavorable foreign exchange rates. Net sales to aerospace and defense customers increased 12.1% in fiscal 2013 compared to the same period last fiscal year, mainly driven by increased build rates by commercial aircraft and the aerospace aftermarket. This increase included $0.3 million attributable to WPA which was acquired in March 2013. This performance was offset by a decline of 8.2% from the diversified industrial markets, resulting primarily from slowing OEM activity in mining, oil and gas, heavy construction and general industrial markets. Our industrial distribution business was slightly down by 0.4% mainly due to the semiconductor aftermarkets. The Plain Bearings segment achieved net sales of $216.0 million in fiscal 2013, an increase of $15.8 million, or 7.9%, compared to $200.2 million for the same period in the prior fiscal year. This segment was favorably impacted by volume of approximately $15.3 million and $2.7 million in product mix/pricing offset by $2.2 million from unfavorable foreign exchange rates. Net sales to aerospace and defense customers increased $17.1 million offset by a decline of $1.3 million in net sales to diversified industrial customers compared with the same period in the prior fiscal year. This increase included $0.3 million attributable to WPA which was acquired in March 2013. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket offset by slowing OEM activity in mining, oil and gas, heavy construction and general industrial markets.

The Roller Bearings segment achieved net sales of $115.0 million in fiscal 2013, a decrease of $8.8 million, or 7.1%, compared to $123.8 million for the same period in the prior fiscal year. This segment was unfavorably impacted by volume of $6.1 million and product mix/pricing of $2.7 million. Of this decline, net sales to the industrial sector contributed $12.4 million offset by an increase of $3.6 million in net sales to aerospace and defense customers. This segment was primarily affected by the slowing OEM activity in mining, oil and gas, heavy construction and general industrial markets. The Ball Bearings segment achieved net sales of $41.4 million in fiscal 2013, a decrease of $0.9 million, or 2.3%, compared to $42.3 million for the same period in the prior fiscal year. Of this decline, approximately $1.9 million was attributable to volume offset by improved product mix/pricing of $1.0 million. Net sales to diversified industrial customers contributed $0.6 million to this decline combined with a decrease of $0.3 million in the aerospace and defense sector. The Other segment, which is focused mainly on the sale of machine tool collets and precision components, achieved net sales of $30.7 million in fiscal 2013, a decrease of $0.5 million, or 1.7%, compared to $31.2 million for the same period last fiscal year. The decrease in net sales was attributable to $0.8 million of unfavorable foreign exchange rates and $0.4 million of product mix/pricing offset by improved volume of $0.7 million. Of this decline, $2.3 million was attributable to lower net sales of machine tool collets mainly in Europe and Asia and $0.8 million to unfavorable foreign exchange rates offset by an increase of $2.6 million due to increased demand for mechanical components

mainly in the U.S. market. Gross Margin. % FY13 FY12 $ Change Change Plain Bearings $ 85.4$ 72.9$ 12.5 17.2 % Roller Bearings 45.1 45.2 (0.1 ) (0.3 )% Ball Bearings 9.4 9.3 0.1 2.0 % Other 13.0 13.2 (0.2 ) (1.9 )% Total $ 152.9$ 140.6$ 12.3 8.8 % Gross margin was $152.9 million, or 37.9% of net sales, in fiscal 2013, versus $140.6 million, or 35.4% of net sales, for the comparable period in fiscal 2012. The increase of $12.3 million in gross margin dollars was driven by approximately $8.8 million in cost reduction and manufacturing efficiencies, $2.8 million in product mix/pricing and $1.6 million in volume offset by $0.9 million of unfavorable foreign exchange rates across both the diversified industrial and aerospace and defense markets. Gross margin for the Plain Bearings segment was $85.4 million, or 39.6%, in fiscal 2013 versus $72.9 million, or 36.4% in fiscal 2012. Of this increase, approximately $5.9 million was attributable to volume, $4.6 million to cost reduction and manufacturing efficiencies and $2.6 million to product mix/pricing offset by $0.6 million to unfavorable foreign exchange rates. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket offset by slowing OEM activity in mining, oil and gas, heavy construction and general industrial markets. The acquisition of WPA contributed $0.1 million to this performance improvement. 25 The Roller Bearings segment reported gross margin of $45.1 million, or 39.2%, in fiscal 2013 compared to $45.2 million, or 36.5%, in the prior fiscal year. This segment was unfavorably impacted by approximately $2.4 million of lower volume offset by $2.0 million in cost reduction and manufacturing efficiencies, $0.2 million in product mix/pricing and $0.1 million of favorable foreign exchange rates. This segment was primarily affected by the slowing activity in mining, oil and gas, heavy construction and general industrial markets. The Ball Bearings segment reported gross margin of $9.4 million, or 22.8%, in fiscal 2013 versus $9.3 million, or 21.8%, in fiscal 2012. Of this improvement, approximately $2.4 million was attributable to cost reduction and manufacturing efficiencies offset by lower volume of $2.3 million. During fiscal 2013, the Other segment reported gross margin of $13.0 million, or 42.3%, compared to $13.2 million, or 42.4%, in the prior fiscal year. This decline in gross margin was primarily driven by approximately $0.3 million of cost increases, $0.3 million from unfavorable foreign exchange rates and $0.1 million of product mix/pricing offset by increased volume of $0.5 million. Of this decline, $0.7 million was attributable to lower machine tool collets activity mainly in Europe and Asia and $0.3 million to unfavorable foreign exchange rates offset by an increase of $0.8 million due to increased demand for mechanical components mainly in the U.S. market.



Selling, General and Administrative.

FY13 FY12 $ Change % Change Plain Bearings $ 15.4$ 14.4$ 1.0 6.1 % Roller Bearings 6.8 6.3 0.5 7.3 % Ball Bearings 3.0 3.4 (0.4 ) (10.4 )% Other 3.7 4.0 (0.3 ) (7.1 )% Corporate 36.9 33.2 3.7 11.3 % Total $ 65.8$ 61.3$ 4.5 7.3 % SG&A expenses increased by $4.5 million, or 7.3%, to $65.8 million in fiscal 2013 compared to $61.3 million for the same period in fiscal 2012. The increase of $4.5 million was primarily attributable to an increase of $3.0 million in personnel-related costs as a result of headcount and salary increases, $0.3 million in legal and professional fees, $0.4 million in other miscellaneous expenses and $1.2 million in incentive stock compensation offset by the impact of favorable foreign exchange rates of $0.4 million. As a percentage of net sales, SG&A was 16.3% in fiscal 2013 compared to 15.4% for the same period in fiscal 2012. While SG&A expenses increased $4.5 million in fiscal 2013, net sales during the 2013 fiscal period increased by $5.6 million, contributing to the higher SG&A percentage to net sales of 16.3%. Other, Net.Other, net in fiscal 2013 was $9.1 million compared to $1.6 million for the same period in fiscal 2012. In fiscal 2013, other, net consisted of $6.9 million related primarily to the consolidation and restructuring of large bearing facilities, $1.6 million of amortization of intangibles, $0.2 million of bad debt expense, $0.2 million related to the disposal of fixed assets and $0.2 million of other miscellaneous costs. In fiscal 2012, other, net consisted of $1.5 million of amortization of intangibles, $0.2 million of bad debt expense and $0.1 million of other costs offset by $0.2 million of other income. Operating Income. FY13 FY12 $ Change % Change Plain Bearings $ 69.0$ 57.9$ 11.1 19.2 % Roller Bearings 37.6 41.1 (3.5 ) (8.5 )% Ball Bearings (0.2 ) 3.5 (3.7 ) (105.4 )% Other 9.0 9.0 - (0.2 )% Corporate (37.3 ) (33.9 ) (3.4 ) (10.3 )% Total $ 78.1$ 77.6$ 0.5 0.6 % Operating income was $78.1 million, or 19.4% of net sales, in fiscal 2013 compared to $77.6 million, or 19.5% of net sales, in fiscal 2012. The increase of $0.5 million in operating income dollars was driven primarily by approximately $7.9 million in other cost reductions and manufacturing efficiencies, $2.8 million in product mix/pricing and $1.6 million in volume offset by $6.9 million related primarily to the consolidation and restructuring of large bearing facilities, $4.5 million related to higher SG&A expenses and $0.4 million from unfavorable exchange rates across both the diversified industrial and aerospace and defense markets. 26 The increase in operating income in one of our four segments was mostly attributable to increased commercial aircraft build rates and the aerospace aftermarket. This increase was offset by slowing activity in mining, oil and gas, heavy construction and general industrial markets, restructuring and consolidation activities, and higher SG&A expenses, primarily driven by higher personnel costs, legal and professional fees, and stock compensation expense. The Plain Bearings segment achieved an operating income of $69.0 million in fiscal 2013 compared to $57.9 million for the same period last year. This improved contribution resulted from approximately a $5.9 million increase in volume, $2.9 million in cost reduction and manufacturing efficiencies and $2.6 million in product mix/pricing offset by $0.3 million of unfavorable foreign exchange rates. This segment was favorably impacted by commercial aircraft build rates and the aerospace aftermarket offset by slowing activity in mining, oil and gas, heavy construction and general industrial markets. The Roller Bearings segment achieved an operating income of $37.6 million in fiscal 2013 compared to $41.1 million in fiscal 2012. The decrease of $3.5 million in operating income year over year was mainly the result of approximately $2.4 million of lower volume and $1.4 million of higher costs offset by $0.2 million of favorable product mix/pricing and $0.1 million from favorable exchange rates. This segment was primarily affected by the slowing OEM activity in mining, oil and gas, heavy construction and general industrial markets. The Ball Bearings segment achieved an operating expense of $0.2 million in fiscal 2013 compared to operating income of $3.5 million for the same period last fiscal year. This segment's performance was unfavorably impacted by approximately $6.9 million of expenses related primarily to the consolidation and restructuring of large bearing facilities and $2.3 million of lower semiconductor and large bearing volume offset by $5.5 million of other cost reductions. The Other segment achieved operating income of $9.0 million in both fiscal 2013 and 2012, respectively. This performance was favorably impacted by increased volume of approximately $0.5 million offset by $0.2 million of cost increases, $0.2 million of unfavorable exchange rates and by $0.1 million from product mix/pricing.



Interest Expense, Net. Interest expense, net was $0.9 million in fiscal 2013 and $1.0 million in fiscal 2012, respectively.

Other Non-Operating Expense (Income). Other non-operating income was $3.0 million in fiscal 2013 compared to expense of $0.6 million in fiscal 2012. The change of $3.6 million was due to the receipt of a CDSOA distribution payment in the amount of $3.6 million in fiscal 2013.



Income Before Income Taxes. Income before taxes was $80.2 million in fiscal 2013 compared to income before taxes of $76.0 million in fiscal 2012.

Income Taxes.Income tax expense in fiscal 2013 was $23.8 million compared to $26.0 million in fiscal 2012. The effective income tax rate in fiscal 2013 was 29.7% compared to 34.2% in fiscal 2012. In addition to discrete items, the effective income tax rates are different from the U.S. statutory rate due to a special manufacturing deduction in the U.S. and foreign income taxed at lower rates which decrease the rate, and state income taxes and an officers' compensation adjustment which increase the rate. For fiscal 2013, there were discrete items of $4.0 million comprised predominately of the release of certain unrecognized tax benefits associated with federal and state income tax audits closing and statute of limitations expiring. Also for fiscal 2013, on 1/2/2013, in the Company's fourth quarter, the American Taxpayer Relief Act of 2012 retroactively reinstated the research and development tax credit which had previously expired. The benefit of the discrete items, along with the benefit from the reinstatement of the research and development tax credit, have caused a decrease in the Company's fiscal 2013 annual effective income tax rate.



Net Income.Net income was $56.3 million in fiscal 2013 compared to net income of $50.0 million in fiscal 2012.

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 the credit facilities will provide adequate resources to fund internal and external growth initiatives for the foreseeable future. 27 Liquidity On October 1, 2012, Schaublin purchased the land and building, which it currently occupies and had been leasing, for 14.1 million CHF (approximately $15.0 million). Schaublin obtained a 20 year fixed rate mortgage for 9.3 million CHF (approximately $9.9 million) at an interest rate of 2.9%. The balance of the purchase price of 4.8 million CHF (approximately $5.1 million) was paid from cash on hand. As of March 29, 2014, the balance on this mortgage was 8.6 million CHF, or $9.7 million. On November 30, 2010, we and RBCA terminated the previous KeyBank Credit Agreement and the related credit, security and ancillary agreements, and entered into a new credit agreement (the "JP Morgan Credit Agreement") and related security and guaranty agreements with certain banks, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A. and KeyBank National Association as Co-Lead Arrangers and Joint Lead Book Runners. The JP Morgan Credit Agreement provides RBCA with a $150.0 million five-year senior secured revolving credit facility which can be increased by up to $100.0 million, in increments of $25.0 million, under certain circumstances and subject to certain conditions (including the receipt from one or more lenders of the additional commitment). Amounts outstanding under the JP Morgan Credit Agreement generally bear interest at the prime rate, or LIBOR plus a specified margin, depending on the type of borrowing being made. The applicable margin is based on our consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, our margin is 0.5% for prime rate loans and 1.5% for LIBOR rate loans. The JP Morgan Credit Agreement requires us to comply with various covenants, including among other things, financial covenants to maintain the following: (1) a ratio of consolidated net debt to adjusted EBITDA not to exceed 3.25 to 1; and (2) a consolidated fixed charge coverage ratio not to exceed 1.5 to 1. As of March 29, 2014, we were in compliance with all such covenants. The JP Morgan Credit Agreement allows us to, among other things, make distributions to shareholders, repurchase our stock, incur other debt or liens, or acquire or dispose of assets provided that we comply with certain requirements and limitations of the credit agreement. Our obligations under the JP Morgan Credit Agreement are secured by a pledge of substantially all of our and RBCA's assets and a guaranty by us of RBCA's obligations. Approximately $4.3 million of the JP Morgan Credit Agreement is being utilized to provide letters of credit to secure RBCA's obligations relating to certain insurance programs. As of March 29, 2014, RBCA had the ability to borrow up to an additional $145.7 million under the JP Morgan Credit Agreement. On October 27, 2008, Schaublin entered into a new bank credit facility with Credit Suisse which replaced the prior bank credit facility of December 8, 2003 and its amendment of November 8, 2004. This facility provides for up to 4.0 million Swiss francs, or $4.5 million, of revolving credit loans and letters of credit. Borrowings under this facility bear interest at Credit Suisse's prevailing prime bank rate. As of March 29, 2014, there were no borrowings

under the Swiss Credit Facility. 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, partially or completely, relocate production lines, 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. As of March 29, 2014, we had cash and cash equivalents of $121.2 million of which approximately $36.0 million 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 entities.

On May 16, 2014, our Board declared a special cash dividend to shareholders of $2.00 per common share or a total of approximately $46.0 million. The special dividend is payable on June 13, 2014, to shareholders of record on May 30, 2014. The ex-dividend date is May 28, 2014. The Board opted for a special dividend payment, rather than a regular reoccurring dividend, to allow greater flexibility given our pipeline of attractive growth opportunities. The Board will, however, consider the use of additional special cash dividends in the future as circumstances warrant. 28 Cash Flows



Fiscal 2014 Compared to Fiscal 2013

In the fiscal year ended March 29, 2014, we generated cash of $48.0 million from operating activities compared to $66.3 million for the fiscal year ended March 30, 2013. The decrease of $18.3 million was mainly a result of an increase of $3.9 million in net income and the net of non-cash charges of $1.6 million offset by a change in operating assets and liabilities of $23.8 million. The change in working capital investment was primarily attributable to decreases in collections of accounts receivables of $8.7 million, inventory of $1.5 million, prepaid expenses and other current assets of $3.3 million, other non-current assets of $1.5 million, accounts payable of $3.6 million and accrued expenses and other current liabilities of $10.6 million, offset by an increase in other non-current liabilities of $5.4 million. Inventory turnover for the fiscal year ended March 29, 2014 decreased to 1.7 as compared to 1.8 for the prior fiscal year. The change in accounts receivable of $8.7 million was a function of increased net sales combined with collection activities as days sales outstanding increased to 62 from 60 at the end of fiscal 2014 and fiscal 2013, respectively. Cash used for investing activities for fiscal 2014 included $28.9 million for capital expenditures, $17.6 million for the acquisition of CMP and TCI and $0.7 million in net proceeds from the purchase and sale of short-term investments offset by $0.1 million of proceeds from the sale of assets. In fiscal 2014, financing activities provided $3.8 million. This was due to $2.8 million of net proceeds from the exercise of stock options and the repurchase of common stock and $1.5 million in excess tax benefits from stock-based compensation offset by $0.5 million decrease in the revolving credit facility.



Fiscal 2013 Compared to Fiscal 2012

In the fiscal year ended March 30, 2013, we generated cash of $66.3 million from operating activities compared to $45.0 million for the fiscal year ended March 31, 2012. The increase of $21.3 million was mainly a result of an increase of $6.3 million in net income, the net of non-cash charges of $0.6 million and a change in operating assets and liabilities of $14.4 million. The change in working capital investment was primarily attributable to increases in collections of accounts receivable of $15.4 million, accrued expenses and other current liabilities of $4.8 million and accounts payable of $0.2 million offset by an increase in inventory of $1.2 million, prepaid expenses and other current assets of $1.5 million and other non-current assets of $0.1 million and a decrease in other non-current liabilities of $3.2 million. Inventory turnover for the fiscal year ended March 30, 2013 decreased to 1.8 as compared to 2.0 for the prior fiscal year. The change in accounts receivable of $15.4 million was a function of increased net sales combined with strong collection activities as days sales outstanding remained at 60 at the end of fiscal 2013 and fiscal

2012, respectively. Cash used for investing activities for fiscal 2013 included $42.0 million for capital expenditures, $2.6 million for the acquisition of WPA and $1.3 million in net proceeds from the purchase and sale of short-term investments offset by $0.7 million of proceeds from the sale of assets. In fiscal 2013, financing activities provided $28.7 million. This was due to $12.2 million of net proceeds from the exercise of stock options and the repurchase of common stock, $9.9 million in net proceeds from a term loan and $7.1 million in excess tax benefits from stock-based compensation offset by $0.5 million of payments on notes payable. Capital Expenditures Our capital expenditures in fiscal 2014 were $28.9 million. Capital expenditures in fiscal 2014 included approximately 4.8 million CHF (approximately $5.2 million) for the purchase of land and building in Poland, and $5.1 million for the purchase and renovations of new or existing properties in California, Connecticut, Mexico and South Carolina. We expect to make capital expenditures of approximately $17.0 to $19.0 million during fiscal 2015 in connection with our existing business. We have funded our fiscal 2014 capital expenditures, and expect to fund fiscal 2015 capital expenditures, principally through existing cash and internally generated funds. We may also make substantial additional capital expenditures in connection with acquisitions. 29 Obligations and Commitments The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Because these estimates are necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table summarizes certain of our contractual obligations and principal and interest payments under our debt instruments and leases as of March 29,

2014: Payments Due By Period Less than 1 to 3 to More than Contractual Obligations(1) Total 1 Year 3 Years 5 Years 5 Years (in thousands) Total debt $ 10,447$ 1,274$ 1,048$ 1,048$ 7,077 Capital lease obligations 105 37 52 16 - Operating leases 14,090 3,955 5,481 2,483 2,171 Interest on fixed rate debt 2,630 275 504 443 1,408

Pension and postretirement benefits 19,166 1,792 3,788 3,842 9,744



Total contractual cash obligations $ 46,438$ 7,333$ 10,873

$ 7,832$ 20,400



(1) We cannot make a reasonably reliable estimate of when (or if) the

unrecognized tax liability of $6.0 million, which includes interest and

penalties, will be paid to the respective taxing authorities. These obligations are therefore excluded from the above table.



Quarterly Results of Operations

Quarter Ended Mar. 29, Dec. 28, Sept. 28, June 29, Mar. 30, Dec. 29, Sept. 29, June 30, 2014 2013 2013 2013 2013 2012 2012 2012 (Unaudited) (in thousands, except per share data) Net sales $ 113,718$ 100,546$ 101,954$ 102,668$ 103,006$ 96,336$ 100,375$ 103,334 Gross margin 45,241 38,496 40,591 40,469 40,680 36,276 37,530 38,443 Operating income 25,179 19,657 21,516 22,298 15,753 19,159 21,195 21,994 Net income $ 18,203$ 12,764$ 14,125$ 15,116$ 10,575$ 12,109$ 16,494$ 17,164 Net income per common share: Basic(1)(2) $ 0.79$ 0.56$ 0.62$ 0.66$ 0.46$ 0.54$ 0.74$ 0.78 Diluted(1)(2) $ 0.78$ 0.55$ 0.61$ 0.65$ 0.46$ 0.53$ 0.73$ 0.76



(1) See Part II, Item 8. "Financial Statements and Supplementary Data," Note 2

"Summary of Significant Accounting Policies-Net Income Per Common Share."

(2) Net income per common share is computed independently for each of the

quarters presented. Therefore, the sum of the quarterly earnings per share

may not necessarily equal the total for the year. Critical Accounting Policies 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. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, recoverability of intangible assets, income taxes, financing operations, pensions and other postretirement benefits and contingencies and litigation. 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. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. In accordance with SEC Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements as amended by Staff Accounting Bulletin 104," we recognize revenues principally from the sale of products at the point of passage of title, which is at the time of shipment, except for certain customers for which it occurs when the products reach their destination.

30

Accounts Receivable. We are required to estimate the collectability of our accounts receivable, which requires a considerable amount of judgment in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Changes in required reserves may occur in the future as conditions in the marketplace change. Inventory.Inventories are stated at the lower of cost or market value. Cost is principally 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. Goodwill (representing the excess of the amount paid to acquire a company over the estimated fair value of the net assets acquired) is not amortized but instead is tested for impairment annually (performed by us during the fourth quarter of each fiscal year), or when events or circumstances indicate that its value may have declined. This determination of any goodwill impairment is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to our 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 fair value of our reporting units is calculated by the combination of a present value of future cash flow method and a multiple of EBITDA method. Although no changes are expected as a result of the comparison, if the assumptions management makes regarding estimated cash flows are less favorable than expected, we may be required to record an impairment charge in the future. 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 Sheet. 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. Pension Plan and Postretirement Health Care. We have a noncontributory defined benefit pension plan covering union employees in our Heim division plant in Fairfield, Connecticut, our Bremen subsidiary plant in Plymouth, Indiana and former union employees of our Tyson subsidiary in Glasgow, Kentucky and Nice subsidiary in Kulpsville, Pennsylvania. Our pension plan funding policy is to make the minimum annual contribution required by the Employee Retirement Income Security Act of 1974. Plan obligations and annual pension expense are determined by independent actuaries using a number of assumptions provided by us including assumptions about employee demographics, retirement age, compensation levels, pay rates, turnover, expected long-term rate of return on plan assets, discount rate and the amount and timing of claims. Each plan assumption reflects our best estimate of the plan's future experience. The most sensitive assumption in the determination of plan obligations for pensions is the discount rate. The discount rate that we use for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis has decreased from 4.20% at March 31, 2012 to 3.80% at March 30, 2013 and subsequently increased to 4.10% at March 29, 2014. In developing the overall expected long-term rate of return on plan assets assumption, a building block approach was used in which rates of return in excess of inflation were considered separately for equity securities and debt securities. The excess returns were weighted by the representative target allocation and added along with an appropriate rate of inflation to develop the overall expected long-term rate of return on plan assets assumption. The expected long-term rate of return on the assets of our pension plan was 7.75% and 8.25% in fiscal 2014 and fiscal 2013, respectively. Lowering the discount rate assumption used to determine net periodic pension cost by 1.00% (from 3.80% to 2.80%) would have increased our pension expense for fiscal 2014 by approximately $0.3 million. Increasing the discount rate assumption used to determine net periodic pension cost by 1.00% (from 3.80% to 4.80%) would have decreased our pension expense for fiscal 2014 by approximately $0.3 million. 31

Lowering the expected long-term rate of return on the assets of our pension plan by 1.00% (from 7.75% to 6.75%) would have increased our pension expense for fiscal 2014 by approximately $0.2 million. Increasing the expected long-term rate of return on the assets of our pension plan by 1.00% (from 7.75% to 8.75%) would have reduced our pension expense for fiscal 2014 by approximately $0.2 million. Lowering the discount rate assumption used to determine the funded status as of March 29, 2014 by 1.00% (from 4.10% to 3.10%) would have increased the projected benefit obligation of our pension plan by approximately $3.7 million. Increasing the discount rate assumption used to determine the funded status as of March 29, 2014 by 1.00% (from 4.10% to 5.10%) would have reduced the projected benefit obligation of our pension plan by approximately $3.0 million. Our investment program objective is to achieve a rate of return on plan assets which will fund the plan liabilities and provide for required benefits while avoiding undue exposure to risk to the plan and increases in funding requirements. Our long-term target allocation of plan assets is 70% equity and 30% fixed income investments. 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 for our options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Fiscal Year Ended March 29, March 30, March 31, 2014 2013 2012 Dividend yield 0.0 % 0.0 % 0.0 %

Expected weighted-average life (yrs.) 4.8 4.8

4.8 Risk-free interest rate 1.04 % 0.68 % 0.98 % Expected volatility 45.2 % 47.8 % 47.6 %

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of our options. Derivative Instruments. We recognize all derivatives on the balance sheet at fair value. We utilize forward contracts and average rate options to mitigate the impact of currency fluctuations on monetary assets and liabilities denominated in currencies other than the applicable functional currency as well as on forecasted transactions denominated in currencies other than the applicable functional currency. These are considered derivative instruments and are recorded as either assets or liabilities which are measured at fair value using models based on observable market inputs such as spot and forward rates and are classified as Level 2 on the valuation hierarchy. For instruments that are designated and qualify as cash flow hedges, the unrealized gains or losses are reported as a component of other comprehensive income ("OCI") and are reclassified from accumulated other comprehensive income ("AOCI") into earnings on the consolidated statement of operations when the hedged transaction affects earnings.



Impact of Inflation, Changes in Prices of Raw Materials and Interest Rate Fluctuations

To date, inflation in the economy as a whole has not significantly affected our operations. However, we purchase steel at market prices, which fluctuate as a result of supply and demand in the marketplace. To date, we have generally been able to pass through these price increases through price increases on our products, the assessment of steel surcharges on our customers or entry into long-term agreements with our customers which often contain escalator provisions tied to our invoiced price of steel. However, even if we are able to pass these steel surcharges or price increases to our customers, there may be a time lag of up to 3 months or more between the time a price increase goes into effect and our ability to implement surcharges or price increases, particularly for orders already in our backlog. As a result, our gross margin percentage may decline, and we may not be able to implement other price increases for our products. We offset these cost increases by changing our buying patterns, expanding our vendor network and passing through price increases. The overall impact on costs for the year was immaterial. 32 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 material is 440c and 52100 wire and rod steel (types of stainless and chrome steel), which has 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.


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