Business Context and Reporting Period
Company: NN, Inc. (formerly NN Ball & Roller, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2000
Business Overview: NN, Inc. operates in two primary segments: Ball & Roller (precision balls and rollers for the bearing industry) and Plastics (precision injection molded components). The company recently expanded its European operations through the formation of NN Euroball ApS, a joint venture with SKF and FAG, and acquired a 51% interest in NN Mexico, LLC.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2000 | 9 Months Ended Sep 30, 2000 |
|---|---|---|
| Net Sales | $37,075 | $90,720 |
| Gross Profit | $10,972 | $26,305 |
| Gross Margin | 29.6% | 29.0% |
| Net Income | $2,443 | $6,795 |
| Diluted EPS | $0.16 | $0.44 |
| Cash from Operations (9mo) | $14,746 | |
| Total Assets | $179,042 | |
| Total Liabilities | $118,242 | |
| Long-Term Debt | $50,427 | |
| Current Ratio | 1.9:1 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 44.8% for the quarter and 48.8% for the nine-month period compared to 1999. This growth is primarily driven by the consolidation of the NN Euroball ApS joint venture and the full nine-month inclusion of the Industrial Molding Corporation (IMC) acquisition.
- Profitability: Net income rose 25.7% for the quarter and 20.9% for the nine-month period. However, net income as a percentage of sales decreased slightly due to increased operating expenses and interest costs associated with acquisitions.
- Balance Sheet Expansion: Total assets nearly doubled from $90.4 million to $179.0 million, reflecting significant acquisitions and capital expenditures. Long-term debt increased from $17.2 million to $50.4 million to finance the Euroball transaction.
- Unusual Items: The company recorded a $10.2 million loss and a corresponding $10.2 million gain related to a fire at its Erwin, Tennessee facility. The loss represented the net book value of destroyed assets, while the gain represented expected insurance recoveries.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to the Euroball joint venture and the IMC acquisition. Gross margins improved slightly due to efficiencies in the ball and roller division, offset by decreased sales in the plastics division. The company plans to spend approximately $9.0 million on capital expenditures in 2000.
Liquidity: The company maintains a $25 million domestic revolving credit facility (with an additional $2 million temporary availability) and a Euro-denominated facility for Euroball. Management believes cash flow and borrowings are sufficient to meet working capital and capital expenditure needs through December 2000.
Risks and Contingencies:
- Customer Concentration: The ten largest customers account for approximately 70% of net sales. Sales to SKF and FAG alone are estimated to represent 32% and 21% of annualized net sales, respectively.
- Raw Materials: Production relies heavily on 52100 steel, which is subject to price fluctuations and supply shortages.
- Foreign Exchange: Approximately 38% of revenues are foreign. A strengthening U.S. dollar could impair competitiveness.
- Integration Risk: The company faces risks associated with integrating the Euroball and IMC acquisitions.
Investor Verification Checklist
- Verify the actual insurance recovery amount for the Erwin, Tennessee fire against the $10.2 million gain recorded.
- Monitor the integration progress and profitability of the NN Euroball ApS joint venture.
- Assess the impact of customer concentration, specifically the reliance on SKF and FAG for over 50% of sales.
- Review the company's hedging strategy for foreign currency exposure given the 38% foreign revenue mix.
- Track compliance with financial covenants on the increased debt load ($50.4 million long-term debt).