Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2001
Business Overview: NN, Inc. manufactures precision balls, rollers, and plastic/rubber components for the bearing and automotive industries. Operations are segmented into Ball & Roller, Euroball (European joint venture), and Plastics. The company recently expanded via the acquisition of Delta Rubber Company (February 2001) and the formation of the NN Euroball joint venture (July 2000).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2001 |
3 Months Ended June 30, 2000 |
6 Months Ended June 30, 2001 |
6 Months Ended June 30, 2000 |
|---|---|---|---|---|
| Net Sales | $47,350 | $25,643 | $97,577 | $53,645 |
| Gross Profit | $12,030 | $7,678 | $24,073 | $15,334 |
| Gross Margin % | 25.4% | 29.9% | 24.7% | 28.6% |
| Operating Income | $4,758 | $3,545 | $9,477 | $7,026 |
| Net Income | $3,506 | $2,242 | $4,954 | $4,352 |
| Diluted EPS | $0.23 | $0.15 | $0.32 | $0.28 |
| Cash from Operations (6mo) | $13,410 | $8,878 | ||
| Cash & Equivalents (End) | ||||
| Total Debt (Current + Long-term) | $64,842 (Current: $5,250; Long-term: $59,592) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 84.7% ($21.7M) for the quarter and 81.9% ($44.0M) for the six months. Growth was primarily driven by the consolidation of the Euroball joint venture ($20.0M quarterly contribution) and the Delta Rubber acquisition ($4.5M quarterly contribution).
- Margin Compression: Gross margin percentage declined from 29.9% to 25.4% (quarterly) due to lower revenue volumes at domestic divisions causing deleveraging of fixed costs, despite overall profit growth.
- Non-Recurring Gains: A net gain of $2.542 million was recorded on involuntary conversion due to insurance proceeds exceeding the book value of assets destroyed in a March 2000 fire at the Erwin, Tennessee facility.
- Interest Expense: Net interest expense increased significantly (from $268k to $1.112M quarterly) due to debt incurred for the Euroball joint venture and the Delta acquisition.
- Accounting Changes: Adoption of SFAS No. 133 (Derivatives) resulted in a cumulative effect net loss of $98,000 for the six-month period.
Guidance, Outlook, and Risks
- Liquidity and Financing: On July 20, 2001, the company secured a new syndicated loan agreement: a $25 million revolving credit facility and a $35 million term loan. Management believes cash flow and borrowings will be sufficient to fund operations and capital expenditures through December 2001.
- Capital Expenditures: Planned CapEx for 2001 is approximately $5.3 million; $2.9 million was spent in the first half of the year.
- Key Risks:
- Customer Concentration: The top 10 customers accounted for ~69% of 2000 sales. SKF and FAG alone represented ~49% of sales.
- Raw Materials: Reliance on specialized 52100 steel from overseas suppliers creates exposure to shortages and price volatility.
- Foreign Exchange: Increased international operations expose the company to currency fluctuations, particularly the strengthening of the U.S. dollar.
- Integration: Risks associated with integrating recent acquisitions (Delta, Euroball) and managing joint ventures.
- Accounting Outlook: The company is evaluating the impact of new FASB standards (No. 141 and 142) regarding goodwill amortization, effective January 1, 2002.
Investor Verification Checklist
- Acquisition Impact: Verify the integration progress and profitability contribution of the Delta Rubber Company and Euroball joint venture.
- Debt Covenants: Confirm compliance with financial covenants in the new $60 million credit facility and the Euroball loan agreements.
- Customer Dependency: Monitor sales trends to major customers (SKF, FAG) given the high concentration risk.
- Insurance Proceeds: Confirm the final settlement and utilization of the $2.5 million gain from the Erwin facility fire.
- Goodwill Impairment: Assess the potential impact of SFAS No. 142 on future earnings, as goodwill amortization will cease and be replaced by impairment testing.