NNBR

Business Context and Reporting Period

Company: NN Ball & Roller, Inc. (NN INC)

Reporting Period: Fiscal year ended December 31, 1999

Overview: The Company is an independent manufacturer of precision steel balls and rollers for anti-friction bearings, serving automotive, gas, mining, and industrial markets. In July 1999, the Company diversified its operations by acquiring Industrial Molding Corporation (IMC), a manufacturer of plastic injection molded components for the bearing, automotive, and consumer markets. The acquisition was funded with approximately $27.5 million in cash and $2.5 million in common stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 16.8% to $85.3 million, driven primarily by the IMC acquisition which contributed $17.6 million in sales. Organic growth in the core Ball & Roller division was offset by decreased foreign sales volumes due to economic conditions in Asia and a strong U.S. dollar.
• Margin Compression: Gross margin declined to 29.7% from 31.0% in 1998. This was attributed to capacity under-utilization in the Ball & Roller division and short-term inventory reduction efforts, which offset the gross profit contribution from IMC.
• Expense Increases: Depreciation and amortization rose 34.5% to $6.1 million due to the IMC acquisition and capital equipment purchases. Interest expense increased significantly to $523,000 from $64,000 following the borrowing of $18.5 million to fund the IMC acquisition.
• Balance Sheet: Total assets grew to $90.4 million from $66.9 million, reflecting the addition of IMC assets and goodwill of approximately $12.8 million. Long-term debt increased to $17.2 million, up from zero in the prior year.

Outlook, Risks, and Unusual Items

• Subsequent Events:
  • Joint Venture: In March 2000, the Company formed a joint venture (NN General, LLC) with General Bearing Corporation to acquire a 60% interest in a Chinese precision ball manufacturer. The investment includes a $2.5 million cash contribution and a $1 million loan commitment.
  • Fire Incident: On March 12, 2000, a fire damaged approximately 30% of the production area at the Erwin, Tennessee facility. No injuries occurred, and production is being shifted to other facilities. Management expects insurance to cover the losses.
• Liquidity: The Company maintains a $25 million revolving credit facility with First American National Bank, extended to July 2001. As of December 31, 1999, $17.2 million was outstanding. The Company plans to spend approximately $5.3 million on capital expenditures in 2000.
• Risk Factors:
  • Customer Concentration: The ten largest customers accounted for 69% of net sales in 1999. SKF alone represented 27% of sales.
  • Raw Materials: The Company relies heavily on imported 52100 steel (95% of usage). Price fluctuations or trade restrictions could adversely affect operations.
  • Foreign Exchange: Approximately 38% of sales are foreign. A strengthening U.S. dollar could impair competitiveness.
  • Integration Risk: Success depends on effectively integrating IMC operations and achieving projected synergies.

Investor Verification Checklist

• Verify the extent of production disruption and insurance claim status regarding the March 2000 fire at the Erwin facility.
• Monitor the integration progress of Industrial Molding Corporation (IMC) and its contribution to future margins.
• Assess the impact of the strong U.S. dollar on foreign sales volumes and pricing power in the Ball & Roller division.
• Review the financial performance of the new Chinese joint venture (NN General, LLC) and the associated capital deployment.
• Track the utilization rates of the Ball & Roller division to determine if capacity under-utilization issues persist.