Business Context and Reporting Period
Company: NN Ball & Roller, Inc. (NN INC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: The Company is an independent manufacturer of high-quality precision steel balls and rollers, primarily supplying anti-friction bearing manufacturers. Products are used in automotive, gas, mining, and industrial applications. Operations include facilities in Tennessee, South Carolina, and Ireland.
Key Financial Metrics (Year Ended Dec 31, 1998)
| Metric | 1998 | 1997 | 1996 |
|---|---|---|---|
| Net Sales | $73,006,000 | $75,252,000 | $84,539,000 |
| Gross Profit | $22,653,000 | $23,545,000 | $27,844,000 |
| Gross Margin | 31.0% | 31.3% | 32.9% |
| Operating Income | $12,200,000 | $13,921,000 | $19,596,000 |
| Net Income | $7,656,000 | $8,510,000 | $12,465,000 |
| Diluted EPS | $0.52 | $0.57 | $0.83 |
| Operating Cash Flow | $12,687,000 | $14,072,000 | $12,665,000 |
| Total Assets | $66,860,000 | $63,273,000 | $59,292,000 |
| Stockholders' Equity | $56,242,000 | $52,971,000 | $48,710,000 |
| Debt (Revolving Credit) | $0 | $1,480,000 | $2,308,000 |
| Working Capital | $20,933,000 | $18,714,000 | $18,353,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3.0% to $73.0 million, driven by a 3.4% drop in foreign sales (due to economic conditions in Asia and South America) and a 2.5% drop in domestic sales.
- Profitability Compression: Net income fell 10.0% to $7.7 million. Gross margin slipped slightly to 31.0% due to capacity under-utilization.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 6.8% to $5.9 million, largely due to the start-up of the Ireland facility. Depreciation increased 11.0% to $4.6 million due to new capital equipment.
- Liquidity Improvement: The Company paid down its revolving credit facility entirely, reducing debt from $1.48 million to $0. Working capital increased to $20.9 million.
Outlook, Risks, and Management Commentary
- Guidance: The Company plans to spend approximately $2.9 million on capital expenditures in 1999, primarily for maintenance, with no intent to increase capacity. Financing will come from operations and the existing credit facility.
- Customer Concentration: The top 10 customers accounted for 76% of 1998 sales. SKF alone represented 37% of sales, and FAG represented 11%. Loss of these customers would have a material adverse effect.
- Raw Material Risk: Approximately 98% of steel used is 52100 steel, purchased almost entirely from foreign mills. The Company is exposed to foreign currency fluctuations and potential trade restrictions.
- Competition: The industry is highly competitive. The Company faces risks from customers bringing production in-house (captive manufacturing) and from Asian competitors reducing overcapacity.
- Year 2000 Compliance: The Company expects to complete system upgrades by mid-1999. Estimated total cost is $800,000, with $600,000 spent as of year-end.
Investor Verification Checklist
- Customer Dependency: Verify the stability of relationships with SKF (37% of sales) and FAG (11% of sales) given the high concentration risk.
- Foreign Exposure: Assess the impact of Asian and South American economic conditions on future foreign sales, which comprised 46% of total revenue.
- Capacity Utilization: Monitor whether the Company can improve gross margins by increasing volume to offset fixed costs at its four facilities.
- Debt Covenants: Confirm continued compliance with the $25 million revolving credit facility covenants, specifically the restriction on earnings decline (not to exceed 50% of the prior year).
- Year 2000 Costs: Track actual expenditures against the $800,000 budget for Y2K remediation to ensure no unexpected overruns.