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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-23486
NN Ball & Roller, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Tennessee Road
Erwin, Tennesee 37650
(Address of principal executive offices, including Zip Code)
(423) 743-9151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of May 13, 1998, there were 14,804,271 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN Ball & Roller, Inc.
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Income and Comprehensive Income
for the three Months ended March 31,
1998 and 1997 2
Condensed Balance Sheets at March 31, 1998
and December 31, 1997 3
Condensed Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
NN Ball & Roller, Inc.
Condensed Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended
Thousands of Dollars, Except March 31,
Share and Per Share Data 1998 1997
- ---------------------------------------------------------------------------
Net sales $ 20,886 $ 20,319
Cost of goods sold 14,177 13,838
------------ ------------
Gross profit 6,709 6,481
Selling, general and administrative 1,304 1,305
Depreciation 1,159 1,052
------------ ------------
Income from operations 4,246 4,124
Interest expense 15 19
------------ ------------
Income before provision for income taxes 4,231 4,105
Provision for income taxes 1,564 1,466
------------ ------------
Net income $ 2,667 $ 2,639
Other comprehensive income:
Foreign currency translation adjustments (261) --
------------ ------------
Comprehensive income $ 2,406 $ 2,639
============ ============
Net income per common share $ 0.18 $ 0.18
============ ============
Weighted average number of
shares outstanding 14,804,244 14,712,638
============ ============
See accompanying notes.
2
NN Ball & Roller, Inc.
Condensed Balance Sheets
March 31, December 31,
1998 1997
Thousands of Dollars (Unaudited)
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 196 $ 366
Accounts receivable, net 16,589 12,449
Inventories, net (Note 2) 12,189 11,865
Other current assets 1,073 1,505
------- -------
Total current assets 30,047 26,185
Property, plant and equipment, net 36,870 37,088
------- -------
Total assets $66,917 $63,273
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ 510 $ 1,480
Accounts payable 5,014 3,662
Accrued vacation payable 612 519
Accrued bonuses payable 434 --
Deferred income 804 458
Income taxes payable 1,018 --
Other current liabilities 1,503 1,352
------- -------
Total current liabilities 9,895 7,471
Deferred income taxes 2,831 2,831
------- -------
Total liabilities 12,726 10,302
Total stockholders' equity 54,191 52,971
------- -------
Total liabilities and stockholders' equity $66,917 $63,273
======= =======
See accompanying notes.
3
NN Ball & Roller, Inc.
Condensed Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common stock Additional Retained other
Number Par paid in earnings comprehensive
Thousands of Dollars of shares Value capital (deficit) income Total
- ----------------------------------------------------------------------------------------
Balance, January 1, 1997 14,629 $ 146 $ 26,983 $21,581 $ - $ 48,710
Net income 2,639 2,639
Dividends (1,111) (1,111)
Stock repurchased (86) -- (999) -- (999)
------- ------- -------- ------- ----- --------
Balance, March 31, 1997 14,543 $ 146 $ 25,984 $23,109 $ - $ 49,239
======= ======= ======== ======= ===== ========
Balance, January 1, 1998 14,804 $ 149 $ 27,902 $25,387 $(467) $ 52,971
Net income 2,667 2,667
Dividends (1,186) (1,186)
Other comprehensive
income (261) (261)
------- ------- -------- ------- ----- --------
Balance, March 31, 1998 14,804 $ 149 $ 27,902 $26,868 $(728) $ 54,191
======= ======= ======== ======= ===== ========
See accompanying notes.
4
NN Ball & Roller, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 2,667 $ 2,639
Adjustments to reconcile net income:
Depreciation 1,159 1,052
Changes in operating assets and liabilities:
Accounts receivable (4,140) (361)
Inventories (324) (39)
Other current assets 432 (202)
Accounts payable 1,352 456
Income taxes payable 1,018 --
Other liabilities 1,024 1,540
------- -------
Net cash provided by operations 3,188 5,085
------- -------
Investing Activities:
Acquisition of plant, property, and equipment (941) (822)
Other assets -- 35
------- -------
Net cash used by investing activities (941) (787)
------- -------
Financing Activities:
Net receipts (payments) under revolving line of
credit (970) (2,188)
Stock options exercised -- --
Repurchase of Company's Common Stock -- (999)
Foreign Currency Translation (261) --
Dividends (1,186) (1,111)
------- -------
Net cash provided (used) by
financing activities (2,417) (4,298)
------- -------
Net Change in Cash and Cash Equivalents (170) --
Cash and Cash Equivalents at Beginning of Period 366 --
------- -------
Cash and Cash Equivalents at Period-End $ 196 $ --
======= =======
See accompanying notes.
5
NN Ball & Roller, Inc.
Notes To Condensed Financial Statements
Note 1. Interim Financial Statements
The accompanying condensed financial statements of NN Ball & Roller, Inc. have
not been audited by independent accountants, except for the balance sheet at
December 31, 1997. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the results of
operations for the three-month periods ended March 31, 1998 and 1997, the
Company's financial position at March 31, 1998 and December 31, 1997, and the
cash flows for the three-month periods ended March 31, 1998 and 1997. These
adjustments are of a normal recurring nature and are, in the opinion of
management, necessary for fair presentation of the financial position and
operating results for the interim periods.
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
(FAS130) which established standards for reporting and displaying comprehensive
income and its components within an entity's financial statements. FAS 130,
which is effective for the Company's 1998 first quarter financial reporting,
defines the components of other comprehensive income to include foreign currency
translation adjustments, unrealized gains and losses on marketable securities
and minimum pension adjustments. Currently, the Company's only component of
comprehensive income is foreign currency translation which is presented before
tax due to the Company's intention to indefinitely reinvest earnings of their
subsidiary outside the United States.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements presented
in this Quarterly Report on Form 10-Q.
The results for the first quarter of 1998 are not necessarily indicative of
future results.
Note 2. Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
Inventories are comprised of the following (in thousands):
March 31, December 31,
1998 1997
(Unaudited)
------- -------
Raw materials $ 2,688 $ 2,911
Work in process 3,339 2,793
Finished goods 6,222 6,221
------- -------
12,249 11,925
Less - Reserve for excess and obsolete inventory 60 60
------- -------
$12,189 $11,865
======= =======
6
Note 3. Net Income Per Share
Three Months Ended
Thousands of Dollars, Except March 31,
Share and Per Share Data 1998 1997
- --------------------------------------------------------------------------------
Net income $ 2,667 $ 2,639
Adjustments to net income -- --
----------- -----------
Net income 2,667 2,639
=========== ===========
Basic shares outstanding 14,804,244 14,543,242
Effect of dilutive stock options -- 169,396
----------- -----------
Dilutive shares outstanding 14,804,244 14,712,638
=========== ===========
Basic net income per share $ 0.18 $ 0.18
=========== ===========
Diluted net income per share $ 0.18 $ 0.18
=========== ===========
Excluded from the shares outstanding at March 31, 1998 and 1997 were 426,500 and
459,600, respectively, of antidilutive options to purchase common shares at an
exercise price of $11.92 to $15.50.
7
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. Net sales increased by approximately $0.6 million, or 2.9%, from
$20.3 million for the first quarter of 1997 to $20.9 million for the first
quarter of 1998. Foreign sales increased $ 0.3 million, or 3.1%, from $ 9.8
million in the first quarter of 1997 to $10.1 million during the first quarter
of 1998. Domestic sales increased $0.2 million, or 1.9%, from $10.5 million in
the first quarter of 1997 to $10.7 million in the first quarter of 1998. The
increase in foreign sales was due primarily to the strengthening of European
economies, offset by reduced sales to Asian customers due to the financial
crisis in Asia and the impact of the continued strengthening of the U.S. dollar
against world currencies.
Gross Profit. Gross profit increased $0.2 million, or 3.1%, from $6.5 million
for the first quarter of 1997 to $6.7 million for the first quarter of 1998. As
a percentage of net sales, gross profit increased from 31.9% in the first
quarter of 1997 to 32.1% for the same period in 1998. The increase in gross
profit and gross profit as a percentage of sales was due to increased sales of
2.9% and to increased operating efficiencies for the first quarter of 1998 as
compared to the first quarter of 1997.
Selling, General and Administrative. Selling, general and administrative
expenses of $1.3 million remained flat for both of the first quarters of 1998
and 1997. As a percentage of net sales, selling, general and administrative
expenses decreased slightly from 6.4% for the first quarter of 1997 to 6.2% for
the same period in 1998.
Depreciation. Depreciation expense increased from $1.1 million for the first
quarter of 1997 to $1.2 million for the same period in 1998. This increase was
due primarily to purchases of capital equipment related to the new Ireland
facility start-up in the fourth quarter of 1997. As a percentage of net sales,
depreciation expense increased slightly from 5.2% for the first quarter of 1997
to 5.5% for the same period in 1998.
Interest Expense. Interest expense decreased slightly from $19,000 in the first
quarter of 1997 to $15,000 during the same period in 1998.
Net Income. Net income increased slightly by $28,000, or 1.0%, from $2.6 million
for the first quarter of 1997 to $2.7 million for the same period in 1998. As a
percentage of net sales, net income decreased from 13.0% in the first quarter of
1997 to 12.8% for the first quarter of 1998. This decrease in net income as a
percentage of net sales was due primarily to increased depreciation and income
taxes recognized in the first quarter of 1998.
Liquidity and Capital Resources
In July 1997, the Company terminated its $10.0 million revolving credit facility
and entered into a loan agreement with First American National Bank ("First
American"). This loan agreement provides for a revolving credit facility of up
to $25 million, which will expire on June 30, 2000.
Amounts outstanding under the revolving facility are unsecured and bear interest
at a floating rate equal to, at the Company's option, either LIBOR plus 0.65% or
the Fed Funds effective rate plus 1.5%. The loan agreement contains customary
financial and operating restrictions on the Company, including covenants,
restricting the Company, without First American's consent, from incurring
additional indebtedness from, or pledging any of its assets to, other lenders
and from disposing of a substantial portion of its assets. In addition, the
Company is prohibited from declaring any dividend if a default exists under the
revolving
8
credit facility at the time of, or would occur as a result of, such declaration.
The loan agreement also prohibits sales of property outside of the ordinary
course of business. The loan agreement also contains customary financial
covenants with respect to the Company, including a covenant that the Company's
earnings will not decrease in any year by more than fifty percent of earnings in
the Company's immediately preceding fiscal year. The Company, as of May 13, 1998
was in compliance with all such covenants.
The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment of
goods, while arrangements with foreign customers (other than foreign customers
that have entered into an inventory management program with the Company)
generally provide that payments are due within either 90 or 120 days following
the date of shipment. Under the Company's inventory management program, payments
typically are due within 30 days after the product is used by the customer. Due
to the continuing expansion of the Company's foreign sales, management believes
that the Company's working capital requirements will increase as a result of
longer payment terms provided to foreign customers. The Company's net sales
historically have not been of a seasonal nature. However, as foreign sales have
increased as a percentage of total sales, seasonality has become a factor for
the Company in that many foreign customers cease production during the month of
August.
In the fourth quarter of 1997, upon the commencement of production in its
Kilkenny, Ireland facility, the Company began to bill and receive payment from
some of its foreign customers in their own currency. To date, the Company has
not been materially adversely affected by currency fluctuations or foreign
exchange restrictions. Nonetheless, as a result of these sales, the Company's
foreign exchange risk has increased. Various strategies to manage this risk are
under development and implementation, including a hedging program. In addition,
a strengthening of the U.S. dollar against foreign currencies could impair the
ability of the Company to compete with international competitors for foreign as
well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories was $20.2 million at March 31, 1998 as compared to $18.7 million at
December 31, 1997. The ratio of current assets to current liabilities decreased
from 3.5:1 at December 31, 1997 to 3.0:1 at March 31, 1998. This decrease was
due primarily to increased accounts payable, income taxes payable and other
payables increases offset by inventory and accounts receivable amounts. Cash
flow from operations decreased from $5.1 million during the first quarter 1997
to $3.2 million during the first quarter 1998. This decrease was primarily
attributed to an increase of $4.1 million in accounts receivable for the first
quarter of 1998 as compared to an increase of $361,000 for the first quarter of
1997.
During 1998, the Company plans to spend approximately $9.0 million on capital
expenditures (of which $941,000 has been spent through March 31, 1998) including
the purchase of additional machinery and equipment for all three of the
Company's U.S. facilities as well as the new Ireland facility. The Company
intends to finance these activities with cash generated from operations and
funds available under the credit facility described above. The Company believes
that funds generated from operations and borrowings from the credit facility
will be sufficient to finance the Company's working capital needs and projected
capital expenditure requirements through December 1998.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward looking statements that involve
certain risks and uncertainties. The Company's actual results could differ
materially from those expressed in such forward looking statements due to
important factors bearing on the
9
Company's business, many of which already have been discussed in this filling
and in the Company's prior fillings.
The following paragraphs discuss the risk factors the Company regard as the most
significant, although the Company wishes to caution that other factors that are
currently not considered significant or that currently cannot be foreseen may in
the future prove to be important in affecting the Company's results of
operations. The Company undertakes no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
Industry Risks. The precision ball and roller industry is cyclical and tends to
decline in response to overall declines in industrial production. The Company's
sales in the past have been negatively affected, and in the future very likely
would be negatively affected, by adverse conditions in the industrial production
sector of the economy or by adverse global or national economic conditions.
Competition. The precision ball and roller market is highly competitive, and
many of the ball and roller manufacturers in the market are larger and have
substantially greater resources than the Company. The Company's competitors are
continuously exploring and implementing improvements in technology and
manufacturing processes in order to improve product quality, and the Company's
ability to remain competitive will depend, among other things, on whether it is
able, in a cost effective manner, to keep apace with such quality improvements.
In addition, the Company competes with many of its customers that, in addition
to producing bearings, also internally produce balls and rollers for sale to
third parties. The Company also faces a risk that its customers will decide to
produce balls and rollers internally rather than outsourcing their needs to the
Company.
Rapid Growth. The Company has significantly expanded its production facilities
and capacity over the last several years. The Company currently is not operating
at full capacity and faces risks of further underutilization or inefficient
utilization of its production facilities in future years. The Company also faces
risks associated with start-up expenses, inefficiencies, delays and increased
depreciation costs associated with its plant expansions.
Raw Material Shortages. Because the balls and rollers manufactured by the
Company have highly-specialized applications, their production requires the use
of very particular types of steel. Due to quality constraints, the Company
obtains the majority of its steel from overseas suppliers. Steel shortages or
transportation problems, particularly with respect to 52100 Steel, could have a
detrimental effect on the Company's business.
Risks Associated with International Trade. Because the Company obtains a
majority of its raw materials from overseas suppliers and sells to a large
number of international customers, the Company faces risks associated with (i)
adverse foreign currency fluctuations, (ii) changes in trade, monetary and
fiscal policies, laws and regulations, and other activities of governments,
agencies and similar organizations, (iii) the imposition of trade restrictions
or prohibitions, (iv) the imposition of import or other changes or taxes, and
(v) unstable governments or legal systems in countries in which the Company's
suppliers and customers are located.
Dependence on Major Customers. During 1997, the Company's ten largest customers
accounted for approximately 77% of its net sales. Sales to various U.S. and
foreign divisions of SKF, which is one of the largest bearing manufacturers in
the world, accounted for approximately 37% of net sales in 1997, and sales to
FAG accounted for approximately 10% of net sales. The Company currently
negotiates and contracts with various purchasing units within SKF and believes
that, in certain respects, such units operate independently with respect to
purchasing decisions. There can be no assurance, however, that SKF will not
centralize purchasing decisions in the future. None of the Company's other
customers accounted for more than 10% of its net sales in 1997, but sales to two
of its customers each represented more than 5% of the Company's 1997 net sales.
the loss of all or a substantial portion of sales to these customers would have
a material adverse effect on the Company's business.
10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No.
- -----------
27 * - Financial Data Schedule (For Information of SEC Only)
- ------
* Filed herewith
(b) Reports on Form 8-K: None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NN Ball & Roller, Inc.
-------------------------------------------
(Registrant)
Date: May 13, 1998 /s/ Roderick R. Baty
---------------- -------------------------------------------
Roderick R. Baty, President and Chief
Executive Officer
(Duly Authorized Officer)
/s/ David L. Dyckman
Date: May 13, 1998 -------------------------------------------
---------------- David L. Dyckman
Chief Financial Officer and
Vice President
(Principal Financial Officer)
(Duly Authorized Officer)
Date: May 13, 1998 /s/ William C. Kelly, Jr.
---------------- -------------------------------------------
William C. Kelly, Jr.,
Treasurer, Assistant Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
12