<PAGE> 1
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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 Number)
800 TENNESSEE ROAD
ERWIN, TENNESSEE 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 14, 1997 there were 14,543,242 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN BALL & ROLLER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Statements of Income for the three months
ended March 31, 1997 and 1996 2
Condensed Balance Sheets at March 31, 1997 and December 31, 1996 3
Condensed Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
NN BALL & ROLLER, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 20,319 $ 26,085
Cost of goods sold 13,838 17,568
---------- ----------
Gross profit 6,481 8,517
Selling, general and administrative 1,305 1,110
Depreciation 1,052 852
---------- ----------
Income from operations 4,124 6,555
Interest expense 19 80
---------- ----------
Income before provision for income taxes 4,105 6,475
Provision for income taxes 1,466 2,203
---------- ----------
Net income $ 2,639 $ 4,272
========== ==========
Net income per common share $ 0.18 $ 0.28
========== ==========
Weighted average number of
shares outstanding 14,712,638 15,071,278
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE> 4
NN BALL & ROLLER, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
THOUSANDS OF DOLLARS (UNAUDITED)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net $ 16,115 $ 15,754
Inventories, net (Note 2) 10,447 10,408
Other current assets 767 565
---------- ----------
Total current assets 27,329 26,727
Property, plant and equipment, net 32,189 32,419
Other 111 146
---------- ----------
Total assets $ 59,629 $ 59,292
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 120 $ 2,308
Accounts payable 4,510 4,054
Accrued vacation payable 455 370
Accrued sales rebates 204 755
Income taxes payable 1,479 96
Other current liabilities 1,414 791
---------- ----------
Total current liabilities 8,182 8,374
Deferred income taxes 2,208 2,208
---------- ----------
Total liabilities 10,390 10,582
Total stockholders' equity 49,239 48,710
---------- ----------
Total liabilities and stockholders' equity $ 59,629 $ 59,292
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
3
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NN BALL & ROLLER, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
THOUSANDS OF DOLLARS, NUMBER PAR PAID-IN EARNINGS
EXCEPT SHARE DATA OF SHARES VALUE CAPITAL (DEFICIT) TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 14,473 $ 144 $ 25,289 $ 13,785 $ 39,218
Net income 4,272 4,272
Dividends (1,158) (1,158)
Stock options exercised 3 -- 53 -- 53
-------- -------- -------- -------- --------
Balance, March 31, 1996 14,476 $ 144 $ 25,342 $ 16,899 $ 42,385
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
4
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NN BALL & ROLLER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
THOUSANDS OF DOLLARS 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 2,639 $ 4,272
Adjustments to reconcile net income:
Depreciation 1,052 852
Changes in operating assets and liabilities:
Accounts receivable (361) (4,338)
Inventories (39) (640)
Other current assets (202) (196)
Accounts payable 456 (819)
Other liabilities 1,540 2,930
---------- ----------
Net cash provided by operations 5,085 2,061
---------- ----------
INVESTING ACTIVITIES:
Acquisition of plant, property, and equipment (822) (3,811)
Other assets 35 (20)
---------- ----------
Net cash used by investing activities (787) (3,831)
---------- ----------
FINANCING ACTIVITIES:
Net receipts (payments) under revolving line of credit (2,188) 2,875
Stock options exercised -- 53
Repurchase of Company's Common Stock (999) --
Dividends (1,111) (1,158)
---------- ----------
Net cash provided (used) by financing activities $ (4,298) $ 1,770
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- --
---------- ----------
CASH AND CASH EQUIVALENTS AT PERIOD-END -- --
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE> 7
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, 1996. 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, 1997 and 1996, the
Company's financial position at March 31, 1997 and December 31, 1996, and the
cash flows for the three-month periods ended March 31, 1997 and 1996. 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 February 1997, the FASB issued Statement No. 128, "Earnings Per Share" (FAS
128), which requires the computation and presentation of earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
FAS 128 requires (a) presentation of basic and diluted EPS, if applicable, on
the face of the income statement and (b) reconciliation of the numerator and
denominator for each basic EPS computation and the numerator and denominator of
each diluted EPS computation. FAS 128 is effective for financial statements for
both interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. Had FAS 128 been effective for the
first quarter of 1997, basic and diluted EPS would have been $0.18 for the three
months ended March 31, 1997, and $0.30 and $0.28, respectively, for the three
months ended March 31, 1996.
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 1997 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):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
----------- ---------
<S> <C> <C>
Raw materials $ 1,236 $ 1,452
Work in process 2,848 2,586
Finished goods 6,423 6,430
-------- ---------
10,507 10,468
Less - Reserve for excess and obsolete inventory 60 60
-------- ---------
$ 10,447 $ 10,408
======== =========
</TABLE>
6
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DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased by approximately $5.8 million, or 22.1%, from
$26.1 million for the first quarter of 1996 to $20.3 million for the first
quarter of 1997. Foreign sales decreased $5.2 million, or 34.6%, from $15.0
million in the first quarter of 1996 to $9.8 million during the first quarter of
1997. Domestic sales decreased $543,000, or 4.9%, from $11.1 million in the
first quarter of 1996 to $10.5 million in the first quarter of 1997. The
decrease in foreign sales was due primarily to the weak European economies and a
slowing in the rate of outsourcing by customers with captive ball production. In
addition, net sales in the first quarter of 1996 reflect approximately $2.5
million of carry over demand from the fourth quarter of 1995 associated with the
tight raw material supply the Company experienced in 1995.
Gross Profit. Gross profit decreased $2.0 million, or 23.9%, from $8.5 million
for the first quarter of 1996 to $6.5 million for the first quarter of 1997. As
a percentage of net sales, gross profit decreased from 32.7% in the first
quarter of 1996 to 31.9% for the same period in 1997. The decrease in gross
profit and gross profit as a percentage of sales was due primarily to decreased
sales of 22.1% for the first quarter of 1997 as compared to the first quarter of
1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $195,000, or 17.6%, from $1.1 million in the first quarter
of 1996 to $1.3 million in the first quarter of 1997. This increase was due
primarily to travel, legal and accounting costs associated with the Company's
acquisition and plant start-up efforts. As a percentage of net sales, selling,
general and administrative expenses increased from 4.3% for the first quarter
of 1996 to 6.4% for the same period in 1997.
Depreciation. Depreciation expense increased from $852,000 for the first quarter
of 1996 to $1.1 million for the same period in 1997. This increase was due
primarily to purchases of capital equipment associated with capacity additions
at the Mountain City, Tennessee facility and, to a lessor extent, the Erwin,
Tennessee and Walterboro, South Carolina facilities. As a percentage of net
sales, depreciation expense increased from 3.3% for the first quarter of 1996 to
5.2% for the same period in 1997.
Interest Expense. Interest expense decreased by $61,000, from $80,000 in the
first quarter of 1996 to $19,000 during the same period in 1997. This decrease
was due to a reduction in amounts outstanding under the Company's revolving
credit facility with NationsBank during the first quarter of 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Net Income. Net income decreased by $1.6 million, or 38.2%, from $4.3 million
for the first quarter of 1996 to $2.6 million for the same period in 1997. As a
percentage of net sales, net income decreased from 16.4% in the first quarter of
1996 to 13.0% for the first quarter of 1997. This decrease in net income as a
percentage of net sales was due primarily to decreased gross profit as a
percentage of net sales, as well as increased selling, general and
administrative expenses and depreciation as a percentage of net sales as
explained above.
LIQUIDITY AND CAPITAL RESOURCES
In February 1995, the Company entered into a loan agreement with NationsBank of
Tennessee N.A. ("NationsBank"). The loan agreement provides for a revolving
credit facility of up to $10.0 million, which will expire on May 31, 1998.
7
<PAGE> 9
Amounts outstanding under the revolving facility are unsecured and bear interest
at a floating rate equal to, at the Company's option, either the NationsBank
prime commercial rate minus 1.0% or LIBOR plus 1.15% (or LIBOR plus 1.0% if the
minimum advance is at least $1.0 million). The loan agreement contains customary
financial and operating restrictions on the Company, including covenants
restricting the Company, without NationsBank's consent, from pledging its
inventory, accounts receivable or other assets to other lenders or from
acquiring any other businesses if the aggregate expenditures by the Company in
connection with such acquisitions would exceed a certain threshold in any fiscal
year. In addition, the Company is prohibited from declaring or paying any
dividend if an event of default exists under the revolving credit facility at
the time of, or would occur as a result of, such declaration or payment. The
loan agreement also contains customary covenants requiring the satisfaction of
certain financial tests and the maintenance of certain financial ratios,
including covenants requiring the Company to maintain a tangible net worth of
not less than $25.0 million, working capital of not less than the greater of
$10.0 million or 15% of revenues, as computed on a rolling 12 month basis, a
ratio of total debt to net worth of not more than 1 to 1, and a ratio of current
assets to current liabilities of not less than 1.5 to 1. The Company, as of
March 31, 1997, was in compliance with all such covenants. The outstanding
principal balance of the Company's borrowings under the revolving facility as of
March 31, 1997 was $120,000.
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.
Currently, all foreign sales are billed and paid for in United States dollars.
To date, the Company has not been materially adversely affected by currency
fluctuations or foreign exchange restrictions, although a continued
strengthening of the U.S. dollar against foreign currencies may impair the
ability of the Company to compete with foreign based competitors for
international as well as domestic sales. As the Company's international
operations continue to grow, foreign exchange risk may increase, and the Company
may be required to develop and implement additional strategies to manage this
risk.
Working capital, which consists principally of accounts receivable and
inventories was $19.1 million at March 31, 1997 as compared to $18.4 million at
December 31, 1996. The ratio of current assets to current liabilities increased
to 3.3:1 at March 31, 1997 from 3.2:1 at December 31, 1996. This increase was
due primarily to slightly higher inventory and accounts receivable amounts and
the decrease in amounts drawn under the revolving credit facility. Cash flow
from operations increased from $2.1 million during the first quarter 1996 to
$5.1 million during the first quarter 1997. This increase was primarily
attributed to an increase of $4.3 million in accounts receivable for the first
quarter of 1996 as compared to an increase of $361,000 for the first quarter of
1997 and a decrease of $819,000 in accounts payable for the first quarter of
1996 as compared to an increase of $456,000 for the first quarter of 1997.
During 1997, the Company plans to spend approximately $10.8 million on capital
expenditures (of which $822,000 has been spent through March 31, 1997) including
the purchase and renovation of a manufacturing facility and related equipment in
Ireland and the purchase of additional machinery and equipment for all three of
the Company's U.S. facilities. 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 1997.
8
<PAGE> 10
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 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
generally.
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. Currently, all foreign sales are billed and
paid for in United States dollars. An increase in the value of the United States
dollar relative to foreign currencies may adversely affect the
9
<PAGE> 11
ability of the Company to compete with its foreign-based competitors for
international as well as domestic sales.
Dependence on Major Customers. During 1996, the Company's ten largest customers
accounted for approximately 78% 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 1996, 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 1996, but sales to
three of its customers each represented more than 5% of the Company's 1996 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
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K
None.
Exhibitss
Financial Data Schedule (for SEC use only)
11
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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 14, 1997 /s/ James J. Mitchell
----------------------------------------
James J. Mitchell, President
and Chief Operating
Officer
(Duly Authorized Officer)
Date: May 14, 1997 /s/ Roderick R. Baty
----------------------------------------
Roderick R. Baty
Chief Financial Officer and
Vice President
(Principal Financial Officer)
(Duly Authorized Officer)
Date: May 14, 1997 /s/ William C. Kelly, Jr.
----------------------------------------
William C. Kelly, Jr.,
Treasurer, Assistant Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 16,355
<ALLOWANCES> (240)
<INVENTORY> 10,447
<CURRENT-ASSETS> 27,329
<PP&E> 53,618
<DEPRECIATION> (21,429)
<TOTAL-ASSETS> 59,629
<CURRENT-LIABILITIES> 8,182
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 49,093
<TOTAL-LIABILITY-AND-EQUITY> 59,629
<SALES> 20,319
<TOTAL-REVENUES> 20,319
<CGS> 13,838
<TOTAL-COSTS> 13,838
<OTHER-EXPENSES> 2,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 4,105
<INCOME-TAX> 1,466
<INCOME-CONTINUING> 2,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,639
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
