NN Reports Second Quarter 2003 Results

NN Inc. (USA), a key producer of bearing balls, rollers, cages and seals, reported second quarter 2003 results, with sharply increased sales from recent acquisitions. Sales were USD $64.2 million, up 30.5% from $49.2 million in 2002, but none of the improvement came from organic sales growth. The increase was due to NN's two recent acquisitions, SKF's Veenendaal plant in The Netherlands and SKF's 23% share of NN Euroball ApS. In the earnings call, NN's Chairman and CEO, Rock Baty, indicated $9.3 million of the quarter's sales increase was due to the Veenendaal acquisition. Mr. Baty said the rest of the sales increase, excluding Veenendaal, of $5.4 million, was due entirely to currency effects. Operating income in the quarter fell to $2.5 million from $5.5 million in 2002, primarily due to restructuring and impairment charges. Net income jumped to $7.3 million from 2002's $2.4 million, with $6.6 million coming from a non-cash gain associated with the acquisition of SKF's share of NN Euroball. NN said part of the earnings decline was due to temporary inefficiencies at Euroball and U.S. ball operations -- tooling for new sizes and shipping to new Asian customers are two important examples -- and material surcharges which could not be passed along to customers. NN Arte plant closing In the second quarter, the company decided to close its 44-employee plastic production facility, NN Arte, in Guadalajara, Mexico. NN said the three-year-old Guadalajara facility never gained traction and had, "deteriorated from day one," with a current run rate of only $1.5 million. David Dyckman, CFO, said Guadalajara's, "customers have recently shifted their manufacturing operations to other geographic regions in the world, making it unprofitable for us to continue to manufacture these products in Guadalajara, Mexico." He indicated the facility would close during the fourth quarter and the assets moved to Industrial Molding Corporation in Lubbock, Texas. NN recorded a $2.0 million charge in the quarter to cover equipment write-down and severance expenses at Guadalajara. Veenendaal acquisition On May 2, 2003, NN acquired SKF's tapered roller and metal cage manufacturing operation in Veenendaal, The Netherlands. Veenendaal currently produces approximately $48 million of rollers for tapered roller bearings, and metal cages for both tapered and spherical roller bearings. Mr. Baty said Veenendaal, "...increases our consolidated roller business to approximately 16% of our total revenues. Both products represent an expansion of our bearing component offering and enhance the value we bring to our customers as a single supply partner for a wide variety of high quality, precision components." In the earnings call, Mr. Baty said Veenendaal's gross margins were now only in the mid to high teens, but over the course of the next 2-3 years, the company sees many opportunities to adjust the cost structure to better approach NN's corporate average margins, particularly in SG&A synergies. • article: NN acquiring SKF Veenendaal plant NN Euroball full ownership acquisition During the quarter, NN also announced it had purchased SKF's 23% ownership in NN Euroball ApS, originally set up as a joint venture of NN, FAG and SKF. In December 2002, NN acquired FAG's 23% share of NN Euroball, and now it has acquired SKF's 23% share for full ownership of NN Euroball ApS. NN indicated that, with Veenendaal and Euroball, 60% of its revenue and 60% of its employment are now tied to European operations. To that end, the company has established NN Europe with Dario Galetti, NN Euroball's Managing Director, as its head. Outlook For third quarter, Mr. Baty said sales will probably be flat, at around $63 million. Echoing other bearing manufacturers, such as Timken's recent comments about the coming quarters, Mr. Baty said NN expects automotive softening in North America and Europe, projecting a 5% to 6% decline in build rate. The industrial markets in both North American and Europe are expected to continue flat overall. One bright spot, which caused some of the second quarter inefficiencies, is Asia. NN said it has been able to capture some Asian business for its U.S. ball and roller plants, primarily due to currency valuations making its products price-competitive. Some overtime was required to meet demand, and additional tooling was brought online to meet demand for Asia-specific sizes not already in its system. Mr. Baty concluded, "We feel there are opportunities to improve our profitability through the further integration of the Veenendaal operation as well as continual cost improvement programs in place throughout our operations." Acquisitions NN indicated there is at least a $1.7 billion captive world market in balls, rollers and retainers. As its customers increasingly move their production operations to eastern Europe and Asia, NN said it knows it needs to be operating in those areas. Following that lead-in, NN said to, "... expect to hear news about expanding geographical capacity," sometime within the next six months to a year.