NN Inc., a Johnson City-based industrial parts manufacturing company, announced this week it is selling off its Precision Bearing Components Group, which includes its properties in Erwin and Mountain City.
The deal with Tsubaki Nakashima Co., Ltd., will bring NN $375 million in cash. It will close later this quarter, subject to regulatory approval. “We think it will close in between 30 and 60 days,” said Richard Holder, NN president and CEO. “We think this deal builds and enormous amount of shareholder value. It’s overall just a solid deal for both organizations.”
The Precision Bearing Components Group includes the group of heritage product lines that made up the business when the company was known as NN Ball & Roller. It includes production of balls, rollers, cages and sheet metal parts.
Holder said the move will be in the best interest of both his company and the employees at Mountain City and Erwin who will work for Tsubaki Nakashima. “We believe that Tsubaki Nakashima is the right strategic fit for the Precision Bearing Components Group (PBC), its employees and its customers. By joining with Tsubaki Nakashima, a well-respected bearing components manufacturer with an established track record of global growth, PBC will continue to thrive.”
While NN is diversifying its product offerings, Holder said, Tsubaki Nakashima is focused entirely on growing the ball and roller segments of the business that are key to the survival of the Erwin and Mountain City plants. “They are a rolling elements company that does not have a North American presence. They did not have a European presence. One hundred percent of what they do is around growing and enhancing the rolling elements business. So we felt comfortable being able to put our business in their hands with this deal. We know they want to do good things for our employee base and our communities. So we feel comfortable with that.”
Currently, the PBC makes up around a quarter of NN’s total sales revenue. Net sales for the first quarter of 2017 were $68.8 million, compared to $64.7 million in the first quarter of 2016, an increase of $4.1 million or 6%. Adjusted income from operations for the first quarter was $8.6 million, compared to $7.1 million in the first quarter of 2016.
NN will retain its Autocam Precision Components and Precision Engineered Products groups, and will utilize the cash brought in from the PBC sale to grow those segments of its business. “The sale of PBC represents a key strategic step toward building a diversified industrial business and capitalizing on growth opportunities that foster strong operating performance, stable earnings and free cash flow over the long term,” Holder said. “This transaction further balances our portfolio and provides us with the capital to execute on our strategic expansion into the higher-growth, medical and aerospace end markets.”
A company press release said NN plans to redeploy the estimated $270 million in net proceeds (after taxes and fees) into paying down its debt and into potential acquisition of other assets. Holder said its likely many of those dollars will be plowed right back into acquisitions of higher-margin, higher-profit lines, “in the very near future.”
“It’s a planned redeployment of capital into a higher-growth, higher-margin end-market profile,” Holder said. “It heightens the focus on our engineered solutions and our ability to execute on the acquisitions that we have on our pipeline.”
By divesting itself of the lines being sold to Tsubaki Nakashima, NN will lessen its exposure to volatile automotive markets while broadening its ability to operate in higher growth areas.
“Our diverse portfolio is now 53 percent of our revenue. So we are no longer overly dependent on the automotive, highly-cyclical market. Post-deal, we will become a much better balanced organization. In automotive, we go from 25 percent highly cyclical exposure down to about 8 percent exposure. Our high-end technology – leading-edge, high-growth product – ends up being about 39 percent of our automotive profile.
“Aerospace and defense is about 2 percent of our business and growing,” Holder said. “We will go from between zero and $1 million to about $35 million exiting this year, so a good growth story and one we are focused on. The rest of our pieces, electrical, industrial and medical, all are about 17 or 18 percent of our revenue, so there is that balance.”
The market’s initial reaction to NN’s announcement was positive. The company’s share price on the NASDAQ rose 10 percent Monday. Moody’s, which assigns credit ratings to publicly held businesses, said late Monday, “NN, Inc.’ s asset sale is credit positive but does not currently impact ratings.”