· | Global industrial growth and economics Global automotive production rates Costs subject to the global inflationary environment, including, but not limited to: | § | Wages and benefits, including health care costs |
· | Global automotive production rates | Energy |
· | Costs subject to the global inflationary environment, including, but not limited to: |
o Raw material availability
o WagesTrends related to the geographic migration of competitive manufacturing
Regulatory environment for United States public companies Currency and benefits, including health care costsexchange rate movements and trends o Regulatory complianceInterest rate levels and expectations
o Energy
· | Raw material availability |
· | Trends related to the geographic migration of competitive manufacturing |
· | Regulatory environment for United States public companies |
· | Currency and exchange rate movements and trends |
· | Interest rate levels and expectations |
Management generally focuses on the following key indicators of operating performance: Sales growth Cost of products sold levels Selling, general and administrative expense levels
· | Cost of products sold levels | Net income Cash flow from operations and capital spending
· | Selling, general and administrative expense levels | Customer service reliability External and internal quality indicators
· | Cash flow from operations and capital spending |
· | Customer service reliability |
· | External and internal quality indicators |
Since our formation in 1980, we have grown primarily through the acquisition of in-house ballcomponent manufacturing operations of domestic and international bearing manufacturers resulting in increased sales of high precision balls for bearing applications. Management believes that our core business sales growth since our formation has been due to our ability to capitalize on opportunities in global markets and provide precision products at competitive prices, as well as our emphasis on product quality and customer service. In 1998, we recognized changing dynamics in the marketplace, and as a result, began implementing an extensive long-term growth strategy building upon our core business and leveraging our inherent strengths to better serve our global customer base. As part of this strategy, we sought to augment our intrinsic growth with complementary acquisitions that fit specific criteria. On July 4, 1999, we acquired substantially all of the assets of Earsley Capital Corporation, formerly known as Industrial Molding Corporation (“IMC”) for consideration of approximately $30.0 million. Formed in 1947, IMC provides full-service design and manufacture of plastic injection molded components to the bearing, automotive, electronic, leisure and consumer markets with an emphasis on value-added products that take advantage of its capabilities in product development, tool design and tight tolerance molding processes. IMC operates two manufacturing facilities in Lubbock, Texas. On July 31, 2000, we formed a majority owned stand-alone company in Europe, NN Europe ApS (“NN Europe”), for the manufacture and sale of chrome steel balls used for ball bearings and other products. As a result of this transaction, we owned 54% of NN Europe. SKF and INA respectively each owned 23% of NN Europe. As part of the transaction, NN Europe acquired the ball factories located in Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by INA), and Kilkenny, Ireland (previously owned by the Company). Acquisition financing of approximately 31.5 million EuroEuros (approximately $29.7 million) was drawn at closing, and the credit facility provided for additional working capital expenditure financing. In connection with this transaction, total equity, specifically additional paid in capital, increased by 10.0 million Euros ($9.3 million) to reflect the increase in our proportionate interest in NN Europe as related to our 54%. We have always consolidated NN Europe due to our majority ownership and have accounted for the acquisitions of the Pinerolo, Italy and Eltmann, Germany ball factories in a manner similar to the purchase method of accounting. On December 20, 2002 we completed the purchase of the 23% interest held by INA. We paid approximately 13.4 million Euros ($13.8 million) for INA/FAG’s interest in NN Europe. The excess of the purchase price paid to INA for its 23% interest over fair value of INA’s 23% interest in the net assets of NN Europe of approximately $1.5 million has been allocated to goodwill. On May 2, 2003 we acquired the 23% interest in NN Europe held by SKF. We paid approximately 13.8 million Euros ($15.6 million) for SKF’s interest in NN Europe. The excess of the purchase price paid to SKF for its 23% interest over the fair value of SKF’s 23% interest in the net assets of NN Europe of approximately $2.1 million was allocated to goodwill. On February 16, 2001, we completed the acquisition of all of the outstanding stock of The Delta Rubber Company, a Connecticut corporation (“Delta”), for $22.5 million in cash. Delta provides high quality engineered bearing seals and other precision-molded rubber products to original equipment manufacturers. Delta operates two manufacturing facilities in Danielson, Connecticut. On September 11, 2001, we announced the closing of our Walterboro, South Carolina ball manufacturing facility effective December 2001. The closing was made as part of our strategy to redistribute our global production in order to better utilize capacity and serve the needs of our worldwide customers. The precision ball production of the Walterboro facility has been fully absorbed by our remaining U.S. Ball & RollerMetal Bearing Components Segment manufacturing facilities located in Erwin and Mountain City, Tennessee. In 2002 and 2001 we recorded before tax charges associated with the closing of $1.3 million and $1.9 million, respectively. In 2001, this amount includes a $1.1 million before-tax charge for the recording of impairment on our manufacturing facility located in Walterboro, South Carolina and $0.8 million related to employee severance costs. In 2002, this amount includes a $0.6 million before-tax charge for the recording of an additional impairment on the facility, a $0.6 million before-tax charge for the recording of impairment on the machinery and equipment and a $0.1 million charge related to employee severance costs. There were no impairment charges related to these assets recorded in 2003. The land and building assets were sold during the fourth quarter of 2004. As a result, we recorded a loss on disposal of assets of approximately $0.8 million which has been recorded as a loss on disposal of assets, a component of income from operations. Additionally, during the fourth quarter of 2004, we recorded an impairment charge of approximately $0.1 million related to certain remaining machinery and equipment assets of this facility. This amount was recorded as a component of restructuring and impairment costs. The financial results of this operation have been reflected in the Domestic Ball and Roller SegmentMetal Bearing Components in the years ended December 31, 2004 and 2003. See Note 12 of the Notes to Consolidated Financial Statements.
Effective December 21, 2001, we sold our minority interest in Jiangsu General Ball & Roller Company, LTD, a Chinese ball and roller manufacturer located in Rugao City, Jiangsu Province, China. To effect the transaction, we sold our 50% ownership in NN General, LLC, which owns a 60% interest in the Jiangsu joint venture to our partner, General Bearing Corporation for cash of $0.6 million and notes of $3.3 million. On May 2, 2003, we acquired 100% of the tapered roller and metal cage manufacturing operations of SKF in Veenendaal, The Netherlands. The results of Veenendaal’s operations have been included in the consolidated financial statements since that date. We paid consideration of approximately 23.0 million Euros ($25.7 million) and incurred other costs of approximately $1.0 million, for the Veenendaal net assets acquired from SKF. The Veenendaal operation manufactures rollers for tapered roller bearings and metal cages for both tapered roller and spherical roller bearings allowing us to expand our bearing component offering. The financial results of the Veenendaal operation are included in the NN Europeour Metal Bearing Components Segment.
On October 9, 2003, we acquired certain assets comprised of land, building and machinery and equipment of the precision ball operations of KLF - Gulickaren (“KLF”), based in Kysucke Nove Mesto, Slovakia. We paid consideration of approximately 1.7 million Euros ($2.0 million). The assets are being utilized by our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia, which began production in 2004. The financial results of the operations are included in our NN EuropeMetal Bearing Components Segment.
During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products Company, Ltd. This subsidiary began production of precision balls during the fourth quarter of 2005, and is located in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China and is a component of our strategy to globally expand our manufacturing base.
On October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to purchase all of SNR’s entire internal precision ball producing equipment for approximately 5.05.2 million Euros ($6.06.2 million). SNR, a division of Renault SA, France, is a global bearing manufacturer and supplier to the automotive, industrial and aerospace industries. As part of the transaction, we received a three yearthree-year supply agreement for the present business (approximately $8.0 million) and a five yearfive-year supply agreement to provide SNR with its annual ball requirements of the former in-house production of approximately $9.0 million. The product will be supplied from NN Europe’sMetal Bearing Components Segment existing precision ball operations. In December 2005, we started to acquire the precision ball producing equipment of SNR, from its manufacturing facility in Annecy, France. Once complete, In the fourth quarter of 2005, we will have acquired approximately 5.0 million Euros (approximately $6.0 million)developed a new five year strategic business plan driven by perceived slower growth in the metal bearing components market and a need to create diversification in served customers and end markets. Consistent with our new strategy, on November 30, 2006, we purchased 100% of equipmentthe shares of Whirlaway Corporation from the sole shareholder for $45.6 million. Whirlaway is a high precision metal component and intangibles.fluid control assembly manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries. Whirlaway produces highly engineered fluid control components and assemblies, shafts, and prismatic machined parts. Whirlaway has three locations in Ohio and through its wholly-owned subsidiary, Triumph, LLC, one location in Tempe, Arizona. The implementation and successful execution of this acquisition strategy to date has allowed the Company to expand its global presence and positions the Company for continued global growth and expansion into core served markets. Our significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, inventory valuation, asset impairment recognition, business combination accounting and pension and post-retirement benefits. Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the Company’s business operations, financial condition and results of operations. There can be no assurance that actual results will not significantly differ from the estimates used in these critical accounting policies. Revenue Recognition. The Company recognizes revenues based on the stated shipping terms with the customer and the Company recognizes revenue when these terms are satisfied and the risks of ownership are transferred to the customer. The Company has an inventory management program for certain major ball and rollerMetal Bearing Components Segment customers whereby revenue is recognized when products are used by the customer from consigned stock, rather than at the time of shipment. Under both circumstances, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sellers’ price is determinable and collectibility is reasonably assured. Accounts Receivable. Accounts receivable are recorded upon recognition of a sale of goods and ownership and risk of loss is assumed by the customer. Substantially all of the Company’s accounts receivable is due primarily from the core served markets: bearing manufacturers, automotive industry, electronics, industrial, agricultural and aerospace. The Company experienced $0.3 million of bad debt expense during 2006 and 2005 and $0 during 2004 and $0.1 million during 2003.2004. In establishing allowances for doubtful accounts, the Company performs credit evaluations of its customers, considering numerous inputs when available including the customers’ financial position, past payment history, relevant industry trends, cash flows, management capability, historical loss experience and economic conditions and prospects. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk of being uncollectible. While management believes that adequate allowances for doubtful accounts have been provided in the Consolidated Financial Statements, it is possible that the Company could experience additional unexpected credit losses. Inventories. Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company’s inventories are not generally subject to obsolescence due to spoilage or expiring product life cycles. The Company assesses inventory obsolescence routinely and records a reserve when inventory items are deemed non recoverable in future periods. The Company operates generally as a make-to-order business; however, the Company also stocks products for certain customers in order to meet delivery schedules. While management believes that adequate write-downs for inventory obsolescence have been made in the Consolidated Financial Statements, the Company could experience additional inventory write-downs in the future.
Acquisitions and Acquired Intangibles. For new acquisitions, the Company uses estimates, assumptions and appraisals to allocate the purchase price to the assets acquired and to determine the amount of goodwill. These estimates are based on market analyses and comparisons to similar assets. Annual tests are required to be performed to assess whether recorded goodwill is impaired. The annual tests require management to make estimates and assumptions with regard to the future operations of its reporting units, and the expected cash flows that they will generate. These estimates and assumptions therefore impact the recorded value of assets acquired in a business combination, including goodwill, and whether or not there is any subsequent impairment of the recorded goodwill and the amount of such impairment. Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has three locations that are currently incurring net operating losses. Management has currently recognized the deferred tax assets from these net operating losses as managment believes these potential tax benefits will be ultimately realized. However, should profitability not improve as expected, management may need to record valuation allowances against these deferred tax assets in the future. (See Note 14 of the Notes to Consolidated Financial Statements). Impairment of Long-Lived Assets. The Company’s long-lived assets include property, plant and equipment. The recoverability of the long-term assets is dependent on the performance of the companies which the Company has acquired, as well as volatility inherent in the external markets for these acquisitions. In assessing potential impairment for these assets the Company will consider these factors as well as forecasted financial performance. For assets held for sale, appraisals are relied upon to assess the fair market value of those assets. Future adverse changes in market conditions or adverse operating results of the underlying assets could result in the Company having to record additional impairment charges not previously recognized. Pension Obligations. The Company uses several assumptions in determining its periodic pension and post-retirement expense and obligations which are included in the Consolidated Financial Statements. These assumptions include determining an appropriate discount rate, rate of compensation increase as well as the remaining service period of active employees. The following table sets forth for the periods indicated selected financial data and the percentage of the Company'sCompany’s net sales represented by each income statement line item presented. | As a Percentage of Net Sales Year ended December 31, |
| | 2005 | | 2004 | | 2003 | | 2006 | 2005 | 2004 | Net sales | | 100.0% | | 100.0% | | 100.0% | | 100.0% | 100.0% | Cost of product sold (exclusive of depreciation shown separately below) | | 77.4 | | 79.0 | | 77.2 | | 78.0 | 77.4 | 79.0 | Selling, general and administrative expenses | | 9.0 | | 9.8 | | 8.6 | | 9.1 | 9.0 | 9.8 | Depreciation and amortization | | | 5.1 | | | 5.3 | | | 5.4 | | 5.3 | 5.1 | 5.3 | (Gain) loss on disposal of assets | | | (0.1 | ) | | 0.3 | | | (0.1 | ) | (0.2) | (0.1) | 0.3 | Restructuring and impairment costs | | | (0.1 | ) | | 0.8 | | | 1.0 | | -- | (0.1) | 0.8 | Income from operations | | | 8.7 | | | 4.8 | | | 7.9 | | 7.8 | 8.7 | 4.8 | Interest expense | | | 1.2 | | | 1.3 | | | 1.3 | | 1.2 | 1.2 | 1.3 | Other income | | | (0.2 | ) | | (0.2 | ) | | 0.1 | | (0.4) | (0.2) | Income before provision for income taxes | | | 7.7 | | | 3.7 | | | 6.5 | | 7.0 | 7.7 | 3.7 | Provision for income taxes | | | 3.0 | | | 1.4 | | | 2.2 | | 2.6 | 3.0 | 1.4 | Minority interest in income of consolidated subsidiary | | | -- | | | -- | | | 0.3 | | | Net income | | | 4.7 | % | | 2.3 | % | | 4.0 | % | 4.4% | 4.7% | 2.3% |
Off Balance Sheet Arrangements We have operating lease commitments for machinery, office equipment, vehicles, manufacturing and office space which expire on varying dates. The following is a schedule by year of future minimum lease payments as of December 31, 20052006 under operating leases that have initial or remaining non-cancelable lease terms in excess of one year (in thousands). Year ended December 31, | 2007 | | $ 3,890 | 2008 | | 3,632 | 2009 | | 3,076 | 2010 | | 2,626 | 2011 | | 2,327 | Thereafter | | 8,593 | | | | Total minimum lease payments | | $ 24,144 |
Year ended December 31, | | | | | | 2006 | | $ | 2,093 | | 2007 | | | 1,843 | | 2008 | | | 1,551 | | 2009 | | | 1,469 | | 2010 | | | 1,420 | | Thereafter | | | 11,748 | | | | | | | Total minimum lease payments | | $ | 20,124 | |
Sales Concentration
Sales to various U.S. and foreign divisions of SKF, which is one of the largest bearing manufacturers in the world, accounted for approximately 47%46% of consolidated net sales in 2005,2006, and sales to Schaeffler Group (INA) accounted for approximately 13%11% of consolidated net sales in 2005. Sales to various divisions of the Timken Company accounted for approximately 6% of our net sales in 2005.2006. During 2005,2006, our ten largest customers accounted for approximately 81% of our consolidated net sales. None of our other customers individually accounted for more than 5%10% of our consolidated net sales for 2005.2006. The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and would lower our operating profit margin and cash flows from operations. The Prior to 2006, Schaeffler Group (INA) and SKF agreements for precision steel balls expire on June 30, 2006 and July 31, 2006, respectively. Schaeffler Group (INA) has decided to in-source approximately $12 millionone-third of annual businessvolume to theirits internal ball manufacturing facility in Germany.Germany, which in 2005 and 2006 resulted in a $9.0 million or 20% reduction in sales. This representsrepresented approximately 30% of the existing Schaeffler Group (INA) business.business at that time. We are in the process of negotiatingnegotiated a long termtwo-year supply agreement effective July 1, 2006 with Schaeffler Group (INA) for the remaining business. In addition, we are in process of negotiating a new long term agreement with SKF to replace the one for precision balls that expiresexpired July 31, 2006 and was informally extended to December 2006. A new multi-year contract is expected to be signed with SKF has informally agreed in principlethe first quarter of 2007 and be effective January 1, 2007.
Year ended December 31, 2006 compared to carry the current agreementyear ended December 31, 2005 Overall Results
| 2006 NN, Inc. before Acquisition | Whirlaway December 2006 | Consolidated 2006 | Consolidated 2005 | Change | Net sales | $ 325,603 | $ 4,722 | $ 330,325 | $ 321,387 | $ 8,938 | Cost of products sold | 252,997 | 4,706 | 257,703 | 248,828 | 8,875 | Selling, general and administrative expense | 29,645 | 363 | 30,008 | 29,073 | 935 | Depreciation and amortization | 17,147 | 345 | 17,492 | 16,331 | 1,161 | Restructuring and Impairment | (65) | -- | (65) | (342) | 277 | Gain on sale of fixed assets | (705) | -- | (705) | (391) | (314) | Interest | 3,743 | 240 | 3,983 | 3,777 | 206 | Other (income) loss | (1,050) | 2 | (1,048) | (653) | (395) | Pre-tax income (loss) | 23,891 | (934) | 22,957 | 24,764 | (1,807) | Taxes | 8,858 | (336) | 8,522 | 9,752 | (1,230) | Net income (loss) | $ 15,033 | $ (598) | $ 14,435 | $ 15,012 | $ (577) |
The table above includes the results of the traditional segments of NN, Inc., Metal Bearing Components and Plastic and Rubber Components, plus one month of operations of Whirlaway Corporation. Whirlaway was acquired November 30, 2006 and operations from December 1 to December 31, 2006 are included in the consolidation of NN, Inc. The month of December 2006 results of Whirlaway are not indicative of normalized annual operations. December is normally a low volume month as many of Whirlaway’s customers shut down over the holidays. Additionally, the cost of products sold includes the elimination of the required step-up of inventory to sales value recorded as part of purchase accounting under SFAS 141 of $0.6 million. When recorded in the opening balance sheet as of November 30, 2006, this step-up represented the profit to be earned on the inventory purchased. As for the traditional segments of NN, overall net income was unchanged from the prior year at $15.0 million. Sales increases from passing on raw material inflation were offset by raw material inflation having little impact on net income. Increases in selling, general and administrative cost and depreciation and amortization were offset by foreign exchange gains from the appreciation of Slovakia Koruna, the gain on sale of excess land at our Pinerolo plant, and an overall lower effective tax rate. Sales were up due to price increases from passing through to customers the impact of raw material inflation. Sales were also up to a lesser extent from positive currency translation of Euro-denominated sales. These increases were partially offset by volume losses to two long-term customers and the unfavorable effect of product mix. In one case, the volume loss was due to the customer’s strategic decision to begin to manufacturer certain products for themselves. In the other case, the volume loss was due to a downturn in the US automotive market. These volume losses were partially offset by volume gains at newer customers. Cost of products sold increased primarily due to inflation in material cost, labor, and energy. In addition, cost of products sold increased due to the ongoing start-up of our China and Slovakian manufacturing facilities. Both of these facilities are not yet operating at optimum capacity as expansion is ongoing and should be complete at both locations in 2007. Offsetting a majority of these increases are savings from our Level 3 program and other cost reduction initiatives. As mentioned above, a majority of the raw material inflation is offset by raw material pass-through to customers. These sales increases offset material inflation and do not improve net income. Selling, general and administrative costs are higher due primarily to the effects of expensing stock options as a result of the adoption of SFAS 123(R). The depreciation and amortization cost are higher in 2006 due to starting depreciation on the fixed assets placed in service with operations of China and Slovakia and the amortization of the customer intangibles acquired in 2006 related to the SNR equipment purchase. In 2006, we had a gain related to the disposal of excess land and building of $1.8 million which was partially offset by a loss on disposal of excess equipment of $1.1 million at our Pinerolo facility. In 2005,we had a gain from the sale of excess land at the Veenendaal manufacturing facility. Finally, the corporate tax rate was lower in 2006 due to a larger portion of the profit in Europe coming from lower tax cost countries, the reduction in tax rate in the Netherlands, from the gain on sale of land being taxed at a lower capital gains rate, and the recognition of certain deferred tax assets. RESULTS BY SEGMENT METAL BEARING COMPONENTS SEGMENT
(In Thousands of Dollars) | | | | | 2006 | 2005 | Change | | | | | | Net sales | | $ 272,299 | $ 263,485 | $ 8,814 | | | | | | Segment profit | | $ 18,331 | $ 18,725 | $ (394) |
The revenue increase in the Metal Bearing Components Segment was primarily due to price increases related to raw material inflation pass-through to customers ($8.9 million), and to a lesser extent, the positive impact of a stronger Euro ($1.6 million). Planned reductions in sales from existing customers were more than offset by increased sales to new customers resulting in a net volume increase ($2.6 million). Price decreases to existing customers and a less favorable mix of bearing products sold had a negative impact ($4.3 million). The negative impacts to segment profit after tax were from the price decreases and unfavorable product mix ($2.2 million). In addition, both our China and Slovakia operations continue to have operational inefficiencies due to transitioning in production and product lines, and each location not running at optimal capacity ($2.1 million). Finally, depreciation and amortization expense was higher due to depreciation and amortization of machinery in China and Slovakia and contract intangibles from the SNR machinery purchase ($0.7 million). Mostly offsetting these negative impacts were the sales price increases, from passing through raw material cost inflation to customers, and cost reduction initiatives more than offsetting material, labor, and utility inflation ($2.8 million). In addition, the net volume increases added $0.7 million to segment profit. The gain from the sale of land at Pinerolo, net of machinery disposals, added $0.5 million. Finally, favorable foreign exchange impacts from the appreciation of the Slovakia Koruna and Euro favorably impacted segment profit by $0.7 million. PRECISION METAL COMPONENTS SEGMENT
(In Thousands of Dollars) | | | | | 2006 | 2005 | Change | | | | | | Net sales | | $ 4,722 | $ -- | $ 4,722 | | | | | | Segment loss | | $ (598) | $ -- | $ (598) |
The Precision Metal Components Segment was added on November 30, 2006 with the purchase of Whirlaway. Therefore the segment's results are only for one month ending December 31, 2006. The month of December 2006 results of Whirlaway are not indicative of normalized annual operations. December is normally a low volume month as many of Whirlaway's customers shut down over the holidays. Additionally, the cost of products sold includes the elimination of the step-up of inventory to sales value recorded as part of purchase accounting under SFAS 141. When recorded in the opening balance sheet as of December 1, 2006, this step-up represented the profit to be earned on the inventory purchased.
Based on pro-forma results, 2006 and 2005 revenues for the Precision Metal Components Segment would have been $77,713 and $71,862 respectively. PLASTICS AND RUBBER COMPONENTS SEGMENT
(In Thousands of Dollars) | | | | 2006 | 2005 | Change | | | | | | Net sales | | $ 53,304 | $ 57,902 | $ (4,598) | | | | | | Segment profit | | $ 2,695 | $ 1,673 | $ 1,022 |
21
Sales at the Plastics and Rubber Components Segment were down $4.6 million primarily due to lower sales volume to one large customer resulting from the downturn in the U.S. automotive market ($6.2 million) partially offset by targeted price increases in the plastics portion of the segment ($1.7 million).The increase in segment profit, after tax, at the Plastics and Rubber Components Segment was due to the price increases ($1.1 million) and to cost saving initiatives in the areas of material usage, labor efficiency, and overhead cost ($1.6 million). These increases were partially offset by raw material and utilities inflation ($0.2 million) and the impact, net of cost of products sold, of reductions in sales volume ($1.5 million.)
Year ended December 31, 2005 compared to the year ended December 31, 2004
Overall Results by Segment (in thousands)
| | Domestic Ball and Roller Segment | | NN Europe Segment | | Plastic and Rubber Components Segment | | NN, Inc. | | NN, Inc. | | | 2005 | | 2004 | | Change $ | | 2005 | | 2004 | | Change $ | | 2005 | | 2004 | | Change $ | | 2005 | | 2004 | | Change $ | | 2005 | 2004 | Change | Net sales | | $ | 66,088 | | $ | 58,435 | | $ | 7,653 | | $ | 197,397 | | $ | 193,930 | | $ | 3,467 | | $ | 57,902 | | $ | 51,724 | | $ | 6,178 | | $ | 321,387 | | $ | 304,089 | | $ | 17,298 | | $321,387 | $304,089 | $17,298 | Cost of products sold | | | 46,849 | | | 42,268 | | | 4,581 | | | 153,681 | | | 154,174 | | | (493 | ) | | 48,298 | | | 44,138 | | | 4,160 | | | 248,828 | | | 240,580 | | | 8,248 | | 248,828 | 240,580 | 8,248 | Selling, general and administrative expense | | | 11,094 | | | 10,619 | | | 475 | | | 14,368 | | | 15,204 | | | (836 | ) | | 3,611 | | | 3,932 | | | (321 | ) | | 29,073 | | | 29,755 | | | (682 | ) | 29,073 | 29,755 | (682) | Depreciation and amortization | | | 3,572 | | | 3,662 | | | (90 | ) | | 10,278 | | | 9,893 | | | 385 | | | 2,481 | | | 2,578 | | | (97 | ) | | 16,331 | | | 16,133 | | | 198 | | 16,331 | 16,133 | 198 | Restructuring and Impairment | | | - | | | 108 | | | (108 | ) | | (342 | ) | | 2,290 | | | (2,632 | ) | | - | | | - | | | - | | | (342 | ) | | 2,398 | | | (2,740 | ) | (342) | 2,398 | (2,740) | Gain (loss) on sale of fixed assets | | | - | | | 755 | | | (755 | ) | | (391 | ) | | 101 | | | (492 | ) | | - | | | - | | | - | | | (391 | ) | | 856 | | | (1,247 | ) | | (Gain) loss on sale of fixed assets | | (391) | 856 | (1,247) | Interest | | | 2,226 | | | 1,639 | | | 587 | | | 585 | | | 1,423 | | | (838 | ) | | 966 | | | 967 | | | (1 | ) | | 3,777 | | | 4,029 | | | (252 | ) | 3,777 | 4,029 | (252) | Other (income) loss | | | (279 | ) | | 171 | | | (450 | ) | | (272 | ) | | (1,009 | ) | | 737 | | | (102 | ) | | (15 | ) | | (87 | ) | | (653 | ) | | (853 | ) | | 200 | | (653) | (853) | 200 | Pre-tax income | | | 2,626 | | | (787 | ) | | 3,413 | | | 19,490 | | | 11,854 | | | 7,636 | | | 2,648 | | | 124 | | | 2,524 | | | 24,764 | | | 11,191 | | | 13,573 | | | Pre-tax income (loss) | | 24,764 | 11,191 | 13,573 | Taxes | | | 1,351 | | | 1,143 | | | 208 | | | 7,426 | | | 4,546 | | | 2,880 | | | 975 | | | (1,600 | ) | | 2,575 | | | 9,752 | | | 4,089 | | | 5,663 | | 9,752 | 4,089 | 5,663 | Net income | | $ | 1,275 | | $ | (1,930 | ) | $ | 3,205 | | $ | 12,064 | | $ | 7,308 | | $ | 4,756 | | $ | 1,673 | | $ | 1,724 | | $ | (51 | ) | $ | 15,012 | | $ | 7,102 | | $ | 7,910 | | | Net income (loss) | | $15,012 | $7,102 | $7,910 |
Net Sales. sales. Overall sales increased $17.3 million, or 6%, due to price increases from the pass through to customers of raw material price changesinflation of $11.4 million, from new market share and volume gains of $4.6 million and favorable foreign currency exchange of $1.3 million. Sales increased in the Domestic Ball and Roller Segment due to price increases related to the pass through to customers of raw material price changes of $5.5 million and new market share and volume gains of $2.2 million. The increases in the NN Europe Segment were due to the pass through to customers of raw material price changes of $4.4 million and favorable foreign currency exchange of $1.3 million offset by lower volume of $2.2 million. Sales at the Plastic and Rubber Components Segment increased $4.7 million due to market share gains and volume gains from existing business and $1.5 million due to price increases in the second half of 2005. Cost of Products Soldproducts sold (exclusive of depreciation reported separately below).. Cost of Products Soldproducts sold increased by $8.3 million, or 3%, due to the sales volume increase offset by improvements in manufacturing efficiency. The cost reductions from the Level 3 program (the Company’s cost reduction and quality improvement initiative) and other cost reduction projects account for this difference. The increase in cost of goods sold in the Domestic Ball and Roller Segment is due to higher material cost, labor inflation, transport and energy inflation of $4.8 million and higher volume of $0.7 million, offset by Level 3 and other cost reduction initiatives of $0.9 million. The increase in the NN Europe Segment is due to higher material costs of $4.8 million and unfavorable foreign currency exchange of $1.2 million, offset by reduced variable costs due to lower volume of $1.7 million, and Level 3, savings from Eltmann restructuring, and other cost reduction initiatives of $4.8 million. The increase in the Plastic and Rubber Components Segment is due to $2.7 million in raw material increases and $3.2 million in higher variable costs due to volume, partially offset by decreases of $1.7 million due to savings from Level 3 and other cost reduction initiatives.
Selling, Generalgeneral and Administrative Expenses. administrative expenses. Selling, general and administrative expenses decreased by $0.7 million, or 2%. Overall SG&A cost are down due to lower spending on Sarbanes-Oxley cost (SOX 404)compliance ("SOX 404") , severance cost,costs, legal, consulting and computer maintenance cost,costs, partially offset by an increase in the NN Asia startup costs. The Domestic Ball and Roller Segment’s costs were up due to higher startup cost in Asia of $0.6 million, the impact of a reserve for potentially uncollectible receivables of Delphi Corporation due to bankruptcy filing of $0.2 million, and foreign exchange transaction losses of $0.3 million, partially offset by savings on SOX 404 cost of $0.6 million. The NN Europe Segment’s costs are down due to reductions in consulting costs of $0.4 million and computer maintenance cost of $0.4 million. The costs for the Plastic and Rubber Components Segment were down due to severance costs spent in 2004 which were not incurred in 2005.
Depreciation and amortization. amortization. Overall depreciation increased $0.2 million, or 1%, due primarily to higher depreciation cost resulting from the investment of fixed assets in Slovakia in late 2004 and 2005.
(Gain) loss on disposal of assets.assets. In 2005, the NN Europe segmentMetal Bearing Components Segment had a gain of $0.4 million principally from the sale of excess land at our Veenendaal manufacturing facility. In 2004, the Domestic Ball and Roller Segmentsegment had a loss of $0.8 million related to the sale of the idle Walterboro, South Carolina land and building assets.
Restructuring and impairment costs. costs. In 2004, the NN EuropeMetal Bearing Components Segment incurred $2.3 million of restructuring costs related to severance cost for approximately 83 employees at our Eltmann, Germany ball production facility. In 2005, we determined that a portion of the Eltmann restructuring charges would not be incurred as expected, creating a benefit of $0.3 million.
Interest expense. Interest expense decreased due to a reduction of debt of our NN Europe SegmentEuropean debt of approximately $16.4 million dollars. This reduction was partially offset by increased interest cost in our Ball and Roller Segment due to higher borrowings in addition toand increased interest rates on our variable-rate debt.
Net Incomeincome. Net income increased $7.9 million or 111% in 2005 compared with 2004 due primarily to higher revenue resulting from price increases from the pass through to customers of raw material price changes, growth with existing customers and new customerscustomers. RESULTS BY SEGMENT METAL BEARING COMPONENTS SEGMENT (In Thousands of Dollars) | | | | | 2005 | 2004 | Change | | | | | | Net sales | | $ 263,485 | $ 252,365 | $ 11,120 | | | | | | Segment Profit | | $ 18,725 | $ 9,517 | $ 9,208 |
The increase in segment profit, after tax, is due primarily to price increases from passing through raw material inflation ($6.1 million) and reductions in variable costs due to Level 3 savings, savings from Eltmann restructuring, and other cost reduction initiatives ($4.2 million) more than offsetting inflation ($5.8 million). Results by Segment (in thousands)
| | Domestic Ball and Roller Segment | | NN Europe Segment | | Plastic and Rubber Components Segment | | NN, Inc. | | | | 2004 | | 2003 | | Change $ | | 2004 | | 2003 | | Change $ | | 2004 | | 2003 | | Change $ | | 2004 | | 2003 | | Change $ | | Net sales | | $ | 58,435 | | $ | 55,437 | | $ | 2,998 | | $ | 193,930 | | $ | 147,127 | | $ | 46,803 | | $ | 51,724 | | $ | 50,898 | | $ | 826 | | $ | 304,089 | | $ | 253,462 | | $ | 50,627 | | Cost of products sold | | | 42,268 | | | 39,162 | | | 3,106 | | | 154,174 | | | 114,312 | | | 39,862 | | | 44,138 | | | 42,184 | | | 1,954 | | | 240,580 | | | 195,658 | | | 44,922 | | Selling, general and administrative expense | | | 10,619 | | | 7,307 | | | 3,312 | | | 15,204 | | | 10,933 | | | 4,271 | | | 3,932 | | | 3,460 | | | 472 | | | 29,755 | | | 21,700 | | | 8,055 | | Depreciation and amortization | | | 3,662 | | | 3,610 | | | 52 | | | 9,893 | | | 7,546 | | | 2,347 | | | 2,578 | | | 2,535 | | | 43 | | | 16,133 | | | 13,691 | | | 2,442 | | Restructuring and Impairment | | | 108 | | | 105 | | | 3 | | | 2,290 | | | - | | | 2,290 | | | - | | | 2,385 | | | (2,385 | ) | | 2,398 | | | 2,490 | | | (92 | ) | Gain (loss) on sale of fixed assets | | | 755 | | | (147 | ) | | 902 | | | 101 | | | - | | | 101 | | | - | | | - | | | - | | | 856 | | | (147 | ) | | 1,003 | | Interest | | | 1,639 | | | 908 | | | 731 | | | 1,423 | | | 1,401 | | | 22 | | | 967 | | | 1,083 | | | (116 | ) | | 4,029 | | | 3,392 | | | 637 | | Other (income) loss | | | 171 | | | 372 | | | (201 | ) | | (1,009 | ) | | (90 | ) | | (919 | ) | | (15 | ) | | (183 | ) | | 168 | | | (853 | ) | | 99 | | | (952 | ) | Pre-tax income | | | (787 | ) | | 4,120 | | | (4,907 | ) | | 11,854 | | | 13,025 | | | (1,171 | ) | | 124 | | | (566 | ) | | 690 | | | 11,191 | | | 16,579 | | | (5,388 | ) | Taxes | | | 1,143 | | | 2,117 | | | (974 | ) | | 4,546 | | | 4,858 | | | (312 | ) | | (1,600 | ) | | (1,249 | ) | | (351 | ) | | 4,089 | | | 5,726 | | | (1,637 | ) | Minority Interest | | | | | | | | | | | | | | | 675 | | | (675 | ) | | | | | | | | | | | | | | 675 | | | (675 | ) | Net income | | $ | (1,930 | ) | $ | 2,003 | | $ | (3,933 | ) | $ | 7,308 | | $ | 7,492 | | $ | (184 | ) | $ | 1,724 | | $ | 683 | | $ | 1,041 | | $ | 7,102 | | $ | 10,178 | | $ | (3,076 | ) |
Net Sales. Our net sales increased by $50.6 million, or 20.0%. Net sales of our NN Europe Segment increased $46.8 million or 31.8%. TheAdditionally there was a positive impact of a full year’s activity in 2004 from our Veenendaal, The Netherlands tapered roller and metal retainer operation acquired on May 2, 2003 accounted for $17.2 million of the increase. Impacts of foreign currency translation within the NN Europe Segment contributed $15.9 million of the increase. The remaining increase of $13.7 million within the NN Europe Segment is a result of increased product demand. Net sales of our Domestic Ball and Roller Segment increased $3.0 million or 5.4% principally due to increases in product demand. Net sales of our Plastic and Rubber Components Segment increased $0.8 million or 1.6% principally due to increases in product demand.
Cost of Products Sold. Ourrestructuring cost of products sold increased by $44.9 million or 23.0%. Within our NN Europe Segment the impact of a full year’s activity in$1.7 million. In 2004, from our Veenendaal, The Netherlands tapered roller and metal retainer operation acquired on May 2, 2003 accounted for $14.4 million of the increase. Impacts of foreign currency translation within the NN Europe Segment contributed $15.3 million of the increase. The remaining increase of $10.2 million within the NN Europe Segment is a result of increased product demand, increases in material cost and the impact of inventory reductions. Cost of products sold of our Domestic Ball and Roller Segment increased principally due to increases in product demand and increases in raw material steel cost. Cost of products sold of our Plastic and Rubber Components Segment principally due to increases in product demand and the impact of inventory reductions. As a percentage of net sales, cost of products sold increased from 77.2% in 2003 to 79.0% in 2004.
The price of steel has risen over the last twelve to eighteen months with the potential for 2005 prices to reflect even greater increases. The increase is principally due to general increases in global demand and, more recently, due to China’s increased consumption of steel. This has had the impact of increasing scrap surcharges we pay in procuring our steel in the form of higher unit prices and scrap surcharges and could adversely impact the availability of steel. Our contracts with key customers allow us to pass a majority of the steel price increases on to those customers. However, by contract, material price changes in any given year are typically passed along with price adjustments in January of the following year. Until the current increases can be passed through to our customers, income from operations, net income and cash flow from operations will be adversely affected.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $8.1 million or 37.1%. Within our NN Europe Segment the impact of a full year’s activity in 2004 from our Veenendaal, The Netherlands tapered roller and metal retainer operation acquired on May 2, 2003 accounted forincurred $1.5 million of the increase. Impacts of foreign currency translation within the NN Europe Segment contributed $1.4 millionrestructuring costs related to severance cost for approximately 83 employees at our Eltmann, Germany ball production facility. In 2005, we determined that a portion of the increase. The remaining increaseEltmann restructuring charges would not be incurred as expected, creating a benefit of $1.4$0.2 million.
In 2005, the Metal Bearing Components Segment had a gain of $0.3 million withinprincipally from the NN Europe Segment issale of excess land at our Veenendaal manufacturing facility. In 2004, the segment had a loss of $0.5 million related to the start-up of our previously announced Level 3 program which integrates the principles of Lean Enterprise, Six Sigma and Total Productive Maintenance (the “Level 3 Program”), expenses associated with our Slovakia ball production facility and severance costs. Selling, general and administrative expenses of our Domestic Ball and Roller Segment increased $3.3 million principally related to Sarbanes-Oxley compliance efforts in the area of internal controls, the Level 3 program and costs associated with the start-up of NN Asia. Selling, general and administrative expenses of our Plastic and Rubber Components Segment increased $0.5 million principally related to the Level 3 program and costs associated with employee severance. As a percentage of net sales, selling, general and administrative expenses increased from 8.6% in 2003 to 9.8% in 2004.
Depreciation and amortization. Depreciation and amortization expense increased $2.4 million or 17.8% all within the NN Europe Segment.. Of this amount, the impact of a full year’s activity in 2004 from our Veenendaal, The Netherlands tapered roller and metal retainer operation acquired on May 2, 2003 accounted for $1.0 million of the increase. Impacts of foreign currency translation within the NN Europe Segment contributed $0.9 million of the increase. The remaining increase of $0.5 million within the NN Europe Segment is related to our Slovakia ball production facility and capital spending increases. There was no change to depreciation and amortization expense within the Domestic Ball and Roller Segment and the Plastic and Rubber Components Segment. As a percentage of net sales, depreciation and amortization expenses decreased from 5.4% in 2003 to 5.3% in 2004.
(Gain) loss on disposal of assets. Within the Domestic Ball and Roller Segment, the loss recorded in 2004 is principally associated with the December 2004 sale of ourthe idle Walterboro, South Carolina land and building assets. This ball production facility
Finally, Metal Bearing Components Segment income, net of tax, increased due to selling, general and administrative expense savings in the areas of professional fees related to SOX 404 compliance, reductions in consulting costs, net of tax, and reductions in computer maintenance cost, partially offset by higher startup cost at NN Asia and the impact of a reserve for potentially uncollectible receivables of Delphi Corporation due to bankruptcy filing ($0.9 million). Additionally, interest cost was closedlower ($0.7 million) due to repayment of segment debt and depreciation expense increased ($0.1 million) due primarily to higher depreciation cost resulting from the investment of fixed assets in 2001 as a part of our ongoing strategy to locate manufacturing capacitySlovakia in closer proximity to our customers. The loss on disposal of assets was 0.3% of net sales in 2004.late 2004 and 2005. PLASTICS AND RUBBER COMPONENTS SEGMENT
Restructuring(In Thousands of Dollars) | | | | 2005 | 2004 | Change | | | | | | Net sales | | $ 57,902 | $ 51,724 | $ 6,178 | | | | | | Segment Profit | | $ 1,673 | $ 1,724 | $ (51) |
Sales at the Plastic and impairment costs. Restructuring and impairment costs decreased by $0.1 million. In 2004, the $2.3Rubber Components Segment increased $4.6 million of restructuring and impairment costs is related to severance costs and related charges for approximately 86 employees at our Eltmann, Germany ball production facility, a component of the NN Europe Segment. In 2003, the $2.4 million of restructuring and impairment costs are related to asset impairments, severance and lease exit costs due to market share gains and volume gains from existing business and $1.5 million due to price increases in the closingsecond half of our Guadalajara, Mexico plastic injection molding facility. As a percentage of net sales, restructuring and impairment costs decreased from 1.0% in 2003 to 0.8% in 2004.2005.
Interest expense. Interest expense increased $0.6The decrease in the Plastic and Rubber Components Segment profit, after tax, is due to $2.0 million or 18.8%. Of this amount, approximately $0.4in raw material, wage and energy
inflation offset by $0.9 million is relatedbenefit due to the April 26, 2004 issuancesales volume increases and decreases in cost of our $40.0products sold of $1.0 million aggregate principal amount of senior notes in a private placement. These notes bear interest at a fixed rate of 4.89%. See “Liquiditydue to savings from Level 3 and Capital Resources.” Within our NN Europe Segment, $0.1 million is related the impacts of foreign currency translation. As a percentage of net sales, interest expense was unchanged at 1.3% in 2003 and 2004.other cost reduction initiatives.
Net income. Net income decreased $3.1 million or 30.2%. As a percentage of net sales, net income decreased from 4.0% in 2003 to 2.3% in 2004.
On May 1, 2003 in connection withSeptember 21, 2006, the purchase of SKF’s Veenendaal component manufacturing operations and SKF’s 23 percent interest in NN Europe, weCompany entered into a $90five-year $90.0 million syndicatedrevolving credit facility maturing in September 2011 with KeyBank as administrative agent. This facility can be increased to a maximum of $120.0 million under certain conditions specified in the agreement. The credit facility provides the Company the ability to borrow in US dollars at LIBOR plus an applicable margin of .60% to .925% or Euros at EURIBOR plus an applicable margin of .60% to .925%. The facility has a $10.0 million swing line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. Costs associated with entering into the revolving credit facility werecapitalized and will be amortized into interest expense over the life of the facility. As of December 31, 2006, $511 of net capitalized loan origination cost was on the balance sheet within other assets and the gross costs were presented in the Financing Activities section of the Statement of Cash Flows. This credit facility replaced our prior $90.0 million credit facility with AmSouth Bank (“AmSouth”) as the administrative agent and SunTrust Bank as the Euro loan agent for the lenders under which we borrowed $60.4 million and 26.3 million Euros ($29.6 million) (the “$90 million credit facility”). This financing arrangement replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg, S.A. The credit facility as originally entered into consisted of a $30.0 million revolver (“$30.0 million revolver”) originally expiring on March 15, 2005, and subsequently extended to June 30, 2007 bearing interest at a floating rate equal to LIBOR (4.54% at December 31, 2005) plus an applicable margin of 1.25% to 2.0%, a $30.4 million term loan expiring on May 1, 2008, bearing interest at a floating rate equal to LIBOR (4.54% at December 31, 2005) plus an applicable margin of 1.25% to 2.0% and a 26.3 million Euro ($29.6 million) term loan (“26.3 million Euro term loan”) expiring on May 1, 2008 which bears interest at a floating rate equal to Euro LIBOR (2.49% at December 31, 2005) plus an applicable margin of 1.25% to 2.0%. All amounts owed under the $30.4 million term loan were paid during the second quarter of 2004 with the proceeds from our issuance of $40 million aggregate principal amount of senior notes in a private placement and we no longer have borrowing capacity under that portion of the $90 million credit facility. The terms of the $30.0 million revolver and the 26.3 million Euro term loan remain unchanged except for the maturity date of the $30.0 million revolver has been extended to June 30, 2007.agent. The loan agreement contains customary financial and non-financial covenants. Such covenants specifyspecifying that we must maintain certain liquidity measures. The loan agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitionsmerger, acquisition and other fundamental changes in the Company’s business. The credit agreement is un-collateralized except forcollateralized by the pledge of stock of certain foreign and domestic subsidiaries and guarantees of certain domestic subsidiaries. We were in compliance with all such covenants as ofAt December 31, 2005.2006, we have $50.5 million of availability under the $90.0 million facility. Subsequent to year end, $18.6 million of the credit facility was used to pay off a note payable to a related party. In connection with the acquisition of KLF’s operations in Slovakia, on September 23, 2003 we entered into a $2.0 million short-term unsecured promissory note (the “$2.0 million note”) with AmSouth as the lender. This note bore interest at the prime rate. All amounts owed under this note were paid during the second quarter of 2004 with the proceeds from our $40 million notes.25
On March 23, 2004 we entered into a $2.7 million short-term promissory note (the “$2.7 million note”) with AmSouth Bank (“AmSouth”) as the lender. This note bore interest at the prime rate. This agreement was entered into to fund short term operating capital requirements. All amounts owed under this note were paid during the second quarter of 2004 with the proceeds from our $40 million notes.
On April 26, 2004, we issued $40.0 million aggregate principal amount of senior notes in a private placement (the “$40 million notes”). These notes bear interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid semi-annually. As of December 31, 2005,2006, $40.0 million remained outstanding. Annual principal payments of approximately $5.7 million begin on April 26, 2008 and extend through the date of maturity. Proceeds from this credit facility were used to repay our existing US dollar denominated term loan, $24 million, and repay a portion, of our borrowings under our US dollar denominated revolving credit facility, $13 million, which are both components of our $90 million credit facility, and to repay borrowings remaining under our $2.0 million note and our $2.7 million note of $2 million and $1 million, respectively. The agreement contains customary financial and non-financial covenants. Such covenants specify that we must maintain certain liquidity measures. The agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business. No event of default had occurred as of December 31, 2005. The notes are not collateralized except forby the pledge of stock of certain foreign subsidiaries. We incurred $0.8 million of related costs as a result of issuing these notes which have been recorded as a component of other non-current assets and are being amortized over the term of the notes. In connection We were in compliance with all covenants related to the issuance of the $40 million notes, capitalized costs in the amount of approximately $0.3 million associated with structuring of the $90$90.0 million credit facility were written off duringand the twelve months ended$40.0 million senior notes as of December 31, 2004 and are included as a component of other (income) expense.2006. During May 2003, we completed a public offering of 3.6 million shares of our stock by a group of selling shareholders. We did not receive any proceeds from the sale of the shares previously held by the group of selling shareholders; however, the underwriters did exercise their over-allotment option of 533,600 shares, which were offered by us. Net proceeds received by us in connection with the exercise of the over-allotment option were approximately $5.1 million, net of issue costs. Per the terms of our credit facility, we repaid a portion of our credit facility with these proceeds.
On October 27, 2004, we completed the sale of our idle warehouse in Kilkenny, Ireland for approximately 1.6 million EuroEuros ($2.0 million), net of selling costs incurred. As a result of this transaction, we recorded a loss on disposal of assets of approximately 0.1 million Euro ($0.1 million) during the fourth quarter of 2004, which was recorded as a component of loss on disposal of assets. Prior to the sale, this asset was classified as a component of property, plant and equipment, net. Proceeds received from the sale of this asset were used to repay a portion of our $90 million credit facility. In December 2005, we generated approximately $0.8 million in proceeds from sale of excess land at our Veenendaal, The Netherlands facility. This transaction resulted in a gain of approximately $0.4 million. In January 2006, we generated approximately $2.8 million in proceeds from sale of excess land at our Pinerolo, Italy facility. The transaction resulted in a net after tax gain of $1.4 million. To date, cash generated by NN Europe and itsforeign subsidiaries has been used exclusivelymostly for general NN Europe-specific purposes including investments in property, plant and equipment and prepayment of the former Euro term loan, which is secured by NN Europe and its subsidiaries. Accordingly, noloan. No dividends have been declared or paid by NN Europethe foreign subsidiaries that may have been used by the Company to permanently pay down our domestic credit facilities. During 2006, a European subsidiary repaid an $8.0 million loan with the parent company. These funds were used to repay part of our domestic credit facilities. 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 of our domestic business (other than foreign customers that have entered into an inventory management program with the Company) generally provide that payments are due within 90 or 120 days following the date of shipment. Under the Domestic Ball and Roller SegmentsMetal Bearing Components Segment’s inventory management program with certain European customers, payments typically are due within 30 days after the customer uses the product. The Company’s arrangement with its NN Europe SegmentEuropean customers regarding due dates vary from 30 to 90 days following date of sale with an average of approximately 50 days outstanding. The Company’s sales and receivables can be influenced by seasonality due to the Company’s relative percentage of European business coupled with many foreign customers ceasing production during the month of August. For information concerning the Company'sCompany’s quarterly results of operations for the years ended December 31, 20052006 and 2004,2005, see Note 1617 of the Notes to Consolidated Financial Statements. The Company bills and receives payment from some of its foreign customers in Euro as well as other currencies. In 2005,2006, the fluctuation of the Euro against the U.S. dollar negativelypositively impacted assets, revenuesales and income. As a result of these sales, the Company’s foreign exchange transaction and translation risk has increased. Various strategies to manage this risk are available to management including producing and selling in local currencies and hedging programs. As of December 31, 2005,2006, no currency hedges were in place. In addition, a strengthening of the U.S. dollar and/or Euro 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 offset by accounts payable, was $51.0 million at December 31, 2006 as compared to $41.1 million at December 31, 2005 as compared to $34.02005. Working capital increased by $10.8 million at December 31, 2004. The movement in working capital is due to the decreaseacquisition of Whirlaway on November 30, 2006. Additionally, working capital increased by $1.3 million due to Euro denominated assets and liabilities increasing in value relative to the dollar. Inventory was reduced by $3.2 million in line with overall company goals and accounts receivable increased $0.8 million due to higher sales volume in the fourth quarter of $4.3 million, offset by increases in inventory2006 versus the fourth quarter of 2005. In addition, the receipt of $2.5 million decrease in accounts payable of $3.6 million, the decrease in the Eltmann restructuring of $2.3 million, and the reclassificationfrom pay-off of a $2.5 million note receivable from non-current assets to current assets.reduced working capital. The ratio of current assets to current liabilities increased from 1.46:1 at December 31, 2004 to 1.63:1 at December 31, 2005.2005 to 1.68:1 at December 31, 2006. Cash flow from operations totaled $33.0 million in 2006, compared with $30.0 million in 2005 compared withand $31.6 million in 2004 and $19.5 million in 2003. Higher net income and accounts receivable collections were offset by an increase in inventory during 2005.2004.
During 2006, we plan to spend approximately $19.2spent $19.3 million on capital expenditures. Of this amount, $7.6we spent $6.7 million related to geographic expansion of our manufacuturing base, $1.8 million to acquire the remaining machinery under the SNR agreement, and $10.8 million related primarily to equipment and process upgrades and replacements. During 2007, we plan to spend approximately $19.0 million on capital expenditures. Of this amount, $11.3 million will be related primarily to equipment and process upgrades and replacements and approximately $8.9$7.7 million will be principally related to geographic expansion of our manufacturing base, and $2.7 million will be related to the completion of the SNR transaction (see Note 2 to the Consolidated Financial Statements, Acquisitions, Purchase of Minority Interest and New Businesses).base. We intend to finance these activities with cash generated from operations and funds available under our credit facilities. The Company believes that funds generated from operations and borrowings will be sufficient to finance the Company’s working capital needs, projected capital expenditure requirements, and dividend payments through December 2006.2007. Subsequent to year-end, the Company’s Board of Directors authorized a new stock repurchase plan. Under this plan the Company is authorized to repurchase during the next 18 months in the open market or in private transactions, in accordance with applicable laws and regulations, up to $10 million in common stock of the Company. This amount represents approximately 5% of the Company’s outstanding stock.
The table below sets forth certain of the Company’s contractual obligations and commercial commitments as of December 31, 20052006 (in thousands): Certain Contractual Obligations | Payments Due by Period | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Long-term debt | $ 100,199 | $ 851 | $ 12,510 | $ 69,694 | $ 17,144 | Expected interest payments | 26,565 | 5,618 | 10,516 | 9,243 | 1,188 | Operating leases | 24,144 | 3,890 | 6,707 | 4,953 | 8,594 | Capital leases (1) | 4,202 | 224 | 448 | 448 | 3,082 | Expected pension contributions and benefit payments | 1,976 | 112 | 284 | 359 | 1,221 | Other long-term obligations (2) | 120,000 | 40,000 | 80,000 | -- | -- | Total contractual cash obligations | $ 277,086 | $ 50,695 | $ 110,465 | $ 84,697 | $ 31,229 |
Certain Contractual Obligations | Payments Due by Period | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Long-term debt | $ 62,568 | $ 4,668 | $ 23,614 | $ 11,428 | $ 22,858 | Expected interest payments | $ 12,275 | 3,217 | 4,307 | 2,701 | 2,050 | Operating leases | 20,124 | 2,093 | 3,394 | 2,889 | 11,748 | Capital leases (1) | 4,425 | 224 | 448 | 448 | 3,305 | Expected pension contributions and benefit payments | 1,950 | 61 | 279 | 351 | 1,259 | Other long-term obligations (2) | 36,661 | 36,661 | -- | -- | -- | Total contractual cash obligations | $138,003 | $ 46,924 | $ 32,042 | $ 17,817 | $ 41,220 |
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(1) On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products Company Ltd, entered into a twenty year lease agreement with Kunshan Tian Li Steel Structure Co. LTD for the lease of land and building (approximately 110,000 square feet) in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China. The lease is cancelable by the Company in the fifth, ninth, and fourteenth year. The building was newly constructed and we began usage of the leased property during the fourth quarter of 2005. The agreement satisfied the requirements ofis a capital lease at June 1, 2004 and we recorded the lease as alease. The capital lease in our consolidated financial statements in the fourth quarter of 2005. The Capital leases line in the table above reflects the undiscounted future minimum lease payments given that the lease was recorded as of October 1, 2005, the date the Company began to use the property. No other amounts are included in Capitalcapital leases above.
(2) Other Long-Term Obligations consist of steel purchase commitments at the NN Europe Segmentour European operations. (See Note 1516 of the Notes to Consolidated Financial Statements.)
The CompanyWe currently hashave operations in Ireland, Germany, Italy and The Netherlands, all of which are Euro participating countries, and in Slovakia which joined the European Union in May 2004 and is expected to adopt the Euro as its functional currency within several years. Each of the Company’sour European facilities sellsells product to customers in many of the Euro participating countries. The Euro has been adopted as the functional currency at all locations in the NN Europe, Segment, except Slovakia whose functional currency is the Slovak Koruna. The functional currency of NN Asia is the Chinese Yuan.
Seasonality and Fluctuation in Quarterly Results The Company'sOur net sales historically have been seasonal in nature due tobecause a significant portion of the Company’sour sales beingare to European customers that cease or significantly slow production during the month of August. For information concerning the Company'sour quarterly results of operations for the years ended December 31, 20052006 and 2004,2005, see Note 1617 of the Notes to Consolidated Financial Statements.
While the Company'sour operations have not been materially affected by inflation during recent years, prices for 52100 Steel, engineered resins and other raw materials purchased by the Companyus are subject to material change. For the Domestic Ball and Roller and NN Europe Segments, the average price of 52100 steel increased approximately 36% and 10% in 2005, respectively. For both segments, the price of 52100 steel increased by 9.8% in 2004, and increased approximately 3.5% in 2003. In our Plastic and Rubber Components Segment we experienced price increases for engineered resins of approximately 10.3% in 2005, 5.3% in 2004, and price decreases of approximately 1.0% in 2003 and increases for proprietary rubber compounds and metal stampings of approximately 7% in 2005, 10.2% in 2004, and price decreases of 2.5% in 2003. Our typical pricing arrangements with steel suppliers are subject to adjustment every six months. The Company’s NN Europe Segment long term agreement with its primary steel supplier expired at the end of 2005. A new yearly agreement has been entered into by NN Europe with the same terms and conditions and is based on a yearly base price and quarterly scrap surcharge adjustments. The CompanyWe typically reservesreserve the right to increase product prices periodically in the event of increases in its raw material costs. In the past, the Company haswe have been able to minimize the impact on itsour operations resulting from the 52100 Steel price fluctuations by taking such measures. However, in the NN Europe Segment,at our European operations, by contract, material price changes in any given year are passed along with price adjustments in January of the following year. Certain sales agreements areyear and beginning in effect with SKF and Schaeffler Group (INA), which provide for minimum purchase quantities and specified, annual sales price adjustments that may2007 scrap surcharges, a component of material cost, will be modified up or down for changes in material costs. These agreements expire during 2006 and 2008.passed through quarterly. In December 2004,July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 123R, “Share-Based Payment,” which requires companies109 “Accounting for Income Taxes”. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to expensetake on a tax return. Under FIN 48, the valuefinancial statements will reflect expected future tax consequences of employee stock options and similar awards and establishes standards forsuch positions presuming the accounting for transactions in which an entity exchanges its equity instruments for goods and services. SFAS No. 123R is effective for interim and annual periods beginning after June 15, 2005 (the SEC delayed the effective date for public companies to annual periods beginning after June 15, 2005) and applies to all outstanding and unvested share-based payment awards. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair valuetaxing authorities’ full knowledge of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). From January 1, 2006 onward the Company will account for outstandingposition and new restricted stock awardsall relevant facts, but without considering time values. FIN 48 also revises disclosure requirements and new and modified stock options as compensation expense based on the grant date fair value. In December 2005, all unvested options became vested under an accelerated vesting program adopted by the Company. The reason for the accelerated vesting was to avoid approximately $0.7 million of after-tax compensation expense in 2006 that would otherwise have been reported. Compensation expense for stock options going forward will depend on the number of options granted and the calculated value of such options.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires these items be recognized as current-period charges. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacityintroduces a prescriptive, annual, tabular roll-forward of the production facilities. This statementunrecognized tax benefits. FIN 48 is effective for fiscal years beginning after JuneDecember 15, 2005. Currently, we anticipate2006. We will adopt FIN 48 on January 1, 2007. We have evaluated the impact of adopting this statementstandard on our consolidated financial position and results of operations and concluded the impact of the adoption will not have a material effect on our consolidated financial statements as we do not have idle facilities.effect.
In December 2004,September 2006, the FASB issued SFAS No. 153, “Exchanges157, “Fair Value Measurements” (SFAS 157), which provides guidance on how to measure assets and liabilities at fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of Nonmonetary Assetsfair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by us beginning in the first quarter of 2008. We are currently evaluating the potential impact this standard on our consolidated financial position and results of operations, but do not believe the impact of the adoption will be material. In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006. We have evaluated the potential impact SAB 108 may have on our financial position and results of operations and do not believe the impact of the application of this guidance will be material. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of APB OpinionFASB Statements No. 29”87, 88, 106 and 132(R)” (SFAS 158). Part of this Statement will be effective as of December 31, 2006, and requires companies that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on the balance sheet on a prospective basis from the effective date. The funded status of these plans is determined as of the plans’ measurement dates and represents the differences between the amount of the obligations owed to participants under each plan (including the effects of future salary increases for define benefit plans) and the fair value of each plan’s assets dedicated to paying those obligations. To record the funded status of those plans, unrecognized prior service costs and net actuarial losses experienced by the plans will be recorded in the Other Comprehensive Income (OCI) section of shareholders’ equity on the balance sheet. The Company recognized the funded status of our defined benefit plan, covering our Eltmann, Germany facility, and provided required disclosures for the fiscal year ended December 31, 2006. The impact was not material to our consolidated financial position. In February, 2007, the FASB issued SFAS No. 153 eliminates the exception from159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value measurementat specified election dates. Upon adoption, an entity must report unrealized gains and losses on items for nonmonetary exchanges of similar productive assetswhich the fair value option has been elected in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flowsearnings at each subsequent reporting date. Most of the entityprovisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available for sale and trading securities. SFAS No. 159 will be effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the effect SFAS No. 159 will have on its consolidated financial position, liquidity, or results of operations. European Restructuring As previously mentioned, in 2004, we restructured our Eltmann, Germany ball production facility and incurred $2.3 million of restructuring costs related to severance cost for approximately 84 employees. In 2006, we entered into negotiations with representatives of the Eltmann employees works council. The negotiations seek significant wage reductions and changes in work rules. These negotiations are progressing as of the date of this report and are expected to change significantly asbe concluded during 2007. However, if a resultsatisfactory agreement cannot be reached, we may begin to shift production to lower cost faciltiies, thereby incurring costs for the production shifts and necessitating further restructuring at the Eltmann facility, which could include actions leading to a significant downsizing or even closure of the exchange. The provisions offacility. If this Statement are effectivewere to occur, we would experience significant cash restructuring costs and impariment charges for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.tangible and intangible assets. In addition, such a restructuring might cause assets at other European plants to become impaired. We do not anticipate any impact frombelieve that such action is probable at this statement at present as we have not and do not plan to enter into any non-monetary transactions.time.
Deduction for Qualified Domestic Production Activities and Repatriation of Earnings
In October 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The Act also provides for a two-year phase out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Based on an analysis of 2005 production cost, we believe the impact from the phase out of the ETI will be principally offset by the phase in of the Act. Thus, based on 2005 production levels the ACT will not have a material impact in the tax expense or net income of the Company.
The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the Act. At this time, the Company does not expect to repatriate earnings under the provisions of the Act.
We are exposed to changes in financial market conditions in the normal course of our business due to our use of certain financial instruments as well as transacting in various foreign currencies. To mitigate our exposure to these market risks, we have established policies, procedures and internal processes governing our management of financial market risks. We are exposed to changes in interest rates primarily as a result of our borrowing activities. At December 31, 2005,2006, these borrowings included $40.0 million aggregate principal amount of senior notes and a $30new $90 million revolving credit facility and a 26.3 million Euro term loan ($29.6 million) which was used to maintain liquidity, and fund our business operations.operations, and fund acquisitions. At December 31, 2005,2006, we had $40.0 million outstanding of senior notes; $17.9notes outstanding and $39.5 million outstanding under the revolving credit facilities and 3.9 million Euro ($4.7 million) outstanding under the Euro term loan.facilities. At December 31, 2005,2006, a one-percent increase in the interest rate charged on our outstanding variable rate borrowings under both credit facilities would result in interest expense increasing annually by approximately $0.2$0.4 million. In connection with a variable Euribor rate debt financing in July 2000 our majority owned subsidiary, NN Europe, entered into an interest rate swap with a notional amount of Euro 12.5 million for the purpose of fixing the interest rate on a portion of their debt financing. The interest rate swap provides for us to receive variable Euribor interest payments and pay 5.51% fixed interest. The interest rate swap agreement expires in July 2006 and the notional amount amortizes in relation to principal payments on the underlying debt over the life of the swap. This original debt was repaid in May 2003; however, the swap remains pursuant to its original terms. On May 1, 2003, we entered into a new $90 million syndicated credit facility. This new financing arrangement replaces our prior credit facility with AmSouth and NN Europe’s credit facility with Hypo Vereinsbank Luxembourg, S.A.; see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” The nature and amount of our borrowings may vary as a result of future business requirements, market conditions and other factors. Translation of the Company'sour operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. Our Domestic BallMetal Bearing Component Segment bills and Roller Segment and NN Europe Segment bill and receivereceives payment from some of its foreign customers in their own currency.currencies other than the U.S. dollar including the Euro. In 2005,2006, the fluctuation of the Euro against the U.S. dollar negativelypositively impacted assets, revenue and income. To help reduce exposure to foreign currency fluctuation, management has incurred debt in Euros in the past and has, from time to time, used foreign currency hedges to hedge currency exposures when these exposures meet certain discretionary levels. The CompanyWe did not use any significant currency hedges in 2005,2006, nor did itwe hold a position in any foreign currency hedging instruments as of December 31, 2005.2006. Item 8. Financial Statements and Supplementary Data Index to Financial Statements Financial Statements Page Report of Independent Registered Public Accounting Firm for the years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Consolidated Balance Sheets at December 31, 2006 and 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Index to Financial Statements
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| Report of Independent Registered Public Accounting Firm for the years ended December 31, 2005, 2004, and 2003 | 30 | Consolidated Balance Sheets at December 31, 2005 and 2004 | 32 | Consolidated Statements of Income and Comprehensive Income for the years ended December 31,
2005, 2004 and 2003
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| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003 | 34 | Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | 35 | Notes to Consolidated Financial Statements | 36 |
0;
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders’ of NN, Inc.:
We have completed integrated audits of NN, Inc.’s 2005 and 20042006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and 2004, and an audit of its 2003 consolidated financial statements2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of NN, Inc. and its subsidiaries at December 31, 20052006 and 2004,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 9 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit pension plans effective December 31, 2006. As discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation as of January 1, 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 and 20042006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005 and 2004,2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial
reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina March 15, 20062007 NN, Inc. | | December 31, 2006 and 2005 | (In thousands, except per share data) |
Assets | 2006 | 2005 | Current assets: | | | Cash and cash equivalents | $ 11,681 | $ 10,856 | Accounts receivable, net | 63,442 | 47,297 | Inventories, net | 43,538 | 38,096 | Income tax receivable | -- | 1,237 | Other current assets | 6,004 | 7,655 | Current deferred tax asset | 1,199 | 809 | Total current assets | 125,864 | 105,950 | | | | Property, plant and equipment, net | 156,447 | 118,829 | Assets held for sale | -- | 1,072 | Goodwill, net | 46,147 | 41,648 | Intangible assets, net | 10,131 | -- | Non current deferred tax assets | 2,117 | -- | Other non-current assets | 1,995 | 2,156 | Total assets | $ 342,701 | $ 269,655 | | | | Liabilities and Stockholders’ Equity | | | Current liabilities: | | | Accounts payable | $ 52,576 | $ 41,660 | Accrued salaries, wages and benefits | 13,519 | 12,407 | Income taxes | 94 | 2,093 | Current maturities of long-term debt | 851 | 4,668 | Current portion of obligation under capital lease | 224 | 224 | Other liabilities | 7,605 | 3,704 | Current deferred tax liabilities | -- | 83 | Total current liabilities | 74,869 | 64,839 | | | | Non-current deferred tax liability | 16,334 | 15,128 | Long-term debt | 80,711 | 57,900 | Related party debt | 21,305 | | Accrued pension | 13,187 | 11,783 | Obligation under capital lease | 1,713 | 1,685 | Other non-current liabilities | 1,413 | 2,246 | Total liabilities | 209,532 | 153,581 | | | | Commitments and Contingencies (Note 16) | -- | -- | | | | Stockholders’ equity: | | | Common stock - $0.01 par value, authorized 45,000 shares, issued and outstanding 16,842 shares in 2006 and 17,206 shares in 2005 | 169 | 172 | Additional paid-in capital | 53,473 | 57,754 | Additional paid-in capital - unearned compensation | -- | (467) | Retained earnings | 64,178 | 55,218 | Accumulated other comprehensive income | 15,349 | 3,397 | Total stockholders’ equity | 133,169 | 116,074 | Total liabilities and stockholders’ equity | $ 342,701 | $ 269,655 |
See accompanying notes to consolidated financial statements NN, Inc. | Consolidated Statements of Income and Comprehensive Income | Years ended December 31, 2006, 2005 and 2004 | (In thousands, except per share data) |
Assets | | 2005 | | 2004 | | Current assets: | | | | | | Cash and cash equivalents | | $ | 10,856 | | $ | 10,772 | | Accounts receivable, net | | | 47,297 | | | 51,597 | | Inventories, net | | | 38,096 | | | 35,629 | | Income tax receivable | | | 1,237 | | | 4,401 | | Other current assets | | | 7,655 | | | 4,787 | | Current deferred tax asset | | | 809 | | | 1,254 | | Total current assets | | | 105,950 | | | 108,440 | | | | | | | | | | Property, plant and equipment, net | | | 118,829 | | | 131,169 | | Assets held for sale | | | 1,072 | | | -- | | Goodwill | | | 41,648 | | | 44,457 | | Other non-current assets | | | 2,156 | | | 4,276 | | Total assets | | $ | 269,655 | | $ | 288,342 | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | Current liabilities: | | | | | | | | Accounts payable | | $ | 41,660 | | $ | 45,217 | | Accrued salaries, wages and benefits | | | 12,407 | | | 16,332 | | Income taxes | | | 2,093 | | | 1,599 | | Current maturities of long-term debt | | | 4,668 | | | 7,160 | | Current portion of obligation under capital lease | | | 224 | | | -- | | Other liabilities | | | 3,704 | | | 4,123 | | Current deferred tax liabilities | | | 83 | | | -- | | Total current liabilities | | | 64,839 | | | 74,431 | | | | | | | | | | Non-current deferred tax liability | | | 15,128 | | | 16,330 | | Long-term debt | | | 57,900 | | | 67,510 | | Accrued pension | | | 11,783 | | | 12,036 | | Obligation under capital lease | | | 1,685 | | | -- | | Other non-current liabilities | | | 2,246 | | | 2,895 | | Total liabilities | | | 153,581 | | | 173,202 | | | | | | | | | | Commitments and Contingencies (Note 15) | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | Common stock - $0.01 par value, authorized 45,000 shares, issued and outstanding 17,206 shares in 2005 and, 16,777 shares in 2004 | | | 172 | | | 168 | | Additional paid-in capital | | | 57,754 | | | 53,423 | | Additional paid-in capital - unearned compensation | | | (467) | | | -- | | Retained earnings | | | 55,218 | | | 45,676 | | Accumulated other comprehensive income | | | 3,397 | | | 15,873 | | Total stockholders’ equity | | | 116,074 | | | 115,140 | | Total liabilities and stockholders’ equity | | $ | 269,655 | | $ | 288,342 | |
See accompanying notes to consolidated financial statements
NN, Inc.
| | Years ended December 31, 2005, 2004 and 2003
| (In thousands, except per share data)
|
| | 2005 | | 2004 | | 2003 | | | | | | | | | | Net sales | | $ | 321,387 | | $ | 304,089 | | $ | 253,462 | | Cost of products sold (exclusive of depreciation shown separately below) | | | 248,828 | | | 240,580 | | | 195,658 | | Selling, general and administrative | | | 29,073 | | | 29,755 | | | 21,700 | | Depreciation and amortization | | | 16,331 | | | 16,133 | | | 13,691 | | (Gain) loss on disposal of assets | | | (391 | ) | | 856 | | | (147 | ) | Restructuring and impairment costs (income) | | | (342 | ) | | 2,398 | | | 2,490 | | Income from operations | | | 27,888 | | | 14,367 | | | 20,070 | | | | | | | | | | | | | Interest expense | | | 3,777 | | | 4,029 | | | 3,392 | | Other (income) expense | | | (653 | ) | | (853 | ) | | 99 | | Income before provision for income taxes | | | 24,764 | | | 11,191 | | | 16,579 | | Provision for income taxes | | | 9,752 | | | 4,089 | | | 5,726 | | Minority interest in consolidated subsidiaries | | | -- | | | -- | | | 675 | | Net income | | $ | 15,012 | | $ | 7,102 | | $ | 10,178 | | | | | | | | | | | | | Other comprehensive income (loss): | | | | | | | | | | | Additional minimum pension liability, net of tax | | | (580 | ) | | (200 | ) | | (177 | ) | Unrealized holding gain (loss) on securities, net of tax | | | (73 | ) | | 73 | | | -- | | Foreign currency translation | | | (11,823 | ) | | 6,591 | | | 11,273 | | Comprehensive income | | $ | 2,536 | | $ | 13,566 | | $ | 21,274 | | | | | | | | | | | | | Basic income per share: | | | | | | | | | | | Net income | | $ | 0.88 | | $ | 0.42 | | $ | 0.64 | | Weighted average shares outstanding | | | 17,004 | | | 16,728 | | | 15,973 | | | | | | | | | | | | | Diluted income per share: | | | | | | | | | | | Net income | | $ | 0.87 | | $ | 0.41 | | $ | 0.62 | | Weighted average shares outstanding | | | 17,193 | | | 17,151 | | | 16,379 | | Cash dividends per common share | | $ | 0.32 | | $ | 0.32 | | $ | 0.32 | |
| 2006 | 2005 | 2004 | | | | | Net sales | $ 330,325 | $ 321,387 | $ 304,089 | Cost of products sold (exclusive of depreciation shown separately below) | 257,703 | 248,828 | 240,580 | Selling, general and administrative | 30,008 | 29,073 | 29,755 | Depreciation and amortization | 17,492 | 16,331 | 16,133 | (Gain) loss on disposal of assets | (705) | (391) | 856 | Restructuring and impairment costs (income) | (65) | (342) | 2,398 | Income from operations | 25,892 | 27,888 | 14,367 | | | | | Interest expense | 3,983 | 3,777 | 4,029 | Other income | (1,048) | (653) | (853) | Income before provision for income taxes | 22,957 | 24,764 | 11,191 | Provision for income taxes | 8,522 | 9,752 | 4,089 | Net income | $ 14,435 | $ 15,012 | $ 7,102 | | | | | Other comprehensive income (loss): | | | | Additional minimum pension liability, net of tax | -- | (580) | (200) | Unrealized holding gain (loss) on securities, net of tax | -- | (73) | 73 | Foreign currency translation | 12,265 | (11,823) | 6,591 | Comprehensive income | $ 26,700 | $ 2,536 | $ 13,566 | | | | | Basic income per share: | | | | Net income | $ 0.84 | $ 0.88 | $ 0.42 | Weighted average shares outstanding | 17,125 | 17,004 | 16,728 | | | | | Diluted income per share: | | | | Net income | $0.83 | $ 0.87 | $ 0.41 | Weighted average shares outstanding | 17,351 | 17,193 | 17,151 | Cash dividends per common share | $ 0.32 | $ 0.32 | $ 0.32 |
See accompanying notes to consolidated financial statements
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2005, 2004 and 2003
(In Thousands)
| | Common Stock | | | | | | | | | | | | | | | | | | | Number of shares | | | Par Value | | | Additional Paid-In Capital | | | Additional Paid-In Capital-Unearned Compensation | | | Retained Earnings | | | Accumulated Other Comprehensive (Loss) Income | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2002 | | | 15,370 | | $ | 154 | | $ | 40,457 | | $ | -- | | $ | 38,984 | | $ | (1,687 | ) | $ | 77,908 | | Shares issued | | | 1,342 | | | 14 | | | 12,503 | | | -- | | | -- | | | -- | | | 12,517 | | Net income | | | -- | | | -- | | | -- | | | -- | | | 10,178 | | | -- | | | 10,178 | | Dividends declared | | | -- | | | -- | | | -- | | | -- | | | (5,231 | ) | | -- | | | (5,231 | ) | Additional minimum pension liability (net of tax $108) | | | -- | | | -- | | | -- | | | -- | | | -- | | | (177 | ) | | (177 | ) | Cumulative translation gain | | | -- | | | -- | | | -- | | | -- | | | -- | | | 11,273 | | | 11,273 | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2003 | | | 16,712 | | $ | 168 | | $ | 52,960 | | $ | -- | | $ | 43,931 | | $ | 9,409 | | $ | 106,468 | | Shares issued | | | 65 | | | -- | | | 463 | | | -- | | | -- | | | -- | | | 463 | | Net income | | | -- | | | -- | | | -- | | | -- | | | 7,102 | | | -- | | | 7,102 | | Dividends declared | | | -- | | | -- | | | -- | | | -- | | | (5,357 | ) | | -- | | | (5,357 | ) | Additional minimum pension liability (net of tax $120) | | | -- | | | -- | | | -- | | | -- | | | -- | | | (200 | ) | | (200 | ) | Unrealized holding gain (net of tax $41) | | | -- | | | -- | | | -- | | | -- | | | -- | | | 73 | | | 73 | | Cumulative translation gain | | | -- | | | -- | | | -- | | | -- | | | -- | | | 6,591 | | | 6,591 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2004 | | | 16,777 | | $ | 168 | | $ | 53,423 | | $ | -- | | $ | 45,676 | | $ | 15,873 | | $ | 115,140 | | Shares issued | | | 376 | | | 4 | | | 3,658 | | | -- | | | -- | | | -- | | | 3,662 | | Issuance of restricted stock | | | 53 | | | -- | | | 673 | | | (673 | ) | | | | | | | | -- | | Amortization of restricted stock award | | | -- | | | -- | | | -- | | | 206 | | | -- | | | -- | | | 206 | | Net income | | | -- | | | -- | | | -- | | | -- | | | 15,012 | | | -- | | | 15,012 | | Dividends declared | | | -- | | | -- | | | -- | | | -- | | | (5,470 | ) | | -- | | | (5,470 | ) | Additional minimum pension liability (net of tax $326) | | | -- | | | -- | | | -- | | | -- | | | -- | | | (580 | ) | | (580 | ) | Unrealized holding loss (net of tax $41) | | | -- | | | -- | | | -- | | | -- | | | -- | | | (73 | ) | | (73 | ) | Cumulative translation loss | | | -- | | | -- | | | -- | | | -- | | | -- | | | (11,823 | ) | | (11,823 | ) | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2005 | | | 17,206 | | $ | 172 | | $ | 57,754 | | $ | (467 | ) | $ | 55,218 | | $ | 3,397 | | $ | 116,074 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NN, Inc. | Consolidated Statements of Changes in Stockholders’ Equity | Years ended December 31, 2006, 2005 and 2004 | (In thousands) | |
(Thousands of Dollars and Shares) | Common Stock Number of Par Shares Value | Additional paid in capital | Additional paid in capital unearned compen-sation | Retained Earnings | Accumulated Other Comprehen-sive Income | Total |
Balance, December 31, 2003 | 16,712 | $ 168 | $ 52,960 | $-- | $ 43,931 | $ 9,409 | $106,468 | | Shares issued | 65 | -- | 463 | -- | -- | -- | 463 | | Net income | -- | -- | -- | -- | 7,102 | -- | 7,102 | | Dividends declared | -- | -- | -- | -- | (5,357) | -- | (5,357) | | Additional minimum pension liability (net of tax $120) | -- | -- | -- | -- | -- | (200) | (200) | | Unrealized holding gain (net of tax $41) | -- | -- | -- | -- | -- | 73 | 73 | | Cumulative translation gain | -- | -- | -- | -- | -- | 6,591 | 6,591 | | | | | | | | | | | | | | | | | | | Balance, December 31, 2004 | 16,777 | $168 | $53,423 | $-- | $45,676 | $15,873 | $115,140 | | Shares issued | 376 | 4 | 3,658 | -- | -- | -- | 3,662 | | Issuance of restricted stock | 53 | -- | 673 | (673) | | | -- | | Amortization of restricted stock award | -- | -- | -- | 206 | -- | -- | 206 | | Net income | -- | -- | -- | -- | 15,012 | -- | 15,012 | | Dividends declared | -- | -- | -- | -- | (5,470) | -- | (5,470) | | Additional minimum pension liability (net of tax $326) | -- | -- | -- | -- | -- | (580) | (580) | | Unrealized holding loss (net of tax $41) | -- | -- | -- | -- | -- | (73) | (73) | | Cumulative translation loss | -- | -- | -- | -- | -- | (11,823) | (11,823) | | | | | | | | | | Balance, December 31, 2005 | 17,206 | $ 172 | $ 57,754 | ($467) | $ 55,218 | $ 3,397 | $ 116,074 | | Reclassification of unearned compensation | -- | -- | (467) | 467 | -- | -- | -- | | Shares issued | 99 | 1 | 983 | -- | -- | -- | 984 | | Repurchase of outstanding shares | (463) | (4) | (5,269) | -- | -- | -- | (5,273) | | Elimination of variable stock option liability | -- | -- | 8 | -- | -- | -- | 8 | | Net income | -- | -- | -- | -- | 14,435 | -- | 14,435 | | Amortization of restricted stock award | -- | -- | 283 | -- | -- | -- | 283 | | Stock option expense | -- | -- | 181 | -- | -- | -- | 181 | | Dividends declared | -- | -- | -- | -- | (5,475) | -- | (5,475) | | Elimination of additional minimum pension liability (net of tax of $46) | -- | | -- | | | 80 | 80 | | Adjustment to initially apply FAS 158 and record unrecognized net losses that have not been recognized as a component of pension income (net of tax $224) | | -- | | -- | -- | (393) | (393) | | Cumulative translation gain | -- | -- | -- | -- | -- | 12,265 | 12,265 | Balance, December 31, 2006 | 16,842 | $ 169 | $ 53,473 | $ -- | $ 64,178 | $ 15,349 | $ 133,169 |
See accompanying notes to consolidated financial statements
NN, Inc. | NN, Inc. | | NN, Inc. | | | | Consolidated Statements of Cash Flows | Years Ended December 31, 2005, 2004 and 2003 | | | Years Ended December 31, 2006, 2005 and 2004 | | Years Ended December 31, 2006, 2005 and 2004 | (In Thousands) | (In Thousands) | | (In Thousands) | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | 2006 | 2005 | 2004 | Cash flows from operating activities: | | | | | | | | Cash flows from operating activities: | | | Net Income | | $ 15,012 | | $ 7,102 | | $ 10,178 | | Net Income | $ 14,435 | $ 15,012 | $ 7,102 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | Depreciation and amortization | | 16,331 | | 16,133 | | 13,691 | | Depreciation and amortization | 17,492 | 16,331 | 16,133 | Amortization of debt issue costs | | 246 | | 220 | | 212 | | | Amortization and write-off of debt issue costs | | Amortization and write-off of debt issue costs | 460 | 246 | 480 | (Gain) loss on disposals of property, plant and equipment | | (391) | | 856 | | (147) | | (Gain) loss on disposals of property, plant and equipment | (705) | (391) | 856 | Allowance for doubtful accounts | | 287 | | 22 | | 158 | | Allowance for doubtful accounts | 311 | 287 | 22 | Write-off of unamortized debt issue costs | | -- | | 260 | | 455 | | | Amortization of restricted stock | | 206 | | -- | | -- | | | Deferred income taxes | | (674) | | 3,254 | | 3,888 | | | Minority interest in consolidated subsidiary | | -- | | -- | | 675 | | | Compensation expense from issuance of restricted stock and incentive stock options | | Compensation expense from issuance of restricted stock and incentive stock options | 464 | 206 | -- | Deferred income taxes (income) expense | | Deferred income taxes (income) expense | (1,384) | (674) | 3,254 | Capitalized interest | | Capitalized interest | (204) | -- | (Gain) of sale of stock investment | | (73) | | -- | | -- | | (Gain) of sale of stock investment | -- | (73) | -- | Restructuring and impairment costs (income) | | (342) | | 2,398 | | 2,328 | | Restructuring and impairment costs (income) | (65) | (342) | 2,398 | Changes in operating assets and liabilities: | | | | | | | | Changes in operating assets and liabilities: | | | | Accounts receivable | | 216 | | (8,123) | | (9,242) | | Accounts receivable | (759) | 216 | (8,123) | Inventories | | (5,134) | | 2,059 | | (3,711) | | Inventories | 3,221 | (5,134) | 2,059 | Income tax receivable | | 1,465 | | (2,878) | | (458) | | Income tax receivable | (956) | 1,465 | (2,878) | Other current assets | | (1,033) | | 111 | | (1,047) | | Other current assets | (188) | (1,033) | 111 | Other assets | | 105 | | (799) | | (1,578) | | Other assets | 920 | 105 | (799) | Accounts payable | | 1,176 | | 9,782 | | 5,118 | | Accounts payable | 2,308 | 1,176 | 9,782 | Other liabilities | | 2,618 | | 1,175 | | (1,059) | | Other liabilities | (2,347) | 2,618 | 1,175 | Net cash provided by operating activities | | 30,015 | | 31,572 | | 19,461 | | Net cash provided by operating activities | 33,003 | 30,015 | 31,572 | | | | | | | | | | Cash flows from investing activities: | | | | | | | | Cash flows from investing activities: | | Acquisition of businesses, net of cash acquired | | -- | | -- | | (21,435) | | | Purchase of minority interest | | -- | | -- | | (15,586) | | | Cash paid to acquire business, net of cash received | | Cash paid to acquire business, net of cash received | (25,025) | -- | Acquisition of property, plant and equipment | | (16,729) | | (12,162) | | (11,429) | | Acquisition of property, plant and equipment | (19,282) | (16,729) | (12,162) | Principal received from long-term note receivable | | 200 | | 200 | | 200 | | | Principal received from note receivable | | Principal received from note receivable | 2,505 | 200 | Proceeds from disposals of property, plant and equipment | | 968 | | 2,342 | | 212 | | Proceeds from disposals of property, plant and equipment | 3,550 | 968 | 2,342 | Proceeds from sale of investment | | 198 | | -- | | -- | | Proceeds from sale of investment | -- | 198 | -- | Acquisition of intangible asset | | (605) | | -- | | -- | | Acquisition of intangible asset | (1,846) | (605) | -- | Net cash used by investing activities | | (15,968) | | (9,620) | | (48,038) | | Net cash used by investing activities | (40,098) | (15,968) | (9,620) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | Cash flows from financing activities: | | Proceeds from long-term debt | | -- | | 40,000 | | 90,332 | | Proceeds from long-term debt | 47,188 | -- | 40,000 | Debt issue costs paid | | (64) | | (839) | | (939) | | Debt issue costs paid | (536) | (64) | (839) | Proceeds from bank overdrafts | | 120 | | -- | | 37 | | | Proceeds from Bank overdrafts | | Proceeds from Bank overdrafts | 784 | 120 | -- | Repayment of long-term debt | | (9,922) | | (49,408) | | (64,196) | | Repayment of long-term debt | (30,556) | (9,922) | (49,408) | Proceeds (repayment) of short-term debt | | -- | | (2,000) | | 2,000 | | Proceeds (repayment) of short-term debt | 266 | -- | (2,000) | Proceeds from issuance of stock and exercise of stock options | | 2,806 | | 463 | | 5,579 | | Proceeds from issuance of stock and exercise of stock options | 984 | 2,806 | 463 | Cash dividends | | (5,470) | | (5,357) | | (5,231) | | | Cash dividends paid | | Cash dividends paid | (5,475) | (5,470) | (5,357) | Other financing activity | | (8) | | -- | | -- | | Other financing activity | (23) | (8) | -- | Repurchase of common stock | | Repurchase of common stock | (5,273) | -- | Net cash provided (used) by financing activities | | (12,538) | | (17,141) | | 27,582 | | Net cash provided (used) by financing activities | 7,359 | (12,538) | (17,141) | | | | | | | | | | Effect of exchange rate changes on cash flows | | (1,425) | | 983 | | 829 | | Effect of exchange rate changes on cash flows | 561 | (1,425) | 983 | | | | | | | | | | Net change in cash and cash equivalents | | 84 | | 5,794 | | (166) | | Net change in cash and cash equivalents | 825 | 84 | 5,794 | Cash and cash equivalents at beginning of period | | 10,772 | | 4,978 | | 5,144 | | Cash and cash equivalents at beginning of period | 10,856 | 10,772 | 4,978 | Cash and cash equivalents at end of period | | $10,856 | | $10,772 | | $4,978 | | Cash and cash equivalents at end of period | $ 11,681 | $ 10,856 | $ 10,772 | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | | | | | | | Supplemental schedule of non-cash investing and financing activities: | | Stock issued related to acquisition of Veenendaal | | $ | -- | | $ | -- | | $ | 6,938 | | | Stock option exercise tax benefit ($856) and restricted stock issuance ($673) included in stockholders’ equity | | $ | 1,529 | | $ | -- | | $ | -- | | | Incurred note payable to former owner as part of consideration for acquiring a business | | Incurred note payable to former owner as part of consideration for acquiring a business | $ 21,305 | $ -- | Stock option exercise tax benefit ($856 in 2005), restricted stock expense ($283 in 2006, $673 in 2005) and stock option expense ($181 in 2006) included in stockholders’ equity | | Stock option exercise tax benefit ($856 in 2005), restricted stock expense ($283 in 2006, $673 in 2005) and stock option expense ($181 in 2006) included in stockholders’ equity | $ 464 | $ 1,529 | $ -- | Obtained land and building by entering into capital lease obligation | | $ | 1,917 | | $ | -- | | $ | -- | | Obtained land and building by entering into capital lease obligation | | | $ -- | Cash paid for interest and income taxes was as follows: | | | | | | | | | | | Cash paid for interest and income taxes was as follows: | | Interest | | $ | 3,440 | | $ | 3,318 | | $ | 2,496 | | Interest | $ 3,353 | $ 3,440 | $ 3,318 | Income taxes | | $ | 6,066 | | $ | 4,887 | | $ | 4,371 | | Income taxes | $ 11,911 | $ 6,066 | $ 4,887 |
See accompanying notes to consolidated financial statements NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) | | | | December 31, 2005, 2004 and 2003
| | (In Thousands, except per share data)
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1) | Summary of Significant Accounting Policies and Practices |
(a) Description of Business NN, Inc. (the “Company”) is a manufacturer of precision balls, cylindrical and tapered rollers, bearing retainers, plastic injection molded products, and precision bearing seals.seals and beginning December 1, 2006, precision metal components. The Company’s balls, rollers, retainers, and bearing seals are used primarily in the domestic and international anti-friction bearing industry. The Company’s plastic injection molded products are used in the bearing, automotive, instrumentation and fiber optic industries. The Domestic Ballprecision metal components products are used in automotive, diesel engine, refrigeration, and Rollerheating and cooling industries. The Metal Bearing Components Segment is comprised of two manufacturing facilities located in the eastern United States, our start-up operationsoperation in The People’s Republic of China, and our corporate office cost. The Company’s NN Europe Segment is comprised of manufacturing facilities located in Kilkenny, Ireland; Eltmann, Germany; Pinerolo, Italy; Veenendaal, The Netherlands and Kysucke Nove Mesto, Slovakia. On March 12, 2004 we changed the name of our primary European entity from NN Euroball, ApS to NN Europe ApS. To avoid confusion between the entity and the segment, we will refer to the segment as the NN Europe Segment and the entity as NN Europe. The facilities in the NN Europe Segment are engaged in the production of precision balls, tapered rollers and metal retainers. The Plastic and Rubber Components Segment consists of Industrial Molding Corporation, (“IMC”), acquired in July 1999 and Delta Rubber, acquired in February 2001. IMC has two production facilities in Texas and Delta Rubber has two production facilities in Connecticut. The Precision Metal Components Segment consists of Whirlaway Corporation which has four plants located in Ohio and Arizona. Whirlaway was acquired on November 30, 2006. All of the Company’s segments sell to foreign and domestic customers. (b) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. (c) Inventories Inventories are stated at the lower of cost or market. Actual costs are evaluated and do not exceed the lower of cost or market. Cost is determined using the first-in, first-out method. The Company accounts for inventory under a full absorption method, and accordingly, our inventory carrying value includes cost elements of material, labor and overhead. Effective January 1, 2006, we adopted SFAS 151 “Inventory Cost” and expense abnormal amounts of idle facility expense, freight, handling cost, and waste. In addition, we allocated fixed production overheads based on the normal capacity of our facilities. Inventories also include tools, molds and dies in progress that the Company is producing and will ultimately sell to its customers. This activity is principally related to our Plastic and Rubber Components Segment.and Precision Metal Components Segments. These inventories are carried at the lower of cost or market.
(d) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Assets held for sale are stated at lower of cost or fair market value less estimated selling costs. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. When a major property item is retired, its cost and related accumulated depreciation are removed from the property accounts and any gain or loss is recorded in the statement of income. The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. During the years ended December 31, 2006, 2005 2004 and 2003,2004, the Company recorded an impairment charge of $0, $108,$0 and $0$108, respectively. Property, plant and equipment includes tools, molds and dies principally used in our Plastic and Rubber Components Segmentand Precision Metal Components Segments that are the property of the CompanyCompany. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) Depreciation is provided principally on the straight-line method over the estimated useful lives of the depreciable assets for financial reporting purposes. Accelerated depreciation methods are used for income tax purposes. We capitalize incremental interest cost related to certain large capital expenditure projects in compliance with SFAS No. 34 "Capitlization of Interest Cost." The amount capitalized is the portion of interest cost incurred during the acquisition period of these assets. NN, Inc.(e)
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
(e)Revenue Recognition
The Company recognizes revenues based on the stated shipping terms with the customer and the Company recognizes revenue when these terms are satisfied and the risks of ownership are transferred to the customer. The Company has an inventory management program for certain major ball and rollerMetal Bearing Components Segment customers whereby revenue is recognized when products are used by the customer from consigned stock, rather than at the time of shipment. Under both circumstances, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sellers’ price is determinable and collectibility is reasonably assured. (f) Accounts Receivable | Accounts Receivable
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Accounts receivable are recorded upon recognition of a sale of goods and ownership and risk of loss is assumed by the customer. Substantially all of the Company’s accounts receivable is due primarily from the core served markets: bearing manufacturers, automotive industry, electronics, industrial, agricultural and aerospace. The Company experienced $0.3 million, $0.3 million and $0 of bad debt expense during 2006, 2005 $0 duringand 2004, and $0.1 million during 2003.respectively. In establishing allowances for doubtful accounts, the Company performs credit evaluations of its customers, considering numerous inputs when available including the customers’ financial position, past payment history, relevant industry trends, cash flows, management capability, historical loss experience and economic conditions and prospects. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk of being uncollectible. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Net Income Per Common Share Basic earnings per share reflect reported earnings divided by the weighted average number of common shares outstanding. Diluted earnings per share include the effect of dilutive stock options, unvested restricted stock, and the respective tax benefits. (i) Stock Incentive Plan ThePrior to January 1, 2006, the Company appliesapplied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)” issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense iswas recorded on the date of grant only if the current market price of the underlying stock exceedsexceeded the exercise price. The Company also appliesapplied the provision of APB Opinion No. 25 to its variable stock options. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” established accountingFor 2005 and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. We have2004, we elected to continue accounting for our stock option compensation plan using the intrinsic value based method under APB Opinion No. 25 until January 1, 2006 when we will adopt FAS 123 (R), and havedid not recordedrecord compensation expense for stock options for each of the threetwo years ended December 31, 2005 2004, and 2003,2004 except as related to stock options accounted for under the variable method of accounting and for restricted stock awards.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) Effective January 1, 2006, the Company will adopt the provisions of FAS 123 (R) usingadopted SFAS 123(R) under the modified prospective method of application.method. From adoptionthat date onward, the Company is accounting for new awards and awards modified under this new standard. Any options issued henceforth will expense the cost of options as compensation expense over the vesting periodbe expensed based on the fair value of the optionoptions at the grant date. As of December 31, 2005, the Company did not have any unvested stock options due to an accelerated vesting program implemented in December 2005. As such, this statement only impacted the Company for its outstanding restricted stock and stock option and restricted stock awards issued subsequent to January 1, 2006. The cost of the options and restricted stock awards will be expensed as compensation expense over the vesting periods based on the fair value at the grant date. (See Note 10) The Company accounts for restricted stock awards by recognizing compensation expense ratably over the vesting period as specified in the award. Compensation expense to be recognized is based on the stock price at date of grant. NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
(j)Principles of Consolidation The Company’s consolidated financial statements include the accounts of NN, Inc. and subsidiaries in which the Company owns more than 50% voting interest. All of the Company’s subsidiaries are 100% owned and all are included in the consolidated financial statements for the years end December 31, 2006, 2005, 2004, and 2003.2004. Unconsolidated subsidiaries and investments where ownership is between 20% and 50% are accounted for under the equity method. All significant inter-company profits, transactions, and balances have been eliminated in consolidation. The ownership interests of other shareholders in companies that are more than 50% owned, but less than 100% owned by the Company, are reflected as minority interests. There were no minority interests in consolidated subsidiaries at December 31, 2005, December 31, 2004, or December 31, 2003 as a result of the Company acquiring the remaining additional interests in NN Europe on May 2, 2003. (k) Foreign Currency Translation Assets and liabilities of the Company’s foreign subsidiaries are translated at current exchange rates, while revenue, costs and expenses are translated at average rates prevailing during each reporting period. Translation adjustments arising from the translation of foreign subsidiary financial statements are reported as a component of other comprehensive income and are accumulated with other comprehensive earnings as a separate component of shareholders equity. (l) | Goodwill and Other Intangible Assets |
Goodwill: The Company recognizes the excess of the purchase price of an acquired entity over the fair value of the net identifiable assets as goodwill. Goodwill is tested for impairment on an annual basis as of October 1 and between annual tests in certain circumstances. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. Goodwill is not amortized. Other Acquired Intangibles: The Company recognizes an acquired intangible asset apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being divided or separated from the acquired entity or sold, transferred, licensed, rented, or exchanged, whether individually or in combination with a related contract, asset or liability. An intangible asset other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. The Company reviews the lives of intangible assets each reporting period and, if necessary, recognizes impairment losses if the carrying amount of an intangible asset is not recoverable from expected future cash flows and its carrying amount exceeds its fair value. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) (m)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment of or Disposal of Long-Lived Assets.” Assets to be held and used are tested for recoverability when indications of impairment are evident. If the reviewed carrying value of the asset is not recoverable based on underlying cash flows related to specific groups of acquired long-lived assets, the asset is written down to the lesser of recoverable value or carrying value. Assets held for sale are carried at the lesser of carrying value or fair value less costs of disposal. The fair value of impaired assets is generally determined with the assistance of independent appraisals and valuations. NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
(n) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (o)Reclassifications Certain 2004 and 2003 amounts have been reclassified to conform with the 2005 presentation.
(p)Derivative Financial Instruments
The Company records all derivative instruments on the balance sheet at their respective fair values. In connection with a variable EURIBOR rate debt financing in July 2000 the Company’s majority owned subsidiary, NN Europe ApS entered into an interest rate swap with a notional amount of 12.5 million Euro for the purpose of fixing the interest rate on a portion of their debt financing. The interest rate swap provides for the Company to receive variable EURIBOR interest payments and pay 5.51% fixed interest. The interest rate swap agreement expires in July 2006 and the notional amount amortizes in relation to the life of the swap.
The interest rate swap does not qualify for hedge accounting under the provisions of SFAS No. 133; therefore, the transition adjustment for adoption of SFAS No. 133 and any subsequent periodic changes in fair value of the interest rate swap are recorded in earnings as a component of other income.
As of December 31, 2005 and 2004, the fair value of the swap is a liability of approximately, $22 and $167, respectively, which is recorded in other current liabilities and in other non-current liabilities, respectively. The change in fair value during the years ended December 31, 2005, 2004, and 2003 were gains of approximately $145, $193, and $125, respectively.
(q)Recently Issued Accounting Standards
In December 2004,In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 123R, “Share-Based Payment,” which requires companies109 “Accounting for Income Taxes”. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to expensetake on a tax return. Under FIN 48, the valuefinancial statements will reflect expected future tax consequences of employee stock options and similar awards and establishes standards forsuch positions presuming the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123R is effective for interim and annual periods beginning after June 15, 2005 (the SEC delayed the effective date for public companies to the annual periods beginning after June 15, 2005) and applies to all outstanding and unvested share-based payment awards. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair valuetaxing authorities’ full knowledge of the award (with limited exception). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period). Effective January 1, 2006, the Company will adopt FAS 123 (R) under the modified prospective application. From that date onward, the Company will account for new awardsposition and awards modified under this new standard. Any options issued henceforth will be expensed based on the fair valueall relevant facts, but without considering time values. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the options at the date of grant. As of December 31, 2005, the Company does not have any unvested stock options due to an accelerated vesting program implemented in December 2005. As such, this statement will only impact the Company for its outstanding restricted stock and stock option and restricted stock awards issued subsequent to January 1, 2006. The cost of the options and restricted stock awards will be expensed as compensation expense over the vesting periods based on the fair value at the grant date. (See Note 10.)
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires these items be recognized as current-period charges. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statementunrecognized tax benefits. FIN 48 is effective for fiscal years beginning after JuneDecember 15, 2005.2006. We believewill adopt FIN 48 January 1, 2007. We have evaluated the impact of adopting this standard will be immaterial to theon our consolidated financial statements asposition and results of operations and concluded the company doesimpact of the adoption will not currently have abnormal amounts of idle facility expense or handling costs.a material effect.
In December 2004,September 2006, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29”.157, “Fair Value Measurements” (SFAS 157), which provides guidance on how to measure assets and liabilities that use fair value. SFAS No. 153 eliminates the exception from157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value measurementbut does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for nonmonetary exchangesfinancial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by us beginning in the first quarter of similar productive assets in paragraph 21(b)2008. We have evaluated the impact of APB Opinion No. 29, Accounting for Nonmonetary Transactions,adopting this standard may have on our consolidated financial position and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance ifresults of operations, and conducted the future cash flowsimpact of of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not anticipate any impact from this statement as at present we have not and do not plan to enter into any nonmonetary transactions.
Deduction for Qualified Domestic Production Activities and Repatriation of Foreign Earnings
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Based on an analysis of 2005 production costs, we believe the impact from the phase out of the ETI will be principally offset by the phase in of the ACT. Thus, based on 2005 production levels the Actadoption will not have a material effect.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. We have applied the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006 and the adoption of SAB 108 did not have a material impact on our financial position and results of operations. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). Part of this Statement will be effective as of December 31, 2006, and requires companies that have defined benefit pension plans and other postretirement benefit plans to recognize the funded status of those plans on the balance sheet on a prospective basis from the effective date. The funded status of these plans is determined as of the plans’ measurement dates and represents the differences between the amount of the obligations owed to participants under each plan (including the effects of future salary increases for define benefit plans) and the fair value of each plan’s assets dedicated to paying those obligations. To record the funded status of those plans, unrecognized prior service costs and net actuarial losses experienced by the plans will be recorded in the tax expenseOther Comprehensive Income (OCI) section of shareholders’ equity on the balance sheet. The Company recognized the funded status of our defined benefit plan, covering our Eltmann, Germany facility, and provided required disclosures for fiscal years ended December 31, 2006. The impact was not material to our consolidated financial position. Adoption of this statement also requires the Company to change its measurement date to match the end of its fiscal year on or net income ofbefore December 31, 2008. The Company plans to change its measurement date by 2008 in order to comply to this provision. In February, 2007, the Company.
Under the guidance in FASB Staff Positionissued SFAS No. FAS 109-1, Application159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 109,115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, “Accounting for Income Taxes,Certain Investments in Debt and Equity Securities,” applies to all entities with available for sale and trading securities. SFAS No. 159 will be effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the effect SFAS No. 159 will have on its consolidated financial position, liquidity, or results of operations.
2) Acquisitions, Purchase of Minority Interest and New Businesses Whirlaway Acquisition On November 30, 2006, we purchased 100% of the common shares of Whirlaway Corporation (“Whirlaway”) from the sole shareholder for $24,337 in cash and a note payable due in 2007 to the Tax Deductionformer owner for $21,305. In addition, we incurred fees from third parties as part of the purchase of $730. The results of Whirlaway’s operations have been consolidated with NN, Inc. since the date of acquisition. Whirlaway is a high precision metal component and fluid control assembly manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries. Whirlaway produces highly engineered fluid control components and assemblies, shafts, and prismatic machined parts. Whirlaway has three locations in Ohio and through its wholly-owned subsidiary, Triumph, LLC (“Triumph”), one location in Tempe, Arizona. The acquisition of Whirlaway represents a first step in our efforts to create a precision metal components platform. The acquisition provides a base from which to create a profitable precision metal components business of significant size and scale over the next several years, consistent with our strategic business plan. The following table summarized the estimated fair values of assets acquired and liabilities assumed at date of acquisition. We are in the process of finalizing third party valuations of certain tangible and intangible assets. We expect this process to be complete in the first half of 2007 and plan to disclose the final allocation within our quarterly report on Qualified Production Activities Provided byForm 10-Q during 2007. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) At November 30, 2006 | | Current assets | $ 19,276 | Property, plant, and equipment | 25,837 | Other assets | 128 | Intangible assets subject to amortization | 7,180 | Intangible assets not subject to amortization | 900 | Goodwill | 2,352 | Total assets acquired | 55,673 | Current liabilities | 7,475 | Other long-term liabilities | 222 | Long term debt | 1,604 | Total liabilities assumed | 9,301 | Net asset acquired | $ 46,372 |
The intangible assets not subject to amortization are trade names that have indefinite lives. The intangible assets subject to amortization are customer contracts of $6,900, a covenant not to compete of $150, and a lease interest favorable to market of $130. The intangible assets subject to amortization have a weighted average life of approximately 19 years. Based on the American Jobs Creation ActCompany's analysis, all of 2004, issuedthe goodwill and effective on December 21, 2004,the deductionintangible assets will be treateddeductible and amortized over 15 years for federal tax. The following unaudited pro-forma financial information shows the revenue, net income, and earnings per share for the years ended December 31, 2006 and 2005, as a “special deduction” as described in FASB Statement No. 109. As such,though the special deductionacquisition of Whirlaway occurred at the beginning of each respective fiscal year. This pro-forma information has no effectbeen adjusted for the effects of purchase accounting on deferred taxthe assets and liabilities existing atacquired. These adjustments include amortization and depreciation based on allocated values of assets acquired, interest expense based on new debt incurred in acquisition, and recognizing the enactment date. Rather, the impacttax impacts of this deduction will be reported in the period in which qualifying activities occur.each adjustment.
| December 31, 2006 | December 31, 2005 | Revenues | $ 403,316 | $ 393,249 | Net income | $ 15,848 | $ 13,529 | Earnings per share basic | $ 0.93 | $ 0.80 | Earnings per share fully diluted | $ 0.91 | $ 0.79 |
The Act also creates a temporary incentive for U.S. corporationspro-forma financial results of Whirlaway in 2005 were dilutive due to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividendsabnormal operational inefficiencies at Triumph from controlled foreign corporations.the transitioning of products from Whirlaway and the integration of production processes. The deduction is subject to a numberoperations of limitationsTriumph and uncertainty remains as to how to interpret numerous provisionsWhirlaway were profitable in the Act. At this time, the Company does not expect to repatriate earnings under the provisions of the Act.2006.
2) Others | Acquisitions, Purchase of Minority Interest and New Businesses
|
On October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to purchase all of SNR’s internal precision ball producing equipment for approximately 5.0 million5,166 Euros ($6.0 million)6,200). As part of the agreement, we entered into a three yearthree-year supply agreement for the present business (about $8.0 million) and a five yearfive-year supply agreement to provide SNR with its annual ball requirements of the former in-house production for approximately $9.0 million. As of December 31, 2005,2006, the Company has purchased approximately $2.1 million$5,867 of the total $6.0$6,200 million of equipment and intangibles. Of this $2.1 million$5,867 purchased, approximately $1.6 million$3,536 has been recorded as tangible fixed assets, based on a third party appraisal, and approximately $0.5 million$2,331 related to the supply agreement has been recorded as an intangible asset in other non-currentwithin Intangible assets, net and is being amortized over the life of the agreement. NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products Company, Ltd, (“NN Asia”)Asia)”. This subsidiary, which began precision ball production during the fourth quarter of 2005, is located in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China and is a component of our strategy to globally expand our manufacturing base. The start -upstart-up costs incurred in 2005 and 2004 of approximately $1,102 and $481, respectively, were expensed as incurred.
On October 9, 2003, we acquired certain assets comprised of land, building and machinery and equipment of the precision ball operations of KLF - Gulickaren (“KLF”), based in Kysucke Nove Mesto, Slovakia. We paid consideration of approximately 1,664 Euros ($1,967).
On May 2, 2003 we acquired the 23 percent interest in NN Europe, ApS (“NN Europe”) held by SKF. We paid approximately 13,842 Euros ($15,586) for SKF’s interest in NN Europe. The excess of the purchase price paid to SKF for its 23% interest over the fair value of SKF’s 23% interest in the net assets of NN Europe of approximately $2,151 was allocated to goodwill. Upon consummation of this transaction, we became the sole owner of NN Europe.
On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage manufacturing operations of SKF in Veenendaal, The Netherlands. The results of Veenendaal’s operations have been included in the consolidated financial statements since that date. We paid consideration of approximately 22,952 Euros ($25,671) and incurred other costs of approximately $1,022, for the Veenendaal net assets acquired from SKF. The excess of the fair value of the net assets acquired over the purchase price paid of 4,195 Euros ($4,692) has been allocated as a proportionate reduction of certain assets acquired. The Veenendaal operation manufactures rollers for tapered roller bearings and metal cages for both tapered roller and spherical roller bearings allowing us to expand our bearing component offering.
In connection with the acquisition of SKF’s Veenendaal, The Netherlands operations, SKF purchased from us 700,000 shares of our common stock for an aggregate fair value of approximately $6,937 million which was applied to the purchase of SKF’s Veenendaal, The Netherlands operations. For purposes of valuing the 700,000 common shares issued in our consolidated financial statements, the value was determined based on the average market price of NN, Inc.’s common shares over the two-day period before, the day of, and the two-day period after the terms of the acquisition were agreed to on April 14, 2003.
The following table summarizes the allocation of the purchase price related to the assets acquired and liabilities assumed at the date of acquisition.
| At May 2, 2003
| Current assets | $ 6,611 | Property, plant and equipment | 27,690 | Total assets acquired | 34,301 | Total liabilities | 7,608 | Total purchase price | $ 26,693 |
The following unaudited proforma summary presents the financial information for the twelve month period ended December 31, 2003 as if our Veenendaal acquisition had occurred as of the beginning of the period presented. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of the period presented, nor are they indicative of future results.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
| Twelve months ended3)Restructuring and Impairment Charges
December 31, 2003
(unaudited)
| | | Net sales | $ 270,989 | Net income | 10,478 | Basic earnings per share | 0.66 | Diluted earnings per share | 0.64 |
3) | Restructuring and Impairment Charges
|
Eltmann, Germany Restructuring
During the fourth quarter of 2004, the Company’s NN Europe subsidiary announced a reduction in staffing at its Eltmann, Germany ball production facility. This restructuring affected 8384 employees and is expected bewas completed during 2006. The Company recorded restructuring charges during 2004 of approximately 1,700 Euro ($2,290) related to severance costs of approximately $2,115 and other related charges of approximately $175. The workforce reduction was a result of the Company’s continuing strategy of rationalizing its global manufacturing capacity and transfer of production principally to its facility in Kysucke Nove Mesto, Slovakia and other facilities. The charges were recorded in restructuring and impairment costs, a component of income from operations.
The following summarizes the 20052006 and 20042005 restructuring charges related to the restructuring at the Company’s Eltmann, Germany facility:
| Reserve Balance at 1/01/06 | Adjustment to Reserve | Paid in 2006 | Currency Impacts | Reserve Balance at 12/31/06 | Severance and other employee costs | $ 845 | $ (65) | $ (516) | $ 45 | $ 309 | Total | $ 845 | $ (65) | $ (516) | $ 45 | $ 309 | | | | | | | | Reserve Balance at 1/01/05 | Adjustment to Reserve | Paid in 2005 | Currency Impacts | Reserve Balance at 12/31/05 | Severance and other employee costs | $ 2,290 | $ (342) | $ (884) | $ (219) | $ 845 | Total | $ 2,290 | $ (342) | $ (884) | $ (219) | $ 845 |
| | Reserve Balance at 1/01/04 | | Charges | | Paid in 2004 | | Reserve Balance at 12/31/04 | | Severance and other employee costs | | $ | -- | | $ | 2,290 | | | -- | | $ | 2,290 | | Total | | $ | -- | | $ | 2,290 | | | -- | | $ | 2,290 | |
| | | | | | | | | | | | | Reserve Balance at 12/31/04 | | | Adjustment to Reserve | | | Paid in 2005 | | | Currency Impacts | | | Reserve Balance at 12/31/05 | | Severance and other employee costs | | $ | 2,290 | | $ | (342 | ) | $ | (884 | ) | $ | (219 | ) | $ | 845 | | Total | | $ | 2,290 | | $ | (342 | ) | $ | (884 | ) | $ | (219 | ) | $ | 845 | |
We expect to pay the remaining amountsamount reserved during 2006, and no additional charges are expected to be incurred. The Adjustment to Reserve amount shown in the above table represented a reduction in the reserve balance in 2005 because actual payouts made were lower in some cases than estimated when the original reserve was established. As a result of the workforce reduction and rationalization of global manufacturing capacity, we performed a test of the recoverability of the goodwill and long-lived assets associated with the Eltmann, Germany facility. This test was pursuant to the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” and Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment on Disposal of Long-Lived Assets” which require that interim tests of asset recoverability be performed under certain circumstances. As a result of the test, we concluded that no indication of impairment existed at December 31, 2004.
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
NN Arté Plant Closing in Guadalajara, Mexico
In May 2003, we decided to close our Guadalajara, Mexico plastic injection molding facility. This operation was started in September of 2000 to supply certain Mexican operations of multi-national manufacturers of office automation equipment. The closure was substantially completed during the third quarter of 2003. The financial results of this operation have been included in the Plastic and Rubber Components Segment.
The plant closing resulted in the termination of approximately 42 full-time hourly and salary employees located at the Guadalajara facility. For the twelve months ended December 31, 2003 total restructuring costs of $230 were recorded related to the severance payments for the affected employees.
As a result of the closing, we performed a test of the recoverability of the goodwill asset associated with the Guadalajara, Mexico operation. This test was pursuant to the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” which require that interim tests of the recoverability of goodwill be performed under certain circumstances. As a result, we recorded an impairment charge of approximately $1,285 to fully write-off the goodwill asset during the twelve month period ended December 31, 2003.
We sold much of the machinery and equipment with certain pieces of machinery and equipment to be transferred and utilized by our Industrial Molding facility in Lubbock, Texas. Pursuant to the provisions of Statement of Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets” we recorded an impairment charge of approximately $1,049 during 2003 to write-down the machinery and equipment to its estimated fair market value. During the three months ended September 30, 2003 we recorded a gain of $145 related to the disposition of certain pieces of the machinery and equipment assets that were previously assessed as impaired. During the twelve months ended December 31, 2003, we recorded a total impairment charge related to the machinery and equipment of approximately $904.
During 2003, we also recorded an accounts receivable write-down of $31 to reduce accounts receivable to its estimated fair market value. Additionally, we recorded an inventory write-down of $108 during 2003 to reduce the carrying value of inventory to its estimated fair market value. The amounts related to the inventory asset has been recorded as a component of cost of products sold.
The following summarizes the 2004 and 2003 restructuring and impairment charges related to the closure of NN Arté:
| | | Charges | | | Non-Cash Write-downs | | | Paid in 2004 | | | Reserve Balance At 12/31/04 | | Asset impairments | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | Lease exit costs | | | -- | | | -- | | | -- | | | -- | | Severance and other employee costs | | | -- | | | -- | | | 45 | | | -- | | Total | | $ | -- | | $ | -- | | $ | 45 | | $ | -- | |
| | Charges | | Non-Cash Write-downs | | Paid in 2003 | | Reserve Balance At 12/31/03 | | Asset impairments | | $ | 2,328 | | $ | 2,328 | | $ | -- | | $ | -- | | Lease exit costs | | | 40 | | | -- | | | 40 | | | -- | | Severance and other employee costs | | | 230 | | | -- | | | 185 | | $ | 45 | | Total | | $ | 2,598 | | $ | 2,328 | | $ | 225 | | $ | 45 | |
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
Walterboro, South Carolina Plant Closing
By December 2001, the closure of our Walterboro, South Carolina ball manufacturing facility was substantially completed. The land, building, and equipment assets with a recorded book value of $1,805 were held for sale at December 31, 2003. In arriving at the carrying value of the assets held for sale, we utilized independent, third party fair value appraisals and valuations. The land and building assets were sold at a loss during the fourth quarter of 2004. As a result, we recorded a loss of approximately $750 which has been recorded as a loss on disposal of assets, a component of income from operations. Additionally, during the fourth quarter of 2004, we recorded an impairment charge of approximately $108 related to certain remaining machinery and equipment assets of this facility. This amount was recorded as a component of restructuring and impairment costs.
4)Notes Receivable
Effective December 21, 2001, the Company sold its 50% ownership in NN General, LLC to its partner, General Bearing Corporation for cash of $622 and notes of $3,305. The notes arenote was due in annual installments of $200 with the balance of $2,505 due on December 21, 2006. The notes bear interest at an average LIBOR (4.54% atnote was paid in full by General Bearing Corporation in December 31, 2005) plus 1.5%.2006. Interest income on this note of $164, $129, and $86 was recorded during 2006, 2005, and 2004, respectively, and has been included as a component of other income in the accompanying consolidated statement of income. Payments totaling $329$2,669 and $286$329 were received during 20052006 and 2004,2005, respectively which includeincluded $2,505 and $200 of principal and $129$164 and $86$129 of interest payments, respectively. At December 31, 2005, the note receivable balance is $2,505 and is included as a component of other current assets and $2,705 is included in other non-current assets at December 31, 2004. The note is current as to payments of principal and interest. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data) 5)Accounts Receivable and Sales Concentrations
5) | | Accounts ReceivableDecember 31,
|
| 2006 | 2005 | 2004 | Trade | $ 64,720 | $ 48,416 | $ 53,331 | Less - Allowance for doubtful accounts | 1,278 | 1,119 | 1,734 | | | | | Accounts receivable, net | $63,442 | $ 47,297 | $ 51,597 |
| | | December 31, | | | | | 2005 | | | 2004 | | | | | | | | | | Trade | | $ | 48,416 | | $ | 53,331 | | Less - Allowance for doubtful accounts | | | 1,119 | | | 1,734 | | | | | | | | | | Accounts receivable, net | | $ | 47,297 | | $ | 51,597 | |
Activity in the allowance for doubtful accounts is as follows: Description | | Balance at beginning of year | | Additions | | Write-offs | | Currency Impacts | | Balance at end of year | | December 31, 2003 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 1,666 | | $ | 151 | | $ | 69 | | | 7 | | $ | 1,755 | | | | | | | | | | | | | | | | | | | December 31, 2004 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 1,755 | | $ | 14 | | $ | 43 | | | 8 | | $ | 1,734 | | | | | | | | | | | | | | | | | | | December 31, 2005 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 1,734 | | $ | 287 | | $ | 871 | | | (31 | ) | $ | 1,119 | |
In 2005, the Company established a reserve of $218 for approximately 100% of the receivables of Delphi Corporation, which filed for Chapter 11 bankruptcy during the year. Also in 2005, the Company wrote off $827 in disputed receivables from a customer due to bankruptcy. All of the amounts written off had been fully reserved.
Description | Balance at beginning of year | Additions | Write-offs | Currency Impacts | Reserve acquired in acquisition | Balance at end of year | | | | | | | December 31, 2004 | | | | | | | Allowance for doubtful accounts | $ 1,755 | $ 14 | $ (43) | $ 8 | $ -- | $ 1,734 | | | | | | | | December 31, 2005 | | | | | | | Allowance for doubtful accounts | $ 1,734 | $ 287 | $ (871) | $ (31) | $ -- | $ 1,119 | | | | | | | | December 31, 2006 | | | | | | | Allowance for doubtful accounts | $ 1,119 | $ 311 | $ (818) | $ 10 | $ 656 | $ 1,278 |
| | December 31, | | | | 2005 | | 2004 | | Raw materials | | $ | 10,153 | | $ | 8,584 | | Work in process | | | 5,845 | | | 6,356 | | Finished goods | | | 23,587 | | | 22,334 | | Less-inventory reserve | | | (1,489 | ) | | (1,645 | ) | | | | | | | | | Inventories, net | | $ | 38,096 | | $ | 35,629 | |
For the years ended December 31, 2006, 2005 and 2004, sales to SKF amounted to $150,841, $151,175 and $145,534, respectively, or 45.6%, 47.0%, and 47.9%, of consolidated revenues, respectively. For the years ended December 31, 2006, 2005 and 2004, sales to Schaeffler Group (INA) amounted to $37,283, $41,399, and $41,693, respectively, or 11.3%, 12.9%, and 13.7% of consolidated revenues, respectively. None of the Company's other customers accounted for more than 10% of our net sales in 2006, 2005 or 2004. SKF was the only customer with an Accounts Receivable concentration in excess of 10%. This outstanding balance as of December 31, 2006 and 2005 was $23,403 and $16,151 respectively. All revenues and receivable related to SKF and INA are in the Metal Bearing Components and Plastics and Rubber Components segments.6)Inventories | December 31, | | 2006 | 2005 | Raw materials | $11,828 | $ 10,153 | Work in process | 10,427 | 5,845 | Finished goods | 23,596 | 23,587 | Less-inventory reserve | (2,313) | (1,489) | | | | Inventories, net | $ 43,538 | $ 38,096 |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) Inventory on consignment at customers’ sites at December 31, 20052006 and 20042005 was approximately $4,554 and $4,669, and $3,755, respectively. NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
7)Property, Plant and Equipment
| | | | December 31, | | | December 31, | | | Estimated Useful Life | | 2005 | | 2004 | | Estimated Useful Life | 2006 | 2005 | Land owned | | | | | $ | 6,431 | | $ | 8,454 | | | $ 7,020 | $ 6,431 | Land under capital lease | | | | | | 408 | | | -- | | | 422 | 408 | Buildings and improvements owned | | | 15-40 years | | | 31,093 | | | 30,833 | | 15-40 years | 39,072 | 31,093 | Buildings under capital leases | | | 20 years | | | 1,490 | | | -- | | 20 years | 1,564 | 1,490 | Machinery and equipment | | | 3-12 years | | | 166,555 | | | 168,561 | | 3-12 years | 209,493 | 166,555 | Construction in process | | | | | | 10,597 | | | 11,249 | | | 12,764 | 10,597 | | | | | | | | | | | | | | | | | | | | | 216,574 | | | 219,097 | | | 270,335 | 216,574 | Less - accumulated depreciation | | | | | | 97,745 | | | 87,928 | | | 113,888 | 97,745 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | | | $ | 118,829 | | $ | 131,169 | | | $ 156,447 | $ 118,829 |
On November 30, 2006, we added $25,837 in fixed assets with the purchase of Whirlaway. (See Note 2). During January 2006, we completed the sale of excess land and two small buildings at NN Europe's Pinerolo plant with a net book value of $1,013. The proceeds from the sale were $2,804, resulting in a pre-tax gain of $1,791. In addition, the Pinerolo plant disposed of excess machinery in the first quarter of 2006 with a net book value of $1,087 resulting in a pre-tax loss of $1,062. In December 2005, we sold excess land at our Veenendaal, The Netherlands division. Prior to the sale, this asset was classified as a component of property, plant and equipment, net. The land had a book value at the time of sale of $383. The proceeds of the sale were $815, which resulted in a gain on disposal of assets of $432.
During January 2006, we completed the sale of excess land and two small buildings at NN Europe’s Pinerolo plant. As a result of this planned sale, the carrying value reclassified from land and building to Assets Held for Sale was approximately $978 and $94, respectively as of December 31, 2005. These assets were sold for a gain of approximately $1,680 which will be recognized in the first quarter of 2006.
The land and building assets of the idle Walterboro, South Carolina ball manufacturing facility were sold at a loss during the fourth quarter of 2004. As a result, we recorded a loss on disposal of assets of approximately $750 which was recorded as a loss on disposal of assets, a component of income from operations. Additionally, during the fourth quarter of 2004, we recorded an impairment charge of approximately $108 related to certain remaining machinery and equipment assets of this facility to write these assets down to their net realizable value based on a fair market-value appraisals and valuations. This amount was recorded as a restructuring and impairment cost.
On October 27, 2004, we completed the sale of our idle warehouse in Kilkenny, Ireland for approximately 1,580 Euros ($1,959), net of selling costs incurred. As a result of this transaction, we recorded a loss on disposal of assets of approximately 37 Euros ($46) during the fourth quarter which was recorded as a component of loss on disposal of assets. Prior to the sale this asset was classified as a component of property, plant and equipment, net.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
There were no short term loans outstanding at December 31, 20052006 and 2004.2005. Long-term debt at December 31, 20052006 and 20042005 consisted of the following: | | 2005 | | 2004 | | 2006 | 2005 | Borrowings under our $90,000 revolving credit facility bearing interest at a floating rate equal to LIBOR (5.36% at December 31, 2006) plus an applicable margin of 0.60 to 0.925, expiring September 20, 2011 | | $ 39,466 | $ -- | | | | | | | | | Borrowings under our $30,000 revolving credit facility bearing interest at a floating rate equal to LIBOR (4.54% at December 31, 2005) plus an applicable margin of 1.25 to 2.0, expiring on June 30, 2007 | | $ | 17,900 | | $ | 11,400 | | | Borrowings under our $30,000 revolving credit facility bearing interest at a floating rate equal to LIBOR plus an applicable margin of 1.25 to 2.0, originally expiring on June 30, 2007 and retired on September 21, 2006 | | -- | $ 17,900 | | | | | | | | | | | Borrowings under our 26,300 Euro term loan expiring on May 1, 2008, bearing interest at a floating rate equal to Euro LIBOR (2.49% at December 31, 2005) plus an applicable margin of 1.25 to 2.0 payable in quarterly installments of Euro 1,314 beginning July 1, 2003 through April 1, 2008 | | | 4,668 | | | 23,270 | | | Borrowings under our 26,300 Euro term loan expiring on May 1, 2008, bearing interest at a floating rate equal to Euro LIBOR plus an applicable margin of 1.25 to 2.0 payable in quarterly installments of Euro 1,314 beginning July 1, 2003 through April 1, 2008. Paid in full and retired on September 21, 2006 | | -- | 4,668 | | | | | | | | | | | Borrowings under our $40,000 aggregate principal amount of senior notes bearing interest at a fixed rate of 4.89% maturing on April 26, 2014. Annual principal payments of $5,714 begin on April 26, 2008 and extend through the date of maturity. | | | 40,000 | | | 40,000 | | 40,000 | 40,000 | | | | | Long term note payable with customer related to acquiring equipment from customer as part of long term supply agreement. Note carries a 0% rate of interest. Interest on this note has been imputed at a rate of 5.41%. Note is paid down by applying a fixed amount per piece purchased by customer. | | 2,096 | -- | | | | | | | | | | | Total long-term debt | | | 62,568 | | | 74,670 | | 81,562 | 62,568 | | | | | | | | | | | Less current maturities of long-term debt | | | 4,668 | | | 7,160 | | 851 | 4,668 | | | | | | | | | | | Long-term debt, excluding current maturities of long-term debt | | $ | 57,900 | | $ | 67,510 | | $ 80,711 | $ 57,900 |
On May 1, 2003 in connection withSeptember 21, 2006, the purchase of SKF’s Veenendaal component manufacturing operations and SKF’s 23 percent interest in NN Europe, weCompany entered into a $90,000 syndicatedfive-year $90.0 million revolving credit facility maturing in September 2011 with Key Bank as the administrative agent. This facility can be increased to a maximum of $120.0 million under certain conditions specified in the agreement. The credit facility provides the Company the ability to borrow in US dollars at LIBOR plus an applicable margin of .60% to .925% or Euros at EURIBOR plus an applicable margin of .60% to .925%. The facility has a $10.0 million swing line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. Costs associated with entering into the revolving credit facility were capitalized and will be amortized into interest expense over the life of the facility. As of December 31, 2006, $511 of net capitalized loan origination cost was on the balance sheet within other assets and the gross amount was presented in the Financing Activities section of the Statement of Cash Flows. This new credit facility replaced our prior $90.0 million credit facility with AmSouth Bank (“AmSouth”) as the administrative agent and SunTrust Bank as the Euro loan agent for the lenders under which we borrowed $60,400 and 26,300 Euros ($29,600) (the “$90 million credit facility”). This financing arrangement replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg, S.A. The credit facility as originally entered into consisted of a $30,000 revolver (“$30.0 million revolver”) originally expiring on March 15, 2005 and subsequently extended to March 31, 2006 and extended again to June 30, 2007 bearing interest at a floating rate equal to LIBOR (4.54% at December 31, 2005) plus an applicable margin of 1.25% to 2.0%, a $30,400 term loan expiring on May 1, 2008, bearing interest at a floating rate equal to LIBOR (4.54% at December 31, 2005) plus an applicable margin of 1.25% to 2.0% and a 26,300 Euro ($29,600) term loan (“26.3 million Euro term loan”) expiring on May 1, 2008 which bears interest at a floating rate equal to Euro LIBOR (2.49% at December 31, 2005) plus an applicable margin of 1.25% to 2.0%. All amounts owed under the $30,400 term loan were paid during the second quarter of 2004 with the proceeds from our $40,000 notes and we no longer have borrowing capacity under that portion of the $90,000 credit facility. The terms of the $30,000 revolver and the 26,300 Euro term loan remain unchanged except for the maturity date of the $30,000 revolver has been extended to June 30, 2007.agent. The loan agreement contains customary financial and non-financial covenants. Such covenants specifyspecifying that we must maintain certain liquidity measures. The loan agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitionsmerger, acquisition and other fundamental changes in the Company’s business. The credit agreement is un-collateralized except forcollateralized by the pledge of stock of certain foreign subsidiaries. The net equityand domestic subsidiaries and guarantees of the NN Europe Segment subsidiaries that have pledged their stock as collateral was $83,386 and this equity was included in the 2005 Consolidated Financial Statements. In connection with this refinancing, capitalized costs in the amount of $455 associated with the paid-off credit facilities were written-off during 2003 and are included as a component of other (income) expense. We incurred $1.1 million of debt issue costs as a result of entering into this credit facility which are being amortized over the life of the credit facility. The unamortized balance at December 31, 2005 was $0.4 million. We were in compliance with all such covenants as of December 31, 2005. certain domestic subsidiaries. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
In connection
The $4,668 under the Euro term loan classified as current portion of long-term debt at December 31, 2005 was repaid in the first quarter of 2006. The borrowings under the 26,300 Euro term loan have all been repaid and the facility was replaced with the acquisition of KLF’s operations in Slovakia, on September 23, 2003 we entered into a $2,000 short-term unsecured promissory note (the “$2.0 million note”) with AmSouth asnew facility discussed above. Capitalized loan costs related to the lender. This note bore interest at the prime rate. All amounts owed under this noteformer facility amounting to $228 were paidwritten off during the second quarter of 2004 with the proceeds from our $40 million notes.2006.
On March 23, 2004 we entered into a $2,700 short-term promissory note (the “$2.7 million note”) with AmSouth Bank (“AmSouth”) as the lender. This note bore interest at the prime rate. This agreement was entered into to fund short term operating capital requirements. All amounts owed under this note were paid during the second quarter of 2004 with the proceeds from our $40 million notes.
On April 26, 2004 we issued $40,000 aggregate principal amount of senior notes in a private placement (the “$40 million notes”). These notes bear interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid semi-annually. As of December 31, 2005,2006, $40.0 million remained outstanding. Annual principal payments of approximately $5,714 begin on April 26, 2008 and extend through the date of maturity. Proceeds from this credit facility were used to repay our existing US dollar denominated term loan, $24,000, and repay a portion, of our borrowings under our US dollar denominated revolving credit facility, $13,000, which are both components of our $90 million credit facility, and to repay borrowings remaining under our $2.0 million note and our $2.7 million note of $2,000 and $1,000, respectively. The agreement contains customary financial and non-financial covenants. Such covenants specify that we must maintain certain liquidity measures. The agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business. No event of default had occurred as of December 31, 2005. The notes are not collateralized except forby the pledge of stock of certain foreign subsidiaries. The net equity of the NN Europecertain Metal Bearing Components Segment subsidiaries that have pledged their stock as collateral was $83,386 and this equity was included in the 2005 Consolidated Financial Statements.$74,231 as of December 31, 2006. We incurred $845 of related costs as a result of issuing these notes which have been recorded as a component of other non-current assets and are being amortized over the term of the notes. The unamortized balance at December 31, 20052006 was $0.7 million. In connection$620. We were in compliance with all covenants related to the issuance of the $40 million notes, capitalized costs in the amount of approximately $260 associated with structuring of the $90new $90.0 million credit facility were written off duringand the three months ended June 30, 2004 and are included$40.0 million senior notes as a component of other (income) expense.December 31, 2006.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 20052006 are as follows: 2006 | | $ 4,668 | | 2007 | | 17,900 | $ 851 | 2008 | | 5,714 | 6,269 | 2009 | | 5,714 | 6,241 | 2010 | | 5,714 | 6,143 | 2011 | | 44,914 | Thereafter | | 22,858 | 17,144 | Total | | $ 62,568 | $ 81,562 |
On June 1, 2004, our wholly owned subsidiary, NN Asia, entered into a twenty year lease agreement with Kunshan Tian Li Steel Structure Co. LTD for the lease of land and building (approximately 110,000 square feet) in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China. The building was newly constructed and we began usage of the leased property October 1, 2005. The agreement satisfied the requirements of a capital lease at June 1, 2004 and we recorded the lease as a capital lease in our consolidated financial statements effective October 1, 2005. The fair value of the land and building are estimated to be approximately $408 and $1,509, respectively and undiscounted annual lease payments of approximately $224 (approximately $4,482 aggregate non-discounted lease payments over the twenty year term). The lease is cancelable after the fifth, ninth, and fourteenth years without payment or penalty by the Company. In addition, after the end of year five we can buy the land for its ascribed fair value and the building for actual cost less depreciation. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data) Below are the minimum future lease payments under the capital lease together with the present value of the net minimum lease payments as of December 31, 2005:2006:
Year ended December 31 | 2006 | $224 | 2007 | 224 | 2008 | 224 | 2009 | 224 | 2010 | 224 | Thereafter | 3,305 | Total minimum lease payments | 4,425 | Less interest included in payments above | (2,516) | Present value of minimum lease payments at 12/31/05 | $1,909 |
Year ended December 31 | 2007 | $ 224 | 2008 | 224 | 2009 | 224 | 2010 | 224 | 2011 | 224 | Thereafter | 3,082 | Total minimum lease payments | 4,202 | Less interest included in payments above | (2,324) | Present value of minimum lease payments at 12/31/06 | $ 1,878 |
NN, Inc.9)Employee Benefit Plans
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
9) | Employee Benefit Plans
|
We have one defined contribution 401(k) profit sharing plan covering substantially all U.S. employees of the Domestic Ball and RollerMetal Bearing Components and Plastic and Rubber Components Segments.segments. All employees are eligible for the plan on the first day of the month following their employment date. A participant may elect to contribute between 1% and 60% of their compensation to the plan, subject to Internal Revenue Service (“IRS”) dollar limitations. Participants age 50 and older may defer an additional amount up to the applicable IRS Catch Up Provision Limit. The Company provides a matching contribution which is determined on an individual, participating company basis. Currently, the matching contribution for U.S. employees of the Domestic Ball and RollerMetal Bearing Components Segment is the highergreater of five hundred dollars or 50% of the first 4% of compensation.compensation contributed. The matching contribution for IMC employees is 25% of the first 6% of compensation contributed and the matching contribution for Delta employees is 50% of the first 6% of compensation.compensation contributed. All participants are immediately vested at 100%. Contributions by the Company for the Domestic Ball and RollerMetal Bearing Components Segment were $146, $139, and $134 in 2006, 2005, and $126 in 2005, 2004, and 2003, respectively. Contributions by the Company for the Plastic and Rubber Components Segment were $110, $128, and $133 in 2006, 2005 and $126 in 2005, 2004, and 2003, respectively.
The Company has a defined benefit pension plan covering its Eltmann, Germany facility employees (a NN Europe division).employees. The benefits are based on the expected years of service including the rate of compensation increase.service. The plan is unfunded.
For the year ended December 31, 2006, we accounted for the Eltmann plan under SFAS 158. The impact of this adoption was to increase the Pension Liability by $491, to increase accumulated other comprehensive income by $313 (net of $178 in taxes) and increase non-current deferred tax asset by $178. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) Following is a summary of the funded status and changes in the projected benefit obligation for the defined benefit pension plan during 20052006 and 2004:2005: | 2006 | | 2005 | Reconciliation of Funded Status: | | | | Benefit obligation | $ (5,167) | | $ (5,616) | Fair value of plan assets | -- | | -- | Funded status | $ (5,167) | | (5,616) | Unrecognized net actuarial loss | -- | | 1,668 | Additional minimum liability | -- | | (1,191) | Net amount recognized under Accrued Pension | $ (5,167) | | $ (5,139) | | | | | Items not yet recognized as a component of net periodic pension cost: | | | | Unrecognized net actuarial loss | $ 618 | | $ 1,191 |
| 2005 | | 2004 | Reconciliation of Funded Status: | | | | Benefit obligation | $ (5,616) | | $ (4,957) | Fair value of plan assets | -- | | -- | Funded status | (5,616) | | (4,957) | Unrecognized net actuarial loss | 1,668 | | 751 | Additional minimum liability | (1,191) | | (327) | Net amount recognized under Accrued Pension | $ (5,139) | | $ (4,533) |
| 2006 | | 2005 | Change in projected benefit obligation: | | | | Benefit obligation at beginning of year | $ 5,616 | | $ 4,957 | Service cost | -- | | 110 | Interest cost | 218 | | 230 | Benefits paid | (84) | | (60) | Effect of currency translation | 597 | | (647) | Curtailment gain | (1,147) | | -- | Actuarial (gain) loss | (33) | | 1,026 | | | | | Benefit obligation at December 31 | $ 5,167 | | $ 5,616 |
| 2005 | | 2004 | Change in projected benefit obligation: | | | | Benefit obligation at beginning of year | $ 4,957 | | $ 4,196 | Service cost | 110 | | 119 | Interest cost | 230 | | 242 | Benefits paid | (60) | | (65) | Effect of currency translation | (647) | | 329 | Actuarial loss | 1,026 | | 136 | | | | | Benefit obligation at December 31 | $ 5,616 | | $4,957 |
| | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | Weighted-average assumptions as of December 31: | | | | | | | | | | | Discount rate | | | 4.25 | % | | 5.25 | % | | 5.5 | % | 4.5% | | 4.25% | Rate of compensation increase | | | 1.5% - 2.5 | % | | 1.3%-2.5 | % | | 1.3%-2.5 | % | 0% - 1.5% | | 1.5% - 2.5% | Measurement date | | | 10/31/05 | | | 10/31/04 | | | 10/31/03 | | 10/31/06 | | 10/31/05 |
In determining the pension discount rate to be used for the Company'sCompany’s German defined benefit plan, the Company utilizes the German Federal Reserve Bank yield curve for high quality corporate bonds. bonds with maturities that are consistent with the projected future benefit obligations of the plan. NN, Inc.
Notes to Consolidated Financial Statements
During the year ended December 31, 2005, 20042006, the Plan benefits were curtailed by not allowing new employees to join the plan and 2003 (In thousands, except per share data)by eliminating any effects of future wage increases. The net effect was to decrease the benefit obligation and the unrecognized net loss by $1,147. The rate of compensation increase of 1.5% only applies to current retirees.
The expected pension benefit payments for the next ten fiscal years are as follows:
| | Pension Benefits | | Pension Benefits | 2006 | | $ 61 | | 2007 | | 132 | | $ 112 | 2008 | | 147 | | 134 | 2009 | | 165 | | 150 | 2010 | | 186 | | 173 | 2011-2015 | | 1,259 | | 2011 | | | 186 | 2012-2016 | | | 1,221 |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data)
| 2006 | | 2005 | | 2004 | | | | | | | Components of net periodic benefit cost: | | | | | | Service cost | $ -- | | $ 110 | | $ 119 | Interest cost on projected benefit obligation | 218 | | 230 | | 242 | Amortization of net loss | 8 | | 11 | | 9 | | | | | | | Net periodic pension benefit cost | $ 226 | | $ 351 | | $ 370 |
| 2005 | | 2004 | | 2003 | Components of net periodic benefit cost: | | | | | | Service cost | $ 110 | | $ 119 | | $ 120 | Interest cost on projected benefit obligation | 230 | | 242 | | 222 | Amortization of net loss | 11 | | 9 | | 13 | | | | | | | Net periodic pension benefit cost | $ 351 | | $ 370 | | $ 355 |
| 2006 | | 2005 | | 2004 | | | | | | | Amounts Recognized in Accumulated Other Comprehensive Income: | | | | | | Period Actuarial (gain) loss | $ (33) | | $ 1,026 | | $ 136 | | | | | | | Curtailment gain | 1,147 | | -- | | -- | FAS 158 adoption Impact | (491) | | -- | | -- | | | | | | | Net periodic pension (benefit) cost | $ (623) | | $ 1,026 | | $ 136 |
The amount of actuarial loss expected to be a component of net pension cost in 2007 is $6. We do not expect to make any contributions to the plan in 20062007 or thereafter in excess of the pension benefit payments listed above.
Severance Indemnity
In accordance with Italian law, the Company has an unfunded severance plan under which all employees are entitled to receive severance indemnities (Trattamento di Fine Rapporto or “TFR”) upon termination of their employment.
The amount payable is based on salary paid and increases in cost of living. The severance indemnities accrue approximately at the rate of 1/13.5 of the gross salaries paid during the year, and are revalued applying a cost of living factor established by the Italian Government. The amounts accrued become payable upon termination of the individual employee, for any reason, e.g., retirement, dismissal or reduction in work force. Employees are fully vested in TFR benefits after their first year of service. The amounts shown in the table below represent the actual liability at December 31, 20052006 and 20042005 reported under Accrued Pension.
The following table details the changes in Italian severance indemnity for the years ended December 31, 20052006 and 2004:2005:
| | 2005 | | 2004 | | 2006 | | 2005 | Beginning balance | | $ | (7,503 | ) | $ | (7,156 | ) | $(6,644) | | $(7,503) | Amounts accrued | | | (983 | ) | | (958 | ) | (1,036) | | (983) | Payments to employees | | | 718 | | | 1,050 | | 320 | | 718 | Payments to pension funds | | | 120 | | | 37 | | 130 | | 120 | Tax prepayments | | | 19 | | | 66 | | -- | | 19 | Foreign Exchange | | | 985 | | | (542 | ) | (790) | | 985 | Ending Balance | | $ | (6,644 | ) | $ | (7,503 | ) | $(8,020) | | $(6,644) |
10)Stock Compensation On January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment.” SFAS No. 123(R) replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and amends SFAS No. 95 “Statement of Cash Flows.” Prior to adoption of SFAS No. 123(R) the Company followed the disclosure-only requirements of SFAS No. 123 and continued to account for stock compensation under the requirements of APB No. 25. The Company adopted SFAS No. 123(R) using the modified prospective method that requires compensation expense of all employee and non-employee director share-based compensation awards to be recognized in the financial statements based upon their fair value over the requisite service or vesting period for all new awards granted after the effective date and for all awards granted prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. Under the requirements of APB No. 25, the Company was required to recognize compensation cost only for stock option awards granted at a price lower than the market price at the date of grant. Effective with adoption of SFAS No. 123(R), compensation expense related to stock option awards is recognized in the financial statements at the fair value of the award. The Company accounts for restricted share awards by recognizing the fair value of the awarded stock at the grant date as compensation expense over the vesting period, less anticipated forfeitures. In accordance with implementation requirements of SFAS No. 123(R) under the modified prospective method, the Company did not restate prior fiscal periods and is required to continue the same disclosure only requirements of SFAS No. 123 for comparative purposes until all periods reported are comparable on the same basis. The following table illustrates the reported net earnings for 2005 and 2004 and pro-forma net earnings for 2005 and 2004 including the effects of expensing stock options and the related assumptions used. | | Year ended December 31, | (In Thousands, Except per Share Data) | | 2005 | | 2004 | Net income - as reported | | $ 15,012 | | $ 7,102 | Stock based compensation (income) expense, net of income tax, included in net income as reported | | (182) | | 27 | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | (860) | | (494) | Net income pro-forma | | $ 13,970 | | $ 6,635 | | | | | | Basic earnings per share - as reported | | $ 0.88 | | $ 0.42 | Stock based compensation (income) expense, net of income tax, included in net income as reported | | (0.01) | | -- | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | (0.05) | | (0.02) | Basic earnings per share - pro-forma | | $ 0.82 | | $ 0.40 | | | | | | Earnings per share-assuming dilution - as reported | | $ 0.87 | | $ 0.41 | Stock based compensation (income) expense, net of income tax, included in net income as reported | | (0.01) | | -- | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | (0.05) | | (0.02) | Earnings per share - assuming dilution-pro-forma | | $ 0.81 | | $ 0.39 |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2005, 2004 and 2003 (In thousands, except per share data)
10) Stock Incentive Plan
The Company has a Stock Incentive Plan under which 2,450 shares of the Company’s common stock are reserved for issuance to officers and key employees of the Company. Awards or grants under the plan may be made in the form of incentive and nonqualified stock options, stock appreciation rights, and restricted stock. The stock options must be issued with an exercise price not less than the fair market value of the Common Stock on the date of grant. The awards or grants under the plan may have various vesting and expiration periods as determined at the discretion of the committee administering the plan.
A summary of the status of the Company’s stock option plan as described above as of December 31, 2005, 2004 and 2003, and changes during the years ended on those dates is presented below:
| | 2005 | | 2004 | | 2003 | | | | Shares | | Weighted-average exercise price Per share | | Shares | | Weighted-average exercise price per share | | Shares | | Weighted-average exercise price per share | | | | | | | | | | | | | | | | Outstanding at beginning of year | | | 1,559 | | $ | 8.82 | | | 1,251 | | $ | 7.53 | | | 1,318 | | $ | 7.33 | | | | | | | | | | | | | | | | | | | | | | Granted | | | 267 | | | 11.61 | | | 438 | | | 12.62 | | | 52 | | | 10.67 | | | | | | | | | | | | | | | | | | | | | | Exercised | | | (377 | ) | | 7.55 | | | (65 | ) | | 7.12 | | | (108 | ) | | 6.74 | | | | | | | | | | | | | | | | | | | | | | Forfeited | | | (46 | ) | | 12.50 | | | (65 | ) | | 11.48 | | | (11 | ) | | 7.63 | | | | | | | | | | | | | | | | | | | | | | Outstanding at end of year | | | 1,403 | | $ | 9.56 | | | 1,559 | | $ | 8.82 | | | 1,251 | | $ | 7.53 | | | | | | | | | | | | | | | | | | | | | | Options exercisable at year-end | | | 1,403 | | $ | 9.56 | | | 1,086 | | $ | 7.84 | | | 1,058 | | $ | 7.27 | |
The vesting of 420 options outstanding, with strike prices ranging from $10.67 to $12.62, were accelerated on December 16,2006, 2005 and these shares became fully vested at that date. The 2005 proforma compensation expense from vesting these options was approximately $672 after tax and is reported only in the proforma schedule below. As the exercise prices were above the market value of the stock at the date of acceleration, there was no compensation expense recognized in the 2005 financial statements. These options were vested primarily to reduce compensation expense that would be recorded upon the adoption of FAS 123 (R) on January 1, 2006.2004
We have elected to continue accounting for our stock option compensation plan using the intrinsic value based method under APB Opinion No. 25 and accordingly have not recorded compensation expense for stock options for each of the three years ended December 31, 2005, 2004, and 2003.
Had compensation cost for the Company’s stock compensation plan been determined based on the fair value at the option grant dates consistent with the method of SFAS No. 123 and SFAS No. 148, the Company’s net income and earnings per share would have been as follows:
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
| | Year ended December 31, | | | | | 2005 | | | 2004 | | | 2003 | | Net income - as reported | | $ | 15,012 | | $ | 7,102 | | $ | 10,178 | | Stock based compensation costs (income) for options only, net of income tax, included in net income as reported | | | (182 | ) | | 27 | | | 160 | | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | | (860 | ) | | (494 | ) | | (1,001 | ) | Net income - proforma | | $ | 13,970 | | $ | 6,635 | | $ | 9,337 | | | | | | | | | | | | | Earnings per share - as reported | | $ | 0.88 | | $ | 0.42 | | $ | 0.64 | | Stock based compensation costs, net of income tax, included in net income as reported | | | (0.01 | ) | | -- | | | 0.01 | | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | | (0.05 | ) | | (0.02 | ) | | (0.06 | ) | Earnings per share - proforma | | $ | 0.82 | | $ | 0.40 | | $ | 0.59 | | | | | | | | | | | | | Earnings per share-assuming dilution - as reported | | $ | 0.87 | | $ | 0.41 | | $ | 0.62 | | Stock based compensation costs, net of income tax, included in net income as reported | | | (0.01 | ) | | -- | | | 0.01 | | Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied | | | (0.05 | ) | | (0.02 | ) | | (0.06 | ) | Earnings per share - assuming dilution-proforma | | $ | 0.81 | | $ | 0.39 | | $ | 0.57 | |
The fair value of each option grant was estimated based on actual information available through December 31, 2005, 2004 and 2003 using the Black Scholes option-pricing model with the following assumptions:
Term | | Vesting periodPeriod | Risk free interest rate | | 4.35%, 3.25%, and 3.38%3.25% for 2005 2004 and 2003,2004, respectively | Dividend yield | | 3.02%, 2.42%, and 3.7%2.42% annually for 2005 2004 and 2003,2004, respectively | Volatility | Expected volatility | 44.6%, and 48.4%, and 49.8% for 2005 2004 and 2003,2004, respectively |
NN, Inc.
Notes to Consolidated Financial Statements
In the year ended December 31, 2005, 20042006, approximately $464 of compensation expense was recognized in selling, general and 2003 (In thousands, except per share data)
administrative expense for all share-based awards. The following table summarizes information aboutcost recognized related to the restricted stock awards was $283. The compensation expense recognized related to stock options outstanding at$181. The impact on net income of all stock based compensation expense in the year ended December 31, 2005:
| | Options outstanding | | Options exercisable | | Range of exercise prices per share | | Number outstanding at 12/31/2005 | | Weighted- average remaining contractual life | | Weighted- average exercise price per share | | Number exercisable at 12/31/2005 | | Weighted- average exercise price Per share | | | | | | | | | | | | | | | | | | | $5.63 - $9.75 | | | 206 | | | 3.9 years | | $ | 6.02 | | | 206 | | $ | 6.02 | | | | | | | | | | | | | | | | | | | $7.63 - $12.62 | | | 1,197 | | | 7.6 years | | $ | 10.17 | | | 1,197 | | $ | 10.17 | |
2006 was approximately $362, net of tax benefits of $102. All optionsStock Option Awards
Option awards are typically granted to non-employee directors and key employees on an annual basis. A single option grant is typically awarded to eligible employees and non-employee directors in the period January 1, 1999 through December 31, 2005third quarter of each year if and when granted by the Compensation Committee of the Board of Directors and occasional individual grants are fully vested as of December 31, 2005 due in partawarded to eligible employees throughout the year. All employee and non-employee directors are awarded options at an exercise price equal to the acceleration of the vesting of shares mentioned above. The exercise price of each option equals the marketclosing price of the Company’s stock on the date of grant,grant. The term life of options is ten years with vesting periods of generally three years for key employees and one year for non-employee directors. The fair value of options cannot be determined by market value as our options are not traded in an open market. Accordingly, a financial pricing model is utilized to determine fair value. The Company utilizes the Black Scholes model which relies on certain assumptions to estimate an option’s maximum term is 10 years. Certainfair value. During 2006, the Company granted 172 options granted in July 1999 were deemed to be repricedcertain key employees and non-employee directors. The number of options available for future issuance under the applicable accounting requirements. Thesecurrent plan is 808. Upon exercise of stock options, which were fully vested asnew shares of the effective dateCompany's stock are issued. The weighted -average assumptions relevant to determining the fair value at the dates of FASB Interpretation No. 44,grant are treated under variable accounting. Accordingly, compensation expensebelow:
Term | 6 years | Risk free interest rate | 4.90% | Dividend yield | 2.81% | Expected volatility | 43.63% | Expected forfeiture rate | 6.20% |
The expected volatility rate is recognized, toderived from actual Company common stock historical volatility over the extentsame time period as the expected term. The volatility rate is derived by mathematical formula utilizing daily closing price data. The expected dividend yield is derived by mathematical formula which uses the expected Company annual dividends over the expected term divided by the fair market pricevalue of the Company’s common stock exceeds $10.50 at the endgrant date. The average risk-free interest rate is derived from United States Department of each year. Treasury published interest rates of daily yield curves for the same time period as the expected term. The Company recognized a reduction inforfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees and non-employee directors. While the forfeiture rate is not an input of the Black Scholes model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded. The term is derived from using the “Simplified Method” of $285 duringdetermining stock option terms as described under the Securities and Exchange Commissions Staff Accounting Bulletin 107. Prior to the adoption of SFAS 123 (R), the option term used was equal to the vesting period of 3 years. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and increases to compensation expense2004 (In thousands, except per share data) The following table provides a reconciliation of $42 during 2004 and $250 during 2003. On July 5, 2005, the Company issued 53 shares of restricted stock awards to certain senior management employees. The stock price at the date of issuance was $12.70. Compensation expense related to the issuance is being recognized ratably over the three year vesting period, and approximated $206 in compensation expense was recognizedoption activity for the year ended December 31, 2005.2006:
On August 4, 1998Options | | Shares ('000) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value ($000) | Outstanding at January 1, 2006 | | 1,403 | | $ 9.56 | | | | | Granted | | 172 | | 11.52 | | | | | Exercised | | (99) | | 8.59 | | | | | Forfeited or expired | | (24) | | 12.62 | | | | | Outstanding at December 31, 2006 | | 1,452 | | $ 9.81 | | 6.12 | | $ 3,805 (1) | Exercisable at December 31, 2006 | | 1,280 | | $ 9.58 | | 5.64 | | $ 3,648 (1) |
(1) Intrinsic value is the Company’s Board of Directors authorizedamount by which the repurchase of up to 740 shares of its Common Stock, equaling 5%market price of the company’s issuedstock ($12.43) exceeds the exercise price of the options outstanding at December 31, 2006. At December 31, 2005, all outstanding options were fully vested and outstandingno compensation expense was incurred from these options. There were 172, 267, and 438 options granted, respectively during the years ended December 31, 2006, 2005 and 2004. The weighted average grant date fair value of the options granted during the year ended December 31, 2006 was $4.30. As of December 31, 2006, there was approximately $476 of unrecognized compensation cost to be recognized over approximately three years. Cash proceeds from the exercise of options in the year ended December 31, 2006 totaled approximately $984. During the years ended December 31, 2005 and 2004, the Company received $2,806 and $463, respectively, in cash proceeds from the exercise of stock options. For the year ended December 31, 2006, proceeds from stock options were presented inclusive of tax benefits of $133, in the Financing Activities section of the Consolidated Statements of Cash Flows. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005, and 2004 was $421, $1,846, and 772, respectively. Restricted Stock Awards In addition to stock option awards, the Company has restricted stock awards, the first grant of which was in July 2005. The Company’s policy for issuing restricted shares is similar to that described under “Stock Option Awards”. The recognized compensation costs before tax for these restricted stock awards in the years ended December 31, 2006 and 2005 were approximately $283 and $206, respectively. The unrecognized compensation cost before tax for these awards at December 31, 2006 and 2005 total approximately $159 and $467, respectively, to be recognized over approximately one and two years, respectively. During the year ended December 31, 2006, the Company experienced a forfeiture rate of 4% of the awards granted. Below is a summary of the status of the restricted shares as of August 4, 1998. The Company has not repurchased any shares under this program through December 31, 2005. Subsequent to2006 and changes during the year end, this stock repurchase plan has been replaced with a new plan within which the Company is authorized to repurchase up to $10 million in common stock (see below.)ended December 31, 2006: Subsequent to year-end, the Company’s Board of Directors authorized a stock repurchase program under which the Company is authorized to repurchase up to $10 million in common stock of the Company, during the next 18 months in the open market or in private transactions, in accordance with applicable laws and regulations. This amount represents approximately 5% of the Company’s outstanding stock. As of the date of this report, no shares had been repurchased under the program.Non-vested Shares | Shares ('000) | Weighted-Average Grant-Date Fair Value | Non-vested at January 1, 2006 | 53 | $ 12.70 | Granted | -- | -- | Vested | (18) | 12.70 | Forfeited | (2) | 12.70 | Non-vested at September 30, 2006 | 33 | $ 12.70 |
11) 53
11)Goodwill , net | Goodwill
|
We completed our annual goodwill impairment review during the fourth quarter of 2006, 2005 2004 and 2003.2004. In performing the impairment reviews for 2006 and 2005, the Company estimated the fair values of the reporting units from discounting each segments’ future cash flows. In 2004, and 2003, the Company estimated the fair values of the reporting units by using a method that incorporated valuations derived from EBITDA multiples based upon market multiples and recent capital market transactions and also incorporated valuations determined by each segment’s discounted future cash flows. As of October 1, 20052006 and 2004,2005, the annual review dates, there was no impairment to goodwill as the fair values of the reporting units exceeded their carrying values of the reporting units. NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
(In thousands, except per share data)
The changes in the carrying amount of goodwill for the years ended December 31, 20052006 and 20042005 are as follows:
In thousands | | Plastic and Rubber Components Segment | | NN Europe Segment | | Total | | | | | | | | | | | | Balance as of January 1, 2004 | | $ | 25,755 | | $ | 17,138 | | $ | 42,893 | | | Goodwill acquired | | | -- | | | -- | | | -- | | | Impairment losses | | | -- | | | -- | | | -- | | | Currency impacts | | | -- | | | 1,564 | | | 1,564 | | | (In thousands) | | Plastic and Rubber Components Segment | Metal Bearing Components Segment | Precision Metal Components Segment | Total | | | $ | 25,755 | | $ | 18,702 | | $ | 44,457 | | | | | Balance as of January 1, 2005 | | | | | | | | | | | $ 25,755 | $ 18,702 | $ -- | $ 44,457 | Goodwill acquired | | | -- | | | -- | | | -- | | -- | -- | -- | Impairment losses | | | -- | | | -- | | | -- | | -- | -- | -- | Currency impacts | | | -- | | | (2,809 | ) | | (2,809 | ) | -- | (2,809) | -- | (2,809) | Balance as of December 31, 2005 | | $ | 25,755 | | $ | 15,893 | | $ | 41,648 | | | | | $ 25,755 | $ 15,893 | -- | $ 41,648 | Balance as of January 1, 2006 | | | | | Goodwill acquired | | -- | 2,352 | 2,352 | Impairment losses | | -- | -- | -- | Currency impacts | | -- | 2,147 | -- | 2,147 | Balance as of December 31, 2006 | | $ 25,755 | $ 18,040 | $ 2,352 | $ 46,147 |
12) Intangible Assets, Net The changes in the carrying amount of intangible assets, net for the years ended December 31, 2006 and 2005 are as follows: Intangible assets subject to amortization, net of amortization (In Thousands) | Precision Metal Components Segment | Metal Bearing Components Segment | Total | Balance as of January 1, 2005 | $ -- | $ -- | $ -- | Acquisition of Intangibles | -- | 476 | 476 | Amortization | -- | -- | -- | Currency impacts | -- | (2) | (2) | Balance as of December 31, 2005 | $ -- | $ 474 | $ 474 |
Balance as of January 1, 2006 | $ -- | $ 474 | $ 474 | Acquisition of Intangibles | 7,180 | 1,855 | 9,035 | Amortization | (39) | (402) | (441) | Currency impacts | -- | 163 | 163 | Balance as of December 31, 2006 | $ 7,141 | $ 2,090 | $ 9,231 |
12) |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) The intangible asset within the Metal Bearing Components Segment is a contract intangible related to the SNR purchase agreement and related supply agreement (See Note 2). This intangible asset is subject to amortization over approximately 5 years and amortization expense will approximate $500 for each of the five years. For the year ended December 31, 2006, the amortization expense and accumulated amortization totaled $402. The intangible assets within the Precision Metal Components segment were acquired on November 30, 2006 with the purchase of Whirlaway (See Note 2). The majority of the value is a customer contract intangible estimated to be worth $6,900. This intangible asset has an estimated useful life of 20 years and $29 of amortization expense was recorded in 2006. The remaining balance is made up of a covenant not to compete of $150 and a favorable leasehold interest $130. These items are amortizable over 2 and 2.5 years, respectively, and $6 and $4 in amortization expense was recorded in 2006. The accumulated amortization related to all of these intangible assets at December 31, 2006 is $39. In addition, as part of the Whirlaway acquisition we acquired an intangible not subject to amortization of $900 related to the value of the trade names of Whirlaway. This intangible asset has an indefinite life and as such is not subject to amortization. 13)Segment Information |
The Company determined its reportable segments under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. During fourth quarter of 2006, the Company changed its operational structure and strategic focus such that the operations are now managed in three reportable segments. The core steel ball and roller business is managed as one reportable segment as the operations have become more fully inter-related and integrated. A new segment entitled "Precision Metal Components" has been established as a result of the Whirlaway acquisition. During 2006, the Company has integrated a new information system that enables the Company to report non-segment specific costs, including corporate expenses, as reconciling items from segment financial statements to the total Company financial statements. We have restated the years ended December 31, 2005 and 2004 to conform to the current segment reporting. The Company’s reportable segments are based on differences in product lines and geographic locations.lines. The three segments of the Company are defined as the Domestic Ball and RollerMetal Bearing Components Segment, the NN Europe Segment, and the Plastic and Rubber Components Segment, and the Precision Metal Components Segment. The Domestic Ball and RollerMetal Bearing Components Segment is comprised of two manufacturing facilities in the eastern United States. Additionally, costs related to our start-up operation in China and corporate office costs are included in the Domestic Ball & Roller Segment. The NN Europe Segment is comprised ofStates, manufacturing facilities located in Europe, namely, Kilkenny, Ireland; Eltmann, Germany; Pinerolo, Italy; Veenendaal, The Netherlands; and Kysucke Nove Mesto, Slovakia.Slovakia and our facility in China. All of the facilities in the Domestic Ball and Roller and NN Europe SegmentsMetal Bearing Components Segment are engaged in the production of precision balls, rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The Plastic and Rubber Components Segment is comprised of four facilities: two located in Lubbock, Texas, which represents the IMC business acquired in July 1999, and two facilities located in Danielson, Connecticut, which represents the Delta Rubber business acquired in February 2001. These facilities are engaged in the production of plastic injection molded products for the bearing, automotive, instrumentation and fiber optic markets and precision rubber bearing seals for the bearing, automotive, industrial, agricultural, and aerospace markets. The Precision Metal Components Segment is comprised of four facilities: three in Ohio and one in Arizona. These facilities are engaged in the production of highly engineered fluid control components and assemblies, shafts, and prismatic machined parts for the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on profit or loss from operations after income taxes. The Company accounts for inter-segment sales and transfers at current market prices. During 2005, the NN Europe segment sold approximately $684 in semi-finished goods to the China start-up operation and the US Ball and Roller segment sold $166 of finished balls to the NN Europe segment. These sales and any resulting profit in inventory were eliminated as part of the consolidation process. The Company did not have any individually material inter-segment transactions during 20042006 or 2003.2005. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
| | December 31, 2005 | | December 31, 2004 | | December 31, 2003 | | | | Domestic Ball and Roller Segment | | NN Europe Segment | | Plastic and Rubber Components Segment | | Domestic Ball and Roller Segment | | NN Europe Segment | | Plastic and Rubber Components Segment | | Domestic Ball and Roller Segment | | NN Europe Segment | | Plastic and Rubber Components Segment | | Net sales | | $ | 66,088 | | $ | 197,397 | | $ | 57,902 | | $ | 58,435 | | | 193,930 | | $ | 51,724 | | $ | 55,437 | | $ | 147,127 | | $ | 50,898 | | Interest expense | | | 2,226 | | | 585 | | | 966 | | | 1,639 | | | 1,423 | | | 967 | | | 908 | | | 1,401 | | | 1,083 | | Depreciation & amortization | | | 3,572 | | | 10,278 | | | 2,481 | | | 3,662 | | | 9,893 | | | 2,578 | | | 3,610 | | | 7,546 | | | 2,535 | | Income tax expense (benefit) | | | 1,351 | | | 7,426 | | | 975 | | | 1,143 | | | 4,546 | | | (1,600 | ) | | 2,117 | | | 4,858 | | | (1,249 | ) | Segment profit (loss) | | | 1,275 | | | 12,064 | | | 1,673 | | | (1,930 | ) | | 7,308 | | | 1,724 | | | 2,003 | | | 7,492 | | | 683 | | Segment assets | | | 57,638 | | | 156,276 | | | 55,741 | | | 50,142 | | | 177,951 | | | 60,249 | | | 55,420 | | | 154,889 | | | 57,590 | | Expenditures for long- lived assets | | | 5,942 | | | 10,061 | | | 726 | | | 3,238 | | | 8,021 | | | 903 | | | 2,948 | | | 5,609 | | | 2,872 | |
Sales | Metal Bearing Components Segment | Precision Metal Components Segment | Plastic and Rubber Components Segment | All Other | Total | December 31, 2006 | | | | | | Net sales | $272,299 | $ 4,722 | $ 53,304 | $ -- | $ 330,325 | Interest expense | 45 | 240 | 960 | 2,738 | 3,983 | Depreciation & amortization | 14,783 | 345 | 2,324 | 40 | 17,492 | Income tax expense (benefit) | 10,681 | (336) | 1,547 | (3,370) | 8,522 | Segment profit (loss) | 18,331 | (598) | 2,695 | (5,993) | 14,435 | Segment assets | 233,051 | 53,535 | 51,836 | 4,279 | 342,701 | Expenditures for long- lived assets | 18,479 | 30 | 773 | -- | 19,282 | | | | | | | December 31, 2005 | | | | | Net sales | $ 263,485 | $ -- | $ 57,902 | $ -- | $ 321,387 | Interest expense | 504 | -- | 966 | 2,307 | 3,777 | Depreciation & amortization | 13,850 | -- | 2,481 | -- | 16,331 | Income tax expense (benefit) | 11,546 | -- | 975 | (2,769) | 9,752 | Segment profit (loss) | 18,725 | -- | 1,673 | (5,386) | 15,012 | Segment assets | 207,128 | -- | 55,741 | 6,786 | 269,655 | Expenditures for long- lived assets | 16,003 | -- | 726 | -- | 16,729 | | | | | | | December 31, 2004 | | | | | Net sales | $ 252,365 | $ -- | $ 51,724 | $ -- | $ 304,089 | Interest expense | 1,770 | -- | 967 | 1,292 | 4,029 | Depreciation & amortization | 13,555 | -- | 2,578 | -- | 16,133 | Income tax expense (benefit) | 8,019 | -- | (1,600) | (2,330) | 4,089 | Segment profit (loss) | 9,517 | -- | 1,724 | (4,139) | 7,102 | Segment assets | 221,332 | -- | 60,249 | 6,761 | 288,342 | Expenditures for long- lived assets | 11,259 | -- | 903 | -- | 12,162 |
Due to the large number of countries in which the Company sells our products, sales to external customers and long-lived assets utilized by the Company were concentratedare reported in the following geographical regions:
| | December 31, 2005 | | December 31, 2004 | | December 31, 2003 | | | Sales | | Long-lived assets | | Sales | | Long-lived assets | | Sales | | Long-lived assets | | | | | | | | | | | | | | United States | | $77,763 | | $31,821 | | $74,228 | | $ 34,945 | | $ 67,756 | | $ 36,523 | Europe | | 185,786 | | 81,348 | | 181,224 | | 96,224 | | 134,914 | | 92,473 | Asia | | 19,689 | | 5,660 | | 18,763 | | -- | | 17,512 | | -- | Canada | | 8,835 | | -- | | 9,040 | | -- | | 10,727 | | -- | Mexico/S.America | | 23,049 | | -- | | 15,642 | | -- | | 13,435 | | -- | Other export | | 6,265 | | -- | | 5,192 | | -- | | 9,118 | | -- | All foreign countries | | 243,624 | | 87,008 | | 229,861 | | 96,224 | | 185,706 | | 92,473 | | | | | | | | | | | | | | Total | | $ 321,387 | | $ 118,829 | | $ 304,089 | | $ 131,169 | | $ 253,462 | | $ 128,996 |
For the years ended December 31, 2005, 2004 and 2003, sales to SKF amounted to $151,175, $145,534, and $107,484, respectively, or 47.0% ,47.9%, and 42.4%, of consolidated revenues, respectively. For the years ended December 31, 2005, 2004 and 2003, sales to Schaeffler Group (INA) amounted to $41,399, $41,693, and $40,110 respectively or 12.9%, 13.7%, and 15.8% of consolidated revenues, respectively. For the years ended December 31, 2005, 2004, and 2003, sales to various divisions of The Timken Co. amounted to $20,376, $17,148, and $10,736 or 6.3%, 5.6%, and 4.2% of consolidated revenues respectively. None of the Company’s other customers accounted for more than 5% of our net sales in 2005, 2004 or 2003. SKF was the only customer with an Accounts Receivable concentration in excess of 10%. This outstanding balance as of December 31, 2005 & 2004 was $16,151 and $21,458 respectively. | | December 31, 2006 | | December 31, 2005 | | December 31, 2004 | | | Sales | | Long-lived assets | | Sales | | Long-lived assets | | Sales | | Long-lived assets | | | | | | | | | | | | | | United States | | $ 77,526 | | $ 54,617 | | $77,763 | | $31,821 | | $74,228 | | $ 34,945 | | | | | | | | | | | | | | Europe | | 194,359 | | 94,369 | | 185,786 | | 81,348 | | 181,224 | | 96,224 | | | | | | | | | | | | | | Asia | | 24,119 | | 7,461 | | 19,689 | | 5,660 | | 18,763 | | -- | | | | | | | | | | | | | | Canada | | 8,028 | | -- | | 8,835 | | -- | | 9,040 | | -- | | | | | | | | | | | | | | Mexico | | 13,164 | | -- | | 12,223 | | -- | | 15,642 | | -- | | | | | | | | | | | | | | South America/Other | | 13,129 | | -- | | 17,091 | | -- | | 5,192 | | -- | | | | | | | | | | | | | | All foreign countries | | 252,799 | | 101,830 | | 243,624 | | 87,008 | | 229,861 | | 96,224 | | | | | | | | | | | | | | Total | | $ 330,325 | | $ 156,447 | | $ 321,387 | | $ 118,829 | | $ 304,089 | | $ 131,169 |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
The Schaeffler Group (INA) and SKF agreements for precision steel balls expire on June 30, 2006 and July 31, 2006, respectively. Schaeffler Group (INA) has decided to in-source approximately $12 million of annual business to their internal ball manufacturing facility in Germany. This represents approximately 30% of the existing Schaeffler Group (INA) business. We are in the process of negotiating a long term supply agreement with Schaeffler Group (INA) for remaining business. In addition, we are in process of negotiating a new long term agreement with SKF to replace the one for precision balls that expires July 31, 2006. SKF has informally agreed in principle to carry the current agreement through to December 31, 2006.
Income before provision for income taxes for the years ended December 31, 2006, 2005 2004 and 20032004 were as follows:
| | Year ended December 31, | | | | | 2005 | | 2004 | | 2003 | | | Year ended December 31, | | | | | | | | | | 2006 | | 2005 | | 2004 | Income before provision for income taxes: | | | | | | | | | | | | | | United States | | $ | 6,227 | | $ | (182 | ) | $ | 3,711 | | | $ 3,735 | | $ 6,227 | | $ (182) | Foreign | | | 18,537 | | | 11,373 | | | 12,868 | | | 19,222 | | 18,537 | | 11,373 | Total | | $ | 24,764 | | $ | 11,191 | | $ | 16,579 | | | $ 22,957 | | $ 24,764 | | $ 11,191 |
Total income tax expense (benefit) for the years ended December 31, 2006, 2005, 2004, and 20032004 were as follows:
| | Year ended December 31, | | | | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 | | | | | | | | | | | | | | | | | | | Current: | | | | | | | | | | | | | | | | | U.S. Federal | | $ | 2,815 | | $ | (2,785 | ) | $ | (388 | ) | $ 3,035 | | $ 2,815 | | $ (2,785) | | State | | | (78 | ) | | 88 | | | (3 | ) | 201 | | (78) | | 88 | | Non-U.S. | | | 7,689 | | | 3,532 | | | 2,229 | | 6,670 | | 7,689 | | 3,532 | | Total current expense | | $ | 10,426 | | $ | 835 | | $ | 1,838 | | $ 9,906 | | $ 10,426 | | $ 835 | |
Deferred: | | | | | | | | | | | | | | U.S. Federal | | $ | (609 | ) | $ | 2,285 | | $ | 1,272 | | $ (3,388) | | $ (609) | | $ 2,285 | | State | | | 303 | | | (46 | ) | | (13 | ) | 17 | | 303 | | (46) | | Valuation allowance | | 1,581 | | -- | | -- | | Non-U.S. | | | (368 | ) | | 1,015 | | | 2,629 | | 406 | | (368) | | 1,015 | | | | | | | | | | | | | | Total deferred expense (income) | | | (674 | ) | | 3,254 | | | 3,888 | | (1,384) | | (674) | | 3,254 | | | | | | | | | | | | | | | | | | | Total expense | | $ | 9,752 | | $ | 4,089 | | $ | 5,726 | | $ 8,522 | | $ 9,752 | | $ 4,089 | |
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
A reconciliation of taxes based on the U.S. federal statutory rate of 35%, 34%, and 34% for the years ended December 31, 2006, 2005, 2004, and 20032004 is summarized as follows: | | Year ended December 31, | | | | | 2005 | | 2004 | | 2003 | | | Year ended December 31, | | | | | | | | | | | | | 2006 | | 2005 | | 2004 | Income taxes at the federal statutory rate | | $ | 8,420 | | $ | 3,805 | | $ | 5,637 | | | $ 8,034 | | $ 8,420 | | $ 3,805 | State income taxes, net of federal benefit | | | 225 | | | 42 | | | (15 | ) | | 143 | | 225 | | 42 | Non-US earnings taxed at different rates | | | 1,019 | | | 562 | | | 483 | | | 353 | | 1,019 | | 562 | Other, net | | | 88 | | | (320 | ) | | (379 | ) | | (8) | | 88 | | (320) | | | | | | | | | | | | | | | | | | | | $ | 9,752 | | $ | 4,089 | | $ | 5,726 | | | $ 8,522 | | $ 9,752 | | $ 4,089 |
The tax effects of the temporary differences are as follows: | | Year ended December 31, | | | | 2005 | | 2004 | | | | | | | | Deferred income tax liability | | | | | | | | Tax in excess of book depreciation | | $ | 11,723 | | $ | 12,793 | | Duty drawback receivable | | | 70 | | | 69 | | Goodwill | | | 5,109 | | | 3,372 | | Flow through loss from pass through entity | | | 729 | | | 719 | | Allowance for Bad Debts | | | 5 | | | -- | | Other deferred tax liabilities | | | 351 | | | 904 | | | | | | | | | | Gross deferred income tax liability | | | 17,987 | | | 17,857 | | | | | | | | | | Deferred income tax assets | | | | | | | | Inventories | | | 557 | | | 646 | | Allowance for bad debts | | | -- | | | 130 | | Pension/Personnel accruals | | | 1,014 | | | 643 | | Other working capital accruals | | | -- | | | 30 | | NN Europe net operating loss carry forward | | | 1,188 | | | 1,104 | | Foreign Tax Credits | | | 460 | | | -- | | Other deferred tax assets | | | 366 | | | 228 | | Gross deferred income tax assets | | | 3,585 | | | 2,781 | | | | | | | | | | Net deferred income tax liability | | $ | 14,402 | | $ | 15,076 | |
| | 2006 | | 2005 | | Deferred income tax liability | | | | | | Tax in excess of book depreciation | | $ 11,073 | | $ 11,723 | | Duty drawback receivable | | -- | | 70 | | Goodwill | | 6,902 | | 5,109 | | Flow through loss from pass through entity | | -- | | 729 | | Allowance for bad debts | | -- | | 5 | | Other deferred tax liabilities | | 291 | | 351 | | | | | | | | Gross deferred income tax liability | | 18,266 | | 17,987 | | | | | | | | Deferred income tax assets | | | | | | Inventories | | 508 | | 557 | | Allowance for bad debts | | 16 | | -- | | Pension/personnel accruals | | 485 | | 1,014 | | Environmental provision | | 408 | | -- | | Net operating loss carry forwards | | 912 | | 1,188 | | Foreign tax credits | | 1,842 | | 460 | | Other deferred tax assets | | 1,077 | | 366 | | Gross deferred income tax assets | | 5,248 | | 3,585 | | | | | | | | Net deferred income tax liability | | $ 13,018 | | $ 14,402 | |
The NN Europe net operating loss carry forwards are composed of net operating losses in Germany, Slovakia, and Slovakia.China, for which valuation allowances have not been recorded as of December 31, 2006, as it is management's judgment that all resulting tax benefits are realizable. According to German law, there are not any time limitations on carrying forward the $4,100$1,338 in net operating losses of our German subsidiary. Slovakian net operating losses of $62, $910,$41, $901, $641, and $1,110$236 expire in 2008, 2009, 2010, and 2011, respectively. The China net operating losses of $88, $814, and $2,163 expire in 2009, 2010, and 2011, respectively. The foreign tax credits shown above are reported net of a valuation reserve based on an estimate of the amount that can be utilized by foreign source income. The gross amount of the foreign tax credits are $3,423 and the valuation reserve is $1,581.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
Although realization of deferred tax assets is not assured, management believes that it is more likely than not that all of the net deferred tax assets presented above will be realized. However, the amount of the deferred tax assets considered realizable could be reduced based on changing conditions. The Company has not recognized aAs of December 31, 2006, all of the Company’s foreign earnings have been previously taxed in the U.S. due to the application of IRC Sec. 956. Accordingly, no deferred tax liabilitytaxes have been provided for the undistributed earnings of its non-U.S. subsidiaries.earnings. The Company expects to reinvest these undistributedfuture earnings indefinitely and does not expect such earnings to become subject to U.S. taxation in the foreseeable future. A deferred tax liability will be recognized when the Company expects that it will recover these undistributed earnings in a taxable manner, such as through the receipt of dividends or sale of the investments. It is not practicable to determine the U.S. income tax liability, if any, that would be payable if such earnings, were not reinvested indefinitely.
As of December 31, 2005,2006, the Company has not provided taxes on unremitted foreign earnings from certain foreign affiliates that are intended to be indefinitely reinvested in finance operations and expansion outside the United States. If such earnings were distributed beyond the amount for which taxes have been provided, foreign tax credits would substantially offset any incremental U.S. tax liability. 14) | 15)Reconciliation of Net Income Per Share |
| | Year ended December 31, | | | | | 2005 | | 2004 | | 2003 | | | Year ended December 31, | | | | | | | | | | 2006 | | 2005 | | 2004 | Net income | | $ | 15,012 | | $ | 7,102 | | $ | 10,178 | | | $ 14,435 | | $ 15,012 | | $ 7,102 | | | | | | | | | | | | | | | | | | Weighted average shares outstanding | | | 17,004 | | | 16,728 | | | 15,973 | | | 17,125 | | 17,004 | | 16,728 | Effective of dilutive stock options | | | 189 | | | 423 | | | 406 | | | 226 | | 189 | | 423 | | | | | | | | | | | | | | | | | | Dilutive shares outstanding | | | 17,193 | | | 17,151 | | | 16,379 | | | 17,351 | | 17,193 | | 17,151 | | | | | | | | | | | | | | | | | | Basic net income per share | | $ | 0.88 | | $ | 0.42 | | $ | 0.64 | | | $ 0.84 | | $ 0.88 | | $ 0.42 | | | | | | | | | | | | | | | | | | Diluted net income per share | | $ | 0.87 | | $ | 0.41 | | $ | 0.62 | | | $ 0.83 | | $ 0.87 | | $ 0.41 |
Excluded from the shares outstanding for the years ended December 31, 2006 and 2005 were 301 and 2004 were 344 and 394 anti-dilutive options, respectively, which had an exercise price of $12.62 per share during 20052006 and 2004. No shares2005. In addition in 2006, there were excluded from shares outstanding for172 options that were anti-dilutive due to the year ended December 31, 2003.large amount of unrecognized compensation expense associated with these options.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
15) | 16)Commitments and Contingencies |
The Company has operating lease commitments for machinery, office equipment, vehicles, manufacturing and office space which expire on varying dates. Rent expense for 2006, 2005, and 2004 was $2,617, $2,422, and 2003 was $2,422, $3,203, and $2,359, respectively. The following is a schedule by year of future minimum lease payments as of December 31, 20052006 under operating leases that have initial or remaining noncancelable lease terms in excess of one year.
Year ended December 31, | | | | | | | | 2006 | | $ | 2,093 | | | & #160; Year ended December 31, | | & #160; Year ended December 31, | 2007 | | | 1,843 | | | $ 3,890 | 2008 | | | 1,551 | | | 3,632 | 2009 | | | 1,469 | | | 3,076 | 2010 | | | 1,420 | | | 2,626 | 2011 | | | 2,327 | Thereafter | | | 11,748 | | | 8,593 | | | | | | | | Total minimum lease payments | | $ | 20,124 | | | $ 24,144 |
The Kilkenny operation of the NN EuropeMetal Bearing Components Segment has received certain grants from the Ireland government. These grants are based upon the Kilkenny, Ireland facility hiring and retention of certain employment levels by the measurement date. At December 31, 2005,2006, actual employment levels are less than those required by certain grant covenants. During 2003, the grant agreement measurement date was amended to extend the measurement date. The Company anticipates that, if necessary, the grant agreement measurement date and /or employment level thresholds would again be adjusted. Effects of this not occurring are estimated not to be material to the consolidated financial statements. As of December 31, 20052006 and 20042005 the grant obligation is recorded as a component of other non-current liabilities in the amount of $423$405 and $559,$423, respectively. The NN EuropeMetal Bearing Components Segment hasis finalizing a supply contract with Ascometal France (“Ascometal”) for the purchase of steel.steel in Europe that covers the years 2007, 2008 and 2009. The contract terms specify thatwill automatically renew annually unless formal notice is sent by either party one year in advance. The percentage of steel purchased for European operations granted to Ascometal provide NN Europe 85%, 85% and 90% of its steel requirements forunder the years ended December 31, 2005, 2004 and 2003, respectively.contract is 70% or approximately $40,000. The contract, among other things, stipulates that Ascometal achieve certain performance targets related to quality, reliability and service.service and the percentage granted can be reduced if those targets are not met by the vendor. The contract provisions include annual price adjustments based upon published indexes in addition to annual productivity improvement factor multiples. In 2005, NN Europe2006, we purchased approximately $34,114$39,360 under the terms of this contract. The estimated commitment for 2006 is $36,661. Thea similar contract that expired on December 31, 2005; however, it was2005 and that automatically renewed for a one year period until December 31, 2006. Under this one year contract, NN Europe committed to buy 70% of its raw steel purchases. The contract is automatically renewed for one year periods thereafter unless notice is provided by either NN Europe or Ascometal. On March 20, 2006, we, as well as numerous other parties, received correspondence from the Environmental Protection Agency ("EPA") requesting information regarding a former waste recycling vendor previously used by us. The vendor has since ceased operations and the EPA is investigating the clean up of the site or sites used by the vendor. As of the date of this report, we do not know whether we have any liability related to this vendor's actions or the estimatable range for any potential liability.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data)
16) 17)Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations for the years ended December 31, 20052006 and 2004.2005. | Year ended December 31, 2006 | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | Net sales | $ 86,017 | | $ 83,554 | | $ 74,870 | | $ 85,884 | Income from operations | 8,905 | | 7,157 | | 4,807 | | 5,023 | Net income | 5,262 | | 3,453 | | 2,633 | | 3,087 | Basic net income per share | 0.31 | | 0.20 | | 0.15 | | 0.18 | Dilutive net income per share | 0.30 | | 0.20 | | 0.15 | | 0.18 | Weighted average shares outstanding: | | | | | | | | Basic number of shares | 17,152 | | 17,157 | | 17,105 | | 16,941 | Effect of dilutive stock options | 224 | | 212 | | 234 | | 200 | | | | | | | | | Diluted number of shares | 17,376 | | 17,369 | | 17,339 | | 17,141 |
| Year ended December 31, 2005 |
| | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | | | | | | | | | | | | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | Net sales | | $ | 86,715 | | $ | 83,787 | | $ | 74,998 | | $ | 75,887 | | $ 86,715 | | $ 83,787 | | $ 74,998 | | $ 75,887 | Income from operations | | | 7,387 | | | 6,353 | | | 5,643 | | | 8,505 | | 7,387 | | 6,353 | | 5,643 | | 8,505 | Net income | | | 4,023 | | | 3,312 | | | 2,557 | | | 5,120 | | 4,023 | | 3,312 | | 2,557 | | 5,120 | Basic net income per share | | | 0.24 | | | 0.20 | | | 0.15 | | | 0.30 | | 0.24 | | 0.20 | | 0.15 | | 0.30 | Dilutive net income per share | | | 0.23 | | | 0.19 | | | 0.15 | | | 0.30 | | 0.23 | | 0.19 | | 0.15 | | 0.30 | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | Basic number of shares | | | 16,889 | | | 16,971 | | | 17,191 | | | 17,206 | | 16,889 | | 16,971 | | 17,191 | | 17,206 | Effect of dilutive stock options | | | 372 | | | 357 | | | 331 | | | 141 | | 372 | | 357 | | 331 | | 141 | | | | | | | | | | | | | | | | | | | | | | Diluted number of shares | | | 17,261 | | | 17,328 | | | 17,522 | | | 17,347 | | 17,261 | | 17,328 | | 17,522 | | 17,347 |
The fourth quarter of 2006 included one month of Whirlaway Corporation with sales of $4,722 and a net loss of $598 due primarily to one time purchase accounting adjustments of $385, net of tax, resulting from increasing the inventory value from cost to fair value.
| | Year ended December 31, 2004 | | | | | | | | | | | | | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | | | | | | | | | | | | Net sales | | $ | 77,632 | | $ | 75,265 | | $ | 72,917 | | $ | 78,275 | | Income from operations | | | 6,108 | | | 4,304 | | | 4,510 | | | (555 | ) | Net income | | | 3,218 | | | 1,986 | | | 2,152 | | | (254 | ) | Basic net income per share | | | 0.19 | | | 0.12 | | | 0.13 | | | (0.02 | ) | Dilutive net income per share | | | 0.19 | | | 0.12 | | | 0.13 | | | (0.01 | ) | Weighted average shares outstanding: | | | | | | | | | | | | | | Basic number of shares | | | 16,712 | | | 16,721 | | | 16,767 | | | 16,773 | | Effect of dilutive stock options | | | 477 | | | 456 | | | 368 | | | 453 | | | | | | | | | | | | | | | | Diluted number of shares | | | 17,189 | | | 17,177 | | | 17,135 | | | 17,226 | |
The first quarter results in 2006 include a net gain resulting from a $770 after-tax gain on the sales of excess land less a loss on disposal of excess machinery at our Pinerolo, Italy facility.
Fourth quarter results in 2005 include a pre-tax gain on the sale of excess land at our Veenendaal, The Netherlands facility of $432. This transaction resulted in aan after-tax gain of approximately $295. Fourth quarter results in 2004 include a pre-tax charge of $2,290 ($1,420 after-tax) related to severance costs and other related charges resulting from a reduction in staffing at the Company’s Eltmann, Germany ball production facility. Additionally, fourth quarter results include a loss on disposal of assets of $856 ($548 after-tax) related to the sale of the Company’s Walterboro, South Carolina land and building assets. These charges have been recorded as components of income from operations.
NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 2004 and 20032004 (In thousands, except per share data) 18)
17) | Fair Value of Financial Instruments |
Management believes the fair value of financial instruments approximate their carrying value due to the short maturity of these instruments or in the case of the Company’s notes receivable and variable rate debt, due to the variable interest rates. The fair value of the Company’s fixed rate long-term borrowings are estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The interest rate swap is carried incarrying amounts and fair values of the books at its fair value.Company's long-term debt are as follows: The carrying amounts and fair values of the Company’s long-term debt and derivative financial instrument are as follows:
| | December 31, 2005 | | December 31, 2004 | | | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | December 31, 2006 | | December 31, 2005 | | | | | | | | | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Variable rate long-term debt | | $ | 17,900 | | $ | 17,900 | | $ | 34,670 | | $ | 34,670 | | $39,466 | | $39,466 | | $ 17,900 | | $ 17,900 | Fixed rate long-term debt | | | 40,000 | | | 38,739 | | | 40,000 | | | 40,421 | | 42,096 | | 39,941 | | 40,000 | | 38,739 | Interest rate swap agreement | | | 22 | | | 22 | | | 167 | | | 167 | | |
18) | 19)Accumulated Other Comprehensive Income |
At December 31, 2006 and 2005 and 2004,, the Company has included in accumulated other comprehensive income unrealized income due to foreign currency translation of $4,121$15,743 and $15,944.$4,121. Income taxes on the foreign currency translation adjustment in other comprehensive income were not recognized because the earnings are intended to be indefinitely reinvested in those operations. Also included in accumulated other comprehensive income as of December 31, 2005 and 2004 was additional minimum pension liability cost, net of tax of $724$724. Included in accumulated other comprehensive income as of December 31, 2006 was an adjustment to initially apply SFAS 158 and $144, respectively, and unrealized holding gain on securitiesrecord the unrecognized actuarialnet loss that has not been recognized as a component of pension income of $394, net of taxtax. The additional minimum liability that made up a portion of $0the 2005 balance was eliminated first by the plan curtailment and $73, respectively.then eliminated under adoption of SFAS 158. (See Note 9)
20)Common Stock Repurchase During the first quarter of 2006, the Company's Board of Directors authorized a stock repurchase program under which the Company is authorized to repurchase up to $10 million in common stock of the Company, during the subsequent 18 months in the open market or in private transactions, in accordance with applicable laws and regulations. This amount represented approximately 5% of the Company's outstanding stock at the date of authorization. During the year ended December 31, 2006, the Company repurchased 463 shares at an approximate average cost of $11.39 a share for a total of $5,273. These shares have been retired and were recorded as an offset to additional paid in capital. 21)Related Party Transactions With the acquisition of Whirlaway on November 30, 2006, the Company incurred a $21,305 note payable to the former shareholder of Whirlaway who is now an employee of the Company. Additionally, on November 30, 2006, the Company entered into operating leases covering two of the Whirlaway manufacturing facilities with a company owed by the former shareholder of Whirlaway who is now an employee of the Company. The terms of the leases are at prevailing market rates for the rental market in which the facilities are located. The rent payments in 2006 to this related party were $50. The total future rent payments will be $3,217 over 5 years or $644 per year. 22) Subsequent Events. Subsequent to the year ended December 31, 2006, the Company remitted $18,638 to the former shareholder of Whirlaway to partially pay-off the related party note payable. The payment was financed under our $90 million credit facility. In January 2007, we entered into a two-year supply agreement with Schaeffler Group (INA) effective as of July 1, 2006 that replaced the agreement that expired on June 30, 2006. NN, Inc. Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (In thousands, except per share data) Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company'sCompany’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures, and internal control over financial reporting as such term is defined under Rule l3a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). Based on this evaluation, Chief Executive Officer and the Chief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures were effective as of December 31, 2005,2006, the end of the period covered by this annual report.
Management'sManagement’s Report on Internal Control Over Financial Reporting
The management of NN, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the Company'sCompany’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company'sCompany’s internal control over financial reporting was conducted based on the framework in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”). Based on that evaluation under the framework in Internal Control- Integrated Framework issued by the COSO, the Company'sCompany’s management concluded that the Company'sCompany’s internal control over financial reporting was effective as of December 31, 20052006.
Management'sManagement’s assessment of the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 20052006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Item 9B. Other Information
None Part III Item 10. | Directors and Executive Officers of the Registrant |
The information required by this item of Form 10-K concerning the Company'sCompany’s directors is contained in the sections entitled "Information“Information about the Directors"Directors” and "Beneficial“Beneficial Ownership of Common Stock"Stock” of the Company'sCompany’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2005,2006, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference. Code of Ethics. Our Code of Ethics (the “Code”) was approved by our Board on November 6, 2003. The Code is applicable to all officers, directors and employees. The Code is posted on our website at http://www.nnbr.com. We will satisfy any disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or waiver from, any provision of the Code with respect to our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions by disclosing the nature of such amendment or waiver on our website or in a report on Form 8-K.
Item 11. | Executive Compensation |
The information required by Item 402 of Regulation S-K is contained in the sections entitled "Information“Information about the Directors -- Compensation of Directors"Directors” and "Executive Compensation"“Executive Compensation” of the Company'sCompany’s definitive Proxy Statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference. Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Items 201(d) and 403 of Regulation S-K is contained in the section entitled "Beneficial“Beneficial Ownership of Common Stock"Stock” of the Company'sCompany’s definitive Proxy Statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference. Information required by Item 201 (d) of Regulations S-K concerning the Company’s equity compensation plans is set forth in the table below: Table of Equity Compensation Plan Information (In thousandsthousands) Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted -average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | Equity compensation plans approved by security holders | 1,452 | $9.81 | 808 | Equity compensation plans not approved by security holders | -- | -- | -- | Total | 1,452 | $9.81 | 808 |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted -average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | Equity compensation plans approved by security holders | 1,403 | $9.56 | 980 | Equity compensation plans not approved by security holders | -- | -- | -- | Total | 1,403 | $9.56 | 980 |
Item 13. | Certain Relationships and Related Transactions |
None.
With the acquisition of Whirlaway on November 30, 2006, wencurred a $21.3 million short-term note payable to the former shareholder of Whirlaway, Thomas Zupan, who is now Vice President - President of Whirlaway Corporation. Additionally, on November 30, 2006, we entered into operating leases covering two of the Whirlaway manufacturing facilities with a company owed by Mr. Zupan. The terms of the leases are at prevailing market rates for the rental market in which the facilities are located. The rent payments in 2006 to this related party were $0.1 million. The total future rent payments will be $3.2 million over 5 years or $0.6 million per year. Item 14. | Principal Accounting Fees and Services |
Information required by this item of Form 10-K concerning the Company’s Accounting’ Fees and Services is contained in the section entitled “Fees Paid to Independent Registered Public Accounting Firm” of the Company’s definitive Proxy Statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Part IV Item 15. | Exhibits, Financial Statement Schedules |
(a) List of Documents Filed as Part of this Report 1. Financial Statements 1. Financial Statements
The financial statements of the Company filed as part of this Annual Report on Form 10-K begins on the following pages hereof: Page | Report of Independent Registered Public Accounting Firm for the years ended December 31, 2006, 2005, and 2004............................................................. 31 Page | Report of Independent Registered Public Accounting Firm for the years ended December 31, 2005, 2004, and 2003 | 30 | Consolidated Balance Sheets at December 31, 2005 and 2004 | 32 | Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2005, 2004 and 2003
| 33 | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003 | 34 | Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | 35 | Notes to Consolidated Financial Statements | 36 |
Consolidated Balance Sheets at December 31, 2006 and 2005........................................................................................................................................................... 33 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004.....................................................34 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004......................................................... 35 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.............................................................................................. 36 Notes to Consolidated Financial Statements.......................................................................................................................................................................................37 2. Financial Statement Schedules 3. See Index to Exhibits (attached hereto) (b) Exhibits: See Index to Exhibits (attached hereto).
The Company will provide without charge to any person, upon the written request of such person, a copy of any of the Exhibits to this Form 10-K. (c) Not Applicable
Pursuant to the requirements of Section 13 or 15(d) 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. Dated: By: March 15, 2006By: /S/ RODERICKs/ Roderick R. BATY______Baty
Roderick R. Baty Chairman of the Board, Chief Executive Officer and President
Dated: March 15, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Name and Signature | Title | Date | /s/ RODERICK R. BATY | Chairman of the Board, Chief Executive Officer and President | March 15, 20062007 | Roderick R. Baty | | | | | /s/ JAMES H. DORTON | Vice President-Corporate Development and Chief Financial Officer | March 15, 20062007 | James H. Dorton | | | | | /s/ WILLIAM C. KELLY, JR. | Vice President-Chief Administrative Officer, Secretary and Treasurer | March 15, 20062007 | William C. Kelly, Jr. | | | | | /s/ G. RONALD MORRIS | Director | March 15, 20062007 | G. Ronald Morris | | | | /s/ MICHAEL E. WERNER | Director | March 15, 20062007 | Michael E. Werner | | | | /s/ STEVEN T. WARSHAW | Director | March 15, 20062007 | Steven T. Warshaw | | | | /s/RICHARD G. FANELLI | Director | March 15, 20062007 | Richard G. Fanelli | | | | /s/ ROBERT M. AIKEN, JR. | Director | March 15, 20062007 | Robert M. Aiken, Jr. |
| 2.1 | Asset Purchase Agreement dated April 14, 2003 among SKF Holding Maatschappij Holland B.V., SKF B.V., NN, Inc. and NN Netherlands B.V. (incorporated by reference to Exhibit 2.1 of Form 8-K filed on May 16, 2003). |
| 3.1 | Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002) |
| 3.2 | Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002) |
| 4.1 | The specimen stock certificate representing the Company’s Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002) |
| 4.2 | Article IV, Article V (Sections 3 through 6), Article VI (Section 2) and Article VII (Sections 1 and 3) of the Restated Certificate of Incorporation of the Company (included in Exhibit 3.1) |
| 4.3 | Article II (Sections 7 and 12), Article III (Sections 2 and 15) and Article VI of the Restated By-Laws of the Company (included in Exhibit 3.2) |
| 10.1 | NN, Inc. Stock Incentive Plan and Form of Incentive Stock Option Agreement pursuant to the Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002)* |
| 10.2 | Amendment No. 1 to the NN, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement No. 333-50934 on Form S-8 filed on November 30, 2000)* |
| 10.3 | Amendment No. 2 to the NN, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of the Company’s Registration Statement No. 333-69588 on Form S-8 filed on September 18, 2001)* |
10.4 | Form10.4 | Amendment No. 3 to NN, Inc. Stock Incentive Plan as ratified by the shareholders on May 15, 2003 amending the Plan to permit the issuance of Non-Competition and Confidentiality Agreement for Executive Officersawards under the Plan to directors of the Company (incorporated by reference to Exhibit 10.4Exhlibit 10-1 of the Company’s Registration Statement No. 333-89950Company's Quarterly Report on Form S-3/A10-Q filed July 15, 2002)August 14, 2003)* |
| 10.5 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002) |
| 10.6 | Form of Stock Option Agreement, dated December 7, 1998, between the Company and the non-employee directors of the Company (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed March 31, 1999)* |
| 10.7 | Elective Deferred Compensation Plan, dated February 26, 1999 (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed March 31, 1999)* |
10.8 | 10.8 | NN, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company’s Form S-8 filed December 16, 2005)* |
| 10.9 | Executive Employment Agreement, dated August 1, 1997,21, 2006, between the Company and Roderick R. Baty (incorporated by reference to Exhibit 10.14 of the Company’s Form 10-Q8-K filed November 14, 1997)August 24, 2006)* |
10.9 | Amendment No. 1 to10.10 | Executive Employment Agreement, dated August 21, 2006, between the Company and Roderick R. Baty, dated January 21, 2002James H. Dorton (incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K8-K filed March 29, 2002)August 24, 2006)* |
10.10 | Change of Control and Noncompetition10.11 | Executive Employment Agreement, dated JanuaryAugust 21, 20022006, between the Company and Roderick R. BatyNicola Trombetti (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K8-K filed March 29, 2002)August 24, 2006)* |
10.11 | 10.12 | Executive Employment Agreement, dated May 7, 1998,August 21, 2006, between the Company and Thomas McKown (incorporated by reference to the Company’s Form 8-K filed August 24, 2006)* |
| 10.13 | Executive Employment Agreement, dated August 21, 2006, between the Company and James Anderson (incorporated by reference to the Company’s Form 8-K filed August 24, 2006)* |
| 10.14 | Executive Employment Agreement, dated August 21, 2006, between the Company and David M. Gilson (incorporated by reference to the Company’s Form 8-K filed October 3, 2006)* |
| 10.15 | Executive Employment Agreement, dated August 21, 2006, between the Company and Thomas G. Zupan (incorporated by reference to the Company’s Form 8-K filed December 6, 2006)* |
| 10.16 | Executive Employment Agreement, dated August 21, 2006, between the Company and Frank T. Gentry (incorporated by reference to Exhibit 10.14 of the Company’s AnnualCurrent Report on Form 10-K8-K filed March 31, 1999)August 24, 2006)* |
10.12 | Amendment No. 1 to Employment Agreement between the Company and Frank T. Gentry, dated January 21, 2002 (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed March 29, 2002)* |
10.13 10.17 | Change of Control and Noncompetition Agreement dated January 21, 2002 between the Company and Frank T. Gentry (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed March 29, 2002)* |
10.14 | Executive Employment Agreement, dated JanuaryAugust 21, 2002,2006, between the Company and Robert R. Sams (incorporated by reference to Exhibit 10.20 of the Company’s AnnualCurrent Report on Form 10-K8-K filed March 29, 2002)August 21, 2006)* |
10.15 | Change of Control and Noncompetition Agreement dated January 21, 2002 between the Company and Robert R. Sams (incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K filed March 29, 2002)* |
10.16 10.18 | Executive Employment Agreement dated JanuaryAugust 21, 2002,2006, between the Company and William C. Kelly, Jr. (incorporated by reference to Exhibit 10.22 of the Company’s AnnualCurrent Report on Form 10-K8-K filed March 29, 2002)August 24, 2006)* |
10.17 | Change of Control and Noncompetition Agreement, dated January 21, 2002, between the Company and William C. Kelly, Jr. (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K filed March 29, 2002)* |
10.18 10.19 | NN Euroball, ApS Shareholder Agreement dated April 6, 2000 among NN, Inc., AB SKF and FAG Kugelfischer Georg Shafer AG (incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K filed March 29, 2002) |
10.19 | 10.20 | Frame Supply Agreement between Euroball S.p.A., Kugelfertigung Eltmann GmbH, NN Euroball Ireland Ltd. and Ascometal effective January 1, 2002 (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, "Confidential“Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission,"” as indicated throughout the document with an asterisk in brackets ([*])) (incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K filed March 31, 2003) |
10.23 | Amendment No. 3 to NN, Inc. Stock Incentive Plan as ratified by the shareholders on May 15, 2003 amending the Plan to permit the issuance of awards under the Plan to directors of the Company (incorporated by reference to Exhibit 10-1 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2003)* |
10.24 | Credit Agreement dated as of May 1, 2003 among NN, Inc., and NN Euroball as the Borrowers, the Subsidiaries as Guarantors, the Lenders as identifies therein, AmSouth Bank as Administrative Agent, and SunTrust Bank as Documentation Agent and Euro Loan Agent (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2003) |
10.25 10.21 | Supply Agreement between NN Euroball ApS and AB SKF dated April 6, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, “Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission, “ as indicated throughout the document with a n asterisk in brackets([*]) (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2003) |
10.26 | 10.22 | Global Supply Agreement among NN, Inc., NN Netherlands B.V. and SKF Holding Maatschappij Holland B.V. dated April 14, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, “Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission, “ as indicated throughout the document with a n asterisk in brackets([*])(incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed August 14, 2003) |
10.27 | Amendment No. 4 dated November 12, 2004, to the Credit Agreement dated May 1, 2003, among NN, Inc. and NN Europe ApS as the Borrowers, the subsidiaries as Guarantors, the Lenders as identified therein, AmSouth Bank as Administrative Agent and SunTrust Bank as Documentation Agent and Euro Loan Agent.(incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K filed March 16, 2005) |
10.28 10.23 | Note Purchase Agreement dated April 22, 2004 among NN, Inc. as the Borrower and its Subsidiary Guarantors and the Prudential Insurance Company of America as Agent for the Purchase. (incorporated by reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K filed March 16, 2005) |
| 10.24 | First Amendment to Note Purchase Agreement dated as of September 1, 2006, among NN, Inc. and The Prudential Insurance and Annuity Company, American Bankers Life Assurance Company of Florida, Inc., Farmers New World Life Insurance Company and Times Insurance Company (incorporated by reference to the Company’s Form 8-K filed September 27, 2006)* |
| 10.25 | Credit Agreement dated as of September 1, 2006 among NN, Inc., and the Lenders as named therein, KeyBank National Association as Lead Arranger, Book Runner and Administrative Agent, and AmSouth Bank, as Swing Line Lender (incorporated by reference to the Company’s Current Report on Form 8-K filed September 27, 2006) |
10.29 | Amendment No. 5 dated March 2005, to the Credit10.26 | Stock Purchase Agreement dated May 1, 2003,as of November 30, 2006, by and among NN, Inc. and NN Europe APS as the Borrowers, the subsidiaries as Guarantors, the Lenders as identified therein, AmSouth Bank as Administrative AgentWhirlaway Corp. and SunTrust Bank as Documentation Agent and Euro Loan Agent.(incorporatedThomas G. Zupan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q8-K filed May 10, 2005)December 6, 2006)* |
10.30 | Amendment No. 6 dated October 3, 2005, to the Credit Agreement dates May 1, 2003, among NN, Inc. and NN Europe APS as the Borrowers, the subsidiaries as Guarantors, the Lenders as identified therein, AmSouth Bank as Administrative Agent and SunTrust Bank as Documentation Agent and Euro Loan Agent. |
21.1 List of Subsidiaries of the Company.
23.1Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
31.1Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
31.2Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
32.1Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act
32.2Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act
______________ * Management contract or compensatory plan or arrangement. |