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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23486
NN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 Waters Edge Drive
Building C, Suite 12
Johnson City, Tennessee 37604
(Address of principal executive offices, including zip code)
(423) 743-9151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of May 7, 2004 there were 16,711,958 shares of the registrant's common stock,
par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 2004 and 2003 (unaudited).........................................2
Condensed Consolidated Balance Sheets at March 31, 2004 and December 31, 2003
(unaudited)..............................................................................3
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 2004 and 2003 (unaudited)............................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (unaudited)......................................................5
Notes to Consolidated Financial Statements (unaudited)......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................12
Item 3...Quantitative and Qualitative Disclosures about Market Risk.....................................20
Item 4...Controls and Procedures........................................................................21
Part II. Other Information
Item 1...Legal Proceedings..............................................................................22
Item 2. Changes in Securities and Use of Proceeds......................................................22
Item 3. Defaults Upon Senior Securities................................................................22
Item 4...Submission of Matters to a Vote of Security Holders............................................22
Item 5...Other Information..............................................................................22
Item 6. Exhibits and Reports on Form 8-K...............................................................22
Signatures..............................................................................................23
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars, Except Per Share Data 2004 2003
- -------------------------------------------------------------------------------------
Net sales $ 77,632 $ 57,609
Cost of products sold (exclusive of depreciation
shown separately below) 60,390 42,743
Selling, general and administrative 7,143 4,632
Depreciation and amortization 3,999 3,079
----------- ----------
Income from operations 6,100 7,155
Interest expense, net 841 513
Other (income) expense (56) (7)
----------- ----------
Income before provision for income taxes 5,315 6,649
Provision for income taxes 2,097 2,472
Minority interest in consolidated subsidiaries -- 534
----------- ----------
Net income 3,218 3,643
Other comprehensive income:
Foreign currency translation (2,489) 1,798
----------- ----------
Comprehensive income $ 729 $5,441
=========== ==========
Basic income per common share: $ 0.19 $ 0.24
=========== ==========
Weighted average shares outstanding 16,712 15,378
=========== ==========
Diluted income per common share: $ 0.19 $ 0.23
=========== ==========
Weighted average shares outstanding 17,189 15,574
=========== ==========
Cash dividends per common share $ 0.08 $ 0.08
=========== ==========
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
Thousands of Dollars 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,143 $ 4,978
Accounts receivable, net 48,728 40,864
Inventories, net 33,322 36,278
Other current assets 6,342 6,299
------------------ ------------------
Total current assets 95,535 88,419
Property, plant and equipment, net 126,142 128,996
Assets held for sale -- 1,805
Goodwill, net 42,245 42,893
Other assets 4,103 4,304
------------------ ------------------
Total assets $ 268,025 $ 266,417
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 35,901 $ 32,867
Dividends payable 1,337 --
Accrued salaries and wages 11,181 12,032
Short-term debt -- 2,000
Current maturities of long-term debt 6,426 12,725
Other current liabilities 4,996 3,070
------------------ ------------------
Total current liabilities 59,841 62,694
Non-current deferred tax liability 13,157 13,423
Long-term loans 75,579 69,752
Accrued pension and other 13,586 14,080
------------------ ------------------
Total liabilities 162,163 159,949
Total stockholders' equity 105,862 106,468
------------------ ------------------
Total liabilities and stockholders' equity $268,025 $266,417
================== ==================
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common Stock Additional Other
Number Of Par paid in Retained Comprehensive
Thousands of Dollars and Shares Shares value capital Earnings Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 15,370 $154 $ 40,457 $ 38,984 $ (1,687) $ 77,908
Shares issued 11 1 78 -- -- 79
Net income -- -- -- 3,643 -- 3,643
Dividends declared -- -- -- (1,230) -- (1,230)
Other comprehensive income -- -- -- -- 1,798 1,798
----------- -------- ----------- ------------ ------------- ------------
Balance, March 31, 2003 15,381 $155 $ 40,535 $ 41,397 $ 111 $ 82,198
=========== ======== =========== ============ ============= ============
Balance, January 1, 2004 16,712 $168 $ 52,960 $ 43,931 $ 9,409 $106,468
Shares issued -- -- 2 -- -- 2
Net income -- -- -- 3,218 -- 3,218
Dividends declared -- -- -- (1,337) -- (1,337)
Other comprehensive income -- -- -- -- (2,489) (2,489)
----------- -------- ----------- ------------ ------------- ------------
Balance, March 31, 2004 16,712 $168 $ 52,962 $ 45,812 $6,920 $ 105,862
=========== ======== =========== ============ ============= ============
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars 2004 2003
- --------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 3,218 $ 3,643
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 3,999 3,079
Amortization of debt issue costs 54 45
Minority interest in consolidated subsidiary -- 534
Changes in operating assets and liabilities:
Accounts receivable (8,859) (9,416)
Inventories 2,348 (1,833)
Other current assets 67 (398)
Other assets (129) (1,522)
Accounts payable 3,835 403
Income taxes payable 2,005 3,014
Other liabilities (388) (361)
------------ -----------
Net cash provided (used) by operating activities 6,150 (2,812)
------------ -----------
Investing Activities:
Acquisition of property, plant, and equipment (2,286) (2,071)
------------ -----------
Net cash used by investing activities (2,286) (2,071)
------------ -----------
Financing Activities:
Proceeds from short-term debt 1,000 --
Book overdraft -- 2,775
Repayment of long-term debt (2,584) (83)
Proceeds from issuance of stock 2 79
------------ -----------
Net cash provided (used) by financing activities (1,582) 2,771
------------ -----------
Effect of exchange rate changes on cash and cash equivalents (117) 196
Net Change in Cash and Cash Equivalents 2,165 (1,916)
Cash and Cash Equivalents at Beginning of Period 4,978 5,144
------------ -----------
Cash and Cash Equivalents at End of Period $ 7,143 $ 3,228
============ ===========
See accompanying notes.
5
NN, Inc.
Notes To Consolidated Financial Statements
(unaudited)
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of NN, Inc. (the "Company")
have not been audited by independent accountants, except that the balance sheet
at December 31, 2003 is derived from the Company's audited financial statements.
In the opinion of the Company's management, the financial statements reflect all
adjustments necessary to present fairly the results of operations for the three
month periods ended March 31, 2004 and 2003, the Company's financial position at
March 31, 2004 and December 31, 2003, and the cash flows for the three month
period ended March 31, 2004 and 2003. These adjustments are of a normal
recurring nature and are, in the opinion of management, necessary for fair
presentation of the financial position and operating results for the interim
periods. As used in this Quarterly Report on Form 10-Q, the terms "NN", "the
Company", "we", "our", or "us" mean NN, Inc. and its subsidiaries.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements presented
in this Quarterly Report on Form 10-Q. These Condensed, Consolidated, Unaudited
Financial Statements should be read in conjunction with our audited Consolidated
Financial Statements and the Notes thereto included in our most recent annual
report on Form 10-K which we filed with the Securities and Exchange Commission
on March 15, 2004.
The results for the first quarter of 2004 are not necessarily indicative of
future results.
Note 2. Derivative Financial Instruments
We have an interest rate swap accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective January 1, 2001. The Company
adopted SFAS No. 133 on January 1, 2001, which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Standard requires the recognition of all derivative instruments on the balance
sheet at fair value. The Standard allows for hedge accounting if certain
requirements are met including documentation of the hedging relationship at
inception and upon adoption of the Standard.
In connection with a variable Euribor rate debt financing in July 2000, our
subsidiary, NN Europe ApS (formerly known as NN Euroball 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 its 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 initially established
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.
As of March 31, 2004, the fair value of the swap was approximately $404,000,
which is recorded in other non-current liabilities. The change in fair value
during the three month periods ended March 31, 2004 and 2003 was a loss of
approximately $8,000 and $104,000, respectively, which have been included as a
component of other (income) expense.
6
Note 3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Inventories are comprised of the following (in thousands):
March 31, December. 31,
2004 2003
------------------- -------------------
Raw materials $ 7,808 $ 8,492
Work in process 6,772 6,808
Finished goods 19,883 22,128
Less inventory reserves (1,141) (1,150)
------------------- -------------------
$ 33,322 $ 36,278
=================== ===================
Inventories on consignment at customer locations as of March 31, 2004 and
December 31, 2003 were $2,509 and $3,046, respectively.
Note 4. Net Income Per Share
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2004 2003
- ----------------------------------------------------- ------------------- -------------------
Net income $3,218 $3,643
=================== ===================
Weighted average basic shares 16,711,651 15,378,313
Effect of dilutive stock options 477,099 195,881
------------------- -------------------
Weighted average dilutive shares outstanding 17,188,750 15,574,194
=================== ===================
Basic net income per share $0.19 $0.24
=================== ===================
Diluted net income per share $0.19 $0.23
=================== ===================
Excluded from the shares outstanding for each of the periods ended March 31,
2004 and 2003 were 438,000 and 39,800 antidilutive options, respectively, which
had exercise prices of $12.62 as of March 31, 2004 and exercise prices ranging
from $9.75 to $10.26 as of March 31, 2003.
Note 5. Segment Information
During 2004 and 2003, the Company's reportable segments are based on differences
in product lines and geographic locations and are divided among Domestic Ball
and Roller, European operations ("NN Europe") and Plastic and Rubber Components.
The Domestic Ball and Roller Segment is comprised of two manufacturing
facilities in the eastern United States. The NN Europe Segment is comprised of
precision ball manufacturing facilities located in Kilkenny, Ireland, Eltmann,
Germany, Pinerolo, Italy, Veenendaal, The Netherlands ("Veenendaal") which is a
tapered roller and metal cage manufacturing operation acquired in May 2003 and
Kysucke Nove Mesto, Slovakia, which is expected to begin production in the
second quarter of 2004. See Note 6, "Acquisitions and Joint Ventures". All of
the facilities in the Domestic Ball and Roller Segment are engaged in the
production of precision balls and rollers used primarily in the bearing
industry. All of the facilities in the NN Europe Segment are engaged in the
production of precision balls used primarily in the bearing industry except for
Veenendaal which is engaged in the production of tapered rollers and cages for
use primarily in the bearing industry. The Plastic and Rubber Components Segment
is comprised of the Industrial Molding Corporation ("IMC") business, located in
Lubbock, Texas and The Delta Rubber Company ("Delta") business, located in
Danielson, Connecticut. IMC is engaged in the production of plastic injection
molded products for the bearing, automotive, instrumentation, fiber optic and
office automation markets. Delta is engaged principally in the production of
engineered bearing seals used principally in automotive, industrial,
agricultural, mining and aerospace applications.
7
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, including those policies
as discussed in Note 1. We evaluate segment performance based on profit or loss
from operations before income taxes and minority interest. We account for
inter-segment sales and transfers at current market prices; however, we did not
have any material inter-segment transactions during the three month periods
ended March 31, 2004 or 2003.
Three Months Ended March 31,
2004 2003
Domestic Plastic and Domestic Plastic and
Ball & NN Europe Rubber Ball & NN Europe Rubber
Thousands of Dollars Roller Segment Components Roller Segment Components
- -------------------------------- ------------ ---------------- ---------------- ------------- --------------- ----------------
Revenues from external
customers $ 14,427 $ 50,055 $ 13,150 $ 14,249 $ 28,835 $ 14,525
Segment pretax profit 767 3,790 758 1,980 3,729 940
Segment assets 50,033 160,321 57,671 61,435 87,721 59,980
Note 6. Acquisitions and Joint Ventures
On May 2, 2003 we acquired the 23 percent interest in NN Europe, ApS ("NN
Europe") (formerly known as NN Euroball ApS) held by SKF. 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. We paid
approximately 13.8 million Euros ($15.6 million) for SKF's interest in Euroball.
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 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 results of the Veenendaal operation are included in the
NN Europe Segment.
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 $6.9 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, April 14, 2003.
The following unaudited pro-forma summary presents the financial information for
the three month period ended March 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
each of the periods presented, nor are they indicative of future results.
Three months ended
(In thousands, except per share March 31, 2003
data) (unaudited)
----------------------------------- ----------------------------------
Net sales $ 70,829
Net income 3,814
Basic earnings per share 0.25
Diluted earnings per share 0.24
8
Note 7. New Accounting Pronouncements
In December 2003, the FASB issued Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities," ("FIN 46(R)"). This
interpretation addresses consolidation by business enterprises of variable
interest entities with certain defined characteristics and replaces Financial
Interpretation No. 46. The interpretation was effective January 1, 2004 for
variable interest entities existing prior to February 2003. FIN 46(R) did not
have a significant impact on the Company's consolidated financial statements.
In December 2003 the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132R
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132R requires
additional disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. With certain
exceptions, principally related to disclosure requirements of foreign plans,
SFAS No. 132R is effective for financial statements with fiscal years ending
after December 15, 2003. As of March 31, 2004, we have complied with the
disclosure requirements of SFAS No. 132R.
We have a defined benefit pension plan covering the employees at our Eltmann,
Germany facility. The benefits are based on the expected years of service
including the rate of compensation increase. The plan is unfunded.
Components of Net Periodic Pension Cost:
Three months ended
March 31,
(in thousands of dollars) 2004 2003
--------------------------------------------------------------------------------------------
Service cost $26 $29
Interest cost 58 52
Amortization of net gain -- 2
----------- ----------
Net periodic pension cost $84 $83
=========== ==========
We expect to contribute approximately $0.3 million to our pension plan in 2004.
As of March 31, 2004, approximately $0.1 million of contributions have been
made.
Note 8. Long-Term Debt and Short-Term Debt
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in Euroball, we entered
into a new $90 million syndicated 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 new financing arrangement
replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg,
S.A. The credit facility consists of a $30.0 million revolver expiring on March
15, 2006, bearing interest at a floating rate equal to LIBOR (1.11% at March 31,
2004) 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
(1.11% at March 31, 2004) plus an applicable margin of 1.25 to 2.0 and a 26.3
million Euro ($29.6 million) term loan expiring on May 1, 2008 which bears
interest at a floating rate equal to Euro LIBOR (1.94% at March 31, 2004) plus
an applicable margin of 1.25 to 2.0. The loan agreement contains customary
financial and non-financial covenants. Such covenants specify 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, acquisitions and other fundamental changes in the
Company's business. The credit agreement is un-collateralized except for the
pledge of stock of certain foreign subsidiaries. We were in compliance
9
with all such covenants as of March 31, 2004. See Note 11. 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 will be utilized by our newly established subsidiary
AKMCH s.r.o. ("AKMCH") based in Kysucke Nove Mesto, Slovakia, which will begin
production in the second quarter of 2004. The financial results of their
operations have been included in our NN Europe Segment.
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, which bears
interest at the prime rate (4.0% at March 31, 2004) matures on May 12, 2004. See
Note 11.
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,
which bears interest at the prime rate (4.0% at March 31, 2004), matures on June
20, 2004. This agreement was entered into to fund short term operating capital
requirements. As of March 31, 2004, borrowings totaled $1.0 million under this
note. See Note 11.
Note 9. Goodwill
The changes in the carrying amount of goodwill for the three month period ended
March 31, 2004 are as follows:
In thousands of dollars Plastic and Rubber
Components Segment NN Europe Segment Total
--------------------- ------------------- ----------------
Balance as of January 1, 2004 $ 25,755 $ 17,138 $ 42,893
Currency impacts -- (648) (648)
--------------------- ------------------- ----------------
Balance as of March 31, 2004 $ 25,755 $ 16,490 $ 42,245
===================== =================== ================
Note 10. Stock Compensation
We have adopted the provisions of SFAS 123, which encourages but does not
require a fair value based method of accounting for stock compensation plans. We
have elected to continue accounting for our stock compensation plan using the
intrinsic value based method under Auditing Practices Board ("APB") Opinion No.
25 and, accordingly, have not recorded compensation expense for the three month
periods ended March 31, 2004 and March 31, 2003. Had compensation cost for our
stock compensation plan been determined based on the fair value at the option
grant dates, our net income and earnings per share would have been reduced to
the pro-forma amounts indicated below:
Three months ended
March 31,
In Thousands, Except per Share Data 2004 2003
- --------------------------------------------------------------------- ------------- -----------
Net income - as reported $ 3,218 $3,643
Stock based compensation costs (income), net of income tax,
included in net income as reported (67) --
Stock based compensation costs, net of income tax, that would have been
included in net income if the fair value method had been
applied (7) (10)
------------- -----------
Net income - pro-forma $3,144 $3,633
============= ===========
10
Three months ended
March 31,
2004 2003
------------- -----------
Basic earnings per share - as reported $ 0.19 $ 0.24
Stock based compensation costs (income), net of income tax, -- --
included in net income as reported
Stock based compensation costs, net of income tax, that would have been
included in net income if the fair value method had been
applied -- --
------------- -----------
Basic earnings per share - pro-forma $ 0.19 $ 0.24
============= ===========
Earnings per share-assuming dilution - as reported $ 0.19 $ 0.23
Stock based compensation costs (income), 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 -- --
------------- -----------
Earnings per share - assuming dilution-pro-forma $ 0.18 $ 0.23
============= ===========
The fair value of each option grant was estimated based on actual information
available through March 31, 2004 and 2003 using the Black Scholes option-pricing
model with the following assumptions:
Term Vesting period
Risk free interest rate 3.85% and 3.28% at March 31, 2004 and 2003, respectively
Dividend yield 2.74% and 3.66% at March 31, 2004 and 2003, respectively
Volatility 49.16% and 50.11% at March 31, 2004 and 2003, respectively
Note 11. Subsequent Events
On April 26, 2004 we issued $40.0 million of aggregate principal amount senior
notes in a private placement. These notes bear interest at a fixed rate of 4.89%
and mature on April 26, 2014. Interest is paid semi-annually. Annual principal
payments 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 and repay a portion of our borrowings under our US dollar
denominated revolving credit facility, which are both components of our $90
million credit facility, and to repay borrowings under our $2.0 million note and
our $2.7 million note. The current maturities of the US dollar denominated
long-term debt and the short-term notes have been classified as long-term loans
in our Consolidated Balance Sheet as of March 31, 2004 as a result of this
transaction. 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. The notes are not collateralized
except for the pledge of stock of certain foreign subsidiaries.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Overview and Management Focus
Our strategy and management focus is based upon the following long-term objectives:
o Captive growth, providing a competitive and attractive alternative to
the operations of our global customers
o Expansion of our bearing product offering, and
o Global expansion of our manufacturing base to better address the
global requirements of our customers
Management generally focuses on these trends and relevant market indicators:
o Global industrial growth and economics
o Global automotive production rates
o Costs subject to the global inflationary environment, including, but
not limited to:
o Raw material
o Wages and benefits, including health care costs
o Energy
o Trends related to manufacturing's geographic migration of competitive
manufacturing
o Regulatory environment for United States public companies
o Currency and exchange rate movements and trends
o Interest rate levels and expectations
Management generally focuses on the following key indicators of operating performance:
o Sales growth
o Cost of products sold levels
o Selling, general and administrative expense levels
o Net income
o Cash flow from operations and capital spending
Our core business is the manufacture and sale of high quality, precision steel
balls and rollers. In 2003, sales of balls and rollers accounted for
approximately 76% of the Company's total net sales with 63% and 13% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 4% and sales of precision molded plastic and rubber parts accounted for the
remaining 20%.
Since our formation in 1980 we have grown primarily through the displacement of
captive ball manufacturing operations of domestic and international bearing
manufacturers resulting in increased sales
12
of high precision balls for quiet 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.
Results of Operations
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31, 2003
Net Sales. Net sales increased by approximately $20.0 million, or 34.8%, from
$57.6 million in the first quarter of 2003 to $77.6 million in the first quarter
of 2004. By segment, sales increased by $21.2 million and $0.2 million for the
NN Europe Segment and Domestic Ball and Roller Segment, respectively. Within the
NN Europe Segment, $15.0 million of the increase is related to our May 2, 2003
acquisition of Veenendaal and the inclusion of its results for the first quarter
of 2004, $4.7 million of the increase is related to the impact of foreign
currency exchange rates and $1.5 million is related to increased product demand.
Offsetting these increases, were decreased sales of the Plastic and Rubber
Components Segment of approximately $1.4 million. Of this amount, $0.6 million
is related to the closure of our NN Arte Guadalajara, Mexico operation announced
during the second quarter of 2003. Additional decreases of $0.8 million are
principally a result of the elimination of one program with an existing customer
and decreased demand.
Cost of Products Sold. Cost of products sold increased by approximately $17.7
million, or 41.3%, from $42.7 million in the first quarter of 2003 to $60.4
million in the first quarter of 2004. By segment, cost of products sold
increased by $18.3 million and $0.5 million for the NN Europe Segment and
Domestic Ball and Roller Segment, respectively. Within the NN Europe Segment,
$12.6 million of the increase is related to our May 2, 2003 acquisition of
Veenendaal and the inclusion of its results for the first quarter of 2004, $3.6
million of the increase is related to the impact of foreign currency exchange
rates and $2.1 million is related to increased product demand, material cost
increases and inventory management efforts. Within the Domestic Ball and Roller
Segment, the $0.5 million increase is principally related to inventory
management efforts. Offsetting these increases, were decreased cost of products
sold in the Plastic and Rubber Components Segment of approximately $1.1 million.
Of this amount, $0.7 million is related to the closure of our NN Arte
Guadalajara, Mexico operation announced during the second quarter of 2003.
Additional decreases of $0.4 million are a result of the elimination of one
program with an existing customer and decreased demand. As a percentage of net
sales, cost of products sold increased from 74.2% during the first quarter of
2003 to 77.8% during the first quarter of 2004.
The price of steel has risen over the last twelve to eighteen months with 2004
prices expected 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. Our contracts with key customers allow
us to pass a majority of the steel price increases we incur 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 are able to 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 approximately $2.5 million, or 54.2%, from
$4.6 million in the first quarter of 2003 to $7.1 million in the first quarter
of 2004. Selling, general and administrative expenses increased by $1.7 million
and $0.7 million for the NN Europe Segment and Domestic Ball and Roller Segment,
respectively. Within the NN Europe Segment, $1.1 million of the increase is
related to our May 2, 2003 acquisition of Veenendaal and the inclusion of its
results for the first quarter of 2004, $0.4 million of the increase is related
to the impact of foreign currency exchange rates and $0.2 million is related to
employee severance. Within the Domestic Ball and Roller Segment, the $0.3
million of the increase is related to costs incurred as a result of the start-up
of our previously announced Level 3 program which integrates the principles of
Lean Enterprise, Six Sigma and Total Productive Maintenance, $0.3 million of the
increase is related to Sarbanes-Oxley compliance efforts in the area of internal
financial control and $0.1 million of the increase is principally related to
insurance increases related to Director and Officer liability coverages. As a
percentage of net sales, selling, general and administrative expenses increased
from 8.0% during the first quarter of 2003 to
13
9.2% during the first quarter of 2004.
Depreciation and Amortization. Depreciation and amortization expenses increased
by approximately $0.9 million, or 29.9%, from $3.1 million in the first quarter
of 2003 to $4.0 million in the first quarter of 2004. Principally all of the
$0.9 million increase was attributable to the NN Europe Segment. Within the NN
Europe Segment, $0.7 million of the increase is related to our May 2, 2003
acquisition of Veenendaal and the inclusion of its results for the first quarter
of 2004 and $0.2 million of the increase is related to the impact of foreign
currency exchange rates. As a percentage of net sales, depreciation and
amortization expense decreased from 5.3% during the first quarter of 2003 to
5.2% during the first quarter of 2004.
Interest Expense. Interest expense increased by approximately $0.3 million from
$0.5 million in the first quarter of 2003 to $0.8 million in the first quarter
of 2004. The increase is attributed to increased debt levels due to the May 2003
acquisition of Veenendaal and the May 2003 purchase of the 23% interest in NN
Europe held by SKF. Effective with the completion of this transaction, we own
100% of NN Europe.
Minority Interest in Consolidated Subsidiary. Minority interest in consolidated
subsidiary decreased $0.5 million from $0.5 million in the first quarter of 2003
to $0 in the first quarter of 2004. The decrease is due entirely to our purchase
of the remaining 23% minority interest in NN Europe on May 2, 2003. During the
first quarter of 2003, minority interest in consolidated subsidiary represented
the 23% of the shares of the joint venture held by SKF.
Net Income. Net income decreased by approximately $0.4 million, or 11.7%, from
$3.6 million in the first quarter of 2003 to $3.2 million in the first quarter
of 2004. As a percentage of net sales, net income decreased from 6.3% during the
first quarter of 2003 to 4.1% during the first quarter of 2004.
Liquidity and Capital Resources
On March 23, 2004 we entered into a $2.7 million short-term promissory note
("the $2.7 million note") with AmSouth Bank as the lender. This note, which
bears interest at the prime rate (4.0% at March 31, 2004), matures on June 20,
2004. This agreement was entered into to fund short term operating capital
requirements. As of March 31, 2004, borrowings totaled $1.0 million under this
note. See Note 8 of the Notes to Consolidated Financial Statements.
In connection with the acquisition of KLF's operations in Slovakia, on September
23, 2003 we entered into a $2.0 million short-term promissory note ("the $2.0
million note") with AmSouth as the lender. This note, which bears interest at
the prime rate (4.0% at March 31, 2004), matures on May 12, 2004. See Note 8 of
the Notes to Consolidated Financial Statements.
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in NN Europe, we entered
into a new $90 million syndicated credit facility with 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 new financing arrangement replaced our
prior credit facility with AmSouth and NN Europe's credit facility with Hypo
Vereinsbank Luxembourg, S.A. The credit facility consists of a $30.0 million
revolver expiring on March 15, 2006, bearing interest at a floating rate equal to
LIBOR (1.11% at March 31, 2004) 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 (1.11% at March 31, 2004) plus an applicable margin of 1.25
to 2.0 and a 26.3 million Euro ($29.6 million) term loan expiring on May 1, 2008
which bears interest at a floating rate equal to Euro LIBOR (1.94% at March 31,
2004) plus an applicable margin of 1.25 to 2.0. The loan agreement contains
customary financial and non-financial covenants. Such covenants specify 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, acquisitions and other fundamental changes in our
business. The credit facility is not collateralized except for the pledge of
stock of certain foreign subsidiaries. We were in compliance with all such
covenants as of March 31, 2004.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private
14
placement. These notes bear interest at a fixed rate of 4.89% and mature on
April 26, 2014. Interest is paid semi-annually. Annual principal payments 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
and repay a portion of our borrowings under our US dollar denominated revolving
credit facility, which are both components of our $90 million credit facility,
and to repay borrowings under our $2.0 million note and our $2.7 million note.
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. The notes are not collateralized except for
the pledge of stock of certain foreign subsidiaries. See Notes 8 and 11 of the
Notes to Consolidated Financial Statements.
Our arrangements with our domestic customers typically provide that payments are
due within 30 days following the date of shipment of goods by us, while
arrangements with certain export customers (other than export customers that
have entered into an inventory management program with the Company) generally
provide that payments are due within either 90 or 120 days following the date of
shipment. Our net sales have historically been of a seasonal nature due to our
relative percentage of European business coupled with slower European production
during the month of August.
We bill and receive payment from some of our customers in Euros as well as other
currencies. To date, we have not been materially adversely affected by currency
fluctuations. Nonetheless, as a result of these sales, our 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 March 31, 2004, no currency hedges were
in place. In addition, a strengthening of the U.S. dollar and/or Euro against
foreign currencies could impair our ability to compete with international
competitors for foreign as well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories, was $35.7 million at March 31, 2004 as compared to $25.7 million at
December 31, 2003. Approximately $8.0 million of the working capital increase is
attributable to the classification of the current maturities of our $90 million
credit facility and borrowings under our $2.0 million note and $2.7 million note
as long-term loans. The ratio of current assets to current liabilities increased
from 1.41:1 at December 31, 2003 to 1.60:1 at March 31, 2004. Cash flow from
operations increased to $6.2 million during the first three months of 2004 from
($2.8 million) during the first three months of 2003. Contributing to the
improvement in cash flow from operations for the three months ended March 31,
2004 was the reduction in inventory levels of approximately $2.3 million.
During 2004, we plan to spend approximately $9.0 million on capital expenditures
related primarily to equipment and process upgrades and replacements and
approximately $5.0 million principally related to geographic expansion of our
manufacturing base. Of these amounts approximately $2.3 million has been spent
through March 31, 2004. We intend to finance these activities with cash
generated from operations and funds available under the credit facilities
described above. We believe that funds generated from operations and borrowings
from the credit facilities will be sufficient to finance our working capital
needs and projected capital expenditure requirements through December 2004.
The Euro
We currently have operations in Italy, Germany, Ireland, and The Netherlands,
all of which are Euro participating countries, and sell product to customers in
many of the participating countries. The Euro has been adopted as the functional
currency at these locations.
Seasonality and Fluctuation in Quarterly Results
Our net sales historically have been of a seasonal nature due to a significant
portion of our sales to European customers that cease or significantly slow
production during the month of August.
15
Inflation and Changes in Prices
While the Company's operations have not been materially affected by general
inflation during recent years, prices for 52100 Steel and other steel related
raw materials have increased significantly during the past twelve months. In the
Company's U.S. operations our typical pricing arrangements with steel suppliers
are subject to adjustment once every six months. The Company's NN Europe Segment
has entered into long-term agreements with its primary steel supplier, which
provide for standard terms and conditions, annual unit price adjustments, and
quarterly pricing adjustments in the form of scrap surcharges. In both our U.S.
and European operations, the steel price increases we have experienced are
related to increasing global demand for scrap and other steel related raw
materials, principally from China. While we reserve the right to increase
product prices periodically in the event of increases in its raw material costs,
our current contracts in effect with SKF and INA/FAG call for adjustments in
selling prices for raw material inflation to occur in January of the following
year. As such, the majority of the inflation we are currently experiencing in
raw material pricing will not be passed through until January 2005. For other
customers, we are currently in the process of adjusting pricing levels to
reflect the increases in steel pricing.
Critical Accounting Policies
Our significant accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 2003 including those policies as discussed in
Note 1. 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
postretirement 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.
Accounts Receivable. Substantially all of the Company's accounts receivable are
due primarily from the served markets: bearing manufacturers, automotive
industry, electronics, industrial, agricultural and aerospace. 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 when considered to be
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 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 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, the expected cash flows that they
will generate, and their market value. 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.
Impairment of Long-Lived Assets. The Company's long-lived assets include
property, plant and equipment. The recoverability of the long-lived assets is
dependent on the performance of the companies
16
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 as of December 31, 2003, appraisals are
relied upon to assess the fair market value of those assets. The assets held for
sale of $1.8 million as of December 31, 2003 have been reclassified as held for
use as of March 31, 2004. The amounts reclassified are carried at fair value
which is lower than the carrying amount before the assets were classified as
held for sale adjusted for depreciation expense. The reclassification of these
assets did not have a material impact to our income from operations, net income
or cash flow from operations for the three months ended March 31, 2004. 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 and Post-Retirement 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 Company uses an
independent actuary to calculate the periodic pension and post-retirement
expense and obligations based upon these assumptions and actual employee census
data.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward-looking statements that involve
certain risks and uncertainties. Statements regarding capital expenditures,
future borrowings, and financial commitments are forward-looking statements.
Readers can identify forward-looking statements by the use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
The Company's actual results could differ materially from those expressed in
such forward-looking statements due to important factors bearing on the
Company's business, many of which already have been discussed in this filing and
in the Company's prior filings. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the risk
factors described below.
You should carefully consider the following risks and uncertainties, and all
other information contained in or incorporated by reference in this quarterly
report on Form 10-Q, before making an investment in our common stock. Any of the
following risks could have a material adverse effect on our business, financial
condition or operating results. In such case, the trading price of our common
stock could decline and you may lose all or part of your investment.
The demand for our products is cyclical, which could adversely impact our
revenues.
The end markets for fully assembled bearings are cyclical and tend to decline in
response to overall declines in industrial production. As a result, the market
for bearing components is also cyclical and impacted by overall levels of
industrial production. Our sales in the past have been negatively affected, and
in the future will be negatively affected, by adverse conditions in the
industrial production sector of the economy or by adverse global or national
economic conditions generally.
We depend on a very limited number of foreign sources for our primary raw
material and are subject to risks of shortages and price fluctuation.
The steel that we use to manufacture precision balls and rollers is of an
extremely high quality and is available from a limited number of producers on a
global basis. Due to quality constraints in the U.S. steel industry, we obtain
substantially all of the steel used in our U.S. ball and roller production from
overseas suppliers. In addition, we obtain substantially all of the steel used
in our European ball production from a single European source. If we had to
obtain steel from sources other than our current suppliers, particularly in the
case of our European operations, we could face higher prices and transportation
costs, increased duties or taxes, and shortages of steel. Problems in obtaining
steel, and particularly 52100 chrome steel, in the quantities that we require
and on commercially reasonable terms, could increase our costs, negatively
17
impact our ability to operate our business efficiently and have a material
adverse effect on the operating and financial results of our Company.
We depend heavily on a relatively limited number of customers, and the loss of
any major customer would have a material adverse effect on our business.
Sales to various U.S. and foreign divisions of SKF, which is one of the largest
bearing manufacturers in the world, accounted for approximately 42% of
consolidated net sales in 2003, and sales to INA/FAG accounted for approximately
16% of consolidated net sales in 2003. During 2003, our ten largest customers
accounted for approximately 77% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2003. 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
profit margin and cash flows from operations.
We operate in and sell products to customers outside the U.S. and are subject to
several related risks.
Because we obtain a majority of our raw materials from overseas suppliers,
actively participate in overseas manufacturing operations and sell to a large
number of international customers, we face risks associated with the following:
o adverse foreign currency fluctuations;
o changes in trade, monetary and fiscal policies, laws and regulations,
and other activities of governments, agencies and similar
organizations;
o the imposition of trade restrictions or prohibitions;
o high tax rates that discourage the repatriation of funds to the U.S.;
o the imposition of import or other duties or taxes; and
o unstable governments or legal systems in countries in which our
suppliers, manufacturing operations, and customers are located.
We do not have a hedging program in place associated with consolidating the
operating results of our foreign businesses into U.S. Dollars. An increase in
the value of the U.S. Dollar and/or the Euro relative to other currencies may
adversely affect our ability to compete with our foreign-based competitors for
international, as well as domestic, sales. Also, a decline in the value of the
Euro relative to the U.S. Dollar could negatively impact our consolidated
financial results, which are denominated in U.S. Dollars.
In addition, due to the typical slower summer manufacturing season in Europe, we
expect that revenues in the third fiscal quarter will reflect lower sales, as
our sales to European customers have increased as a percentage of net sales.
The costs and difficulties of integrating acquired business could impede our
future growth.
We cannot assure you that any future acquisition will enhance our financial
performance. Our ability to effectively integrate any future acquisitions will
depend on, among other things, the adequacy of our implementation plans, the
ability of our management to oversee and operate effectively the combined
operations and our ability to achieve desired operating efficiencies and sales
goals. The integration of any acquired businesses might cause us to incur
unforeseen costs, which would lower our profit margin and future earnings and
would prevent us from realizing the expected benefits of these acquisitions.
We may not be able to continue to make the acquisitions necessary for us to
realize our growth strategy.
Acquiring businesses that complement or expand our operations has been and
continues to be an important element of our business strategy. This strategy
calls for growth through acquisitions constituting
18
approximately two-thirds of our future growth, with the remainder resulting from
internal growth and market penetration. We bought our plastic bearing component
business in 1999, formed NN Europe with our two largest bearing customers, SKF
and INA/FAG, in 2000 and acquired our bearing seal operations in 2001. During
2002, we purchased INA/FAG's minority interest in NN Europe and on May 2, 2003
we acquired SKF's minority interest in NN Europe, to become the sole owner at NN
Europe. On May 2, 2003 we acquired SKF's tapered roller and metal cage
manufacturing operations in Veenendaal, The Netherlands. On October 9, 2003 we
acquired the precision ball producing assets of KLF-Gulickaren in Kysucke Nove
Mesto, Slovakia. We cannot assure you that we will be successful in identifying
attractive acquisition candidates or completing acquisitions on favorable terms
in the future. In addition, we may borrow funds to acquire other businesses,
increasing our interest expense and debt levels. Our inability to acquire
businesses, or to operate them profitably once acquired, could have a material
adverse effect on our business, financial position, results of operations and
cash flows.
Our growth strategy depends on outsourcing, and if the industry trend toward
outsourcing does not continue, our business could be adversely affected.
Our growth strategy depends in significant part on major bearing manufacturers
continuing to outsource components, and expanding the number of components being
outsourced. This requires manufacturers to depart significantly from their
traditional methods of operations. If major bearing manufacturers do not
continue to expand outsourcing efforts or determine to reduce their use of
outsourcing, our ability to grow our business could be materially adversely
affected.
Our market is highly competitive and many of our competitors have significant
advantages that could adversely affect our business.
The global market for bearing components is highly competitive, with a majority
of production represented by the captive production operations of certain large
bearing manufacturers and the balance represented by independent manufacturers.
Captive manufacturers make components for internal use and for sale to third
parties. All of the captive manufacturers, and many independent manufacturers,
are significantly larger and have greater resources than do we. Our competitors
are continuously exploring and implementing improvements in technology and
manufacturing processes in order to improve product quality, and our ability to
remain competitive will depend, among other things, on whether we are able to
keep pace with such quality improvements in a cost effective manner.
The production capacity we have added over the last several years has at times
resulted in our having more capacity than we need, causing our operating costs
to be higher than expected.
We have expanded our ball and roller production facilities and capacity over the
last several years. During 1997, we built an additional manufacturing plant in
Kilkenny, Ireland, and we continued this expansion in 2000 through the formation
of NN Europe with SKF and INA/FAG. Our ball and roller facilities have not
always operated at full capacity and from time to time our results of operations
have been adversely affected by the under-utilization of our production
facilities, and we face risks of further under-utilization or inefficient
utilization of our production facilities in future years.
The price of our common stock may be volatile.
The market price of our common stock could be subject to significant
fluctuations and may decline. Among the factors that could affect our stock
price are:
o our operating and financial performance and prospects;
o quarterly variations in the rate of growth of our financial
indicators, such as earnings per share, net income and revenues;
o changes in revenue or earnings estimates or publication of research
reports by analysts;
o loss of any member of our senior management team;
19
o speculation in the press or investment community;
o strategic actions by us or our competitors, such as acquisitions or
restructurings;
o sales of our common stock by stockholders;
o general market conditions; and
o domestic and international economic, legal and regulatory factors
unrelated to our performance.
The stock markets in general have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
Provisions in our charter documents and Delaware law may inhibit a takeover,
which could adversely affect the value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable and may prevent you
from receiving a takeover premium for your shares. These provisions include, for
example, a classified board of directors and the authorization of our board of
directors to issue up to 5,000,000 preferred shares without a stockholder vote.
In addition, our restated certificate of incorporation provides that
stockholders may not call a special meeting.
We are a Delaware corporation subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law. Generally, this statute
prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years after the
date of the transaction in which such person became an interested stockholder,
unless the business combination is approved in a prescribed manner. A business
combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. We anticipate that the provisions of
Section 203 may encourage parties interested in acquiring us to negotiate in
advance with our board of directors, because the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.
These provisions apply even if the offer may be considered beneficial by some of
our stockholders. If a change of control or change in management is delayed or
prevented, the market price of our common stock could decline.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 March 31,
2004, we had $59.3 million outstanding under the domestic credit facilities and
NN Europe had 21.0 million Euro ($25.7 million) outstanding under the Euro term
loan. See Note 8 of the Notes to Consolidated Financial Statements. At March 31,
2004, a one-percent increase in the interest rate charged on our outstanding
borrowings under both credit facilities would result in interest expense
increasing annually by approximately $0.8 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
20
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 the $90 million
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 our operating cash flows denominated in foreign currencies is
impacted by changes in foreign exchange rates. Our NN Europe Segment, bills and
receives payments from some of its foreign customers in their own currency. To
date, we have not been materially adversely affected by currency fluctuations of
foreign exchange restrictions. However, to help reduce exposure to foreign
currency fluctuation, management has incurred debt in Euros and has periodically
used foreign currency hedges. These currency hedging programs allow management
to hedge currency exposures when these exposures meet certain discretionary
levels. We did not hold a position in any foreign currency hedging instruments
as of March 31, 2004.
Item 4. Controls and Procedures
As of March 31, 2004, we carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act filings.
There have been no changes in this fiscal quarter in the Company's internal
control over financial reporting or in other factors that have materially
affected, or are reasonably likely to materially affect, the registrant's
internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
All legal proceedings and actions involving the Company are of an ordinary and
routine nature and are incidental to the operations of the Company. Management
believes that such proceedings should not, individually or in the aggregate,
have a material adverse effect on the Company's business or financial condition
or on the results of operations.
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits Required by Item 601 of Regulation S-K
10.1 Amendment No. 2 to Credit Agreement dated March 12, 2004, by and among
NN, Inc., NN Euroball ApS, certain subsidiaries, AmSouth Bank as
administrative agent and SunTrust Bank as Documentation Agent and Euro
Loan Agent.
10.2 Amendment No. 3 to Credit Agreement dated March 31, 2004, by and among
NN, Inc., NN Europe ApS, certain subsidiaries, AmSouth Bank as
administrative agent and SunTrust Bank as Documentation Agent and Euro
Loan Agent.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
Reports on Form 8-K
The Company furnished a Form 8-K, in response to Items 12 and 7, on
February 26, 2004 announcing its fourth quarter and fiscal year 2003
earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NN, Inc.
--------------------------------
(Registrant)
Date: May 10, 2004 /s/ Roderick R. Baty
-------------------- --------------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 2004 /s/ David L. Dyckman
-------------------- --------------------------------
David L. Dyckman
Vice President - Corporate Development
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: May 10, 2004 /s/ William C. Kelly, Jr.
-------------------- --------------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Administrative Officer
(Duly Authorized Officer)
23