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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 September 30, 2005
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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 October 31, 2005 there were 17,206,072 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 2005
and 2004 (unaudited)............................................2
Condensed Consolidated Balance Sheets at September 30, 2005
and December 31, 2004 (unaudited) ..............................3
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2005 and 2004 (unaudited)...4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (unaudited)...................5
Notes to Consolidated Financial Statements (unaudited)............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................14
Item 3 Quantitative and Qualitative Disclosures about Market Risk.......23
Item 4 Controls and Procedures..........................................24
Part II. Other Information
Item 1 Legal Proceedings................................................25
Item 2. Changes in Securities and Use of Proceeds........................25
Item 3. Defaults Upon Senior Securities..................................25
Item 4 Submission of Matters to a Vote of Security Holders..............25
Item 5 Other Information................................................25
Item 6. Exhibits and Reports on Form 8-K.................................25
Signatures................................................................26
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Thousands of Dollars, Except Per Share Data) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Net sales $74,998 $72,917 $ 245,500 $ 225,815
Cost of products sold (exclusive of depreciation
shown separately below) 58,177 57,263 191,848 176,590
Selling, general and administrative 7,180 7,126 21,961 22,309
Depreciation and amortization 3,998 3,999 12,302 11,918
Loss on disposal of assets -- -- 6 --
----------- ----------- ------------ ------------
Income from operations 5,643 4,529 19,383 14,998
Interest expense, net 967 1,101 2,976 2,925
Other (income) expense, net 53 (177) (286) (208)
----------- ----------- ------------ ------------
Income before provision for income taxes 4,623 3,605 16,693 12,281
Provision for income taxes 2,066 1,453 6,801 4,926
----------- ----------- ------------ ------------
Net income 2,557 2,152 9,892 7,355
Other comprehensive income (loss):
Unrealized holding gain on securities,
net of tax -- -- (73) --
Foreign currency translation (460) 1,184 (10,425) (1,304)
----------- ----------- ------------ ------------
Comprehensive income (loss) $2,097 $ 3,336 $ (606) $ 6,051
=========== =========== ============ ============
Basic income per common share: $ 0.15 $ 0.13 $ 0.58 $ 0.44
=========== =========== =========== ============
Weighted average shares outstanding 17,191 16,767 16,963 16,721
=========== =========== ============ ============
Diluted income per common share: $ 0.15 $ 0.13 $ 0.57 $ 0.43
=========== =========== ============ ============
Weighted average shares outstanding 17,522 17,135 17,286 17,142
=========== =========== ============ ============
Cash dividends per common share $ 0.08 $ 0.08 $ 0.24 $ 0.24
=========== =========== ============ ============
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
(Thousands of Dollars) 2005 2004
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,707 $ 10,772
Accounts receivable, net 52,981 51,597
Inventories, net 35,051 35,629
Income tax receivable 2,468 4,401
Other current assets 8,541 5,939
------------------ ------------------
Total current assets 106,748 108,338
Property, plant and equipment, net 115,930 131,169
Goodwill, net 41,932 44,457
Other assets 6,197 5,905
------------------ ------------------
Total assets $ 270,807 $ 289,869
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 36,092 $ 45,217
Accrued salaries and wages 13,835 16,332
Income taxes 4,714 1,599
Current maturities of long-term debt 6,319 7,160
Other current liabilities 4,658 4,123
------------------ ------------------
Total current liabilities 65,618 74,431
Non-current deferred tax liability 16,715 17,857
Long-term debt 61,481 67,510
Accrued pension and other 13,018 14,931
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Total liabilities 156,832 174,729
Total stockholders' equity 113,975 115,140
------------------ ------------------
Total liabilities and stockholders' equity $ 270,807 $ 289,869
================== ==================
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, 2004 16,712 $168 $ 52,960 $ 43,931 $ 9,409 $ 106,468
Shares issued 60 -- 430 -- -- 430
Net income -- -- -- 7,355 -- 7,355
Dividends declared -- -- -- (4,016) -- (4,016)
Other comprehensive loss -- -- -- -- (1,304) (1,304)
----------- -------- ----------- ------------ ------------ ------------
Balance, September 30, 2004 16,772 $168 $ 53,390 $ 47,270 $8,105 $ 108,933
=========== ======== =========== ============ ============= ============
Balance, January 1, 2005 16,777 $168 $ 53,423 $ 45,676 $ 15,873 $ 115,140
Shares issued 429 5 3,529 -- -- 3,534
Net income -- -- -- 9,892 -- 9,892
Dividends declared -- -- -- (4,093) -- (4,093)
Unrealized holding loss on available
for sale securities -- -- -- -- (73) (73)
Other comprehensive loss -- -- -- -- (10,425) (10,425)
----------- -------- ----------- ------------ ------------- ------------
Balance, September 30, 2005 17,206 $173 $ 56,952 $ 51,475 $ 5,375 $ 113,975
=========== ======== =========== ============ ============= ============
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
(Thousands of Dollars) 2005 2004
- --------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 9,892 $ 7,355
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 12,302 11,918
Amortization of debt issue costs 182 106
Write-off of unamortized debt issue costs -- 260
Loss on disposal of property, plant and equipment 6 30
Interest income on notes receivable -- 77
Compensation expense from issuance of restricted stock 102 --
Changes in operating assets and liabilities:
Accounts receivable (5,022) (9,609)
Inventories (1,750) 3,587
Other current assets (2,195) (717)
Other assets (467) (306)
Accounts payable (6,976) 4,897
Income tax receivable 1,895 2,079
Other liabilities 2,289 2,299
------------ -----------
Net cash provided by operating activities 10,258 21,976
------------ -----------
Investing Activities:
Acquisition of property, plant, and equipment (8,370) (7,999)
Proceeds from disposals of property, plant and equipment 31 51
------------ -----------
Net cash used by investing activities (8,339) (7,948)
------------ -----------
Financing Activities:
Proceeds from long-term debt -- 40,000
Increase in cash from reclassification of book overdraft 1,870 --
Debt issue costs paid -- (771)
Repayment of long-term debt (4,704) (44,642)
Repayment of short-term debt -- (2,000)
Proceeds from issuance of stock 2,862 431
Dividends paid (4,093) (4,016)
------------ -----------
Net cash used by financing activities (4,065) (10,998)
------------ -----------
Effect of exchange rate changes on cash and cash equivalents (919) (235)
Net Change in Cash and Cash Equivalents (3,065) 2,795
Cash and Cash Equivalents at Beginning of Period 10,772 4,978
------------ -----------
Cash and Cash Equivalents at End of Period $ 7,707 $ 7,773
============ ===========
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 our independent registered public accounting firm,
except that the balance sheet at December 31, 2004 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 and nine month periods ended September 30,
2005 and 2004, the Company's financial position at September 30, 2005 and
December 31, 2004, and the cash flows for the nine month periods ended September
30, 2005 and 2004. 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 unaudited, condensed, consolidated
and unaudited, consolidated 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 for the year ended
December 31, 2004 which we filed with the Securities and Exchange Commission on
March 16, 2005.
The results for the first, second, and third quarters of 2005 and for the nine
month period ended September 30, 2005 are not necessarily indicative of results
for the year ending December 31, 2005 or any other 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 September 30, 2005, the fair value of the swap was approximately $71,000,
which is recorded in other current liabilities. The change in fair value during
the three and nine month periods ended September 30, 2005 was a loss of
approximately $37,000 and a loss of approximately $97,000, respectively, which
have been included as components of other (income) expense. The change in fair
value during the three and nine month periods ended September 30, 2004 was a
loss of approximately $11,000 and a gain of approximately $73,000, respectively.
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):
September 30, December 31,
2005 2004
------------------ -----------------
Raw materials $ 9,011 $ 8,584
Work in process 6,550 6,356
Finished goods 20,935 22,334
Less inventory reserves (1,445) (1,645)
------------------ -----------------
$ 35,051 $ 35,629
================== =================
Inventories on consignment at customer locations as of September 30, 2005 and
December 31, 2004 totaled $4.2 and $3.8 million, respectively.
Note 4. Net Income Per Share
Three months ended Nine months ended
September 30, September 30,
(Thousands of Dollars, Except Share and Per Share Data) 2005 2004 2005 2004
- ------------------------------------------------------ -------------- ------------- -------------- -------------
Net income $ 2,557 $ 2,152 $ 9,892 $ 7,355
============== ============= ============== =============
Weighted average basic shares 17,191,122 16,767,092 16,963,201 16,720,515
Effect of dilutive stock options 330,640 367,414 322,528 421,633
------------- ------------- -------------- -------------
Weighted average dilutive shares outstanding 17,521,762 17,134,506 17,285,729 17,142,148
============= ============= ============== =============
Basic net income per share $ 0.15 $ 0.13 $ 0.58 $ 0.44
============= ============= ============== =============
Diluted net income per share $ 0.15 $ 0.13 $ 0.57 $ 0.43
============= ============= ============== =============
Excluded from the shares outstanding for each of the periods ended September 30,
2005 and 2004 were 344,000 and 438,000 antidilutive options, respectively, which
had exercise prices of $12.62 as of September 30, 2005 and as of September 30,
2004.
Note 5. Segment Information
During 2005 and 2004, our 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,
roller and metal cage manufacturing facilities located in Kilkenny, Ireland;
Eltmann, Germany; Pinerolo, Italy; Kysucke Nove Mesto, Slovakia (which began
production in the second quarter of 2004); and Veenendaal, The Netherlands
("Veenendaal"). 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,
and fiber optic 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 our Annual Report on Form 10-K for
the fiscal year ended December 31, 2004. We evaluate segment performance based
on profit or loss from operations before income taxes. 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 or nine month
periods ended September 30, 2005 or 2004.
Three Months Ended September 30,
2005 2004
-------------------------------------------- ---------------------------------------------
Domestic Plastic and Domestic Plastic and
Ball & NN Europe Rubber Ball & NN Europe Rubber
(In Thousands of Dollars) Roller Segment Components Roller Segment Components
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 16,444 $ 43,749 $ 14,805 $ 14,440 $ 45,485 $ 12,992
Pretax profit (loss) (49) 3,856 816 233 3,874 (502)
Assets 53,585 159,566 57,656 51,818 160,594 57,279
Nine Months Ended September 30,
2005 2004
-------------------------------------------- ---------------------------------------------
Domestic Plastic and Domestic Plastic and
Ball & NN Europe Rubber Ball & NN Europe Rubber
(In Thousands of Dollars) Roller Segment Components Roller Segment Components
- ------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 48,879 $152,460 $ 44,161 $ 43,417 $ 143,926 $ 38,472
Pretax profit 1,647 13,553 1,493 862 10,752 667
Assets 53,585 159,566 57,656 51,818 160,594 57,279
For the year ended December 31, 2004 sales to our largest customers SKF and INA
were 47.9% and 13.7%, respectively.
Note 6. Acquisitions
During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD, ("NN Asia"). This subsidiary, which is expected to begin precision
ball production during the fourth quarter of 2005, will be 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 costs incurred as a result of this start-up for the nine month periods
ended September 30, 2005 and 2004 of approximately $0.6 million and $0.3
million, respectively, were classified as selling, general and administrative
expense and are included in the Domestic Ball and Roller Segment.
On July 22, 2005, we acquired an adjacent building to the existing building in
Kysucke Nove Mesto, Slovakia for approximately 1.2 million Euros ($1.4 million),
which will allow for future growth in manufacturing capacity.
Note 7. Pensions
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. This pronouncement 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".
8
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. At
September 30, 2005, 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. There
were no prior service costs recognized in the nine months ended September 30,
2005 and September 30, 2004.
Components of Net Periodic Pension Cost:
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
(In Thousands of Dollars) 2005 2004 2005 2004
- ----------------------------------------------------------- ----------- ------------
Service cost $ 24 $ 26 $ 71 $ 78
Interest cost 49 58 146 174
Amortization of net gain 2 -- 7 --
------------ ----------- ----------- ------------
Net periodic pension cost $ 75 $ 84 $ 224 $ 252
============ =========== =========== ============
We expect to contribute approximately $0.3 million to our pension plan in 2005.
As of September 30, 2005, approximately $0.2 million of contributions have been
made.
Note 8. New Accounting Pronouncements
In March 2005 the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations", refers to a legal obligation
to perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. We are currently evaluating the impacts of FIN
47 on the Company's consolidated financial statements.
On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which requires companies to expense the value of employee stock options and
similar awards and establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods. SFAS No. 123R is
effective for 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 value 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). We are currently
evaluating the impacts of SFAS No. 123R on the Company's consolidated financial
statements.
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 that these
items be recognized as current-period charges. In addition, SFAS No. 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after June 15, 2005. We are
currently evaluating the impact of SFAS No. 151 on the company's financial
statements.
9
Deduction for Qualified Domestic Production Activities
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. We are
not yet in a position to determine the net effect of the phase out of the ETI
and the phase in of this new deduction on the effective tax rate in future
years. We expect to be in a position to finalize our assessment by December 31,
2005.
Under the guidance in FASB Staff Position No. FAS 109-1, Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004, issued and effective on December 21, 2004, the deduction will be treated
as a "special deduction" as described in FASB Statement No. 109. As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in
the period in which qualifying activities occur.
Repatriation of Foreign Earnings
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). 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.
This deduction is subject to a number of limitations and uncertainty remains as
to how to interpret numerous provisions in the Act. As such, we are not yet in a
position to decide on whether, and to what extent, we might repatriate foreign
earnings that have not yet been remitted to the U.S. We expect to be in a
position to finalize our assessment by December 31, 2005.
Note 9. Long-Term Debt and Short-Term Debt
On May 1, 2003, we entered into a $90.0 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 "$90.0 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") expiring on
March 15, 2005, subsequently extended to June 30, 2007 bearing interest at a
floating rate equal to LIBOR (3.86% at September 30, 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 (3.86% at September 30, 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 (2.12% at September 30, 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 $40.0 million notes and we no longer have borrowing capacity under that
portion of the $90.0 million credit facility. The terms of the $30.0 million
revolver and the 26.3 million Euro term loan remain unchanged. 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. Management of the company believes that we were in compliance with
all such covenants as of September 30, 2005. We incurred $1.1 million of related
cost as a result of entering into the credit facility. The unamortized balance
at September 30, 2005 and December 31, 2004 was $0.4 million and $0.6 million,
respectively.
10
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40.0 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 September 30, 2005, $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, $24.0 million, and
repay a portion, of our borrowings under our US dollar denominated revolving
credit facility, $13.0 million, which are both components of our $90.0 million
credit facility, and to repay other short term borrowings totaling approximately
$4.7 million. 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. We were in compliance with all such
covenants as of September 30, 2005. The notes are not collateralized except for
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. The unamortized balance at September 30, 2005 and December 31, 2004
was $0.7 million and $0.8 million, respectively.
Debt outstanding under the various agreements as of September 30, 2005 and
December 31, 2004 was as follows:
(In Thousands of Dollars) September 30, December 31,
2005 2004
---------------------------------------------------------------------------------
$90 million credit facility:
Current maturities of long-term debt $ 6,319 $ 7,160
Long-term debt 21,481 27,510
-------------------------------------
Total $27,800 $34,670
=====================================
$40 million notes
Current maturities of long-term debt $ -- $ --
Long-term debt 40,000 40,000
-------------------------------------
Total $40,000 $40,000
=====================================
The fair value of our fixed rate long-term borrowings are estimated using
discounted cash flow analysis based on our incremental borrowing rates for
similar types of borrowing arrangements. We estimate the fair value of the $40
million notes to be $38.5 million at September 30, 2005 and $40.4 million at
December 31, 2004.
As a result of the Company's cash management system, checks issued but not
presented to the banks for payment may create negative book cash balances. Such
negative balances are included in accounts payable and totaled $2.3 million and
$0.4 as of September 30, 2005, and December 31, 2004, respectively.
Note 10. Goodwill
The changes in the carrying amount of goodwill for the nine month period ended
September 30, 2005 and the twelve month period ended December 31, 2004 are as
follows:
Plastic and
Rubber
Components NN Europe
(In Thousands of Dollars) Segment Segment Total
- -------------------------------------------------------------------------------------------------------
Balance as of January 1, 2004 $25,755 $17,138 $42,893
Currency impacts -- 1,564 1,564
-------------------------------------------------
Balance as of December 31, 2004 $25,755 $18,702 $44,457
=================================================
Balance as of January 1, 2005 $25,755 $18,702 $44,457
Currency impacts -- (2,525) (2,525)
-------------------------------------------------
Balance as of September 30, 2005 $25,755 $16,177 $41,932
=================================================
11
Note 11. 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 and
nine month periods ended September 30, 2005 and September 30, 2004, except as
related to stock options accounted for under the variable method of accounting
and for restricted stock awards issued in third quarter (see below). 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 changed to the pro-forma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
(In Thousands, Except per Share Data) 2005 2004 2005 2004
- -------------------------------------------------- ------------ ----------- ------------ -----------
Net income - as reported $2,557 $2,152 $ 9,892 $ 7,355
Stock based compensation income, net of
income tax, included in net income as
reported (49) (98) (108) (86)
Stock based compensation costs, net of
income tax, that would have been
included in net income if the fair value
method had been applied (19) (388) (307) (442)
------------ ----------- ------------ -----------
Net income - pro-forma $2,489 $1,666 $9,477 $6,827
============ =========== ============ ===========
Basic earnings per share - as reported $ 0.15 $ 0.13 $ 0.58 $ 0.44
Stock based compensation income, net of
income tax, included in net income as
reported (0.01) (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 -- (0.02) (0.02) (0.03)
------------ ----------- ------------ -----------
Basic earnings per share - pro-forma $ 0.14 $ 0.10 $ 0.55 $ 0.41
============ =========== ============ ===========
Earnings per share-assuming dilution - as
reported $ 0.15 $ 0.13 $ 0.57 $ 0.43
Stock based compensation income, net of
income tax, included in net income as
reported (0.01) (0.01) (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 -- (0.02) (0.02) (0.02)
------------ ----------- ------------ -----------
Earnings per share - assuming dilution-pro-
forma $ 0.14 $ 0.10 $ 0.54 $ 0.40
============ =========== ============ ===========
The fair value of each option grant was estimated based on actual information
available through September 30, 2005 and 2004 using the Black Scholes
option-pricing model with the following assumptions:
Term - Vesting period
Risk free interest rate - 4.18% and 3.50% at September 30, 2005 and 2004,
respectively
Dividend yield - 2.67% and 2.79% at September 30, 2005 and 2004,
respectively
Volatility - 45.31% and 48.88% at September 30, 2005 and 2004,
respectively
12
We issued 53,000 shares of restricted stock awards to certain senior management
employees in the third quarter of 2005. 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 $103,000 for the
third quarter of 2005.
Note 12. Commitments
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 agreement satisfied the
requirements of a capital lease at June 1, 2004, and we anticipate recording the
lease as a capital lease in our consolidated financial statements as of October
1, 2005, when our possession of the building commences. Accordingly, as of
September 30, 2005, no amount has been recorded related to the asset and
corresponding obligation associated with the lease agreement in our consolidated
financial statements. We estimate the fair value of the land and building to be
approximately $2.0 million and undiscounted annual lease payments of
approximately $0.2 million (approximately $4.1 million aggregate non-discounted
lease payments over the twenty year term). The lease includes fair value buy-out
provisions, and we maintain the option to extend the lease term under the same
terms and conditions as the original agreement.
On October 7, 2005, we entered into an areement with SNR Roulements ("SNR") to
purchase all of SNR's internal precision ball producing equipment for
approximately 5.0 million Euros ($6.0 million). As part of the agreement, we
entered into a five year supply agreement to provide SNR with an additional $9.0
million of annual ball requirements.
Note 13. Restructuring Charges
Eltmann, Germany Restructuring
- ------------------------------
During the fourth quarter of 2004, the Company's NN Europe subsidiary, a
component of our NN Europe Segment, announced a reduction in staffing at our
Eltmann, Germany ball production facility. This restructuring affected
approximately 86 employees and is expected to be completed during 2005. As a
result, we recorded restructuring charges of approximately 1.7 million Euros
($2.3 million) related to severance costs of approximately $2.1 million and
other related charges of approximately $0.2 million. The workforce reduction is
a result of our continuing strategy of rationalizing our global manufacturing
capacity and the transfer of production principally to our facility in Kysucke
Nove Mesto, Slovakia. The charges were recorded in restructuring and impairment
costs, a component of income from operations in the fourth quarter of 2004.
The following summarizes the restructuring charges related to the restructuring
at the Company's Eltmann, Germany facility for the twelve months ended December
31, 2004 and the nine months ended September 30, 2005:
Twelve months ended December 31, 2004
Reserve Reserve
Balance at Paid in Currency Balance at
(In Thousands of Dollars) 01/01/04 Charges 2004 Impacts 12/31/04
------------- ------------ ---------- ------------ -------------
Severance and other
employee costs $ -- $ 2,290 $ -- $ -- $ 2,290
------------- ------------ ---------- ------------ -------------
$ -- $ 2,290 $ -- $ -- $ 2,290
============= ============ ========== ============ =============
Nine months ended September 30, 2005
Reserve Reserve
Balance at Paid in Currency Balance at
(In Thousands of Dollars) 01/01/05 Charges 2005 Impacts 09/30/05
------------- ------------ ---------- ------------ -------------
Severance and other
employee costs $ 2,290 $ -- $ (683) $ (211) $ 1,396
------------- ------------ ---------- ------------ -------------
$ 2,290 $ -- $ (683) $ (211) $ 1,396
============= ============ ========== ============ =============
13
We expect to pay all amounts during 2005 and no additional charges are expected
to be incurred related to the 2004 restructuring program.
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:
- Captive growth, providing a competitive and attractive alternative to the
operations of our global customers
- Expansion of our bearing product offering, and
- 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:
- Global industrial growth and economics
- Global automotive production rates
- Costs subject to the global inflationary environment, including, but not
limited to:
- Raw material
- Wages and benefits, including health care costs
- Regulatory compliance
- Energy
- Raw Material Availability
- Trends related to manufacturing's 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
- Net income
- Cash flow from operations and capital spending
Our core business is the manufacture and sale of high quality, precision steel
balls and rollers. In 2004, sales of balls and rollers accounted for
approximately 77% of the Company's total net sales with 59% and 18% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 6% and sales of precision molded plastic and rubber parts accounted for the
remaining 17%.
14
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 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 September 30, 2005 Compared to the Three Months Ended
September 30, 2004
Net Sales. Net sales increased by approximately $2.1 million, or 2.9%, from
$72.9 million for the third quarter of 2004 to $75.0 million for the third
quarter of 2005. By segment, sales decreased $1.7 million, increased $1.8
million and increased $2.0 million for the NN Europe Segment, Plastic and Rubber
Components Segment, and the Domestic Ball and Roller Segment, respectively.
Within the NN Europe Segment, the net decrease was composed of an approximate
$0.1 million increase related to the impact of currency exchange rates, an
increase of approximately $0.6 million related to price adjustments associated
with raw material pass through, and approximately $2.4 million related to
decreased product demand. Within the Plastics and Rubber Components Segment,
approximately $1.6 million of the increase was related to increased product
demand and approximately $0.2 million was related to price adjustments
associated with raw material pass through. Within the Domestic Ball and Roller
Segment, approximately $1.2 million was related to price adjustments associated
with raw material pass through, approximately $1.1 was related to favorable mix
principally due to higher demand for rollers, offset by approximately $0.3
million related to decreased demand for balls.
Cost of Products Sold (exclusive of depreciation). Cost of products sold
increased by approximately $0.9 million, or 1.6%, from $57.3 million for the
third quarter of 2004 to $58.2 million for the third quarter of 2005. By
segment, cost of products sold increased $0.7 million, decreased $1.4 million
and increased $1.6 million for the Plastics and Rubber Components Segment, the
NN Europe Segment and the Domestic Ball and Roller Segment, respectively. Within
the Plastics and Rubber Components Segment, approximately $1.2 million was
related to increased volume and approximately $0.4 million was related to
increased material costs offset by $0.9 million of decreased cost associated
with manufacturing efficiencies. Within the NN Europe Segment, approximately
$2.1 million was related to decreased volume and approximately $0.8 to increased
material costs offset by manufacturing efficiencies of approximately $0.1
million. Within the Domestic Ball and Roller Segment, approximately $1.0 million
was related to increased material cost, approximately $0.7 million was related
to higher spending on labor, maintenance cost, production supplies,
transportation fuel surcharges, offset by approximately $0.1 million in
decreased volume. As a percentage of net sales, cost of products sold decreased
from 78.5% during the third quarter of 2004 to 77.6% during the third quarter of
2005.
The price of steel has risen over the last twelve to eighteen months with the
potential for prices for the remainder of 2005 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 steel prices 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, for our NN
Europe Segment, material price changes in any given year are typically passed
along with price adjustments in January of the following year. Unless we can
continue to pass these increases 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 $0.1 million, or 0.8%, from
$7.1 million during the third quarter of 2004 to $7.2 million during the third
quarter of 2005. By segment, selling, general and administrative expenses
decreased approximately $0.4 million, decreased by approximately $0.2 million,
and increased approximately $0.7 million for the NN Europe Segment, Plastics and
Rubber Components Segment, and the Domestic Ball and Roller Segment,
respectively. Within the NN Europe Segment, the decrease was principally related
to lower consulting costs of approximately $0.1 million and lower administrative
15
costs of approximately $0.3 million. Within the Domestic Ball and Roller Segment
the increase was principally related to the impact of recording a reserve for
the Delphi Corporation outstanding accounts receivable balance of approximately
$0.2 million, higher salary cost of approximately $0.3 million, and higher China
start-up cost of approximately $0.2 million. Within the Plastics and Rubber
Components Segment, the decrease was principally related to a non-recurring
severance cost paid in the third quarter of 2004. As a percentage of net sales,
selling, general and administrative expenses decreased from 9.8% during the
third quarter of 2004 to 9.6% during the third quarter of 2005.
Depreciation and Amortization. Depreciation and amortization expenses were flat
compared to the third quarter of 2004 from $4.0 million for the third quarter of
2004 to $4.0 million for the third quarter of 2005. As a percentage of net
sales, depreciation and amortization expense decreased from 5.5% during the
third quarter of 2004 to 5.3% during the third quarter of 2005.
Interest Expense, Net. Interest expense decreased by approximately $0.1 million,
or 12.2%, from $1.1 million in the third quarter of 2004 to $1.0 million in the
third quarter of 2005. The reduction was due to debt reduction in the third
quarter. See "Liquidity and Capital Resources".
Net Income. Net income increased by approximately $0.4 million, or 18.8%, from
$2.2 million in the third quarter of 2004 to $2.6 million in the third quarter
of 2005. As a percentage of net sales, net income increased from 3.0% during the
third quarter of 2004 to 3.4% during the third quarter of 2005.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September
30, 2004
Net Sales. Net sales increased by approximately $19.7 million, or 8.7%, from
$225.8 million for the first nine months of 2004 to $245.5 million for the first
nine months of 2005. By segment, sales increased $8.5 million, $5.7 million and
$5.5 million for the NN Europe Segment, the Plastic and Rubber Components
Segment and the Domestic Ball and Roller Segment, respectively. Within the NN
Europe Segment, approximately $5.4 million of the increase was related to the
impact of currency exchange rates, approximately $2.5 million of the increase
was related to price adjustments associated with raw material pass through, and
approximately $0.6 million related to increased product demand. Within the
Plastic and Rubber Components Segment, approximately $4.7 million of the
increase was related to increased product demand and approximately $1.0 million
was related to price adjustments associated with raw material pass through.
Within the Domestic Ball and Roller Segment, approximately $3.3 million of the
increase was related to price adjustments associated with raw material pass
through and approximately $2.2 million was volume due to higher demand for
rollers.
Cost of Products Sold (exclusive of depreciation). Cost of products sold
increased by approximately $15.3 million, or 8.6%, from $176.6 million for the
first nine months of 2004 to $191.8 million for the first nine months of 2005.
By segment, cost of products sold increased $6.1 million, $5.2 million and $4.0
million for the NN Europe Segment, the Plastics and Rubber Components Segment
and the Domestic Ball and Roller Segment, respectively. Within the NN Europe
Segment, approximately $4.4 million of the increase was related to the impact of
currency exchange rates, approximately $4.4 million was related to increased
material costs, and approximately $0.7 million was due to increased volume.
These increases were offset by approximately $3.4 million of productivity
improvements mainly in labor savings and in lower production cost of cages.
Within the Plastics and Rubber Components Segment, approximately $3.7 million
was related to increased volume and approximately $2.5 million was related to
increases in raw material costs. Offsetting these increases were productivity
improvements of $1.0 million. Within the Domestic Ball and Roller Segment,
approximately $1.9 million of the increase was related to increased material
cost, approximately $0.6 million related to increased volume and approximately
$1.5 million of the increase was related to transportation fuel surcharges, and
higher spending in maintenance, labor cost, and production supplies. As a
percentage of net sales, cost of products sold decreased from 78.2% during first
nine months of 2004 to 78.1% during the first nine months of 2005.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by approximately $0.3 million, or 1.6%, from
$22.3 million during the first nine months of 2004 to $22.0 million during the
first nine months of 2005. By segment, selling, general and administrative
expenses decreased $0.6 million, increased $0.6 million and decreased $0.3
million for the NN Europe Segment, Domestic Ball and Roller Segment and the
Plastic and Rubber Components Segment, respectively. Within the NN Europe
16
Segment, the decrease was related principally to lower consulting and salary
costs of approximately $1.0 million, offset by the negative impact of foreign
currency exchange rates of approximately $0.4 million. Increased expenses at the
Ball and Roller Segment were due primarily to the start-up costs in China $0.4
million and the impact of recording a reserve for the Delphi Corporation
outstanding accounts receivable balance of $0.2 million. Within the Plastics and
Rubber Components Segment, the decrease was principally related to a
nonrecurring severance cost paid in 2004. As a percentage of net sales, selling,
general and administrative expenses decreased from 9.9% during the first nine
months of 2004 to 8.9% during the first nine months of 2005.
Depreciation and Amortization. Depreciation and amortization expenses increased
by approximately $0.4 million or 3.2% from $11.9 million for the first nine
months of 2004 to $12.3 million for the first nine months of 2005. The increase
of approximately $0.4 million was attributable to the NN Europe Segment. The
impact of foreign currency exchange rates accounted for $0.3 million of the
increase and the remainder was a result of capital investments in machinery and
equipment. As a percentage of net sales, depreciation and amortization expense
decreased from 5.3% for the first nine months of 2004 to 5.0% for the first nine
months of 2005.
Interest Expense, Net. Interest expense increased by approximately $0.1 million
from $2.9 million in the first nine months of 2004 to $3.0 million in the first
nine months of 2005. The increase was principally related to increased market
interest rates. See "Liquidity and Capital Resources".
Net Income. Net income increased by approximately $2.5 million, or 34.5%, from
$7.4 million in the first nine months of 2004 to $9.9 million in the first nine
months of 2005. As a percentage of net sales, net income increased from 3.3%
during the first nine months of 2004 to 4.0% during the first nine months of
2005.
Liquidity and Capital Resources
On May 1, 2003, we entered into a $90.0 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 "$90.0 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") expiring on
March 15, 2005, subsequently extended to June 30, 2007 bearing interest at a
floating rate equal to LIBOR (3.86% at September 30, 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 (3.86% at September 30, 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 (2.12% at September 30, 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 $40.0 million notes and we no longer have borrowing capacity under that
portion of the $90.0 million credit facility. The terms of the $30.0 million
revolver and the 26.3 million Euro term loan remain unchanged. 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 with all such covenants as of September 30,
2005.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40.0 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 September 30, 2005, $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, $24.0 million, and
repay a portion of our borrowings under our US dollar denominated revolving
credit facility, $13.0 million, which are both components of our $90.0 million
credit facility, and to repay other short term borrowings totaling approximately
17
$4.7 million. 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. We were in compliance with all such
covenants as of September 30, 2005. The notes are not collateralized except for
the pledge of stock of certain foreign subsidiaries. We incurred $0.7 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.
Amounts outstanding under the $90.0 million credit facility and the $40.0
million note as of September 30, 2005 were $27.8 million and $40.0 million,
respectively. See Note 9 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 (consignment) 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 September 30, 2005, 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 offset by accounts payable, was $41.2 million at September 30, 2005
as compared to $33.9 million at December 31, 2004. The ratio of current assets
to current liabilities increased from 1.46:1 at December 31, 2004 to 1.63:1 at
September 30, 2005. Cash flow from operations totaled $10.3 million during the
first nine months of 2005, compared with $21.9 million during the first nine
months of 2004. The primary reason for the reduction in operating cash flow was
a decrease in accounts payable of $7.2 million versus an increase of $4.9
million in 2004.
On October 8, 2005, Delphi Corporation filed Chapter 11 bankruptcy for its U.S.
based companies. We have reserved substantially all of the receivable balance
with Delphi at September 30, 2005. The balance totals $0.2 million. We continue
to ship to Delphi under normal terms as we believe they have post-bankruptcy
financing adequate to meet current purchases from vendors. We have filed to
reclaim our goods shipped 10 days prior to the filing and have filed for
preferred vendor status.
During 2005, we announced plans to spend approximately $17.0 million on capital
expenditures of which $9.1 million is related primarily to equipment, process
upgrades, and replacements and approximately $7.9 million principally related to
geographic expansion of our manufacturing base. We now believe that the total
capital expenditure for the year will be between $12.0 million and $15.0 million
based on re-evaluation of needs in 2005. Of these amounts approximately $8.4
million has been spent through September 30, 2005. 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 September 2006.
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 in the NN Europe Segment, except Slovakia whose
functional currency is the Slovak Koruna. Slovakia joined the European Union in
May 2004, and the country is expected to adopt the Euro as its currency within
several years.
18
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.
Inflation and Changes in Prices
Prices for 52100 Steel, engineered resins and other raw materials purchased by
us are subject to material change, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview and Management Focus".
For example, due to an increase in worldwide demand for 52100 Steel and the
decrease in the value of the United States dollar relative to foreign
currencies, we experienced an increase in the price of 52100 Steel and may
experience difficulty in obtaining an adequate supply of 52100 Steel from our
existing suppliers. In our U.S. operations, our typical pricing arrangements
with steel suppliers are subject to adjustment once every six months. Our NN
Europe Segment has entered into long term agreements with its primary steel
supplier which provide for standard terms and conditions and annual pricing
adjustments to offset material price fluctuations in steel and quarterly scrap
surcharge adjustments. We typically reserve the right to increase product prices
periodically in the event of increases in its raw material costs. In the past,
we have been able to minimize the impact on its operations resulting from the
52100 Steel price fluctuations by taking such measures. However, by contract,
material price changes in any given year are passed along with price adjustments
in January of the following year. Certain sales agreements are in effect with
SKF and INA, which provide for minimum purchase quantities and specified, annual
sales price adjustments that may be modified up or down for changes in material
costs. These agreements expire during 2006.
Critical Accounting Policies
Our significant accounting policies, including the assumptions and judgments
underlying them, are disclosed in our Annual Report on Form 10-K, for the fiscal
year ended December 31, 2004 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 our 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 our accounts receivable are due
primarily from the served markets: bearing manufacturers, automotive industry,
electronics, industrial, agricultural and aerospace. In establishing allowances
for doubtful accounts, we perform credit evaluations of our 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 we 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. Our inventories are not
generally subject to obsolescence due to spoilage or expiring product life
cycles. We operate generally as a make-to-order business; however, we also stock
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, we could experience
additional inventory write-downs in the future.
Acquisitions and Acquired Intangibles. For new acquisitions, we use 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
analysis and comparisons to similar assets. Annual tests are required to be
performed to assess whether recorded goodwill is impaired. The annual tests
19
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. Our long-lived assets include property, plant
and equipment. The recoverability of the long-lived assets is dependent on the
performance of the companies which we have acquired, as well as volatility
inherent in the external markets for these acquisitions. In assessing potential
impairment for these assets, we will consider these factors as well as
forecasted financial performance. Future adverse changes in market conditions or
adverse operating results of the underlying assets could result in having to
record additional impairment charges not previously recognized.
Pension and Post-Retirement Obligations. We use 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. We use 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
We wish to caution readers that this report contains, and our future filings,
press releases and oral statements made by our 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. Our actual results
could differ materially from those expressed in such forward-looking statements
due to important factors bearing on our business, many of which already have
been discussed in this filing and in the our 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
impact our ability to operate our business efficiently and have a material
adverse effect on our operating and financial results.
20
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 48% of
consolidated net sales in 2004, and sales to INA accounted for approximately 14%
of consolidated net sales in 2004. During 2004, our ten largest customers
accounted for approximately 81% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2004. 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:
- adverse foreign currency fluctuations;
- changes in trade, monetary and fiscal policies, laws and regulations,
and other activities of governments, agencies and similar organizations;
- the imposition of trade restrictions or prohibitions;
- high tax rates that discourage the repatriation of funds to the U.S.;
- the imposition of import or other duties or taxes; and
- 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 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
21
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:
- our operating and financial performance and prospects;
- quarterly variations in the rate of growth of our financial indicators,
such as earnings per share, net income and revenues;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- loss of any member of our senior management team;
- speculation in the press or investment community;
22
- strategic actions by us or our competitors, such as acquisitions or
restructurings;
- sales of our common stock by stockholders;
- general market conditions; and
- 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 September
30, 2005, we had $19.9 million outstanding under the domestic credit facilities,
$40.0 million aggregate principal amount of senior notes outstanding and NN
Europe had 6.6 million Euro ($7.9 million) outstanding under the Euro term loan.
See Note 9 of the Notes to Consolidated Financial Statements. At September 30,
2005, a one-percent increase in the interest rate charged on our outstanding
borrowings under our credit facilities, that are subject to variable interest
rates, would result in interest expense increasing annually by approximately
$0.3 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
23
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 the $90.0 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. On April 26, 2004, we issued $40.0
million of aggregate principal amounts of senior notes in a private placement,
replacing a portion of our $90.0 million credit facility, 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 or
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 September 30, 2005.
Item 4. Controls and Procedures
As of September 30, 2005, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our 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, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective.
There have been no changes in this fiscal quarter in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
24
Part II. Other Information
Item 1. Legal Proceedings
All of our legal proceedings are of an ordinary and routine nature and are
incidental to our operations. Management believes that such proceedings should
not, individually or in the aggregate, have a material adverse effect on our
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
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
We furnished a Form 8-K, in response to Items 2.02 and 9.01 on August
10, 2005 announcing an amendment to the press release issued on July
28, 2005
We furnished a Form 8-K, in response to Items 2.02 and 9.01 on July 28,
2005 announcing earnings for the second quarter of 2005
25
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: November 8, 2005 /s/ Roderick R. Baty
-------------------- ------------------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 8, 2005 /s/ James H. Dorton
-------------------- -----------------------------------------
James H. Dorton
Vice President - Corporate Development and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: November 8, 2005 /s/ William C. Kelly, Jr.
-------------------- -------------------------------------
William C. Kelly, Jr.,
Vice President and
Chief Administrative Officer
(Duly Authorized Officer)
26
Exhibit 31.1
CERTIFICATIONS
I, Roderick R. Baty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NN, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 8, 2005
------------------
/s/ Roderick R. Baty
------------------------------------
Roderick R. Baty
Chairman, President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, James H. Dorton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NN, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 8, 2005 /s/ James H. Dorton
------------------ --------------------------
James H. Dorton
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NN, Inc. (the "Company") on Form 10-Q
for the interim period ended September 30, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, in
the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge: (1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: November 8, 2005 /s/ Roderick R. Baty
------------------ -------------------------
Roderick R. Baty
Chairman, President and Chief
Executive Officer
[A signed original of this written statement required by Section 906 has been
provided to NN, Inc. and will be retained by NN, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.]
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NN, Inc. (the "Company") on Form 10-Q
for the interim period ended September 30, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, in
the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge: (1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: November 8, 2005 /s/ James H. Dorton
-------------------- ---------------------------
James H. Dorton
Chief Financial Officer
[A signed original of this written statement required by Section 906 has been
provided to NN, Inc. and will be retained by NN, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.]